Russia’s manufacturing on the rise

26 January 2017

Russia’s manufacturing on the rise 

Russia’s manufacturing has overcome its reliance on the Soviet legacy and is growing at a steady pace, an analytical report by the Centre for Strategic Research said. 

The analysts calculated the total productive capacity (the maximum possible output per machine tool or plant by industry – Editor’s note) of Russian manufacturers and compiled the data for the period between 2000 and 2015.

It turns out that Russia’s manufacturing capacity rose 30% during that time. The report also noted that “Soviet legacy” enterprises accounted for slightly more than a third of all operating facilities, with the rest having appeared during the 2000s.

The report’s author, Deputy Director of the Center for Macroeconomic Analysis and Short-Term Forecasting Vladimir Salnikov, admits that he was taken by surprise by the report’s findings. “I had a feeling that our investments were not all that big and capacity hadn’t been renewed that much, yet the data we collected are quite impressive”, he said.

Catching up with the rest of the world

Even so, a closer look at the industries that reported the biggest capacity gains shows a bleaker picture, Vladimir Salnikov noted, adding that today’s manufacturing is mainly based on commodity industries, which are the ones posting growth. For instance, the biggest gains in capacity over the 15-year period were reported in rubber and plastic product manufacturing (+115% since 2000).

“There’s no surprise there”, Salnikov said. “In those areas, we were simply catching up with the world in general, which had transitioned earlier from wood, glass and other materials to plastics in a number of industries.”

Positive changes were apparent in other sectors too: electric and optical equipment manufacturing capacity has risen 106% since the beginning of the 2000s, while coal production and enrichment and the food and beverage industry posted gains of 67% and 65%, respectively.

According to Salnikov, many finished-product manufacturers were hardly competitive even before 2000, as they were kept afloat thanks to the closed Soviet economy. Once Russia entered the global market, they lost whatever competitiveness they had.

Lost machine engineering 

Capex-driven machine engineering is one such industry, which, according to Salnikov, Russia “has all but lost.” According to the CSR report, car manufacturing capacity shrank 44% over the 15-year span. 

Such numbers do not surprise the expert. “The Soviet Union had well-developed machine engineering geared towards defence or other strategically important industries, while civilian machine engineering was rather in decline”, he said. What is more, once Russia’s economy opened up, this kind of manufacturing suddenly found itself competing head to head with major global players, which was no easy feat. Had it not been for the targeted government policy of encouraging foreign investors to localise production in Russia, car manufacturing would have performed even worse, according the report’s author.

The only industry even worse off than machine engineering today is textiles, whose capacity decreased by 54%. The reasons are rooted in history too, according to Salnikov. “While Russia languished in a transition downturn, the world wasn’t standing still: basic technological production facilities were being shipped off to developing countries that are very hard to compete with because of their cheap labour”, the report’s author noted.

According to Salnikov, China has been the main competitor in textiles over the past few years. But even the Chinese are now shifting their production to countries with even lower wages, such as Bangladesh, where textile workers earn around USD 20–30 a month.

The Dutch Disease

“Unpleasant” – that is what Deputy Director of the Centre of Development Institute at the Higher School of Economics Valery Mironov has to say about the situation in machine and textile manufacturing. Yet he sees nothing strange about it.

That is what’s called “the Dutch Disease.” According to Mironov, since the early 2000s, the government, specifically the Ministry of Industry and Trade, should have been more far-sighted and provided special support for those industries to keep them afloat. Failing that, he believes, textiles and car manufacturing “nearly died.” Now those industries will have to be recreated virtually from scratch.

Reviving manufacturing and replacing Soviet-era car manufacturing with a modern industry is a complicated and slow process, agrees Georgy Ostapkovich, Director of the Higher School of Economics’ Centre for Business Tendency Studies. Resuscitating enterprises requires new equipment, mainly imports, which have appreciated over recent years together with the US dollar.

“The process of import substitution in machine engineering has been slow, but this is normal – this is not as easy as replacing stationery; such processes take years”, the expert said reassuringly. According to his calculations, Russia’s car manufacturers could expect positive changes to occur as soon as within three to four years.

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