Taking stock of Russian growth prospects

Graham Stack for Russia Profile (www.russiaprofile.org)

Rumours of imminent growth may be exaggerated by sketchy inventory statistics. A chorus of analysts are attributing Russia’s 10% GDP contraction this year to companies selling down inventories rather than producing, and are gung ho about growth restarting as soon as inventories empty. But others are warn against drawing strong conclusions from Russia’s sketchy national statistics on inventory levels.

 

Alexei Moiseev, macroeconomic analyst at Renaissance Capital, speaks for a number of analysts arguing that Russia’s astonishing GDP collapse of 10.2% – in the first half of 2009 was the result of huge selling down of inventories by industrial enterprises rather than demand collapse.

 

“Very expensive money resulted in massive de-stocking in fourth quarter 2008,” he argues. “The trend intensified in the first quarter of 2009, with the negative contribution to GDP in this quarter exceeding 7 percentage points of a total decline of 9.8%.” 

 

Similarly, Anton Nikitin of UralSib argues, “the fall of GDP and slowdown in industrial production was mostly driven by the huge disposal of inventories” which started late 2008 and continued into early 2009. Citibank’s Elina Ryvbakova also estimates that at least one third of the collapse in production in the first half of this year resulted from destocking.

 

Since GDP is a pure production statistic, it plummets when enterprises en masse stall production lines to sell down inventory, even if turnover stays steady. And the harder they come, the harder they fall: overheated growth in 2008 brought about unprecedented stockpiling due to anticipated future demand. “Spiraling costs of raw materials 2007-2008 also caused companies to massively build up their inventories,” says Rybakova. Moisseev speaks of “a crisis of overproduction” starting in the first quarter of 2008, with inventories at 150% of their 2007 value.

 

If destocking rather than demand collapse was so much to blame for the economic disaster this year, then logically when inventories are empty stalled production will start up again. According to Moisseev, “some of the damage done to the economy has resulted from overheating in 1H08, and some of the damage will be easy to recover. Unfortunately, inventory statistics come with a significant delay, so we have no way of knowing what has been happening since, but historical experience suggests de-stocking cannot last for longer than two-to-three quarters”

 

Shadowy statistics

 

As Moiseev admits, the catch with betting on emptying inventories to kickstart growth is that no one knows very much about them. The problem is that Russian Federal State Statistics (Rosstat) reports inventory statistics only sketchily, on a quarterly basis and aggregated across the economy. The next figures won’t appear until October, meaning that forecasting growth on their basis is very speculative.

 

“The question of inventories has advanced to be the one of the key questions, especially because the economy ministry has focused on it,” explains Vladimir Sal’nikov of the Centre of Macroeconomic Analysis. “But the problem is that inventories are not counted directly and there is a high level of statistical error involved. It is very difficult to separate the real inventory level from the margin of error.”

 

According to VTB Capital analyst Aleksandra Evtifyeva, “Rosstat only provides quarterly aggregate inventory figures that don’t allow close analysis. The Economy Ministry has a wider base of statistics available and said in August that inventories were drying up. However we don’t know for instance if oil companies are included in their statistics or not.”

 

Business daily Kommersant has reported that Bank of Moscow analysts report that inventories have remained stable over the last three quarters, and that as a proportion of turnover inventory has grown by a third compared to 2006-2008. If true, this would point to demand collapse that Sal’nikov also feels has been underestimated. “It seems to us to be the case that markets have contracted more strongly than is reflected in statistics,” he says.

 

Citi’s Rybakova admits that the quality of inventory statistics provided by Rosstat is very poor. However, she says  “the magnitude of the production collapse in the first quartern 2009 is hard to explain by any other factor. It was more severe than in 1998.”

 

“Restocking however won’t be a panacea to cure the economy,” she adds. “Instead, we are seeing an adjustment down to a new production level, meaning inventory will never return to pre-crisis levels.” Rybakova believes restocking could add 1-3% to annual GDP growth, but not before 2010. Instead, she believes that consumer demand will pull Russia back up, if it strengthens. Sal’nikov also prefers demand as a growth factor – but tips deferred demand for investment goods instead of consumers.

 

With the government still holding out for growth driven by an end to destocking, skeptical voices are growing stronger. The Finance Ministry forecast for August was for 1.5% growth, but the result disappointed at 0%. Electricity consumption statistics, a proxy for industry, show demand still contracting.

 

Timothy Ash of Royal Bank of Scotland is consequently dismissive about the talk of growth. “Brokers seems to be jumping over themselves at the moment to talk up the Russia story, that recovery has begun, and that Russia will bounce back quickly. While favourable base period effects should come into play in the final few months of the year, the data flow is far from convincing,” he says.