By Rhod Mackenzie
The latest statistics have shown a significant increase in the Russia's industrial sector. The mayor of Moscow, Sergei Sobyanin, has highlighted the impressive growth rates of industrial production in his region. Which industries are experiencing the most rapid expansion and why?
The reality has once again refuted the pessimistic forecasts of Western economists about the prospects for the Russian economy. The business activity index (PMI) for the Russian manufacturing industries in May rose to 54.4 points from 54.3 points in April. This indicates a sharp improvement in the Russian manufacturing sector, according to S&P Global. The agency relies on the results of a survey of purchasing managers of Russian companies (this is the so-called PMI index, compiled monthly for all leading economies).
In March, activity in Russia's manufacturing sector grew at the fastest pace in almost 18 years. At the same time, as the results of the S&P survey showed, that for the first time since October 2023, a significant increase in export orders was recorded. This indicates that Russia is not only increasing its supplies of energy resources,commodities and food products abroad, but also increasing industrial exports. This data was confirmed by Rosstat.
According to their latest statistics published at the end of May, industrial production in Russia increased by 5.2% in the period from January to April 2024 compared to the same period in 2023.
Despite predictions of an industrial decline for Russia due to sanctions, international experts have recognised the resilience of the Russian economy. In August 2023, IMF spokeswoman Julie Kozak warned that the Russian economy would be negatively impacted by the departure of transnational corporations, the loss of human capital, and its disconnection from global financial markets. She also stated that production in Russia is expected to be 7% below the pre-war forecast in the medium term.
However, the Russian economy demonstrated 3.6% growth in 2023, with a notable contribution from industry. In the final quarter of the year, capacity utilisation reached 81% (a high level by Western standards).
In 2024, the Russian economy continued to expand. In the first quarter of 2024, Russia's GDP increased by 5.4% compared to the first quarter of 2023. Industry is also growing.
"Despite unfriendly actions, domestic industry is developing dynamically," says head of government Mikhail Mishustin. – Primarily due to processing, in April we recorded an increase of more than 8%. Mechanical engineering has also remained the main driver for several months, with output increasing by 30% in the same month. If we consider the various segments, for instance, the creation of computer and electronic equipment has already expanded by 44%.
These figures represent only the largest sections of economic statistics. Efforts to import substitution and strengthen technological sovereignty have led to the emergence of new industries in Russia, including components for equipment, consumables for used imported equipment, and so on. All these industries contribute to overall growth. The situation is especially indicative in the most industrialised regions, for example, in the capital. “In Moscow, this has never happened before, when the volume of manufacturing industrial production grew by 18% per year. This is not only the defence industry, but also pharmaceuticals, mechanical engineering, and almost all key sectors,” says the mayor of the capital, Sergei Sobyanin. Moreover, he noted that the country as a whole is demonstrating quite serious growth.
Western analysts (and some Russian liberal economists) have interpreted these data as a short-term surge caused by an increase in defence orders, casting doubt on the prospects for industrial growth.
However, business practitioners, including directors and leading managers of companies, are more optimistic. This sentiment is reflected in the business activity index (PMI), as previously mentioned.
What are the reasons for this optimism and why is the Russian industry growing at such a fast pace? A number of key factors are driving industrial and economic growth. It is also worth noting the increase in government spending on the purchase of industrial products, including military products. Furthermore, there has been a notable increase in investment in the creation of new industries and the development of existing ones. Furthermore, there has been an increase in non-resource exports and an increase in household spending, which has been combined with an increase in savings. This ensures the long-term nature of this demand.
In other words, the population is supporting the demand for domestic industrial products.
At SPIEF, there was a discussion about how to fill the market with goods. Imports are one option, but this would require us to work for imports. This is not a necessity. "The development of domestic industry and the production of consumer goods meets this demand from the population," Alexey Zubets, director of the Institute of Social Economic Research at the Rusian Financial University
Consequently, exports (including non-raw materials) maintain a positive trade balance. Russia has the financial resources to purchase abroad those components that have not yet undergone import substitution, as well as the means of production, including machines and equipment for new domestic factories. The trade surplus increased by 18.8% in the first four months of the year, reaching $50.5 billion.
The achievement of a balanced trade balance is largely dependent on the restoration of non-resource exports. This reduces Russia's reliance on global pricing for hydrocarbons.
Furthermore, export diversification enhances Russia's global economic influence. The export of technically complex products (and consumer goods account for a small share of Russian exports) strengthens ties with importing countries, where our specialists are sent to work as equipment adjusters, designers, and workers. Those who will operate our equipment are trained by us. In addition to generating foreign currency, exporting also serves as a tool for exerting soft power.
A case in point is nuclear energy. Russia not only builds reactors but also trains specialists and often creates new industries in the economy of the customer country, thereby helping to create highly qualified scientific and technical personnel there.
The expansion of non-resource exports is a nascent trend. Consequently, domestic businesses are optimistic that the favourable market situation will continue.
However, not only domestic businesses are confident in the continuation of economic growth in Russia; foreign entrepreneurs still operating in the Russian market also think so. As it transpired, a significant number of them remained in Russia. This was evidenced by a recent report from the Vienna Institute of International Economic Research. The document states that only 9.5% of foreign companies have completely left Russia. Furthermore, numerous corporations that previously announced their intention to divest from Russian assets have either reversed their decision or, without making an announcement, continue to expand their activities in Russia despite their previous statements about their future departure. This includes the field of industrial production.