In March and early April, Russian enterprises faced interruptions in the supply of raw materials and components, and they restructured both their production activities and the geography of their supplies. According to the Bank of Russia survey of more than 13,000 enterprises, businesses’ price expectations have reached a historic high. The survey was conducted in April in each of the seven Russian macro-regions, the boundaries of which correspond to the regions of operation of the Main Branches of the Central Bank of the Russian Federation (Bank of Russia MBs).
Two-thirds of the enterprises surveyed have faced problems with the supply of imports. More than half of companies dependent on imports planned to switch to domestic alternatives, and many were trying to change the geography and structure of their imports and exports. Due to the contraction of output, some enterprises have introduced part-time employment schemes.
Econs publishes excerpts from the report on the main economic trends recorded by the Bank of Russia MBs in the macro-regions.
Refocusing of import and export
Due to the sanctions, key industries are refocusing on the domestic market and Asian countries. However, imports from Asia can be much more expensive than those from the EU due to the extension of the routes and cargo delivery times.
As of April 2022, companies had sufficient stocks of raw materials for several months, which in their view enabled them to continue their operations. At the same time, they planned to consider possible solutions to the existing problems and find new suppliers and new target markets. A number of regions, including Tatarstan, Bashkortostan, Karelia, as well as Ryazan, Ulyanovsk, and Chelyabinsk Regions have established import substitution centres to help manufacturers find domestic alternatives to previously imported goods.
Machine-builders, chemical manufacturers, and consumer goods trading companies are most dependent on imported equipment, components, raw materials, and finished goods. On the one hand, the restrictions in place entail the risk that companies might lose their share in some foreign markets, whereas, on the other hand, a number of industries have been presented with the opportunity to increase their production capacities and expand the output of goods they supply to the domestic market. According to some enterprises in the machine industry, the substitution of foreign components with supplies from friendly states will take approximately 18 months, whereas the launch of domestic production of key components will require nearly three years.
Mining and quarrying. After the US and a number of European companies have suspended oil purchases from Russia, the majority of large Russian oil and gas producers have started to actively redirect their exports to Asia. To substitute the supply of sanctioned imported equipment, projects have now been launched to manufacture similar equipment within Russia. The production of drilling rigs has been launched in the Tver Region, and the manufacture of metal structures for the construction of oil pipelines has begun in the Kurgan Region.
The export of Russian diamonds is gradually being redirected to Asia. In one example of the broadening of the geography of coal exports, a coal producer in Yakutia has delivered its first pilot shipment of coal to a new market in Southeast Asia.
Manufacturing. Oil refineries have been forced to reduce output, as they have lost their share in some markets because of the sanctions. Due to difficulties with equipment imports, the Perm Territory has suspended a large investment project to construct an advanced oil refining unit to produce propylene.
As the EU banned imports of Russian ferrous metals and ferrous metal products, metallurgical enterprises in the Urals started a shift in the geography of their exports in March 2022. In particular, a large producer in the Orenburg Region has rerouted its exports from Europe to Asia; a manufacturer of steel wire and cables in Bashkortostan redirected its shipments to the domestic market and the CIS countries. Several companies have been forced to suspend exports due to difficulties with foreign currency payments, and also because transportation companies have refused to deliver products abroad.
Machine-building companies are searching for alternative suppliers of components among domestic manufacturers and Asian and the CIS countries. Concurrently, some companies have recorded a rise in the demand for their products. A Kostroma-based enterprise is expanding its manufacture of cable products, while a company from Kursk is increasing its output of spare parts for agricultural machinery.
In certain cases, when it is impossible to deliver components and equipment directly from the EU and the USA, they are supplied via third countries to circumvent the imposed sanctions, which increases costs. The problem with component supplies is most acute for the automotive cluster of the Central, Volga-Vyatka, North-Western, and Ural Federal Districts. This drags output down and sometimes interrupts production processes. In particular, as of April 2022, 17 plants in the Kaluga Region were idle, all automobile plants in Saint Petersburg suspended operation from March 2022, and an enterprise in the Kurgan Region has reduced its output of buses.
