How Russian Industry is Coping with the Crisis

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May 23, 2015

 How Russian Industry is Coping with the Crisis

By Fritzmorgen

Translated from Russian by J.Hawk

Minister Denis Manurov gave a report yesterday on the successes of our industry. To be honest, I thought it would be worse. Industry is not a sidewalk chocolate stand, so neither the sanctions nor the lower ruble exchange rate would not start having positive effects before the autumn. Here’s the video of his appearance. 

http://www.duma.gov.ru/analytics/tv/meetings-archive/1099213/

I recommend to watch such appearances from time to time. They are a useful antidote for people who judge State Duma activity by articles published in liberal media and believe all it does is discuss whose image ought to go on the 100 ruble bill. The video is also useful to anyone who believes that Russia has nothing to offer except oil and gas, with the rest of its industry being in deep decline.

http://ruxpert.ru/Промышленность_России

At the same time, it’s too early for optimism, the crisis is continuing, and I can’t even vouch that we have already passed its worst phase. Nevertheless, there are reasons for joy.

Machine-Building

The defense industry is in pretty good shape. That’s not surprising–the current political situation requires major investments in the military, therefore Russia is not cutting back on its defense orders.
Defense enterprises have been given advances and guarantees so as to put to rest the banks’ concerns in the current difficult situation. Only Uralvagonzavod experienced problems, and the situation there will be dealt with through “hands-on management.

http://tass.ru/ekonomika/1975425

When it comes to combat aircraft, Russia last year achieved a record–we built 103 aircraft, thus taking the top spot in the world. It’s nice to be first once again, especially in an area as important as this one. We are also observing healthy growth in commercial aircraft construction, however airlines these days simply have no money to buy the aircraft that have been built. In order to remedy the problem, President Putin decided to increase the level of capitalization of the United Aviation Construction Corporation. It will help airplane manufacturers to hold out until their planes begin to sell again. And they will begin to sell, because right now we’re quietly introducing financial instruments to replace dollar credits with ruble-based leasing.

Everything’s just peachy in agriculture. Domestic factories have increased the tractor output by a factor of more than 1.5. Production of harvesters is also up. By comparison, the largest machine builder in the US, sales have been declining for 29 months in a row:

http://aftershock.su/?q=node/309540

Still, I would not take too much pleasure in that: Caterpillar has a plant in Tosno (near St. Petersburg), and that plant also did not raise its output. But the government is doing the right thing by helping our farmers buy domestically manufactured harvesters and tractors. The government is also helping the auto industry with money, where there are problems due to the rapid contraction of the market caused by the wild December buying spree. But there are no signs of catastrophe in the auto industry. The ruble exchange rate is forcing assembly plants to increase the level of localization and to open plants manufacturing spare parts. In the long term this is actually very good news. As a reminder, there tens of car plants other than AvtoVAZ, half of which are turning out wholly Russian designs such as Kamaz and Gazelle:

http://ruxpert.ru/Российский_автопром

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This year will also see money being assigned to support the auto industry under the program of “recycling” old cars and of buying domestic vehicles for state agencies. Starting in April, a program was launched aimed at facilitating car financing and leasing. It is estimated these programs will help sell additional 300 thousand cars and thus help the auto manufacturers overcome the worst of the crisis. 

In general, we are actively adopting the experience of our Western friends and partners: we protect our manufacturers by any means possible. I don’t think such practices are wholly consistent with the spirit of the WTO, but Western countries have so thoroughly wiped their feet on WTO norms that I’m starting to have doubts whether that organization which used to frighten everyone before is still alive.

Exporters
The exporters–metallurgy and chemical industry–feel relatively confident even without state support. Their expenditures are in rubles, their income in foreign currency, and the ruble exchange rate is 1.5 times lower. In this situation it would be difficult to suffer losses. To be sure, global metal prices are also dropping…but so far the ruble course changes are effectively compensating. The government convinced the metal industry to maintain low prices on the domestic market in order to allow the auto industry purchase metal at a normal price. If the government allowed the metal industry to raise prices to export levels, machine-building would have had a very hard time indeed which in final account would also harm the metallurgy industry.
Fertilizers prices have been held down through similar “hands-on” means, allowing our agribusinesses to have a successful sowing season. I don’t know what the “invisible hand of the market” would have done if the state had decided to go liberal. I suspect that the situation would have resembled the ’90s, when our industry and agriculture were trying to out-die one another. Keep in mind that the main thing our government is doing is organize access to rubles. The US closed our major enterprises’ access to dollar credits, and it will pay for it by losing the Russian financial market. Credits will now be issued in rubles, with all the massive benefits to our country that the switch entails. It seems that Washington expected our economy will be “torn to shreds” before de-dollarization progresses too far:

http://ruxpert.ru/Дедолларизация

But now it is wholly apparent that Uncle Sam was slightly naive.

