Russian company profits down 6.9% in 2024

The 6.9% decline in net pre-tax profit of Russian companies in 2024, as reported by Rosstat on 5 March, was anticipated, given the evident deterioration in working conditions, according to economists surveyed by themagazine  Expert. However, the decline was predominantly concentrated in sectors vulnerable to the risks posed by foreign policies and sanctions.
Otherwise, the year shows either a continuation of the confident growth of previous years (as in mechanical engineering, and not only defence) or a long-awaited exit from the "red zone" (wood processing, automotive industry).
The overall situation is not as severe as it may seem at first glance.
Vladimir Salnikov, Deputy Director General of the Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF), provided an analysis to Expert: "Profits decreased primarily in sectors where this was predictable due to external economic challenges. These include a decline in wholesale trade (-46.1%, to 1.8 trillion rubles), metallurgy (-9.1%, 1.7 trillion rubles) and the chemical industry (-10.5%, 1 trillion rubles). These declines are attributable to external economic challenges and mounting sanctions pressure. Conversely, the oil and gas industry (+15.7%, 5.3 trillion rubles) has shown positive results, particularly when considering the impact of voluntary restrictions on oil production.

The net financial result of wholesale trade has fallen by almost half, largely due to the inclusion of gas-producing companies, whose results continue to be affected by foreign policy pressure and the lower level of gas exports.In addition, high interest rates and logistics costs have had a significant impact on the margins of all wholesalers, according to Alexander Ivanov, an analyst for macroeconomics at Ingosstrakh Investments.
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In addition to these factors, retail trade (-2%, RUB 803 billion) has been pressured by rising wages (23% y/y adjusted for seasonality), which has led to a reduction in retailers' profits. Alexander Ivanov also notes that the landscape of the retail market is gradually changing, with online auctions being used by marketplaces to reduce prices, which is having a negative impact on the profits of small stores. There has been a notable shift in consumer behaviour towards online shopping, leading to a decline in footfall and spontaneous purchases in shopping centres. In response, retailers are allocating substantial resources to developing their online presence, which is contributing to rising costs.Conversely, the property sector has experienced a surge in profits, primarily driven by the management of warehouse complexes, a critical component of the business operations of marketplaces and large networks.

According to Vladimir Salnikov from the Center for Macroeconomic Analysis and Short-Term Forecasting, the inefficiency of the current model of natural monopolies became evident in 2024. "Among the clearly negative trends, the sharp decline in profits from rail transportation is particularly striking (-31.4%, 266.5 billion rubles). The main factor was the growth of costs and the increasing load on the infrastructure - the tracks are, one might say, overloaded. This is problematic, as rail transportation currently plays a pivotal role in the development of new logistics."
Another pertinent example is the provision of electricity and heat, i.e. gas and steam, which decreased by -35.4% to 1 trillion rubles.As Vladimir Salnikov elucidated, tariffs in this sector are growing at a significantly slower rate than costs, which are being driven, in part, by the absence of adequate incentives to enhance efficiency, compounded by an excess of less efficient capacities that are not being decommissioned due to non-economic factors. The economist highlights that electricity and heat supply is a natural monopoly industry, meaning that often, the most efficient option is to keep a plant open even if it is not the most cost-effective. This is because it is often the only source of heat and electricity for a city.
In 2024, the sectors most adversely affected by the negative external environment are demonstrating a strong recovery in profitability. Wood processing, for instance, which suffered significantly from the closure of European markets, has shown a notable turnaround, reporting a net pre-tax profit of RUB 24.1 billion, contrasting with a loss of RUB 4 billion in 2023.
Vladimir Salnikov also notes that the sector has adapted by optimising costs and establishing deliveries to new destinations.The automotive industry, which includes the production of motor vehicles, trailers and semi-trailers, is another notable example of a sector that has shown significant profit growth. In 2024, the industry's profits increased by 2.1 times, reaching 185.7 billion rubles. Profit growth has also continued in mechanical engineering as a whole. "This is not only about those segments where defence enterprises are concentrated, but also about those that are mostly civilian. Active growth has been observed here in the last two years, and the preservation of this growth is a very positive signal," says  Salnikov.

A substantial increase in net pre-tax profit in the building construction sector is evident, reaching a one and a half-fold growth (+50.7%, amounting to 865 billion rubles). Construction companies have consistently accumulated financial reserves, even in the face of challenging industry conditions, characterised by a significant decline in government-backed mortgages and a record-high key rate.
Salnikov has also expressed concerns that the measures to support the construction industry being discussed today, such as expanding family mortgages, may be too hasty. He suggests waiting for a correction in housing prices before introducing them, as prices on the housing market remain record-breaking and the level of affordability of housing is quite low.
The provision of immediate assistance to builders could further accelerate price growth, particularly in light of the significant increase in their profits."
In 2025, Russian companies are set to experience a continued decline in total profit, according to Boris Kopeikin, chief economist at the Stolypin Institute for Growth Economics. Despite the robust domestic demand dynamics, the financial performance of companies is under pressure from rising costs, including increasing labour costs and interest payments on debt obligations. This year, interest expenses are expected to remain high, and wages are likely to continue growing, though at a slower pace than in recent years. "However, it is likely that the overall economic dynamics will experience a significant slowdown."
In addition to this, the economist points out the expected increase in the financial obligations that companies will face and arrives at the unfortunate conclusion that "profit dynamics in 2025 will be driven solely by inflationary processes, and a further reduction in profit margins is highly probable against the backdrop of the anticipated growth in the number of unprofitable companies and bankruptcies."

However, Alexander Ivanov from Ingosstrakh-Investments Management Company anticipates sustained growth in several industries and segments: "It is foreseeable that by 2025, profit growth will persist in the education, medicical and pharmaceutical plus logistics and warehouse management sectors. Undoubtedly, the processing sector will expand, driven by a substantial proportion of government orders. In contrast, the retail sector is not expected to experience a significant surge in profits in the near future, due to the ongoing challenges in the labour market, high interest rates, and consumers' inclination towards a savings model.

Regarding the potential support measures that the state may implement, Boris Kopeikin suggests that, given the limited availability of labour resources, it would be prudent to focus support measures on the most efficient industries and companies rather than on lagging sectors. "This approach will enhance the efficiency of investment resources, boost productivity, and accelerate the transformation of the economy as a whole."