Under the conditions of foreign sanctions, forestry industry companies from Central Russia and the North-West were considering opportunities for expanding their cooperation with Latin American, African, and Asian states, as well as the CIS countries, and planned to ramp up supplies to the domestic market.
Consumer goods. For the most part, the food market had sufficient quantities of domestic products, but such products are manufactured using a large proportion of imported components, namely equipment, packaging, and raw materials. Dairy product manufacturers in the Far East, Central Russia, and the South facing problems with packaging imports were negotiating with Russian suppliers of similar products and using other methods for packing dairy products (for instance, by switching to polyethylene). Some food enterprises considered the exit of foreign competitors from the Russian market as an opportunity for extensive import substitution: for example, to cover the deficit of biologically active additives and medicines, a company in the Stavropol Territory which manufactures edible and refined lactose is ready to ramp up its output exponentially.
Non-food product manufacturers have also faced a shortage of imported raw materials and components. Linen and cotton textile manufacturers in the Kaluga Region have switched to Turkish and Chinese fabrics. Furniture manufacturers in Tatarstan have begun to purchase fittings in Asia. A large retail chain selling construction materials and home improvement goods was planning to increase its proportion of domestic products to 80%.
Agriculture. Most frequent have been difficulties with imports of sugar beet seed, stone fruit plant material, and fertilisers. Agricultural enterprises are seeking opportunities to increase the proportion of domestic materials. Specifically, a horticultural enterprise cultivating fruit and berries in the South of Russia planned to refocus on vegetable production as Dutch seed suppliers have refused to continue cooperation. To decrease dependence on imported farm machinery, Russian agricultural enterprises are replacing equipment with domestic alternatives. For example, the Nizhny Novgorod dealer for a large domestic manufacturer of farm machinery plans to replace Czech tyres with tyres produced in Altai.
Livestock producers are searching for alternatives to imported feed components, vaccines, hormones, and veterinary medicines in Belarus and China and are replacing certain imported goods with domestic ones. Breeding material imports for the poultry industry have not been suspended, but logistics costs have tripled and have been fully passed through to consumer prices.
Agricultural export from Central Russia to Middle Eastern countries, China, and the EAEU states, which have not enacted any restrictions, has been complicated somewhat due to logistics problems caused by the threat of the seizure of rail transport and difficulties in the navigation of the Black Sea induced by geopolitical tensions. Despite all these issues, the agroindustrial complex is expanding the geography of its exports. The Kursk Region, for example, plans to export buckwheat, flour, and beet pulp to Africa.
Key trends in Russian regions
Central Federal District. Businesses’ price expectations in the Central Federal District have hit record highs for any macro-region in April 2022. Retailers and restaurants have suspended the opening of new locations, noting rising purchase prices and supply disruptions. Price escalation has also accelerated in both the secondary and new housing markets due to a surge in demand. Developers have redirected themselves to new markets for suppliers of equipment and materials, which is primarily relevant for premium-class projects, in which the share of imports is significant.
The production of petroleum products has declined due to falling demand. According to the Central Dispatching Department of the Fuel and Energy Complex, Russian refineries reduced oil refining in March by 10.9% as compared to February. Food manufacturers have faced disruptions and cancellations of the deliveries of raw materials, spare parts, containers, and packaging, as well as cash gaps and a considerable rise in working capital costs. However, the majority of respondents in the food industry didn’t not plan to reduce their staff.
Main Branch Regions in the Central Federal District: Moscow; Belgorod, Bryansk, Ivanovo, Kaluga, Kostroma, Kursk, Lipetsk, Moscow, Orel, Ryazan, Smolensk, Tambov, Tula, Tver, Vladimir, Voronezh, and Yaroslavl Regions.
North-West. Restrictions on component supplies have significantly affected the output of the macro-region’s carmakers: three of the four automotive plants in this federal district have announced the suspension of production. After that, several spare parts manufacturers suspended their operations as well. Sales of new cars in Saint Petersburg halved in annualised terms. As of April 2022, car dealers expected the inventories of cars and spare parts to cover the demand for two-three months, while supplies of certain items could last for six months.