Import Substitution

The top priority was military equipment. Plans and schedules have been approved to replace components from Ukraine, NATO, and EU with domestic equivalents. I don’t know how much more expensive they will be, however, substitution will yield major orders for several branches of industry which, in the long term, is the right thing to do. 
As recently as yesterday I was told an interesting story about Western machine tools. It turns out that Western gentlemen include gyroscopes and GPS sensors on their machine tools, which render them inoperative even when attempting to move them from one factory floor to another. Once that happens, you have to summon service support, pay them money.  One has to wonder how one can work with such people at all? We have to rid ourselves of Western machine tools as soon as possible. Even if it means using hackers to have them remove the gyroscope protections. I’d like to remind that recently Rostekh began a major campaign to restore own machine tool industry, and we may expect seeing major changes on that market by 2020.

There are also plans for import substitution in the area of civilian-use equipment. We have a serious dependency on imports in the oil industry, that problem must be actively dealt with, especially when it comes to continental shelf exploration. More than half of the equipment can be replaced by 2017-2018. In cases where money is needed, the government will help. I am not citing here concrete numbers because they won’t mean anything to non-specialists, but I can say that we are talking about trillions of rubles. We are investing in our industry on a major scale, with a truly Russian momentum, and for every billion invested by the state there are several billion of private investments. The state is only helping business, rather than fully replacing it.

Thus, for example, the government has subsidized credits, compensating 70% of RCB’s rates. As a result manufacturers are able to obtain credits at rates lower than the inflation rate–however, this is not a gift but a credit, which will have to be returned with interest. Another major initiative is the construction of plants for manufacture of AIDS, TB, and cancer treatment drugs. They are too expensive to buy from abroad: moreover, to reiterate, our Western friends and partners don’t look like reliable suppliers these days. Russia will also begin to manufacture modern diesel engines and composite cisterns. They were manufactured before, but now the pace will be accelerated.

Bans

A few areas of industry are being helped with bans. For example, last year Russia introduced a ban on leather exports which allowed our light industry to maintain access to raw materials at normal prices. If it weren’t for that ban, there would have been no material for leather jackets and purses. The government is also trying to prohibit state agencies from buying imported equipment in order to give domestic manufacturers a chance to expand. This is a, mildly speaking, unpopular measure, yet one that is necessary given the circumstances.

Laws

There are plans to have the Duma pass a law that would allow state agencies to enter into contracts with suppliers for a period of 7 years. I don’t know why we need that law: I suspect the reason is to promote the production of certain products and give them sufficient time to become profitable. Duma is also working on a standardization law. A much needed thing. In the absence of a whip wielded by the state, individual manufacturers have no incentive to negotiate with one another–rather the opposite, they are liable to produce incompatible components so as to complicate life for the competition.

Trade

Remarkably, last year grew by a couple of percent, but this year it was hit by an expected decline. People have grown poorer, they have less money for purchases. That’s a fact. But the drop was not huge, only 6%. I thought it would be worse. Manturov is defending the retailers–he says that retail trade took the brunt of the price scissors, and maintained low prices at the expense of own profits. That’s news to me–I can see with my own eyes something exactly the opposite. While our farmers’ prices have not changed a great deal, the prices in supermarkets have grown considerably. It’s possible that in some areas prices have not changed much, but if one were to close eyes and grab a random product off the shelf, one would note with some surprise that the price has seriously gone up.

In Conclusion

On the one hand, our industry’s is still far from ideal conditions. There are many problems, including the drop in demand and the difficulty of transitioning to domestic technologies. On the other hand, Manturov is implementing the correct policy: the policy of appropriate protectionism, import substitution, and reasonable defense of domestic manufacturers, defense from our own banks, our own buyers, and our own suppliers of raw materials.

I’m not expecting immediate results: industry, as I noted above, is not a street stand, you can’t expect instant results. However, we can expect a dramatic improvement in only a few years. That wild optimism is not based on nothing–even today we are seeing the start of very large construction projects aimed at increasing both the production and infrastructure capacity: 
http://ruxpert.ru/Крупные_российские_проекты_(строящиеся)

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