Russian Industry: Hoping For A Better 2020

Even though overall industrial production growth softened in 2019, some investment-driven sectors outperformed, including those focused on agriculture, oil downstream, chemicals, construction, and transportation. For 2020 we continue to expect acceleration given the budget stimulus that had already been planned and potential extra injections.

Industrial production in 2019: pressured by OPEC+, weather, and pessimism over local consumer demand

Russian industrial production accelerated from 0.3% year on year in November to 2.1% YoY in December, somewhat below our 2.7% YoY expectations. We note, however, that both November and December data have been distorted by calendar effects: November 2019 had 1 workday less than November 2018, while December 2019 had 1 workday more than December 2018. Moreover, December data benefited from the splurge in year-end budget spending, which further complicates forecasting and lowers the indicative power of year-end statistics.

In full-year terms, industrial production (around 23% of the Russian GDP) decelerated from 2.9% YoY in 2018 to 2.4% YoY in 2019, which came in slightly below our 2.5% expectations. We don't take it as a sign of material deterioration of the industrial output trends for the following reasons:

  • The two key sectors that assured up to 80% of the slowdown were commodity extraction (37% of industrial output, growth decelerated from 4.1% in 2018 to 3.1% in 2019) and electricity&heat distribution (11% of industrial output, growth decelerated from 1.6% to 0.4%). This was a result of Russia's OPEC+ commitments to limit oil production and warm weather conditions that lowered local demand for electricity&heat (and therefore for gas production as well).
  • Manufacturing (50% of industrial output), the key portion of Russian industry, posted only a modest slowdown from 2.6% in 2018 to 2.3% in 2019, which is still an impressive figure given that for most of the year budget policy was not supportive, with the VAT hike pressuring consumer demand and budget spending dynamics improving only at the very end of the year.
  • Looking at the composition of the manufacturing output, the slowdown was driven by consumer-focused sectors (light vehicles, household appliances, office supplies, clothes), while others stand out as showing improved dynamics in 2019 vs. 2018, including oil downstream (7% of total industrial output), chemicals (4% of total), construction materials and metals (8% of total), and machinery and equipment focused on the agricultural sector.
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Moon Kil Woong 2 months ago Contributor's comment

Russia will be dependent on if the price of oil holds and if China and others will keep buying their oil. For now things look better, however, we will see if oil will go up or down from here.