Pulp and paper mills have faced considerable constraints, including disruptions in imports of raw materials, equipment, and components, and several target markets have closed. A number of producers in the macro-region have begun to manufacture unbleached eco-friendly printer paper. One regional plant was planning to move from European to Asian markets, while another enterprise in this macro-region has redirected a part of its kraft paper exports to the domestic market.
Household spending on public catering has edged downwards. Nonetheless, after a popular international fast food chain exited the Russian market, other fast food market players in Saint Petersburg noted a rise in sales. Additionally, one public catering company from the North-West plans to open 20 locations in Moscow.
Regions of the North-Western Main Branch: Saint Petersburg; Republic of Karelia; Komi Republic; Nenets Autonomous Area; Arkhangelsk, Kaliningrad, Leningrad, Murmansk, Novgorod, Pskov, and Vologda Regions.
Volga-Vyatka macro-region. There has been a reduction in the number of visitors to cultural organisations, cinemas, beauty salons, as well as public catering locations: some restaurants have reported a nearly 50% slump in traffic. According to companies’ estimates, up to one-third of retail areas may become vacant due to the decrease in shopping mall traffic and the departure of foreign lessees. Consumer demand for food, which rose sharply in March, remained elevated in April. At the same time, purchases of certain non-perishable food products edged down due to restrictions on the sale of goods to each individual customer, as well as to stocks that households had already accumulated.
Supply disruption was a matter of concern for over one-third of respondents. Several foreign carmakers stopped their conveyors. A large domestic car manufacturer suspended production for a total of two weeks and raised retail prices for its cars twice during the month. Consequently, as of the end of March, the auto group’s retail sales contracted by nearly two thirds in annualised terms. The carmaker did not plan to accept orders from dealers for May. In summer, the enterprise was going to start assembling cars with a lower proportion of foreign components and introduce a part-time working week. A leading domestic truck producer that was sanctioned reported that it had switched to manufacturing previous-generation models due to problems with component imports.
There has been a reduction in the exports of several large chemical manufacturers. Considering the significant proportion of exports in the sales structure, this caused a slump in output by more than a half in March for one enterprise, a twofold decrease in output targets for April for the another, and the accumulation of inventories and a high risk of partial production suspension for the third. Furthermore, problems with imports have created difficulties with raw material supplies for manufacturers of rubbers and household chemicals, who expected output to shrink either in the near future or in two–three months, as their supplies run out. However, companies are trying to find possible solutions, such as rearranging their logistics chains, searching for alternatives in the global market, and launching the production of necessary raw materials at domestic enterprises.
Regions of the Volga-Vyatka Main Branch: Mari El Republic; Republic of Mordovia; Tatarstan; Udmurt Republic; Chuvash Republic; Kirov, Nizhny Novgorod, Penza, Samara, Saratov, and Ulyanovsk Regions.
Southern macro-region. Direct sales channels are expanding. Seven regions of the Southern Federal District have opened more fairs. The Krasnodar Territory increased supplies of socially important goods to distribution networks and retail centres. In June, Ingushetia first in the region planned to open a wholesale distribution centre.
One in ten companies in the macro-region reported that they have introduced part-time employment schemes, and there has been a decline in income in air and sea transportation.
Manufacturers of meat and dairy products were searching for new supply channels to import technology and spare parts via third countries needed to maintain foreign equipment. A sausage manufacturer in the Karachay-Cherkess Republic reported that it had sufficient stocks of imported raw materials for two months and was looking for domestic alternatives. A large juice and baby food manufacturer in the Volgograd Region planned to ramp up deliveries within Russia. Expectations for output and demand significantly worsened in March, plunging to a record low for the last several years.
Textile enterprises in the macro-region complained about a shortage of raw materials and are restructuring their manufacturing processes. Large clothing manufacturers in the Volgograd and Rostov Regions planned to switch from European to Turkish and Chinese fabrics, companies in the Stavropol Territory were going to arrange supplies of raw materials from Asia, and enterprises in Sevastopol intended to use domestic knitwear. One company in the Krasnodar Territory reported problems with purchasing trims and accessories in Europe, and it expected that it will take up to six months to arrange alternative supplies from China and Turkey.
