Vladimir Putin will not let the economy take a break: indicators of economic activity have improved markedly by September, but mobilization will correct this trend

September indicators of the business climate in Russia showed strong growth, primarily due to improved assessments of the current situation. However, positive expectations of enterprises continued to grow. Companies continue to successfully adapt to new conditions, according to the Central Bank’s business climate indicator. Only the mining sector stands out from the general trend, which, however, has significant weight in the economy and is of particular importance for government revenues. Negative assessments of its current state and prospects reflect the impact of sanctions and expectations of their expansion. However, the Central Bank surveys, on the basis of which the indicator is calculated, were conducted before the announcement of mobilization, which is highly likely to increase the impact of crisis factors in the economy. Although, so far, economic dynamics look so much better than expectations in March-April that the Kremlin is most likely not afraid of this risk.

The Central Bank's business climate indicator , calculated on the basis of surveys of more than 14 thousand enterprises and summing up two separate indices - the current assessment index and the expectations index, increased by 1.4 points in September - to the maximum since January 2.8 points (taking into account seasonal adjustments). Our review of August business climate data noted that the overall index's growth was driven almost exclusively by expectations, while current assessments were mostly down slightly from July. In August, a turning point emerged - improvements in general indices are ensured by improved assessments of the current state; expectations also continue to grow, although not at the same pace as before.

Business climate indicators, 2019 – September 2022

Business continues to successfully adapt to new conditions, actively building new production and logistics chains, the Central Bank report says. The current state index, which measures how demand and output have changed over the past month, rose from -5.8 to -3.8, the highest since January 2021. Growth affected most sectors, with the exception of mining, where the index again went into negative territory after a brief rise, as well as transport and services, where both current estimates and expectations stagnated. But this circumstance outweighs the fact that in the manufacturing sector and in trade the index moved into positive territory for the first time since February of this year.

Current estimates for both demand and production have improved - unlike last month, when only demand and not production saw an increase in estimates. Company estimates for production dynamics are almost back to early 2021 levels. Even in the auto industry, there has been a revival - due to the emergence of some auto production from idle time and the reorientation of the industry to the trade in used cars.

The index of current estimates of demand changes returned to 2018–2019 levels in September. Improvements were also seen in most sectors, with the exception of transport, which has been hit by restrictions on international transport. Demand expectations have improved, especially in agriculture, where businesses are counting on strong demand from domestic and foreign markets - unlike many other export industries, agriculture has not been hit by sanctions. In other export-oriented industries, in particular wood processing, expectations are negative.

The Central Bank surveys were conducted on September 1–19, and the trends they recorded are most likely already being adjusted. The mobilization announced on September 21 will lead to a new wave of crisis, the authoritative economic telegram channel MMI believes : due to uncertainty and the departure of part of the economically active population, consumer demand may worsen noticeably in the coming weeks.

If 300,000 people are called up as part of the mobilization (about 0.9% of the 33.9 million men aged 20 to 55), this will increase this year's GDP decline by 0.25 percentage points, to 3.75%. , mainly due to a reduction in the workforce, says Alexander Isakov from Bloomberg Economics (his estimate does not take into account the departure of employees to other countries). The mobilization is most active in rural areas, so it will primarily hit agriculture and construction, Natalya Zubarevich, a professor at Moscow State University and a specialist in regional economics, told Bloomberg. According to Sofia Donets from Renaissance Capital, mobilization, refusal of unnecessary purchases and reduced demand will add another 0.5 percentage point to the fall in GDP this year. However, the prospect of deterioration hardly scares the Kremlin: economic dynamics look much better than expected in March-April, and a rollback of 0.5 percentage points cannot be compared with the prospect of military defeats in Ukraine.

The values ​​of the business climate indicator (BCI) indices are the modified difference between the answers “the situation has improved” and “the situation has worsened.” The consolidated IBC is formed from two components - an assessment of the current business climate and an assessment of the expected business climate. Business managers are asked how they assess changes in demand and production volume at the time of the survey and three months into the future. Separately, the Central Bank calculates composite indices for demand and production volume.