L-shaped Stability: end of year industrial production in Russia neither declined nor grew

According to estimates, industrial production in Russia continues to remain in a state of ‘unsustainable stagnation’, despite exhibiting some signs of limited growth in October and November. Across different industrial sectors, situations vary and fluctuate often. Some weak positive dynamics could be observed in October, mainly as a result of an increase in military production and ‘technologically regressive import substitution.’ In November, mining accounted for the biggest contribution to overall growth. Such unpredictable fluctuations are likely to continue into the future, and this serves as a warning that the crisis will continue to be ‘L-shaped’, that is they exhibit stabilising behaviour after a period of sharp decline. There are currently no indications of a stable recovery, but there has been no second, sharp downturn, as various experts had predicted.

According to Rosstat, Russia’s industrial production index exhibited positive growth for two consecutive months for the first time since the start of the war in Ukraine. This occurred in October (Re: Russia previously analysed October’s data here) and in November (+0.7%).

The intensity index of the output of goods and services by basic types of economic activity* has also increased for two consecutive months: by 1.4 and 0.6%, respectively. At the same time, November’s growth appears to have been rather insignificant, and when analysed through the prism of various production areas, it is impossible to say that there has actually been any kind of recovery at all. By October, manufacturing and agriculture had exhibited a decline by –1.2 and –0.9%, respectively. At the same time, mining and retail trade stagnated (+0.2 and +0.6%), although construction, freight transport and wholesale trade exhibited positive growth (+2.6%, +2.5%, +2.3%). The food service industry’s profits grew rapidly (+4.1%), yet the volume of services provided to the population stagnated (+0,5%). Overall, household spending increased by +0.7%, but this does not offset the decline witnessed in the two months prior (–1% and –0.3% in September and October).

When compared with figures from December 2021 (the peak of the pre-crisis growth), the index fell by –5.3%. A sharp decline occurred in April (-6.7% compared to December 2021) and little has changed since. According to a monthly report prepared under the leadership of Vladimir Bessonov (Development Center of the National Research University Higher School of Economics), 2022’s dynamics can be described as a ‘L-shaped crisis’ (stabilisation following a sharp decline), as opposed to a V-shaped one (a sharp decline followed by intensive recovery), the latter of which was observed during the coronavirus crisis.

A similar L-shaped scenario is evident in the industrial sector. As the previous example shows, although the extractive industry’s indicators have remained largely stable, processing drags the overall index of industrial production down. The greatest contribution to its decline comes from the automobile industry (production of cars and equipment, production of other motor vehicles, railway transport, as well as the timber industry).

In their assessment of the past two months, the Center for Macroeconomic Forecasting (CMASF) is more optimistic about the ongoing recovery of industry. According to their figures, which align with those of Rosstat, October’s growth rate stands at +0,7%. However, CMASF has pointed out the index’s larger lag compared to the peak of December 2021. Rosstat estimates that the volume of industrial production fell by 5% in April, and by November, that figure stood at 3,6%. Compared to December of the previous year, the figure from November 2022 was 4.1%. The difference between Rosstat’s estimates and those of the analytical centre can be explained by the different methods used to recalculate Rosstat’s raw data, which take into account seasonal and calendar factors. To add to this, CMASF does not examine data sourced from closed industries, such as the defence industry. Finally, the analysts do not have to consider government orders and so are able to understand actual economic trends much more effectively.

Industrial output according to Rosstat, estimates by CMACP and NRU HSE, 100 = monthly average for 2019

In the case of industries, CMASF identified seven important trends in November:

• All energy resources increased their production: oil (+1.2% compared to October), gas (+3.6%) and coal (4.7%). Moreover, coal production in November set a historical record. The growth in the production of petroleum products was the result of recovery growth.

• The volume of production of all types of building materials, after a pause in October, continued to decline (by -1.8% compared to October).

• Clothing production continued to grow (+1.7% compared to October; +4.3% compared to February). Here, however, it must be said that up to 80% of the clothing produced in Russia consists of specialty clothing and uniforms. This means that light industry did not actually experience any organic growth, and increased production levels can be explained by the need to clothe hundreds of thousands of mobilised people for the war in Ukraine.

• After some stabilisation in September – October, the volume of timber production decreased once again (–1.3% compared to October, –24.5% compared to February). Enterprises that are located in the European part of the country have experienced particularly tough conditions, as they are accustomed to working for the Western market and are technologically dependent on it, notes CMASF.

• Chemical production grew by 1.2% compared to October’s levels. At the same time, the situation differed widely across various segments: for example, manufacturers of household chemicals, paints and varnishes, as well as plastics, have recovered almost completely, due to import substitution. The production of mineral fertilisers has continued to stagnate after a significant drop.

• The volume of production of machinery and machinery-related equipment decreased by 3.5% for the first time in six months. But CMASF cannot, at this time, identify this as the beginning of a negative trend.

• A strong decline in the automotive industry (–27% in passenger car production) halted the recovery surge observed in October (+24% compared to September). Truck production has not declined to such an extent, but it has done so steadily, failing by 17% over the past three months.

Although the latest CMASF review emphasised that industry production was recovering, experts at the centre had already introduced the term ‘unsustainable stagnation’ in previous editions of the review to describe the situation. After falling dramatically in spring, economic activity has attempted to rebound, but this has yet to become a stable trend across different industry sectors. According to analysts, November’s modest rise in output was due to increased levels of energy product extraction, while mechanical engineering and the timber industry remained in negative territory. None of this points to stable economic recovery.

* The Intensity Index of product and service output (also known as the Bessonov index) helps to understand the state of the economy, and is highly similar to indexes meant to assess the level of GDP. At the same time, the Bessonov index is quicker to calculate and easily available, complete with details regarding the key sectors of economic activity. It is calculated based on Rosstat’s data regarding the volume of production output, but excludes seasonal information, as well as specific, insignificant and random fluctuations.