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Southern Russia's markets in the first half of 2009

In Soviet times, statisticians would use a comparison with the year 1913 to show the progress being made towards constructing a communist society. When people tried to use another baseline to study the economy of “developed socialism” the Communist Party would tell them, “Our growth rates are slowing, but each percentage is starting to count for more”.

Today, analysts are studying the current economic crisis in Russia by comparing statistical indicators with the pre-crisis year, 2008, which was a very successful year. Experts are predicting that the Russian economy will have recovered from the downturn by 2013. But the crisis has its own trends, analysis of which is important if we are to properly assess conceptions of post-crisis development:

• — Which sectors, regions and markets will grow after the crisis?
• — How stable is this growth?
• — What markets might emerge in the process of this growth?

Two documents published by the Federal Statistics Service provide a fairly objective picture of the new economic development trends: Information for Monitoring the Socioeconomic Position of the Constituent Members of the Russian Federation in January-June 2009, and Russia's Socioeconomic Position (January-June 2009) (http://www.gks.ru). The results of this analysis are presented below, and an attempt is made to analyse these trends in terms of market mechanisms.

The population has shown fortitude in the face of the crisis: the birth rate has gone up, the death rate has gone down, and there is less migration. Family ties have been strengthened with an increase in the number of marriages and a decrease in the number of divorces. If we look at the figures per thousand population, southern Russia outperformed the Russian average by approximately two people for each of these indicators. Even the traditional southern temperament, reflected in higher than average marriage and divorce rates, has changed during this crisis: the people of southern Russia are being more pragmatic and are trying to preserve and increase even very modest family assets.

Labour market

Southern Russia adapted to unemployment long before the crisis, and this experience has proved advantageous for the labour market in the present conditions.

Throughout the country, including southern Russia, the crisis has forced into work even those people who previously were not working for one reason or another. According to a statistical survey, between February and May 2009, the employment rate for people of working age increased by 1.6% nationally and by 1.8% in the Southern Federal District (southern Russia).

Unemployment fell in the same period: by -1.0% nationally, and by - 0.9% in southern Russia. 

These trends are confirmed by the Federal Labour and Employment Service's comparison of data for May and April of this year: the numbers of economically inactive people and registered unemployed, and even the number of unemployment benefit recipients, are all falling. In southern Russia, the crisis has not resulted in a sharp increase in the number of economically inactive people, registered unemployed, or unemployment benefit recipients. The impact of the crisis on employment has been 7-10 times less in southern Russia than throughout the rest of country. Yet, despite the positive trends, unemployment in southern Russia as a whole is 3% higher than the Russian average. In the republics of the North Caucasus it is 4-6 times higher, although in these areas too unemployment is falling.

Following the redundancies in winter, there has been an increase in the number of job vacancies advertised in government-run job centres in the Russian Federation (+13.4%). In southern Russia, the increase has been considerably lower (+2.2%), with the exception of those regions where large federal projects are being implemented: Ingushetia (+7.9 times) and Krasnodar Krai (+22.2%).

The labour market in southern Russia has proved to be more mobile at this time of crisis: June saw an increase in redundancies (+12.0%), but also an increase in the number of people hired (+17.8%) and the number of vacancies (+5.9%). The respective results for Russia as a whole were: +7.8%, +15.8% and -0.2%. This indicates that southern Russia’s labour market is seeing a more active attempt to find a new equilibrium point: both employees and employers are trying to find new ways in which existing human resources can be used. There are also a number of objective factors behind the greater mobility: southern Russia's diversified economic structure; the absence of any single-industry towns; and the population's fairly high education level, allowing workers to quickly adapt to new working conditions in new jobs.

In addition to objective factors, subjective factors also influence the trends and the mechanisms at play in the labour market. While in June 2009, southern Russia accounted for 10.63% of all redundancies in Russia, the percentage of redundancies that were voluntary was higher in the south (12.13%). Worker behaviour in southern Russia's labour market is determined by the workers' strong self-esteem, the independent behaviour of the population of the south, and confidence among workers that there is demand for their skills.

