Maxim Sakov, Market Consultant-Russia for Power Systems Research, discusses his Q1 2021 economic outlook for Russia in this episode of PSR PowerTALK.
Transcript
Welcome to the PSR PowerTALK podcast, produced by Power Systems Research.
00:06 Emiliano Marzoli:
From Power Systems Research, hello everyone. I’m Emiliano Marzoli, editor of PSR PowerTALK, and today I will discuss the economic outlook for Russia with Maxim Sakov, our marketing consultant in Moscow. Maxim provides our clients with economic and production forecasts for Russia each quarter. And thank you for joining us today, Maxim.
00:34 Maxim Sakov:
Hello.
00:36 Emiliano Marzoli:
Uhm so, Maxim in your first quarter forecast, uh, you note that the negative effect of the covid pandemic has been softened by the government support measures. Can you describe the these measures a bit for us please?
00:53 Maxim Sakov:
Yeah, these measures have included tax holidays, privileged credits, direct financial support, and some administrative measures.
01:08 Emiliano Marzoli:
Uh, you mentioned privileged credits. How’s that work? What is that about?
01:17 Maxim Sakov:
Privileged credit. That’s a credit given by the bank for a certain purposes, and it has the interest rate far below the usual. The difference between the usual privileged rate, usual interest rate and the privileged interest rate is covered from the state budget.
01:48 Emiliano Marzoli:
So, uh, it appears that the Russian government has put in place a lot of support for, for the Russian economy, so it seems that the outlook is positive? Or would you say that there are any clouds on the horizon?
02:09 Maxim Sakov:
Uh, unfortunately Emiliano, the growth of the Russian economy will be restricted by several factors. Business will have to deal with the end of pent-up consumer demand, the end of government support measures, and the still-remaining quarantine restrictions.
This situation will lead to reduce it purchases from consumers and reduction of investment activities from business; because maybe companies, companies, especially big companies, are still reviewing their investment programs.
And, generally, development trends will be determined by economic and epidemiological factors. However, the risks of my new pandemics are dropping with increased vaccination.
03:15 Emiliano Marzoli:
So, Maxim, uh, how fast or how slow do you think the economy will recover?
03:23 Maxim Sakov:
Uh, well, restoration of the economy will not be fast. After the first rebound to the levels below pre-crisis values there will be a moderate growth; interrupted, however, by local decline periods.
It is expected that the Russian economy will not reach the pre-crisis level until Q3 or even Q4 of 2021, and then it will show a stable growth trend. So, we should see annual growth rates above 3% of GDP during following years.
04:14 Emiliano Marzoli:
And, uh, going back about those government support programs. Can you tell us a little bit about whether they’re going to be expanded and how they’re going to be expanded?
04:26 Maxim Sakov:
Well, so we started to talk not just about the government support program after recovery, post pandemic, but about the general development program, uh, formed by the State. So as a national plan of economic development included following practical steps:
Export the stimulation and the promotion of Russian OEMs to existing and new markets, and development of joint production sites with leading international OEMs
Creation of measures targeted, targeted for import substitution
Expansion of partial state financing of research and development works and implementation of their results to mass production.
Stimulation of the use of domestic machinery during implementation of State programs and, uh, large infrastructure projects, including stimulus by providing privileged credit leasing terms for domestic machines.
And, Giving priority to domestic machinery during purchases of materials by companies with the State shared property.
06:06 Emiliano Marzoli:
It’s quite an impressive and aggressive approach. Do you see it all working? Do you see some limitations? Uh, some of those points?
06:20 Maxim Sakov:
Well, some factors still restrict industrial recovery now. One of them is the deficit of chips used in machines. The shortage started in Q4 of last year and may last until like Q3 of this year or even till the end of the year.
Another problem is the increasing prices for steel. This factor is connected to the weakening of the Russian ruble in 2020 and a growing demand for steel around the world. As a result, some steel products for machinery have grown in price by 50% and the even more. The government is considering raising steel export taxes and some other measures to slow down with steel prices rose.
07:21 Emiliano Marzoli:
Maxim, let’s talk a little bit about oil, because that’s, that’s another huge portion of the Russian economy, isn’t it?
07:28 Maxim Sakov:
Uh, yes Emiliano. Oil is a traditional Russian source of income. At the moment it’s beating local price records. Currently it’s exceeding 65 U.S. dollars per barrel, whereas the economic plans for 2021 were calculated based on 45 U.S. dollars per barrel.
07:57 Emiliano Marzoli:
Well, that sounds uh, like a, like a positive outlook for the Russian economy. I mean, considering particularly the, the, the really difficult year in the oil industry in 2020. Moving forward, what do you see as the main booster for the for the economy?
08:15 Maxim Sakov:
Based on what we see today is expected was that the main drivers for economic growth during last a couple of years will be industries that push innovation, the export-oriented sector, and I.T., construction, and the transport sectors as well as real estate.
