Russian manufacturing growth accelerates

he 4.6% growth in Russia's industrial production in 2024, reported by Rosstat on 5 February, was a record for the past three years, and if we do not take into account the post-covid surge in 2021, then for the past 13 years.
These dynamics were driven by the manufacturing industry, and it was not only defence enterprises that are provided with state orders that grew. Despite the presence of several restraining factors, many industries have demonstrated the potential for further growth, although a slowdown is anticipated in 2025.
The year's results surpassed initial expectations, with a +4.6% growth rate, marking a significant high-water mark over the past 13 years, excluding the post-Covid recovery surge of 6.3% in 2021.

Historically, December has consistently exhibited robust positive dynamics, attributable to the completion of significant projects in various industries, a trend that is evident in the latest statistics.In the final month of 2024, industrial production surged by 8.2% year-on-year, marking a record since January 2022, when the post-pandemic recovery of 2021 was sustained.
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The growth rates observed in December and for the year as a whole are encouraging. According to Boris Kopeikin, chief economist at the P.A. Stolypin Institute for Growth Economics, : "The growth turned out to be significantly higher than the 4% expected in the fall and included in the macroeconomic development forecast. "Notably, industries catering to the Special Military Operation as well as those focused on domestic consumer demand, such as furniture, clothing, beverages and food production, demonstrated robust growth.
The uptick in the extractive sectors points to promising export prospects for 2025."
Manufacturing continued to be the primary catalyst for industrial growth in Russia, contributing an additional 8.5% over the past year (following an increase of 8.7% in 2023). The key growth sectors were "production of finished metal products (except machinery and equipment)" (+35.3% in 2024 after +27.8% in 2023), "production of other vehicles and equipment" (+29.6% after +25.5%), and "production of computers, electronic and optical products" (+28.8% after +32.8%).

"Industries that have received additional orders on the domestic market have begun to stand out. This is also evidenced by the fact that business activity indicators for the past few years are currently at their highest levels," states Oleg Abelev, head of the analytical department of the investment company Rikom-Trust.

These three industries are notable for their significant presence in the military-industrial complex (MIC), as Vladimir Salnikov, Deputy General Director of the Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF), informed Expert.

"It is unclear whether there will be demand for a further increase in their production: the volumes are already very high and it is difficult to maintain such growth rates over the long term," the analyst noted.

He anticipates that the growth will persist, albeit at a reduced pace: "Following such a substantial surge, a slowdown is unavoidable. Enterprises are encountering limitations in both production and personnel," says the deputy head of the Center for Macroeconomic Analysis and Short-Term Forecasting.

Oleg Abelev from Rikom-Trust also notes that the problem with the capacity deficit concerns the entire industry as a whole. "The economy is currently operating at approximately 80% capacity and is approaching the technological production limit. However, if we manage to build new production capacities in Russia, then there will be no overheating of the economy. However, he notes that there is currently a physical production deficit in some industries, leading to price increases.

The fourth industry to have recorded double-digit growth rates for two consecutive years is "production of motor vehicles, trailers and semi-trailers" (+16.5% in 2024 after +13.6%). However, it should be noted that this growth remains recovery-oriented, with the sector experiencing a decline of 44.7% in 2022. In 2025, the recovery is expected to decelerate, as the automotive sector is predicted to face challenges due to a predicted slowdown in consumer lending, as stated by the deputy general director of the Center for Macroeconomic Analysis and Short-Term Forecasting.

Conversely, the production of "medicines and materials used for medical and veterinary purposes" is projected to exhibit a robust growth trajectory, with an estimated increase of 18% in 2024, following a slight slowdown to +1.9% in the previous year. The return to high rates (+8.6% in 2022, +11.5% in 2021) is attributed to "successful import substitution and growth in household incomes," as noted by Vladimir Salnikov.