The strong sense of self-worth among the workers is forcing employers to take a more responsible approach to making redundancies (southern Russia accounts for 10.42% of the total number of intended redundancies in the country), and to retaining vacancies (11.49% of total vacancies in Russia). Relationships in the labour market in southern Russia are sufficiently transparent that there is no need for extensive use of hidden forms of unemployment, such as part-time work (6.26% of the figure for Russia) and compulsory leave (5.0% of the figure for Russia).

Another factor behind the dynamic development of southern Russia's labour market is self-employment. Under new Russian legislation, the statistics now combine the number of people employed by small enterprises (up to 100 employees) and medium-sized enterprises (up to 250 employees). Using these new indicators, we see that in the first quarter of 2009 it was medium-sized enterprises that were most affected by job cuts (-12.1%). In Russia as a whole, 4% of jobs were shed. But in southern Russia, the high percentage of individual entrepreneurs (20.69%) and the number of people working for small enterprises (14.0%) more than compensate for this.

The crisis is forcing a reassessment of many resources, including human resources. In May 2009, the nominal wage was still going up in comparison with May of last year (pre-crisis). Moreover, the increase in southern Russia (+12.1%) was higher than the national average (+7.5%); in the pre-crisis period, wages in southern Russia barely kept pace with the Russian average. But, relative to April's results, there was no increase in Russia as a whole, and only a very small increase in southern Russia (+ 0.7%). In a number of areas, the nominal wage actually fell: the Chechen Republic (-1.0%), Kalmykia (-0.4%), and the Volgograd region (-0.2%).  

In June 2009 alone, thanks to government measures and the efforts of regional commissions aimed at preventing the late payment of wages and salaries, total wage arrears in Russia were down by 18% and in southern Russia by 50.1%. There are now virtually no wage arrears in Dagestan, North-Ossetia-Alania, the Rostov region or Krasnodar Krai. There are occasional spikes in wage arrears at individual companies, but these are addressed through the efforts of the local authorities, employers and federal debtors. 

Consumer market

In May 2009, real personal income in absolute terms fell by 5.5% in Russia as a whole and by 4.3% in southern Russia. While in southern Russia the population is still delighted with their increased wealth relative to last year (+1.8%), the rest of Russia is no longer under any illusions (-1.3%).

Consumer behaviour is also changing. March saw an increase in both personal income and consumer spending. Moreover, the growth in spending exceeded the growth in income, both nationally (by 1.6%) and in southern Russia (by 2.5%). The population were trying to carry out their pre-crisis plans. In April, spending rose at a slower pace than income: in Russia by -6.9%, and in southern Russia by -5.4%. The population had started to save. In May, income and consumer spending both showed negative trends, but spending less so: consumption had almost reached the level when any further reduction would mean that basic needs were not met.

The January festive season saw retail sales fall by 25.6% throughout Russia as a whole, and by 29.2% in southern Russia. But then in February the consumer market quickly recovered, with sales up by 28.2% overall, and 36.7% in the south.

After that, normal free market laws began to take effect in the consumer market: the fall in the rate of growth of personal income led to a contraction in sales, or to lower prices for individual types of goods. Given that pricing in the service sector is not dictated by the market, but instead is subject to regulation, the emergence of market mechanisms can be more clearly illustrated by comparing trends in sales volumes and prices for food and non-food items.

In June, the Russian consumer market reacted to the previous month's fall in per capita income (-4.9%) with an increase in purchases of non-food items (+1.1%) and a decrease in purchases of food products (-0.6%). In June, food prices in Russia increased by 0.5% and prices for non-food items by 0.8%. The government's attempts to regulate food prices did not result in increased food sales.

In May, average per capita income in southern Russia fell by 3.5%. Despite this, sales of non-food items and food products in the region were up (+4.0% and +3.0%, respectively). The higher sales were accompanied by higher prices for both non-food items (+0.6%) and food products (+0.8%). The market itself will find a new supply and demand equilibrium, but this requires market conditions.

In this respect, a comparison of data for Krasnodar Krai and the Rostov region for May-June 2009 is revealing.

In Krasnodar Krai, in May, personal income fell by - 3.78%, the food price indexes increased by just 0.4%, and food sales were up by 7.1%. 

