Maxim Sakov, Market Consultant-Russia for Power Systems Research, discusses his Q3 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
Hello everyone. From Power Systems Research, I’m your host, Emiliano Marzoli, editor of PSR PowerTALK. And today we’ll discuss the economic outlook for Russia with Maxim Sakov, our market consultant in Moscow.
And thank you very much for joining us today, Maxim.
00:26 Maxim Sakov
Ah, thank you for having me on the show, Emiliano.
00:29 Emiliano Marzoli
You’re most welcome.
Maxim, tell us a little bit. What do you see for the Russian economy for the rest of 2021 and for 2022, based on what you’ve seen so far in the first nine months of the year?
In, uh, your third quarter forecast you, you know that Russia is successfully work its way through the 3rd wave of COVID-19. Can you give us some more insights?
00:57 Maxim Sakov
Ah yes, numerous other restriction implemented in June have been canceled or reduced significantly, and new restriction are not planned at the moment. However, uh, these things can be changed because right now we see increase of new infection cases.
01:17 Emiliano Marzoli
Yeah, the, the, the situation remains uncertain like in in the rest of Europe and in the world, for sure.
What do you see for the Russian economy for, for Q4 then?
01:28 Maxim Sakov
Yeah, the Russian economy has been improving each quarter this year. In the second quarter, industrial growth was 10%, but, according to government statistics. We expect GDP growth for this year to reach about 4%.
01:46 Emiliano Marzoli
That’s, that’s very solid.
Maxim, the, the Eastern Economic Forum, held in, in, back in September, usually provides a good barometer of economic activity. What can you tell us about this year’s event?
02:00 Maxim Sakov
The value of a contracts signed was about 60 billion U.S. dollars, or four and a half trillion rubles. That is 32% more than in 2019. In 2020, the forum was cancelled because of COVID.
02:20 Emiliano Marzoli
That sounds impressive compared to 2019. Are there any negatives to these or …
02:26 Maxim Sakov
I guess yes, the inflation is the biggest problem now.
02:30 Emiliano Marzoli
Right.
02:30 Maxim Sakov
All material prices, like wood and metals, are going to the skies. Other commodities, like natural gas, electric power, gasoline and diesel are controlled, so there are no such rises there. However, we can still see the risk for these commodities.
In turn it causes the, the price increases for industrial and consumer goods. on top of it, Russian Central bank hikes the basic rate to 6.5%.
03:08 Emiliano Marzoli
Yeah, it’s still, it’s still so, a bit of a complicated situation as, as it is in the rest of Europe as well.
Let’s, let’s now look a little bit more into our industry and let’s start with one of the most important segments in the Russian economy, which is the agricultural segment. Can you give us some information?
03:29 Maxim Sakov
Agriculture market in Russia has increased 1.5 for times in the first half of 2021. Production volume is up 45% and they reached 112.7 billion rubles, or $1.5 billion US dollars.
The biggest growth was tractors, up 43% to 2800 units, and then sprayers, up 37.3% to 900 units, and grain combines up more than 10%, to 3.8 thousand units.
04:15 Emiliano Marzoli
This is a very strong growth. I mean, these are really serious performances.
I assume part of it is, is justified by recovery from last year’s recession. Are there any other factors in play for to, to justify such big numbers?
04:29 Maxim Sakov
Yes, the, the growth is driven by following factors:
It’s the increase in prices of agricultural products, like grain
Then an expectation of increase in machine prices because possible future reduction in subsidies. But here additional government funding is possible. This year, in the 2021, $140 million US dollars are already sent in subsidies and $70 million more is being considered.
However, here, uh, the growth is restricted by the lack of inventory.
05:12 Emiliano Marzoli
That’s an issue that is involving a lot of OEMs, sure.
Maxim, the construction segment usually sees similar trends to agriculture. What’s going on with this, with this segment?
05:26 Maxim Sakov
Here the main problem is the inflation as well as the material price hikes, machinery price hikes. The state, as a reaction, planned to add 2 trillion rubles for infrastructure project in the next five years to compensate inflation.
05:49 Emiliano Marzoli
Right, so this is a big project.
What’s happening on the consumer side of construction?
05:53 Maxim Sakov
Consumer construction includes apartments, shops, warehouses, and so forth. The apartments is , uh, the biggest. Here we see the lack of demand. Recently government has increased a subsidized mortgage rate from 6% to 7 1/2% and dropped a credit limit to $40,000. As a result, it cut demand by more than 20%.
06:23 Emiliano Marzoli
That’s for sure the impact.
Any, any trend you can talk about for the for the industrial segments?
06:32 Maxim Sakov
Rising prices for commodities has boosted mining and the construction industries. Mining company increasing investment to meet growing demand for commodities.
Also, we have received the plans of Russian Government. Russia plans to increase oil extraction to 530 million tons by 2024 and looks to gain a 25% share of the world coal market. It includes increasing coal shipment to China. As a result, local OEMs, including KAMAZ, are developing new own mining machines to meet increased market demand.