08:38 Emiliano Marzoli:
If we dig a little bit deeper, in the key segments of the Russian economy, when we look at our machinery work, how did the AG segment workout?
08:50 Maxim Sakov:
Although COVID hit Russia last year, 2020 turned out surprisingly successful for Russian AG Equipment manufacturers. Sales of, uh, agriculture machines, both exports and domestically, grow rapidly.
According to Rosspetsmash, the Russian Association of Specialized Machinery and Equipment Manufacturers, production of AG machines has increased by 30%, in value terms, and internal sales have grown by 46%.
Of course, there was a ruble devaluation effect; but in units the trend was also positive in 2020. In units, the number of tractors, of tractors made their increased by 27% versus 2019, and the, the combines by 24%. Other machines, like sprayers, have also shown significant growth.
10:13 Emiliano Marzoli:
Well, those, those are impressive number. And, uh, wasn’t the agricultural machinery considered a necessary industry? That, uh, at a factor in this growth, what do you think about that?
10:27 Maxim Sakov:
Uh, yes Emiliano, you are correct about that.
At the beginning of the pandemic, AG machinery was considered a supposed “system base industry” or necessary industry like backbone industry. Because of this designation corrective measures were not applied to agriculture industry workers. AG OEMs did not practice lockdowns, although some of them did close the plants for a few days in the spring of 2020.
11:16 Emiliano Marzoli:
I see. Thanks Maxim. And, uh, despite the fact that the, the, the agricultural industry didn’t shut down in Russia, did you see some supply chain issues with, with the overseas suppliers – considering what was happening all over the world?
11:33 Maxim Sakov:
Uh, yes, the break in delivery of foreign components, uh, did not affect the industry much because most of the OEMs found the local substitute suppliers.
At the same time Russian machines became more in demand because of base currencies raising versus Russian ruble, and, uh, because of the suspending imports.
12:03 Emiliano Marzoli:
And, correct me if I’m wrong Maxim, but I recall that the harvest was pretty good as well.
12:11 Maxim Sakov:
Yes, it certainly did, and because of the, the good harvest in 2019, Russian agriculture holdings generated good profits and were able to renew their fleets faster. At the same time, the state continued to, to support the industry.
12:34 Emiliano Marzoli:
So Maxim, we had a stellar 2020 for ag equipment. Uh, what is the outlook for, for 2021?
12:43 Maxim Sakov:
A well the perspective for 2021 are not so optimistic, however. Now OEMs are facing rising costs of production because of raising metal prices and the increasing prices of natural monopolies such as electric power and utilities.
The new export tax for grain is also a factor. All of these factors com-, combine to increase prices for AG machines by 10 to 20%. Those price increases, it can slow down the sales.
13:27 Emiliano Marzoli:
Do you think or have you heard about any initiatives from the government to support the industry?
13:34 Maxim Sakov:
Well, first of all, the government has decided to continue financial support of the industry to soften this impact.
At the same times increase in the utilization fee are on the way. For wheel tractors the fee will be increased by 2.7 times, for crawler tractors by 3.6 times, and for combines by two times. This will put more pressures on import, however, and they will bring more money to local equipment manufacturers.
14:12 Emiliano Marzoli:
Uhm, if we move to the construction segment, can we see similar trends or is there some differences?
14:22 Maxim Sakov:
Well, according to Russian statistics, during the year 2020 more than 80 million square meters of living apartment were constructed in Russia. Despite the pandemic, it’s only 1.8% less than in 2019.
14:45 Emiliano Marzoli:
Right, uh, can you expand a bit on that? What else happened in last year?
14:54 Maxim Sakov:
During the second half of 2020, the number of new construction projects grow significantly by 39%. Generally, the construction segment in Russia, including road and infrastructure construction, finished at 2020 with positive results, plus 0.1% versus 2019, and in Q1 of 2021 the growth continues.
The government plans that during the next three years the construction segment will grow by 5% per year.
15:40 Emiliano Marzoli:
Maxim, can you tell us a bit about the drivers for this growth?
15:47 Maxim Sakov:
Uh, yes Emiliano. We have identified 4 main reasons for this expected growth.
First is, a, privileged loan. We discussed what is the privileged loan before. This program with 6.5% annual interest rate instead of the usual 12% rate. This 6.5% rate will be extended until 2023. Initially the program was planned to run only until the end of the year 2020. Then it was extended until the third quarter of 2021. And now another extension has been introduced.
Next, we have the implementation of investment projects for road and building construction.
Then we have the renewal of many machinery fleets in a construction companies.
And finally, we have State measures that are targeted for cutting costs among OEMs making construction machines.
17:07 Emiliano Marzoli:
And Maxim, probably I shouldn’t be surprised that the state sponsored infrastructure programs are important supports for construction, right?