The corresponding results for the Rostov region were as follow: in May, average per capita income fell by - 2.65%; in June, the food price index increased by 1.2%, and food sales increased by 1.2%. Besides other factors, it should be borne in mind that there are large retail chains in the Rostov region. These chains have been forced to focus on imported goods, which have become more expensive as a result of the devaluation of the ruble. The local population are responding to this pricing policy with a reduction in demand.

Despite the higher prices, demand for non-food items in the south remains steady: the population still fear a new inflationary spike and are trying to make previously deferred purchases.

One fifth of all of Russia's covered and outdoor markets and 27.6% of their trading stands are concentrated in southern Russia. With its tradition of holding markets, the economy of southern Russia has better chances than an economy dominated by retail chains. This is especially true in the summer season.

Changes in income, sales and price indicators in May-June 2009, percentages

In the first half of the year, retail sales in Russia as a whole fell by 3%, while in southern Russia they rose by 0.5%. In June, there was very little change in retail sales nationally (+0.2%), but the south saw a 3.5% increase on the previous month. It was only in the Volgograd and Astrakhan regions that sales declined, and these regions also experienced a much more substantial contraction in wages, and an increase in wage arrears.

At the start of the crisis, wholesale trade in southern Russia suffered considerable losses, with sales down 30% on the previous year; in the country as a whole, they only fell 3.2%.  But this sharp contraction has boosted accelerated growth in the new crisis conditions: in June compared to May, wholesale trade in southern Russia was up 5.5%, against a national increase of 1.1%.

As is to be expected in a partial market economy, the service sector, in which prices and tariffs are largely government regulated, has reacted less to the fall in personal income: both the prices and the sales of charged services are going up. The sector of charged services, which contracted last year by 8% in the country as a whole and by 3.1% in southern Russia, is trying to recover its position: in June 2009, sales volumes for charged services grew by 1.5% nationally, and by 3.3% in southern Russia. Moreover, the prices and tariffs for charged services went up: by 5% in Russia as a whole, and by 0.7% in southern Russia.

Producers’ markets

The downturn in industry as a result of the crisis was felt equally by southern Russia and the rest of the country: in the first half of the year, the index of industrial production fell by 13.5% in the south and by 14.8% nationally.

However, the south is overcoming the crisis in industry more rapidly, with growth of + 15.3% in June compared to May, while Russia as a whole showed growth of just 4.5%.  Moreover, June's growth was even higher in manufacturing: +19.9% in southern Russia, compared to 9.9% nationally. The extraction industry is recovering more slowly: growth in June did not reach May's level either in the Russian Federation as a whole (-0.1%) or in southern Russia (-2.1%).  As for the generation and distribution of electric power, gas and water, these sectors also saw a fall in June compared to the previous month (-14.0% nationally and -12.5% in southern Russia) but this was largely due to seasonal factors.

The shock from the contraction in industry at the beginning of the year is gradually starting to dissipate. Food production and local industry continue to be at the forefront of post-crisis growth. Electric power generation and the manufacturing of electrical goods and local construction materials are achieving pre-crisis levels. There has been a decline of more than 10% in the manufacturing of combine harvesters, paint and coatings, man-made fibres, fabrics, pipes, electric locomotives, tractors and cars. The very diverse results for different types of industrial output are partly the result of government assistance for engineering. But even if this support was taken out of the equation, southern Russia would still have advantages in the post-crisis economy: its diversified economic structure, its emphasis on food production, and improved efficiency at the company-level in all sectors.

For agriculture we should wait until autumn to draw our main conclusions. In terms of interim results, we can see a reduction in the area sown with cereal crops, leguminous plants, sunflowers and sugar beet, and an increase in the area sown with potatoes and vegetables. Farmers are not confident that the prices they receive from sunflower and sugar beet processors justifies the cost of producing these crops. On the other hand, there will always be demand for potatoes and vegetables, especially when the population has less money to spend. Regardless of the specific situation, southern Russia will always be the country's larder, accounting for more than 40% of sunflower and vegetable production, and more than 20% of cereal crops.

