In January, business activity indicators in Russia fell to their lowest levels in three years. But industrialists are still looking to the future with optimism. According to market surveys, captains of industry had a good rest during the Christmas holidays and hope that production and employment at their enterprises will start to grow again in the spring.

In January, the so-called seasonal factor makes a loud statement. The country does not work for half a month, so compared to the December peak, production and investment fall sharply. However, the decline in business activity in January 2002 cannot be explained by seasonality alone, say the survey organizers. Production in Russia has not grown as slowly as last month for three years. This is the conclusion reached by the British research company NTC Research, which has been calculating The Moscow Narodny Purchasing Managers Index (MN PMI) since September 1997 on behalf of the London subsidiary of the Central Bank. In January, the index, based on the results of a survey of 350 purchasing managers of large Russian companies, fell by two points compared to December - to 50.1. A fall in the index below 50 points will mean that a decline has begun in industry.

According to NTC Research, the increase in output and new orders in January 2002 were the smallest since November 1998. The stagnation in production has led to a rise in the number of companies cutting jobs. "Overall employment fell for the first time in three years," NTC Research analysts say.

A similar picture is painted by a survey conducted by the Institute for the Economy in Transition (IET). Production output was reduced in January 2002 more intensively than at the beginning of 2001, and the decline in cash sales was the most significant since March 1999, when the post-default growth of solvent demand and production began in Russian industry, notes Sergei Tsukhlo, head of the IET market survey laboratory.

Stagnation in industry is caused by low solvent demand and a shortage of working capital among enterprises, according to respondents from NTC Research and the IET. However, competition from imports worries companies much less today than it did six months ago. According to the IET, in January imports prevented only 8% of companies from increasing production, compared to 15% in July 2001. The gloomy reality does not prevent entrepreneurs from looking to the future with hope. According to the IET, in January company managers gave the most optimistic forecasts for changes in output over the past 12 months. The most optimistic expectations are among machine builders, chemists and petrochemists, as well as in the forestry complex. "Enterprises intend to restore intensive growth of production in the spring," says Tsukhlo.

The optimism of industrialists has not yet been transmitted to analysts. "Entrepreneurial expectations have a pronounced cyclical nature," recalls Vladimir Salnikov from the Center for Macroeconomic Analysis and Short-Term Forecasting. "Optimism is always at its peak in January, but over the course of the year it gradually fades away." And MDM Bank analyst Kirill Tremasov does not yet see any reason for optimistic forecasts to be realized anytime soon: "Industrial growth will most likely resume not in the spring, but in the second half of the year, when exporters feel the expansion of external demand."

Experts are in no hurry to draw far-reaching conclusions from the January surveys. "The January data give cause for concern, but... do not contradict the forecast of 4% growth of Russian GDP in 2002," notes Moscow Narodny Bank economist Paul Forrest. "Growth is slowing down, but we already saw a similar picture in late 2000 - early 2001," says Alexey Zabotkin of the United Financial Group. "I think that, as last year, we are dealing with a temporary slowdown." Zabotkin predicts that in the coming months, growing domestic demand will once again lead to a revival in industry.

On the brink of recession