Russias Industrial Sector: Defense Growth Amid Civilian Industry Decline

Russia’s industrial sector, primarily driven by its defense industry, saw an increase of 1.6% in May and 1.8% over the past year after adjusting for seasonal variations, according to data from the state statistics agency, Rosstat.

These figures come amidst a significant downturn in civilian sectors, prompting analysts to caution that Russia’s economy has increasingly become reliant on the military-industrial complex as it enters the fourth year of its ongoing war in Ukraine.

The Telegram channel Tverdye Tsifr, which focuses on financial statistics, reported a remarkable 42% rise in the production of «various transport equipment» and a 14% boost in the output of finished metal products over the past month, which helped to offset weaker performances in March and April.

Production of apparel increased by 12%, while the manufacturing of electronic and optical devices, computers, and pharmaceuticals grew by 9%.

Analysts from Raiffeisenbank assessed that the machinery production sector expanded by 7%, whereas other segments of the industrial sector collectively contracted by 0.4%.

Experts from Alfa-Bank, Russia’s largest private banking institution, characterized the May statistics as indicative of a fragmented economy.

In the past, noted MMI, a Telegram channel that analyzes microstatistics in Russia and beyond, periods of sluggish civilian growth alongside strong defense growth resulted in some expansion across all sectors. Currently, however, every civilian industry has experienced declines as defense production has surged. «Resources are limited, leading to necessary cutbacks,» they stated.

Promsvyazbank indicated that industrial prices have declined for the third consecutive month.

Rosstat revealed that the producer price index for industrial products decreased by 1.3% in May and by 2.8% since the year’s beginning.

Promsvyazbank cautioned that the ongoing decrease in industrial prices “indicates a weakening resilience of the real economy to elevated interest rates.”

Tverdye Tsifr reported a seasonally adjusted decline in automobile production of 4% for May, with decreases of 3% for wood products and 2% for rubber and plastics.

Year-to-date Rosstat figures indicated a 13.7% reduction in the manufacturing of cars and trailers, a 3.2% drop in furniture production, a 2.3% decrease in clothing output, and reductions of 3.4% and 1.9% for rubber, plastics, and wood products, respectively.

Leather goods production fell by 16.9%, while food and beverage manufacturing saw declines of 0.9% and 3.3%, respectively.

According to the CMACP analytical center, which is affiliated with the government, industrial growth has predominantly been limited to the defense sector, with civilian industries languishing since mid-2023.

Deputy Prime Minister for Agriculture Dmitry Patrushev attributed these trends to “rising working capital costs driven by the prevailing key interest rate.”

Raiffeisenbank further suggested that industrial output is hampered by the Central Bank’s 20% interest rate.

“The strong ruble coupled with the Central Bank’s interest rate conditions [are factors] that render credit resources more costly for businesses, slowing down economic activity and diminishing domestic consumption,” the bank noted in a Telegram update.