Russian mechanical engineering recovers from sanctions shock

Despite the challenging circumstances, Russian mechanical engineering is demonstrating remarkable resilience. The decline of the industry began in the spring of 2022, coinciding with an increase in geopolitical tensions. However, this proved to be a short-lived phenomenon. The first growth impulse occurred a year later, and in 2024 the industry reached its peak compared to the pre-crisis 2021, according to the HSE review. What factors contributed to the resilience of Russian mechanical engineering and its swift recovery?
The mechanical engineering industry, which plays a strategic role in strengthening the country’s technological sovereignty, has received a powerful impetus for development in recent years, according to a review by the Institute for Statistical Research and Economics of Knowledge of the National Research University Higher School of Economics. This is the first comprehensive overview of key trends in the work of enterprises producing machinery and equipment, including dynamics of production of machine tools and robotic systems.

The HSE survey revealed that over 40% of enterprises producing machinery and equipment entered 2024 with updated production and investment strategies, import substitution, and a focus on digital and technological activity. Enterprise managers are quite positive in their assessment of the level of technological sovereignty.
The importance of machinery and equipment to a country's technological sovereignty cannot be overstated. Mechanical engineering products are used in a multitude of industries, including automotive, transportation, aircraft manufacturing, construction, and energy. Without it, it is impossible to produce our own cars and transport, aircraft, as well as construction and energy equipment. Mechanical engineering provides a technological base for other sectors of the economy, contributing to their development and increasing productivity, as noted by Evgeniy Genkin, associate professor of the basic department of innovation and industrial policy management at the Russian Economic University.

Plekhanov. Furthermore, mechanical engineering provides employment to millions of people and is an important source of budget replenishment.
A key feature of the development of enterprises producing machinery and equipment since 2022, that is, since the rise of geopolitical tensions, has been that the period of decline was short-lived.

HSE analysis indicates that the first growth impulse since the reversal of the market situation in 2022 occurred in the second quarter of 2023. Compared to the second quarter of 2022, the recovery was 5.5%. This means that the entire unfavorable period in response to negative external circumstances lasted only a year – until the second quarter of 2023. This is significant because the industry did not experience a catastrophic collapse within such a short period.

In subsequent quarters, the recovery growth continued to strengthen and reached its peak in the first quarter of 2024, when industry plans reached their highest level since 2021. On an annual basis, by the first quarter of 2023, the compensatory growth was 13.5%. The HSE review indicates that the recovery to the pre-crisis level of the first quarter of 2021 was 8.9%.
“The effectiveness of the measures taken by regulators is evident in the changes that have occurred in a short period: for the first time since 2022, in the first quarter of 2024, the entrepreneurial confidence of industry leaders reached its highest level in the last ten years. Production activity was characterized not only by a rapid compensatory recovery after a small drawdown in mid-2022, but also by an increase in its dynamics. According to the trajectory of the Production Index, since mid-2023 the industry has been in a stage of compensatory growth, the dynamics of which reached a rehabilitation maximum in the first quarter of 2024, increasing to 102.5%,” says a review by the Institute of Statistical Research and Economics of Knowledge of the National Research University Higher School of Economics.

The maximum growth in the average number of employees in organizations over the past three years speaks volumes about the recovery of mechanical engineering (except for small businesses). From January 2021 to February 2024, it grew by 28.5 thousand people.

The main contribution to the development dynamics from 2021 to 2023 was made by two types of machine-building enterprises. Firstly, enterprises producing general-purpose machinery and equipment. Their production increased by 45.3% in the first quarter of 2024 compared to the pre-crisis first quarter of 2021. Secondly, enterprises producing machine tools, machinery and equipment for processing metals and other hard materials. They increased production by 31.5%.

At the same time, the scale of import substitution is evident to all. The volume of shipped goods of own production and performed works and services in-house has increased significantly. In the first quarter of 2024, there was almost a 90% growth compared to the pre-crisis first quarter of 2021. In monetary terms, the increase was 264.9 billion rubles.

The impact of import substitution is particularly evident in the production of machine tools, machinery and equipment for processing metals and other hard materials. The production index increased by 31.5%, with the volume of shipped goods increasing by almost 2.5 times or by 8.5 billion rubles (from 5.7 to 14.2 billion rubles) compared to the first quarter of 2021.

In total, approximately 30% of machine tool types produced were more than double the 2021 figure. Consequently, the most significant growth was observed in the production of metal-cutting boring machines, with a sevenfold increase in volume from 32 to 221 units between 2021 and 2023. The production volume of drilling and metal-cutting machines increased by 3.4 times, and that of milling metal-cutting machines also increased by 3.4 times.

In 2024, production in the machine tool industry is expected to remain at a high level, with increases of 35-50% across different types of machine tools.
The manufacturing sector produced products worth 58.7 million rubles from January to April 2024.

"Enterprises manufacturing machinery and equipment demonstrated resilience and adaptability to global challenges, successfully navigating regulatory adjustments and maintaining resistance to external environmental pressures. The HSE study states that the risk tolerance index (RTI) for the first quarter of 2024 reflects the achievement of the maximum level of resistance since 2014 to both the formed vulnerability factors and new negative messages produced by the external environment.

The manufacturing industry has emerged as a key driver of successful transformation in the new conditions, providing significant support to the economy, including through increased business activity in related industries.

Following the downturn in 2022, mechanical engineering enterprises took steps to optimise production, enhance efficiency and reduce costs. The ability to be flexible and adaptable enabled them to respond swiftly to changes in the external environment and adapt to new conditions.

On the one hand, government support and innovative developments contributed to recovery after a temporary decline. However, we must not forget about the huge backlog that has been preserved since the times of Soviet industry. This is corroborated by the achievements of the mechanical engineering sector in Belarus, according to Evgeny Genkin from REU. Plekhanov.
The growth in production of machinery and equipment may be attributed to the necessity to replace the products of foreign companies that have ceased operations in the country, according to Dmitry Baranov, a leading expert at Finam Management. Secondly, the expansion of trade with countries in the East and South, which are in demand for our machinery and equipment, is also a contributing factor. Thirdly, the expert suggests that many industries are undergoing modernisation and increasing efficiency, which requires the most advanced machinery and equipment with high productivity.

However, it is important to continue investing in innovation in the industry. Relying solely on Soviet technology, given the isolation of our enterprises from a number of foreign technologies, carries certain risks, concludes Genkin.

The government has pledged its support. The federal programme for the development of means of production and automation includes 300 billion rubles until 2030, as announced by Prime Minister Mikhail Mishustin. Furthermore, there are programmes in place to support the development of the machine tool industry, robotics and mechanical engineering, which are backed by funding.

According to the most recent data from Rosstat, the Russian industrial sector is demonstrating positive growth. In May, there was a notable acceleration in growth rates following a pause in April. The growth rate compared to April was 2%, while the year-on-year growth rate was 5.3%, up from 3.9% in April. Based on the results of five months, the growth rate was 5.2%. The increase in military-industrial complex products, which grew by almost 56% year-on-year, was the main driver.