Russian corporates across all sectors show good profits

By Rhod Mackenzie

The financial performance of Russian businesses acros all sectors of the economy have shown a positive trend, with profits returning to growth. According to reports , profits for the period between January and May of this year increased by 13% to reach 13 trillion rubles.
This occured across all sectors with construction, oil production and automotive industries being  the main drivers of growth this year. Analysts have highlighted that the financial results of companies have improved in light of their adaptation to the sanctions restrictions and a surge in construction activity driven by the anticipation of the cancellation of preferential mortgages.
Additionally, import substitution and high domestic demand resulting from wage increases have contributed to this growth.

What were the profitss of Russian companies?
The total profits for the period from January to May 2024 increased by 13.6%, from 11.3 trillion to 13 trillion rubles. 89 rubles to the dollar so you can work out the figures or $115 billion an $135 billion
Now I got this information is  from the reportle "Comments on the State and Business," authored by Alexei Kuznetsov, an expert at the HSE Development Center Institute ). His  calculations were based on data from the Russian Federal State Statistics Service (Rosstat).
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In particular, there was a 69% increase in profits in the construction sector. The oil and gas extraction sector, along with the automotive industry, saw a significant increase of 66% in the indicator. There was alos 44% increase in the other non oil and gas extractive sector ( coal, copper,nickel etc) and a 30% increase in agriculture.

Now what were the reasons  for this growth.

Well despite the challenges posed by sanctions and other external factors, the trend indicates a consistent growth trajectory for domestic industries, according to economist and Moscow regional branch of Delovaya Rossiya member Alexey Khizhnyak.

For context, enterprise profits for the same period one year earlier (from January to May) showed a decrease of 21.3% compared to the previous five months of 2022. Andrey. Onishchenko, Director General of the Agency for Transformation and Development of the Economy (ATRE), noted that the low base is only one of the reasons for the high dynamics.

So what  is drivein up business profits in Russia?
The companies' achievements can be attributed to a number of favourable factors in 2024. The results of the processes that began two years ago are now becoming apparent. In particular, enterprises have received a boost against the backdrop of import substitution, since many Western competitors have left the market. The sanctions have forced businesses to unite and restructure their production, technological, financial and logistics processes.

Now one factor that has to be mentioned that compared to Western companies the costs of production being across all sectors is much lower due to energy costs.The cost of electricty in Russia is 7 times lower than in Germany for example. So making bricks for construction is much cheaper as is producing concrete.In food processing and manufacturing where energy is a significant part  of the cost having cheap energy means lower costs.That is relevant across all industrial sectors and has to be taken into account.
Also for logistics the much lower costs of transportation  due much lower fuel costs is a major benefit and adds to the profitability

Also , the prominence of construction is not mere coincidence. The groundwork for this was laid several years ago, as observed by Evgeny Druzhinin, the general director of Open City. The primary factors driving this growth are preferential mortgages and state support in the residential real estate sector.
Many Russians were keen to purchase apartments before the new building programme was cancelled. As reported by the Central Bank , 673,000 mortgage loans were taken out by citizens in the first half of 2024, amounting to almost 13 trillion rubles. Furthermore, developers benefit from large-scale infrastructure projects and the development of landscaping, according to Evgeny Druzhinin.

The situation for companies in the mineral extraction sector was also favourable. The price of Russian oil increased from and average $69.1 per barrel in January to $78 in April, according to data from the HSE. Vladislav Onishchenko also highlighted the positive impact of rising oil and gas exports.

Another factor contributing to the positive growth was the weakening of the average ruble exchange rate. By the end of the first five months of 2024, it had decreased by approximately 5% compared to the previous year, with a rate of approximately 90 rubles per $1, according to expert analysis. This had a positive impact on the income and profits of exporting companies.

Vladimir Kurashov, a member of the CSR Expert Club, attributes some of the growth in profits to the accelerated advance funding of the economy from the budget.

Additionally, the agricultural sector is experiencing a positive trend, with grain trade in Asian markets expanding and exports to China increasing by 1.7 times in less than a year, according to Denis Paleev, a research fellow at the Center for Strategic Research at the RUDN University Faculty of Economics.

Pluse, the first half of the year saw a significant expansion in real incomes and lending, creating a conducive environment for elevated consumer spending and driving increased profits for numerous Russian enterprises, according to Vladimir Eremkin, a research fellow at theInstitute  of Structural Research. The real disposable income of Russians (exclusive of inflation and mandatory payments) increased by 5.8% between January and March 2024, according to a report from Rosstat.

What factors could potentially impede the growth of profits?
Alexey Khizhnyak from Delovaya Rossiya anticipates that positive financial results for companies will be supported by high domestic consumption. Another factor that will support growth is the expansion of export contracts with the SCO, BRICS and Latin American countries, particularly as the price they get for the raw materials is high.
Denis Paleev anticipates that positive dynamics will continue in the next few years. However, in the second half of the year, the trend in construction is expected to change slightly. This is due to the cancellation and tightening of preferential programmes, as well as the growth of the key rate, which will result in a slowdown in demand tied to lending. This is likely to have a negative impact on the profits of developers.
Mr. Vladimir Kurashov of the Center for Strategic Research also cited the growth of the key interest rate to 18% in July as a potential impediment to growth. Concurrently, the Central Bank has not ruled out the possibility of an increase to 20%. An increase in financing costs will have a negative impact on the company's potential profitability.
However do bear in mind that most Russian companies use their profits for investment rather than borrowing at high rates to fund  their expansion plus there are numerous Government grants and subsidies available as part of the import substitution and industrial self sufficient programme available.

Further potential risks include a shortage of labour in the context of record low unemployment (2.4%), ageing equipment, and difficulties in importing new equipment. The expert believes that these factors could limit the trend towards profit growth.

That said the future for almost all sectors of the Russian economy are looking positive which is mor than can be said for those who imposed the sanctions on Russia.