Russia: The Economy Is Strengthening

by: Oleh Kombaiev


The growth of business activity in manufacturing and services in Russia updated multi-year highs in January.

The real disposable income of citizens rose for the first time in 13 months.

Retail trade may start growing soon.

Russia's macro statistics in January demonstrated overall positive dynamics, which confirms the continuation of the economic recovery.

At the end of 2016, the State Statistics Service of Russia modified its methodology for assessing industrial production. As a result, maximum annual growth was recorded in the industry in November last year. However, the State Statistics Service decided it was not enough, and already at the beginning of this year, it has repeatedly modified the methodology, recalculating all the last year's indicators. In order to assess the modifications, let me present you the chart of Russian industrial production (NYSEARCA:RSX) growth rates BEFORE modification of method:

and AFTER:

As you can see, the second result is much better than the first one. At least, according to the new data, the decrease in the Russian industrial production in 2015 no longer seems such a disaster as before. And since February 2016, the industry growth rate is no longer in the negative zone.

I have no reason not to trust the Russian Statistics Service. However, it changed the calculation methodology twice over less than half a year, and the growth rate of the Russian industry is getting better and better after every change, which raises some suspicions.

However, if we turn to the alternative estimates of the current state of the Russian industry, we will still find confirmations of a positive change.

In January, the seasonally adjusted Markit Russia Manufacturing PMI Index hit a 70-month high of 54.7 p. Markit research also indicated maximum employment growth in the industry for almost six years. More than that, Russian goods producers registered a further accumulation of backlogs of work.

In January, the services sector in Russia experienced increasing backlogs, and employment growth was the highest over 41 months. The Markit Russia Services Business Activity Index increased, hitting an eight-and-a-half year high of 58.4 p.

The rate of construction in the Russian Federation in January remained negative just like a month earlier. However, construction usually responds to positive developments in the economy with delay. I believe that positive growth in this industry should be expected no sooner than in the middle of the year.

The growth rate of both nominal and real wages in Russia has stabilized, showing steady growth over the past four months. Steady decline in inflation played a significant role in improving data indicators. According to the central bank, inflation in Russia amounted to 5% in January, and already by the end of this year it may reduce to the level of 4%.

And here's what I think is a breakthrough. In January, the real disposable income of citizens increased by 8.1% YOY, demonstrating growth for the first time since December 2015. The fact that this indicator has moved to the positive zone is a necessary precondition for revival in domestic demand.

The slowdown in the decline of Russian retail was the logical consequence of the increased income. In January, this indicator has fallen by only 2.3% YOY, which is the minimum rate of reduction in the industry for two years. It is hoped that at month-end February, this indicator will finally enter the growth area.


So, the growth of the business activity in both the service and industry sectors amid increasing backlogs and employment is a distinct symptom of the economic recovery. Also, in January, we saw the first signs of increasing real disposable incomes, which guarantees future growth in domestic demand.

In general, the economy is reviving, and it is difficult to argue with that.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.