Economic indicators support activity in the defense industry
The stabilization of the rate of decline in industrial production in the Russian Federation recorded by Rosstat in May 2022 is largely due to the dynamics of the military-industrial complex (MIC), production in mixed industries in which it is difficult to distinguish civilian products, and the production of components for nuclear reactors. Despite the fact that there is no need to stimulate the military-industrial complex, based on statistics, the defense department of the government has developed a bill on a temporary special mode of operation of the industry, including night shifts. According to economists, the defense industry motivated by the bill will not make a strong contribution to the dynamics of industrial production, the expected effect is about one percentage point of output in the industry. The output of mass-produced goods, which is characterized by greater reliability of reporting data, according to the calculations of CMACP analysts, continues to decline quite rapidly.
The recent May data from Rosstat on industrial production (see Kommersant on June 29) allowed analysts to talk about the stabilization of the rate of decline in output in this sector, but a detailed analysis of the data still captures the continued acceleration of the reduction in the output of mass-produced goods. According to the calculations of CMACP, whose analysts use a limited set of representative goods compared to Rosstat, but with more reliable data, and also exclude classified positions (Rosstat has more than 1.1 thousand representative goods, CMACP has 625), the decline in industry is noticeably deeper. However, in the expression "year to year" and "month to month, taking into account seasonality and calendar", the slowdown in the decline is also noticeable.
If in May to April, taking into account seasonality, industrial production, according to Rosstat, decreased by 0.2%, then according to the CMACP — by 1.3% (in annual terms — by 1.7% and 4.2%, respectively). By the same period of pre-crisis 2019, a noticeable increase in the decline is recorded in the production of long-term goods (from 52.1% in April to 58.5% in May) and investment goods (from 7.7% to 10%, respectively).
"The discrepancy in estimates is largely due, but not entirely due to the fact that we do not include defense industry products in the calculation of the index," the center's analytical note says. Vladimir Salnikov from TsMAKP explained to Kommersant that in addition to the military industry, we are talking about mixed industries, from which it is impossible to single out civilian products (radar equipment, ship and aircraft construction), and components for nuclear energy.
In June, according to preliminary estimates, the weakening of production activity in the economy continued, according to the CMACP. They base this conclusion on the leading data on electricity consumption, on the loading of goods on rail transport and on the dynamics of the manufacturing sector PMI index (in June it increased slightly — from 50.8 to 50.9 points). "In June, estimates of changes in production were negative, and the overall neutral value of the index is associated with an increase in the volume of new orders in the domestic market",— comment on the PMI data in the CMACP.
In theory, in the coming months, the situation may be affected by the "mobilization" bill submitted to the State Duma by the government, which proposes to allow the authorities to oblige businesses to compulsory work on state orders in the interests of the army and special services, and defense industry employees to work at night and seven days a week (prepared in the government department of the defense industrial complex, the author is the deputy chief department Daniil Kononchik). This is a framework document, among the powers it gives to the White House are "holding events", the disposal of mobilization capacities, facilities and reserves, the dynamic redistribution of funding and the volume of state defense orders (GOZ), and even the establishment of features of the legal regulation of labor relations in the defense industry, including the definition of "the procedure and conditions for engaging in work beyond the established duration working hours, at night, on weekends and non-working holidays, the provision of annual paid holidays."
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| Dynamics of industrial production. |
| Source: kommersant.ru |
The draft sounds quite menacing and military - in fact, this is the first draft law since the beginning of the Russian military operation in Ukraine, which can be considered direct support for this operation from the economy, although, we note, it cannot be considered any full—fledged document on the transfer of the economy to the mobilization regime, if it involves military-economic mobilization, then only in the military-industrial complex sector, which, in theory, should already work in a mode different from civilian industry, even in peacetime. However, the document contains very little specifics, and its direct application in the form in which it is registered in the State Duma is apparently impossible. For example, the draft allows for a revision of the terms of the contract — an increase and decrease in purchases under the State Budget — if the supplier does not have the opportunity to refuse; however, the bill does not consider the availability of raw materials, equipment and labor for this in principle.
Participants of the Russian Trilateral Commission, which agreed on the document last Friday, also speak about the vagueness of the proposed innovations in labor law in an interview with Kommersant. The interlocutors of Kommersant suggest that the government will have to solve the issues of the real application of the "mobilization" norms when preparing amendments to the second reading of the bill or introduce reference norms into it ("the procedure ... is determined by the government") and then develop a whole set of relevant resolutions and orders of the White House or put up with the conclusion of unenforceable contracts.
In April, wages entered the race to reduce demand
Finally, the project may have a purely symbolic meaning, as well as many draft laws of recent years, and according to the developers, it can only be applied proactively — references to such a law can in principle be a weighty argument in negotiations with suppliers of the military-industrial complex. The problematic nature of this practice has been shown repeatedly: the existence of symbolic laws blurs the legal field, serves as a ground for corruption and long-term reduces the controllability of the regulated industry, strengthening informal practices bypassing ineffective norms; this is one of the reasons for the problems of the military-industrial complex in Soviet times.
In the case of a real success of the government's launch of the "mobilization sector of the economy" instead of the general transfer of the economy to mobilization rails (there are still no signs of which, we repeat, there are still no signs), according to Vladimir Salnikov from the CMACP, the work of the defense industry in three shifts and forcing companies to fulfill state orders "will add at least 1 percentage point to the output, but by the overall dynamics of industrial production will not be greatly affected."
The deterioration of business activity in industry in June was previously recorded by Rosstat and the Gaidar Institute ( see “Kommersant" from June 22 ). "Business activity indices reflect the balance of responses (worse-better), that is, current moods and feelings, but do not give an accurate answer about the dynamics. The available data indicate at least that the processing situation has not improved. The decline in Russian Railways loading largely correlates with a drop in exports. There is still a risk of a negative reaction of production to a reduction in stocks with slowing imports",— notes Dmitry Polevoy from Locoinvest. Raiffeisenbank analysts add that the dynamics of the current recession is not similar to the coronacrisis. "Now the negative factors are more long-term: problems with the supply of imported components that have not yet affected a wide range of industries, a decline in domestic and limited external demand (in addition to logistical difficulties, the profitability of exporters' businesses may suffer both due to price discounts and due to the strong ruble exchange rate)," they conclude.
Alexey Shapovalov, Oleg Sapozhkov, Dmitry Butrin