Regions of the Southern Main Branch: Republic of Adygea; Chechen Republic; Republic of Daghestan; Republic of Ingushetia; Kabardino-Balkar Republic; Republic of Kalmykia; Karachay-Cherkess Republic; Republic of North Ossetia – Alania; Krasnodar Territory; Stavropol Territory; Astrakhan, Volgograd, and Rostov Regions; Republic of Crimea and Sevastopol.
Ural macro-region. As of April 2022, metallurgical enterprises have partially suspended their exports to non-CIS countries. There also was an oversupply of steel forming in the domestic market due to the reduction in oil and gas investment and lower demand for metals in construction and the automotive industry. Ural companies manufacturing ferrous metal products did not plan to decrease output as they have signed a sufficient number of contracts for supplies to the domestic market and the CIS countries.
Ural machine-builders mostly supply their products to the domestic market (including under state contracts) and the CIS countries. On the one hand, they have gained opportunities to sell their products since their foreign competitors exited the Russian market: a company from the Orenburg Region commissioned a new assembly and testing shop to produce drilling rigs in March, while several enterprises in the Perm Territory have ramped up their output of oil production equipment. On the other hand, machine-builders reported delayed or cancelled deliveries of prepaid imported equipment.
Owing to government support measures, the employment rate in the Urals remained almost the same. Certain companies were using part-time employment schemes on a case-by-case basis, for example, in air transportation.
Regions of the Ural Main Branch: Republic of Bashkortostan; Perm Territory; Chelyabinsk, Kurgan, Orenburg, Sverdlovsk, and Tyumen Regions; Khanty-Mansiysk and Yamalo-Nenets Autonomous Areas.
Siberian macro-region. In March–April, Siberian coal producers reported still favourable price trends in the global coal market, on the one hand, and stronger anti-coal rhetoric from European countries, on the other hand (Europe accounts for 32% of coal exports). Most coal producers maintained stable levels of output, but they admitted the possibility of a forced reduction in coal output. A large thermal coal producer reported that it was concluding new long-term contracts and several have been already signed. Many coal producers reported that they have formed inventories of components and spare parts that will last from six months to one year.
According to the Siberian division of the aluminium holding company, its production was continuing as normal. However, the restrictions on raw material imports involve the risk of the underutilisation of production capacities in the future. Nonetheless, the losses may be offset with supplies from other countries. For example, Chinese traders have already shipped their first pilot batches. Another global leader in industrial metal production reported that its production and sales have continued as normal, as the demand for metals was still high in the market.
Recreation centres and health resorts reported an increase in the inflow of tourists and active reservations for the spring and summer seasons.
Regions of the Siberian Main Branch: Altai Republic; Republics of Buryatia, Khakassia, and Tuva; Altai, Zabaykalsky, and Krasnoyarsk Territories; Irkutsk, Kemerovo, Novosibirsk, Omsk, and Tomsk Regions.
Far East. Mining and quarrying companies reported suspensions of the import of equipment and spare parts, but this did not have a significant impact on production volumes in March. Thus, a large coal mining company, which received equipment from the USA, Europe, and Japan, was looking for suppliers in China and Russia. The exit of US, British, and Dutch companies from oil and gas projects on Sakhalin did not have any significant effect on output in March and the first ten days of April. Gold mining in Chukotka was suspended in March after a Canadian gold mining company announced its exit from the Russian market, and in April, the business was sold to a Russian company.
Seaports in the Primorsky Territory have reduced coal exports and refocused on operations with containers, fertilisers, and other cargoes previously transported via European seaports. Consequently, the cost of railway transportation from the West to the East surged more than four times in early April as compared to the beginning of the year.
Due to an expected reduction in prices for raw fish, fisheries increased their volume of processing. In the first quarter of 2022, deliveries of fish products from the Far East to Central Russia exceeded the volumes of the same period in 2021 by nearly one-fourth, in part because of subsidies for transportation. Several fisheries had to engage intermediaries to arrange supplies as direct exports became impossible.
Regions of the Far Eastern Main Branch: Republic of Sakha (Yakutia); Kamchatka, Khabarovsk, and Primorsky Territories; Amur, Magadan, and Sakhalin Regions; Jewish Autonomous Region; and Chukotka Autonomous Area.