Amid the deep recession in the Russian economy, there is a sign of possible improvement: Russian industry might start growing this year.
A woman walks past a shop window with a T-shirt on display reading, 'I Believe in the Ruble', in downtown Moscow, Russia, on Monday, Dec. 22, 2014. Photo: AP
The difficult situation in the Russian economy is old news. According to the official data provided by the Federal State Statistics Service (FSSS), in 2015 Russia's GDP decreased by 3.7 percent and industrial production dropped by 3.4 percent. Based on that data, it appears that there are no reasons to be optimistic in 2016. The fundamental factors that caused the recession are still there: oil prices are low, and international sanctions have not been lifted.
For a very different take read: "The worst of the economic crisis in Russia lies ahead"
Nevertheless, there is light at the end of this seemingly endless tunnel. At least, there are some reasons to hope for the best.
Positive news and worrisome facts
A closer look at the FSSS 2015 figures shows that not all segments of the economy reported negative results. True, the processing industry cut production by 5.4 percent, and the production and distribution of power, gas and water was down by 1.6 percent, but agriculture grew by 3 percent as a clear response to the opportunities presented by the “sanctions war.”
Mining operations increased by 0.3 percent, which means that the crisis has not quelled investors' interest in this key segment for the Russian economy.
Actually, a few segments utilized their competitive advantage that resulted from sanctions, embargoes, import substitution and devaluation of the ruble.
Three industries came out on top last year: the food processing industry, including tobacco and drink manufacturers (2 percent growth), coal and oil production (0.3 percent growth) and chemical production (6.3 percent growth).
In other areas, the growth was sporadic. During the recession, Russia increased the production of meat, fish, dairy, cheese, sugar, textiles, car tires, pipes, plywood, chipboard, varnish, paint and household chemicals.
Moreover, positive dynamics were also exhibited by such complex industrial sectors as machinery (1.3 percent), computers and their components (2.8 percent), microchips (10.4 percent), radio and TV transmitters (14 percent), medical products, including surgical equipment and orthopedic devices (1.5 percent), pharmaceuticals (8.9 percent) and locomotives (230 percent). Not too bad overall.
Remarkably, in spite of the recession and the general decline in production, companies' ruble income dramatically increased last year. Based on January-November 2015 results (the FSSS has not yet tallied up annual results), summing up the profits and losses of companies, ruble income increased by 48.6 percent and reached 8.3 trillion rubles (about $ 105 billion in today's currency rate).
This number is made up of the following telling statistics: 38,500 Russian companies reported 10.233 trillion rubles in total profits, while only 16,000 companies reported losses in the amount of 1.896 trillion rubles.
The main reason for the encouraging financial performance is the 290 percent year-on-year increase in the positive balance of processing companies, which earned 2.184 trillion rubles and topped the 2.09 trillion rubles profit of the fuel and energy complex.
Unfortunately, that is it for the good news. Let us consider a few disturbing facts. Last year's vast additional corporate income did not translate into investments into core assets. In real terms, the overall investment amount dropped by 9.4 percent.
So where did the “extra” money go? Looks like it was converted into bank deposits. According to the Bank of Russia, from Dec. 1, 2014 to Dec. 1, 2015, ruble deposits of legal entities increased by 685 billion rubles, and their foreign-currency deposits grew by almost 1.5 trillion rubles. In total, the funds in corporate accounts shot up by 2.3 trillion rubles.
These statistics beg the logical conclusion: certain industries' lack of growth (or extremely slow growth) is not caused by the lack of funding, but by their reluctance to invest into development projects.
Thus, it is important to understand what needs to be done for the money accumulated in the economy to start working.
The Higher School of Economics' Center for Business Tendency Studies asked Russian businessmen to share their opinions on the issue. The Center's report on investment activities of large and medium industrial companies in 2015 indicates that eight out of ten respondents feel that "high interest rate on commercial credits" is the main obstacle that hampers entrepreneurial and investment activities.
"Unstable economic situation in the country" and "low demand for produced goods" shared the second and third places on the list of factors that put significant pressure on Russian companies. Still, the most optimistic part of the business community believes that the economic situation will improve in three to six months.
Abel Aganbegyan, the department head at the Russian Presidential Academy of National Economy and Public Administration, believes that Russia possesses a major internal investment resource.
"The main internal money pot consists of bank assets estimated at 775 billion rubles, which is commensurate with GDP," Aganbegyan claims. According to his calculations, only 1.5 percent of this enormous amount is invested, while in developed countries (for example, in Italy) the number is around 20 percent. Even if Russian banks' investments reach 5 percent, it will help create the conditions for future economic growth.
In the beginning of February, the FSSS published the assessment of corporate business activity based on January 2016 data. On the one hand, the study of three thousand organizations predictably showed the decline of business confidence index compared against the December results.
On the other hand, researchers were surprised to learn that in January 82 percent of top managers working in the mining industry and 81 percent of top managers representing the processing industry assessed their companies' economic climate as positive or satisfactory.
On average, companies were using 63 percent of their production capacity in Jan. 2016, according to the FSSS survey. 91 percent of respondents felt that their production capacity would ensure that they meet the demand in the next six months, and 12 percent of them believed that they had excess capacity.
It is worth noting that the number of top managers who are optimistic about production growth in the next three months is higher than the number of those who anticipate lower production volumes: the margin is 3 percent for mining companies and 18 percent for the processing industry. The question about the possibility of growth in the next six months returned similar results: a 9 percent margin in optimists' favor in mining and 13 percent in processing.
Read the Q&A about the challenges of Russia's investment climate with well-known economist Andrey Yakovlev: "How the economic crisis hampers Russia's investment climate"
So what can serve as the growth incentive for the Russian economy? Ruslan Grinberg, an associate member of the Russian Academy of Sciences and the director of the Institute for International Economic and Political Studies at the Russian Academy of Sciences, believes that state investments may serve as a much needed impulse.
"No economic recovery is possible unless the government invests into infrastructure, meaning projects that facilitate regional development, such as the construction of high-speed railways, highways and residential housing. It is important to focus on 10-12 top priority projects. Here is how it should work: the government initiates projects, starts funding them, and then makes them appealing to private investors," the expert says.
As for Mikhail Dmitriyev, the president of the New Economic Growth consultancy and ex-president of the Center for Strategic Research, he believes that we should engage "dormant" private investments.
Dmitriyev is referring to the potential for quick development of non-resource economic sectors in the vicinity of large urban metropolises. In order to jump start these growth drivers, Russia needs to create a market for investing into infrastructure, which implies the removal of obstacles for private investors.
"I am not just talking about transportation, telecommunications, energy, housing, the utility sector, logistics, offices and real estate. They are closely linked to the development of a residential construction market that is catastrophically underinvested in Russia," Dmitriyev explains.
In his opinion, the creation of housing and infrastructure markets that are attractive to private investors will supply the sought-after boost for the development of the non-resource economy. Actually, investments in infrastructure projects in and of themselves serve as a strong incentive that stimulates the demand for domestic goods, especially in the service sector and the manufacturing of construction materials and energy and transport equipment.
There is no denying the fact that the Russian economy is in recession. Still, there is definitely room for growth, and that is also an incontrovertible fact. The most important task now is to redirect the funds that are far from being depleted, as shown by the statistics, to critical investment projects.