17:17 Maxim Sakov:
Absolutely. State funding of construction projects always will be an important support for the industry.
Among their many projects being supported are gas pipelines, the State highways network, the railroad network in Siberia, and the infrastructure in the Arctic.
17:41 Emiliano Marzoli:
Do you have any idea how much the total funding is for these projects? Or how many billions we’re talking about?
17:51 Maxim Sakov:
Currently, Emiliano, the expected volume of financing construction and repair of priority objects, means roads and bridges, has reached 8 billion U.S. dollars for the period of from 2020 till 2024.
Meanwhile, the sales of construction machinery in Russia since 2015 has increased by 2.4 times. So, in the long run, this approach has shown good results.
18:32 Emiliano Marzoli:
And, and, Maxim, I imagine that this growth that we’ve seen since 2015 has involved local OEMs more than, than foreign OEMs. Is that is that correct?
18:46 Maxim Sakov:
Correct, absolutely.
18:48 Emiliano Marzoli:
Yeah, uhm, let’s have a look at the industrial segment. Can you tell us something about that?
18:55 Maxim Sakov:
The most important part of the industrial sector is mining. Last year the Russian government has created the so-called “program of coal mining development until 2035”. It calls for development of new coal deposits in the wild regions in northern Siberia and the Far East.
19:23 Emiliano Marzoli:
And, and, uh, so is this development in mining limited to the coalfields or is, is there more to this development?
19:33 Maxim Sakov:
No, no, not at all. The program also calls, calls for additional transport infrastructure. For example, the Trans-Siberian Railway will be expanded with connections to major harbors on the Pacific Coast.
An Arctic Sea route is also in the plans for coal transportation. One of the companies, the Northern Star Company, is going to order 28 ice-class bulk carriers to transport coal from the coal pit on Taymyr peninsula.
20:16 Emiliano Marzoli:
Do you have an idea of the cost of this project, Maxim?
20:21 Maxim Sakov:
Well, it’s not cheap. The expected cost of the project is about 1.4 billion U.S. dollars. These new projects are designed to increase internal activities and for export to Asia.
20:42 Emiliano Marzoli:
Right. Uhm, can we have a look at the truck market, passenger cars, or a little bit on on-highway applications?
20:53 Maxim Sakov:
Well, the heavy truck market in Russia in the first quarter this year has shown a significant drop. The results are down 16% compared to last year.
Not everything is bad, however. KAMAZ has shown a 5% growth with its best-selling model being the KAMAZ 43118. This chassis is used mostly on dump trucks involved in construction work.
On the downside, MAN and Mercedes both dropped 50%. Both of them have kit assembly in Russia.
The on-road transportation sector in Russia is declining; related to mostly to post-pandemic factors. However, it is expected that during the second and the third quarter of 2021 the situation will improve.
21:56 Emiliano Marzoli:
Can you tell us a bit about the drivers that will, will help the improvement of this situation?
22:02 Maxim Sakov:
Uh, increase of truck production will be facilitated by the expected growth of cargo sales, the need for fleet renewal, export support programs, and additional measures driven by the government.
This forecast is supported by current production figures. In January, for example, Russian equipment manufacturers produced 5600 trucks; which is 50% better than, uh, in January 2020.
22:41 Emiliano Marzoli:
What about the light commercial vehicle segment? Is this similar to the medium and heavy duty; or are there some differences?
22:50 Maxim Sakov:
Actually, the LCV market in Russia has started to rebound this year from a 5.7% decline last year. The main reason for last year’s slump was the depletion of postponed demand and the fact that the support programs for this year are still in discussion.
However, moderate growth is expected in this segment in 2021, driven by fleet renewals. Meanwhile, the Russian LCV market is in 6th place in Europe after France, UK, Germany, Italy and Spain.
23:37 Emiliano Marzoli:
OK. So, so it seems that the LCV market is a bit better than the medium and heavy duty. What about passenger cars?
23:46 Maxim Sakov:
After active growth at the end of 2020, the Russian passenger car sector recovered somewhat; so that slowed down so, so, so it’s remained flat for the entire year compared to 2019. Nevertheless, market players and Russian top officials are optimistic regarding the market.
The Russian automotive sector has a good chance to match production with existing demand, according to Russian government officials. He said that domestic market has taken fourth place in Europe by volume for the first time in the history.
Car sales were growing during Q4 of 2020 and the dealers now are talking about inventory deficit. If the production does not recover during the second quarter, the market will stop, they say. The Russian minister is sure, however, that OEMs will handle this challenge easily.
25:03 Emiliano Marzoli:
What do you think is going to happen if production does not improve?
25:08 Maxim Sakov:
Well, there is still a shortage in the Russian market. New cars are arriving to the market; but, but the prices are higher by from 10 to 40% compared to last year. In this situation, if the situation continues, the market could fall sharply.
