Russian think tank warns of stagnating industrial output, investment

LONDON, (Reuters) - Russia’s industrial production and investments are stagnating, its exports of goods are continuing to deteriorate and profitability in most industries is declining, a think tank close to the government has said in a report.

The Centre for Macroeconomic Analysis and ShortTerm Forecasting issued its downbeat assessment on Saturday, also warning about a shortage of imported components and raw materials.

Despite Russia’s ongoing war in Ukraine, its economic performance last year exceeded the expectations of officials and analysts. But in its monthly analysis of macroeconomic trends for April, the centre said it saw signs of a deterioration in many indicators at the end of 2023 and the beginning of 2024.

The emerging trends are a cause for concern, it said, while long-term challenges to the economy need solutions “here and now.”

“In most of the main types of activity, the transition to stagnation has either already occurred or is increasingly visible,” it noted, adding that high interest rates were beginning to slow the growth of consumer demand, seen as a key driver of economic growth.

In January and February, consumer activity fell by 0.2%, excluding seasonality, according to think tank’s data.

February was the fourth month in a row when investment activity had stagnated, it added, something it partly blamed on what it called the exhaustion of previous “growth ideas”.

Earlier investment projects have focused on infrastructure, import substitution, the military-industrial complex and housing, but lending conditions are now tighter and profitability in a number of industrial sectors has dropped.

Profitability could fall further, hurting investment prospects even more given the difficulties of private-public co-financing projects, the centre warned.

Import restrictions due to Western sanctions over the war in Ukraine and problems with payments were a further obstacle as some businesses were critically dependent on the supply of components and raw materials, it said.

“The possibilities of ‘cheap’ (non-capital-intensive and non-innovative) import substitution have largely been exhausted. Next, investments are needed,” the report said.

Russia can no longer rely on energy revenues and cheap labour for economic growth due to sanctions on hydrocarbons and a shortage of personnel, it said.

One solution, the report suggested, would be to increase labour productivity by further automation and the greater use of digital technology and robots.