07:23 Emiliano Marzoli
That’s very interesting. And, uh, the new German Government that is forming is just announced that they want to exit coal. So it’ll be interesting to see if Russia will be able to gain even more exports if, if Germany is going to abandon that segment.
Let’s talk about lawn and garden, Maxim. How do you think about that?
07:43 Maxim Sakov
There was a sharp decline in 2020, but now the market is bouncing back because postponed demand is kicking in. Then when the demand is filled, uh, the market is expected to be flat. Also, there are supply chain problems caused by COVID.
08:05 Emiliano Marzoli
Do you see similar issues when we talk about light commercial vehicles?
08:10 Maxim Sakov
Currently, Emiliano, there is not enough inventory available to keep up with demand in L series. Pent up demand is driving sales, so the market is expected to show significant growth this year.
Here we see following factors: The state supports this sector, but, uh, privileged credit programs were dropped. Instead, uh, it sponsored leasing is maintained and, uh, direct purchased by state are maintained for school buses and ambulance cars. So, in total, the state plans to invest about $70 million U.S. dollars here as subsidies in 2020.
08:59 Emiliano Marzoli
Right, so a lot of support, that’s for sure.
Let’s move on to medium and heavy vehicles, commercial vehicles.
09:06 Maxim Sakov
Segment continues to grow and we expect plus 28% is this year.
09:13 Emiliano Marzoli
That’s, that’s a really positive. What factors are driving this growth?
09:18 Maxim Sakov
First of all, it’s a growing demand for cargo transportation. Then the state support for heavy OEMs. This is a direct support large infrastructure project and the restriction measures like, utilization fees which restricts imports and stimulate local production. Among the fundamental factors we can point out the necessity in fleet renewal because average age of truck in Russia is 17 years.
Regarding bus market, it’s also growing and we can see a state investment in alternative fuel vehicles. For example, recently the state adopted the program and according to it about $10 million US dollars are planned for electric vehicle development. Also we see a hydrogen vehicles prototype was shown by leading Russian OEMs.
10:25 Emiliano Marzoli
Maxim, we can see some different trends between the light commercial vehicles and the medium and heavy commercial vehicles.
Staying on the road, what is going on with cars?
10:36 Maxim Sakov
The situation is different. With cars, there, there are mixed trends here. First seven months of 2021 we see 33% growth in production; but, 30% sales decline for August. And my reason identified for the decline is a cheap deficit, but the lack of demand is also included.
We need to know that 60% of cars in Russia is purchased with a credit or leasing. Now sponsored credit programs for passenger cars are reduced or eliminated, so only 40% of the market remains. And here we see, probably, a big shrinking of the demand; and the dealers are preparing for it by reducing inventories and maintaining long waits for the client who are going to purchase a car.
On top of it, the inflation is here as well. Some brands have already increased prices. More expected to do it in the nearest future.
11:51 Emiliano Marzoli
So Maxim, uh, here in Europe and North America, for sure, as well, passenger cars and SUVs are, uhm, amongst the segments that suffered the most from supply chain issues. You mentioned it, uh before, uh, could you give us some more insights on the situation in Russia?
12:12 Maxim Sakov
Well, logistic issues in Russia are not like the problems is in UK or US. There are no significant shortage of truck drivers and stevedores. And most of the problems are related to unavailability or delays in supply of imported goods, parts of component, including semiconductor chips.
12:37 Emiliano Marzoli
I I would imagine, hope that this situation is, uh, is different when, uh, we look at power generators.
12:44 Maxim Sakov
Yes, higher oil prices have boosted the genset sales because companies and the investors are putting money into oil drilling. Companies are buying more equipment. Also here we see increased demand for power backup for, from various industries. Needs in reserve power is followed by increased warehouses opening plus 25%. in future, we expect the growth will be continued, but in a slower rate.
13:22 Emiliano Marzoli
OK, so that, that’s definitely another segment showing a positive trend.
Finally, Maxim, I would like to discuss the marine segment. This also seems to be a growing industry in Russia.
13:36 Maxim Sakov
Well, development of the shipbuilding complex during middle term will be driven by increase of direct state orders and the orders from large companies. So, many vessels are planned already under construction. Among them drilling platforms, ice breakers, gas carriers, cruise vessels, fishing trawlers, support vessels and so on and so on.
As example, a large Russian oil and gas company, Novatek, is planning to order five large gas carriers per year from the new shipyard, Zvezda, in the Far East in Russia.
14:26 Emiliano Marzoli
Maxim, thank you very much for all these insights on the different segments. This was a really, really insightful and, and helpful. I hope, I hope for our listeners too.
All this data is pulled from two of the major Power Systems Research databases: OE Link — the database of OEM production and forecast data, and EnginLink — which provides engine production, forecast, and specification data.
Look for reports on Russia every month in the PSR PowerTALK news reports and on these podcasts every quarter.
Then please contact us for more information on the power products such as those we discussed here today.
Thank you very much folks.
15:06
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