According to Salnikov, the clothing (+5.9%), food (+3.5%) and beverage (+9.4%) industries also experienced a positive outlook in 2024, driven by the growing income of the population. A notable example is the dairy industry, as reported by the National Union of Milk Producers (Soyuzmoloko): "The trend of increasing demand for dairy products, caused by the growth of real disposable income of the population, continued in 2024. The processing sector also maintains positive development dynamics. Ice cream continues to dominate in terms of growth rates, with consumption in this sector surging by 30% over the past two years."

The woodworking sector (with the exception of the furniture industry) has shown signs of stabilising, with positive growth projections of +4.2% in 2024, following a -0.2% decline in 2023 and a substantial +12.5% growth in 2022. +4.2% in 2024 after a 0.2% decline in 2023 and 12.5% in 2022. The industry is confidently recovering from the impact of Western market closures, according to Vladimir Salnikov. On the one hand, alternative supply channels are being identified, and on the other, domestic demand is increasing. Paper (+5.6%) and furniture (+7.7%) production also demonstrated good dynamics last year.

The chemical industry has maintained its positive growth trajectory: "production of chemicals and chemical products" grew by 3.1% in 2024 after +4.6% in 2023. Vladimir Salnikov from the Center for Macroeconomic Analysis and Short-Term Forecasting suggests that the chemical industry's growth potential may have been constrained by logistical challenges resulting from sanctions and the June 2023 explosion of the Tolyatti-Odesa ammonia pipeline. According to the expert, the sector has considerable potential for growth, which will be realised as new port capacities are commissioned and construction projects are completed.

The rate of mineral extraction continued to decline steadily (-0.9% in 2024 following -1% in 2023). According to Vladimir Salnikov from the Center for Macroeconomic Analysis and Short-Term Forecasting, the situation is unlikely to change this year, either as a result of voluntary restrictions within OPEC+ or due to other factors: He also highlights the potential for increased trade restrictions and heightened competition in global markets. For instance, there is an anticipated rise in the supply of American oil, in line with US President Donald Trump's policy of stimulating production.

One of the major industrial sectors, coke and petroleum products production, declined by 2.1% in 2024, largely due to attacks by enemy drones on production facilities. Metallurgy also recorded a 1.2% decline, primarily due to restrictions on foreign markets imposed by sanctions.

"The external demand for metallurgical products is currently very weak. The surplus in China is exerting pressure due to its excess supply relative to domestic demand. "It is elementary for China to dominate the global markets: their metallurgy exceeds ours by an order of magnitude in volume," Vladimir Salnikov states.

He anticipates that the situation is unlikely to improve in 2025 and highlights the challenges faced by metallurgists in the domestic market. "The abolition of preferential mortgages will inevitably affect the pace of construction, and this segment is one of the main sources of domestic demand for metallurgical products. However, there is potential for mechanical engineering, driven by the defence industry and import substitution."
In 2025, we should expect a slowdown in industrial production growth, according to Vladimir Salnikov from the Center for Macroeconomic Analysis and Short-Term Forecasting: "Considering the factors that exist today, the probable rate for the current year is about 1%, and in certain months and quarters we can expect negative dynamics."

He also anticipates a slowdown in the growth of consumer demand. "Enterprises have less and less income to raise salaries at the same rate as before. Until recently, profits provided a margin of safety, but this cushion has now been exhausted," the analyst assessed.

This trend aligns with the broader concept of economic cooling.

However, Oleg Abelev from Rikom-Trust expresses a more optimistic outlook, stating, "We can expect more or less positive forecasts for development in import-substituting industries by the end of the year. This is particularly optimistic given the current shortfall in new production capacities.

Representatives of the food industry are optimistic about the outlook, with Soyuzmoloko confident that "the trend of increasing production of key food products will continue in 2025 as demand for the category increases." The association emphasises the crucial importance of enhancing production.

"This should include the construction of new farms, the modernization of existing livestock complexes, and work to increase productivity at existing sites. However, given the current economic conditions, characterised by long payback periods for projects and high investment capacity, the implementation of affordable loans and other measures of state support for the raw materials sector is imperative to facilitate these developments," Soyuzmoloko emphasised.