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Regular version of the site

'Infected' Industry

How the pandemic has affected Russian manufacturers

© ISTOCK

Within the first two months of the lockdown, COVID-19 had crippled almost all key production aspects of Russian industry. Although the economic fall began to abate in May, economic growth relative to that of 2019 may not be regained until 2022. The Centre for Business Tendencies Studies of the HSE Institute for Statistical Studies and Economics of Knowledge studied the results of a survey conducted in May by the Federal Service of State Statistics of four thousand managers of Russian industrial enterprises. The key outcomes and results are available in 'Theses' on IQ.HSE.

Almost half (47%) of managers of large and mid-size processing enterprises reported a poor demand for their product in May. Results worse than that (58%) were observed in the midst of the 2008-2009 crisis. It was the consumer goods manufacturers that got hit first. Demand has been significantly decreasing for the last three months, although the situation slightly improved in May.

Due to decreased demand, production in turn also fell. One third of managers reported that they considered the current level of demand to be insufficient for adequate development. In May, a little over 58% of production capacities were used. To put this in perspective, around 70% of them were being used during stable years of 2003-2007.

Uncertainty over the country's economy has put increased pressure on business. Around 54% of those surveyed expressed concern over it, and 'uncertainty' itself ranked first in the list of factors setting back industrial development. This factor has an extremely negative impact. If a manager does not understand what is going on with the economy, he starts reducing the strategic planning period, innovative activities, and investments. This results in a slackening of both industrial modernization and the replenishment of key reserves, the deterioration of which is 52% as it is in the Russian industry.

Managers’ negative assessment of the current and future situation triggered a drop in the business confidence index The business confidence index calculated as an arithmetic mean value of balances of actual demand level and finished product stock (with an opposite sign) and anticipated trend for product output —  a parameter that describes a country's business climate. This index dropped primarily in the process industry, which, unlike the production industry, operates primarily on a standard work week with two days off. During the lockdown, a number of enterprises had to close and their revenue was reduced to zero. Moreover, even though they were ‘on holiday’, they did not receive exemptions from financial obligations (taxes, rent, salaries, debt payments, etc.).

In order to minimize expenses, companies began laying off workers. Layoffs increased in April and May, though they did not reach the critical levels observed during the crises of 2008-2009 and 2015-2016. However, it is not improbable that there is still ‘disguised’ unemployment in the industry, namely employees that have been subject to pay cuts and forced unpaid leaves. Officially, such employees are not considered to be unemployed.

Fluctuation in the number of employed workers in the process manufacturing industry (2009-2020)

Source: HSE Centre for Business Tendencies Studies; Federal Service of State Statistics

The situation with enterprises' financial resources and revenues is much worse than with unemployment. It deteriorated in May for almost a third of companies and hasn't changed in 61% of cases. This negative dynamic may be fraught with debt and bankruptcy. Nevertheless, it is too soon to predict any consequences for the industry. There is a good chance that negative assessments are being given by the managers of poorly performing or loss-making companies. There are quite a lot of them in the industry: according to the Federal State Statistics Service for the first quarter of 2020, there were around 36% of them. These are the companies that drag the industry down not only in the event of a crisis.

The price situation turned out to be the most favorable in May. Only 14% of respondents reported growth in prices for their goods, while 4% reported price reductions. These trends are even better than those of May of last year (20% and 3%). No surges of inflation from producers are anticipated within the next three to four months.

The fluctuation in prices for sold products, feedstock, and materials in the process manufacturing industry

Source: HSE Centre for Business Tendencies Studies; Federal Service of State Statistics

The mining industry turned out to be the most shock-resistant. Mining, metal ore, oil and gas companies were characterized by a high Risk Tolerance Index, an indicator that reflects the aggregate assessments by entrepreneurs of factors that impede business development due to the crisis. The processing sector represented by typographers, manufacturers of paper, furniture, textiles, shoes, food, electrical equipment, computers, electronic, and optical products were all characterized as having the lowest level of risk tolerance.

What's next?

Georgy Ostapkovich, Director of HSE Institute for Statistical Studies and Economics of Knowledge:

This negative trend for industrial development due to the coronavirus will probably change drastically in June. This is indicative by both external indicators, such as European parameters estimated on the entrepreneurs' pool results, and similar studies conducted in Russia.

In May, the key production parameters in Europe skyrocketed following three months of near freefall. Although they are still in the negative zone, the mere fact of this turnaround appears to be cause for optimism.

The results of Russian surveys in absolute terms definitely do not match their European counterparts, but the trend directions are almost always in sync. Given that COVID-19 crossed the Russian border a month later, the economic turmoil also came a month later, and we should start to see the beginning of a recovery in June.

It is hard to predict how fast it will proceed in the short and mid-term. Unfortunately, there is a number of very specific problems attributed to the Russian industry that are insignificant for Europe. For example, the uncertainty factor of the economic situation in the country, given which production capacities and investment activity have decreased significantly. Continuous negative dynamics of such parameters is a potential fire that is very hard to put out.

A negative impact may be caused by a likely second wave of the pandemic. It is not quite clear what is going to happen to feedstock prices, Russia’s key export asset. Their slow recovery after an unprecedented fall early this spring is likely to lead to issues with the state budget and, consequently, will lead to challenges for a large industry-leading state-owned industrial business.

However, we should keep in mind that any crisis is not just pure evil but a chance for a pragmatic restart for industries. With all its adverse effects on the economy, COVID-19 is not a disaster after all. It does not disrupt the key assets and basically does not reduce workforce productivity. The enterprises' potential is reserved at the level of 2019. If there are no major force majeure circumstances, the Russian industry is practically doomed to a long and slow recovery starting around Q4 of this year and not reaching a steady increase above the base level of 2019 until mid-2022.

IQ

Author: Svetlana Saltanova, July 14