25:31 Emiliano Marzoli:
Do you think that the government will step in to stabilize the market?
25:36 Maxim Sakov:
The government is talking about the support program, but currently doesn’t cover the difference in vehicles price. The increase of the utilization fee for the cars and the expansion of the list of cars with higher fees and so-called luxury tax is also a negative factor.
The government is discussing steps to prevent future declined. One of the initiatives, initiatives is to force car sharing companies to improve the domestic models in their fleets, but the future’s, the future of these initiatives is not certain.
26:25 Emiliano Marzoli:
Well, it seems there is a lot going on in the passenger cars for sure. Can we see the same with power generation?
26:33 Maxim Sakov:
Uh, about the power generation… Surprisingly, the year 2020 was extremely positive for the power generation segment in Russia. After a sharp decline in the beginning of 2020, service and production figures of gensets increased and towards the end of the year. The industry showed significant growth; which is, which will be continued into the year 2021.
27:10 Emiliano Marzoli:
That’s, uh, that’s really positive. Why is this such a hot segment?
27:15 Maxim Sakov:
There are several factors supporting this growth. They are the development of remote communication, an increase of road construction projects, increasing needs for warehouses, the number of warehouses has grown by 25% last year, and increased in moving people out of the city to rural areas with increased demand for power backup.
27:50 Emiliano Marzoli:
Can you see which gensets are in demand? Can you really see some trends? Or, or, not really?
28:01 Maxim Sakov:
Well, generally power generation segment consists of two parts: they are low power gasoline gensets, mostly used by individuals and small businesses, and the industrial segments with high-horsepower diesel and natural gas gensets.
The main clients for the gensets in Russia are oil and gas companies, mining companies, construction companies, and power plants for some of the cap needs. Also we saw increased demands from agriculture businesses.
Now all of these clients are restoring orders after the lockdowns. We expect the, this later growth will be continued, but in slower rate.
29:01 Emiliano Marzoli:
Right thanks, thanks Maxim.
Uhm, let’s, let’s close our discussion with one last segment, which is a marine. Can you give us some insight on this one?
29:13 Maxim Sakov:
Well, the development of the ship, the shipbuilding complex during middle-term periods will be driven by an increase of direct State orders, but also by implementation of projects with big companies such as Gazprom, Rosatom, Sovcomflot, Rosneft, Novatek, and others.
A wide range of vessels is under construction and the in the planning stage. Among them are drilling platforms, ice breakers, ice-class tankers and gas carriers, passenger vessels, fishing trawlers, service vessels, and others. Here I’m not talking about military ships.
Uh, the development will use tools of State support under the State program called the “Development of Shipbuilding and Equipment for Exploration of Offshore Fields.”
30:22 Emiliano Marzoli:
Is there a new shipyard that is being developed?
30:27 Maxim Sakov:
Yes, an important part of this program is the recently started “Zvezda” Shipyard in the Far East. Last year, the shipyard launched the first AFRAMAX tanker with a dead weight of 114,000 tons.
The tanker was assembled in the Russian shipyard. However, part of it, including the stern with 13.8 MW engines, were produced on the Hyundai wharf in South Korea.
Totally, the contract includes twelve such vessels, with a gradual decrease of foreign components. The last two tankers are expected to be made of local company’s components totally. In total “Zvezda” shipyard has 39 motor vessels in its order portfolio. With options, this number is 59 vessels.
31:38 Emiliano Marzoli:
And, and my understanding is that this is not the only shipyard that is doing well. Actually, there are others, right?
31:47 Maxim Sakov:
Of course, at the same time, a number of smaller shipyards are operating. Most of them are subsidiaries for OSK. It’s a united shipbuilding company, State-owned company.
All of them are packed tightly with orders for internal use and for export. For example, Nizhny Novgorod ZKB shipyard plans to supply to European Union eight hydrofoil vessels Valdai 45R during this year. There are passenger ships with 45-person capacity and one MW engine from MTU.
32:42 Emiliano Marzoli:
While, Maxim, thanks a lot. I think this can wrap up things for our outlook of the Russian industry. This was really, really insightful. Thanks a lot, Maxim.
33:00 Maxim Sakov:
OK. Thank you for all these questions.
33:03 Emiliano Marzoli:
Yeah. You’re welcome.
And everybody, we pulled the data related to the growth in the segments from our databases, OE Link and EnginLink. They provide machinery engine productions globally, including forecasts and specification data.
You can look for reports on Russia every month in our PSR PowerTALK News report, and obviously on these podcasts we’ll, we’ll cover this region again.
And, uh, you’re welcome to contact us for more information on the power products, such as we discussed today. You can find information about our regional offices on www.powersys.com. Thanks everyone.
33:55
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