Recently published data from Rosstat shows that Russian industrial output — excluding seasonal and calendar factors — continued to stagnate in the fourth quarter of 2023. Thus, output has remained at roughly the same level for more than half a year. In individual months, Rosstat noted growth by tenths of a percentage point, while in others, there was a similarly modest decline. Overall, according to its estimates, Russian industrial production grew by 3.5% over the year. The most significant growth is predictably observed in sectors of the manufacturing industry associated with the military-industrial complex and 'critical' import substitution. For example, the production of computers, electronics, and optics increased by almost 33%, metal products by 28%, and 'other means of transport' by 25.5%. However, in the case of computers and electronics, this does not necessarily indicate import substitution but assembly, and the high growth rates may suggest an increased share of imported components. Output in extractive industries decreased by 1.3%, mainly due to the restriction of oil production.
The government-aligned Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF) describes the situation in a more complimentary style as a 'transition from growth to stabilisation'. However, it dates this transition to the fourth quarter, not the middle of the second quarter, as indicated by Rosstat. The estimates of CMASF and Rosstat have been almost identical since September; before that, the federal service consistently reported higher values, despite the absence of growth. The industrial production index calculated by the Higher School of Economics (HSE) also shows a lack of growth from July, remaining at even lower levels.
Traditionally optimistic is the January survey of companies by S&P Global. In January, the company's Business Activity Index was 52.4 points, compared to 54.6 in December. Although the growth in activity began to wane in January, a value above 50 points indicates activity growth, meaning that despite the slowdown, activity still remains in the positive zone. In addition, S&P Global analysts note that the number of people employed remained unchanged in January after 14 months of continuous growth.
The analysts at CMASF attribute the plateauing of industrial production to three factors: 1) a decline in exports; 2) the gradual depletion of the impetus given to manufacturing by the war in Ukraine (in December this correction began in metal products manufacturing); and 3) overly tight monetary policy. Central Bank analysts in their February report 'What the Trends Say' also noted that all aggregated subgroups of manufacturing industries stabilised in the fourth quarter, after growth for most of 2023.
The Central Bank started raising the key rate in August and, by the end of the year, had raised it to 16%. In a recent interview, the head of the regulator Elvira Nabiullina once again stated that in the coming months a rate cut should not be expected. However, CMASF analysts are increasingly critical of the Central Bank's policy. This argument is developed in an article by the centre's researchers Ilya Medvedev and Oleg Solntsev. In order to cool excess demand, the Central Bank has to keep the rate at a level that suppresses long-term economic growth. However, they write, the transmission mechanism of monetary policy (the mechanism of influence of the key rate on inflation) is not working as effectively as it used to. Its operation has been distorted by the fact that both banks and borrowers assess risks differently because of the sanctions.
The CMASF experts suggest that the regulator should supplement monetary policy with a number of measures that will contribute to the process of economic transformation. First, they propose supporting the development of financial services that have become difficult to access due to sanctions. This includes insurance for foreign economic activities and syndicated loans. The Central Bank, according to CMASF, should develop tools to help companies cope with these problems. Second, the Central Bank should take measures to reduce the volatility of the exchange rate, which hinders enterprises from building long-term investment strategies. Third, it is necessary to increase liquidity of so-called friendly countries in the domestic currency markets, especially the yuan, in which many Russian exporters are being forced to make payments. Fourth, the Central Bank could influence the cost of long-term lending through interventions in the federal loan bond (OFZ) market. Fifth, and finally, the CMASF experts suggest strengthening capital controls. If it becomes more difficult to withdraw money from the country, they hope that companies will be forced to invest.
In essence, the article by Medvedev and Solntsev serves as a guide to the insurmountable problems and additional costs that sanctions have created for Russian business. The economists suggest that the Central Bank should take responsibility for their mitigation, and abandon traditional approaches and practices that limit its competencies in managing the key rate. As stagnation becomes more protracted, the pressure on the Central Bank will mount.