In the first half of the year, compared with 2008, livestock and poultry production increased by +5.9% nationally, and by 1.8% in southern Russia. Milk production in Russia as whole fell slightly (-0.5%), but in the south it was up 2.5% compared to the same period of 2008. Egg production increased both Russia in as a whole (+4.0%) and in southern Russia (+4.4%). During the crisis, agriculture seems to be the only sector of the Russian economy that is experiencing growth, and given that southern Russia dominates this sector, it is the south that is starting to drive post-crisis economic development.

In the first half of the year, as a rule, the agricultural sector predominantly sells animal produce. In the first six months of 2009, prices for agricultural products in the Russian Federation fell by 2.0%, but sales increased: meat by 5.9%, and eggs by 4.0%. Only milk production experienced a fall in sales, of 0.5%.

In the south, despite the 1.3% increase in prices, sales volumes for milk and eggs have increased steadily (+2.5% and +4.4%, respectively), but meat sales have not expanded rapidly (1.8% growth compared to the first six months of 2008). Experts predict that the drought of 2009 will result in further price increases for the agricultural products that farmers have not managed to produce in the same record quantities as in 2008.

In construction, despite the view widely disseminated by the media that the sector is in a disastrous state, the reality is less dramatic: nationally, the sector has contracted by 19.3%, and in southern Russia by 9.1%. The amount of new housing has fallen by 0.3% nationally and by 4.0% in southern Russia. Until a new equilibrium between supply and demand emerges in the housing construction market, construction companies cannot automatically keep building house after house. In the meantime, in the first half of 2009, prices on the new homes market fell by 6.1% nationally, and by 5.7% in southern Russia. 

Looking in more detail at the results for southern Russia, while prices fell by 12.6% in Krasnodar Krai and 17.3% in the Volgograd region, the Rostov region saw prices on the new homes market increase by 4.9%, Stavropol Krai by 6.3%, and the Astrakhan region by 9.7%. 
It can be expected that the contraction in prices in the construction industry will slow down, but this will depend on growth in income.

The reaction by the construction industry in southern Russia to the crisis has been more in line with free market principles than has generally been the case in the rest of country: in the first half of the year, prices fell by 2.5% in southern Russia and the volume of completed work by 9.1%. In Russia as a whole, construction companies agreed to just a 1.8% reduction in prices, but then volumes of construction work fell by almost 20%. 

In the first half of 2009, tonnage of freight lifted by roadfell by 13.4% in Russia as a whole, and by 19.2% in southern Russia. Nationally, there was a decline not only in tonnage of freight lifted, but also in tonnage of freight moved (-14.8%). Meanwhile, in southern Russia the tonnage of freight moved increased by 3.9%. Southern Russia's border regions saw the most significant increases in the tonnage of freight moved by road: the Rostov region (+30.5%), Krasnodar Krai (+5.6%), and the Republic of Dagestan (13.4 times).

Although the data on freight tariffs and the volumes of road freight shipped by large and medium-sized enterprises are not wholly comparable, it is revealing that in southern Russia tariffs fell by 3.0% in the first half of the year, and the tonnage of freight moved by road increased by 3.9%.  In Russia as a whole, freight rates increased by 2.5% and tonnage of freight moved by road dropped by almost 15%.

Overseas trade

The downturn in overseas trade has been the most apparent result of the crisis. In the first quarter of 2009, compared to the same period of 2008, Russian exports fell by 47.7%, and imports by 38.9%. There was a decline in exports to non-CIS countries (-48.0%) as well as to former Soviet republics (-46.0%). Imports from non-CIS countries fell by 37.5% and from former Soviet republics by 47.7%. Although southern Russia's overseas trade is not extensive, it is based on stable relationships with both groups of trade partners (former Soviet republics and non-CIS countries). Consequently, the crisis has adversely affected southern Russia's exports to both of these groups of countries to a lesser and approximately equal degree (-17%). Southern Russia's imports from former Soviet republics fell very considerably (-61.8%).

In the first quarter of 2009, southern Russia imported food (8.6% of Russia's total food imports) mineral commodities (8.8%), fuel and energy products (11.0%), metals and metal items (9.0%), timber and pulp and paper products (3.6%), machinery, equipment and vehicles (3.7%). In terms of total Russian exports, southern Russia accounted for 32.4% of food exports, 7.4% of exports by the chemical industry, 6.6% of textile goods and shoes, 5.1% of metals and metal items, and 4.7% of machinery, equipment and vehicle exports. Along with food products, southern Russia's import and export trade is well balanced for a wide range of goods. However, southern Russia's overseas trade does not yet match its role in the Russian economy; it is less than half what it should be.  The regions most heavily engaged in overseas trade are the Rostov region and Krasnodar Krai.

The example of the textile industry in the Rostov region deserves mention. Textile companies created in mining towns in the Soviet Union were mainly intended to address demographic problems. During the years of reform in the 1990s, these companies retooled and today they account for 4.7% of total Russian textile imports.

Finance and investment market

Amid a general decline in Russia's investment activity of more than 15.6%, southern Russia's performance in the first quarter of 2009 stood out with a 2.6% increase in investment in fixed capital. This growth was connected with the completion of construction projects, work that was financed primarily using public money. A comparison for January-May shows that the breakthrough achieved in terms of investment activity is diminishing, but for the time being southern Russia (+0.4%) is outperforming the national average (-8.3%). Data for May shows a slowing in investment activity both in Russia as a whole (-14.0%) and in southern Russia (-3.4%), but this does not allow for investment in preparation for the Sochi 2014 Winter Olympics: investment in Krasnodar Krai was up 29.7%.

Obviously, during a crisis, ambitious, but inefficient investment projects should be rejected, especially those that are financed using public money. However, the desire to conserve public funds should not entail a failure to make the necessary investments for the social development of future generations. Given that public money is limited, mechanisms to get real value from this money must be put into action, drawing on international best practice. 

In the end of the first quarter, southern Russia accounted for 9.39% of total investment in the Russian Federation, and 3.4% of foreign investment. In Krasnodar Krai the respective results were 3.4% and 0.8%, and in the Rostov region, 2.16% and 1.4%.
Companies suffered their largest losses in January. In the south, companies only started seeing profits in March (in some regions, in April). From that point, southern Russia's contribution to the consolidated financial result of the country's businesses began to increase, reaching 4.32% in May. Although this was 1.32% lower than in 2008, it was much better than January's result, when the south accounted for 9.0% of total losses.

In January-May 2009, the profitability of large and medium-sized enterprises in Russia fell by 48% in comparison with the same period of the previous year, while southern Russia showed a decline of only 39.8%.

Due to the fall in company revenues, southern Russia accounted for 0.6% less of total taxes and other mandatory payments to the state, but there was no change in the amount of overdue payments.

The crisis has engendered a specific type of “investment” activity: buying up assets that have fallen in price. Recognising the danger in this, companies in southern Russia are trying to manage their liquidities and control their receivables and payables.

In the first half of the year, southern Russia's share of the total accounts payable of Russia's companies did not change, standing, on average, at about 6.3%. Its share of overdue accounts payable has also remained steady, at about 9.5%.

In terms of accounts receivable, southern Russia is responsible for about 5.4% of the national total, and about 7.5% of overdue accounts receivable. There is some fluctuation depending on when the latest tranche of government financial assistance is received, as well as public finance for Russian companies working on government contracts, and payments by debtors to southern Russia’s companies.

As there will be cutbacks in the scale of government assistance, there will be an increased risk that Russian debtors will fail to make timely payments to companies in southern Russia. At the same time, every effort must be made to ensure the timely payment of work carried out in southern Russia under government contracts.

...

The main thing that southern Russia has demonstrated in the first half year of its economic development in crisis conditions is its commitment to using market mechanisms to overcome the crisis: in the labour market, in the consumer market, in the producers’ markets, and even in the investment and finance market. Market mechanisms in southern Russia differ from the speculative rises and falls on the global market: they demonstrate confidence that persistent efforts can achieve a new market equilibrium and respect for those people who work hard and who are trying to adapt their business plans to the new market realities. So far we are only seeing the early results, the preservation of social stability at a time of crisis. We must make the transition from social stability to a social offensive by creating new investment projects to win competitive advantages in the post-crisis economy.