Regions have survived the worst, but not all are out of the woods yet

Selected indicators of socio-economic development in Russian regions

  • By September, regional economies in Russia had not recovered to pre-crisis levels after the easing of pandemic measures. Despite the growth of some indicators after decreases in April−May, a return to pre-crisis figures before the end of this year and next year looks unlikely. This means that regional budget revenues will not recover. However, measures to combat the increase in cases in the fall were not as strict as in the spring, which means that the worst is behind us in terms of most economic indicators.
  • The volume of services consumed by the public for the population began to decline even before preventive measures were introduced and will not recover until the end of the year. Since transport services are still partially limited, utility payments may be postponed, and demand for household services may have declined even after the quarantine was eased, it makes no sense to wait for the sector to recover before the end of the year. There have been substantial decreases in the volume of services consumed by the public without significant recovery not only in Moscow, but also in large industrial regions like the Republic of Sakha (Yakutia), Republic of Bashkortostan, Primorsky Krai, Sakhalin region, the Yamalo-Nenets Autonomous Okrug, and Arkhangelsk region.
  • The most significant drops are in the dynamics of public catering turnover, and the fastest recoveries are in retail. Turnover in public catering fell by half this spring. In September, only eighteen regions had recovered, four of which are tourist. Retail trade turnover, which declined less primarily due to the non-food sector, had almost recovered to last year’s values by July-September.
  • Real income has fallen and unemployment has increased. In Q2, the real income of the population decreased by 7.7% compared to the same period last year. In some regions, the decline over this period was 12−17%. Officially, registered unemployment had increased more than 5x by September to 4.9%, which is comparable to the unemployment registered according to ILO methodology (6.3%). The number of vacancies is half that of the officially registered unemployed. Nevertheless, the easing of pandemic measures suggests that the growth of unemployment will stop by the end of the year.
  • Negative trends in manufacturing began before pandemic measures were introduced in Russia. Not only mining regions, but also regions with a high share of manufacturing industries, mainly export-oriented, have experienced this decline. The depth of the decline in some indices exceeds the decline of 2015, and the global nature of the economic downturn suggests that a rapid recovery in unlikely. However, the decline in manufacturing is not comparable in depth with either services consumed by the public or public catering.

The volume of services consumed by the public will not recover until the end of the year

Services consumed by the public include:

Household;
Passenger transport;
Communication;
Housing and utilities;
Services of cultural institutions;
Tourism and sightseeing;
Physical education and sports;
Medical;
Health and wellness;
Veterinary;
Legal;
Banking;
Services in the education system;
Market services.

 

The volume of services consumed by the public for the population reflects the consumption of various services that meet some of the needs of the population, but are not embodied in material form. These services provide a profit to companies that provides them. Therefore, the volume of services consumed by the public, along with the turnover of retail trade and public catering, is an important macroeconomic indicator that reflects the current state of the economy through consumption.

The first official non-working day in Russia due to the spread of the coronavirus pandemic was March 30, but the volume of services consumed by the public began to decline at the end of March, and as early as February In the Caucasus, the Volga region, the Urals and the Trans-Urals. In April and May, there was a widespread drop in the volume of services. However, the Siberian Federal District (SFD) suffered the least, where figures did not fall below 70% (month on month compared to last year).

Table 1. Drop in services consumed by the public in Federal Districts, April−May 2020*

* Month of the current year to the corresponding month of the previous year in nominal terms.
Sources: Federal State Statistics Service, ACRA

The share of spending on tourism, hotel accommodation, and cultural events, which declined significantly in the first months of increased cases, is only about 7% of the total volume of services. Therefore, the decline to 60−65% in April and May from the corresponding period in 2019 occurred not only amid a reduction in this spending, but also due to a comprehensive decline in all significant types of services (except for communication and telecommunications services, which make up just over 10%).

Housing and utilities (about 28%) and transport services (about 20%) account for the largest share in the structure of services consumed by the public. The restriction of air traffic with other countries at the end of March, the reduction of domestic air traffic, the restriction of rail traffic, and other measures eventually made a significant contribution to the decline in the volume of services. In relation to housing and utility services in early April, the government decided to cancel fines until the end of 2020. As a result, according to Association “NP Market Council,” electricity payments in April decreased by almost 9% compared to the same month last year. At the end of August, this figure did not reach 100% compared to last year. The Bank of Russia has also recorded the negative contribution of the electricity supply industry to the dynamics of financial flows in consumer industries.

Household services account for another 10% of services consumed by the public (e.g., hairdressing and beauty services, clothing and footwear repairs, equipment repairs, dry cleaning, etc.). Even if individual regions did not restrict the activities of consumer services during the pandemic, the demand for their services has obviously decreased.

The crisis in the services consumed by the public market in the regions has unfolded in different ways. Slightly more than half of the regions experienced an index drop to 70−75% (month on month compared to last year), while it had recovered to 90% or higher by September in more than half of the regions. In the Altai Krai, Republic of Crimea, Krasnodar Krai, the Republic of Adygea, and the Belgorod region, as well as in half of the North Caucasus republics, the volume of services recovered to 100% or higher compared to September 2019. However, not all regions were so fortunate; in the Urals, for example, recovery is very sluggish.

This figure was expected to fall the most in Moscow (to 42.3% in May compared to May of last year, while in September it recovered only to 76%). In some regions, recovery has been slow after significant decline, including the Republic of Sakha (Yakutia), Sakhalin Region, Republic of Bashkortostan, Primorsky Krai, Saint Petersburg Region, and Arkhangelsk Region.

According to ACRA, the volume of transport, household, and tourist services will not recover until the end of this year. In addition, new pandemic measures have been in effect since November, which means that the volume of services consumed by the public will mostly remain below last year’s figures.

Turnover in public catering has experienced the most severe drop

Turnover in public catering showed an even greater decline than in services consumed by the public. Nationwide, turnover was 48.5% in April and May of last year and 47.9% in April and May 2020, while in some regions the decline was even stronger.

Figure 1 shows dynamics for 20 regions where the drop was the deepest, in some months below 40% lower than last year. These regions have recovered at different rates. For example, in the Republic of Kalmykia, Republic of Tatarstan, Republic of Bashkortostan, Stavropol Krai, and Khabarovsk Krai, the demand for public catering had not recovered by September and was less than 80% of September’s level last year. The best situation is in the Krasnodar Krai (111%), which is obviously the result of the tourist flow in the second half of summer.

20 regions with the maximum drop in public catering turnover:

1.     Bryansk Region;
2.     Tambov Region;
3.     Moscow;
4.     Kaliningrad Region;
5.     Saint Petersburg;
6.     Republic of Kalmykia;
7.     Republic of Crimea;
8.     Krasnodar Krai;
9.     Rostov Region;
10.   Kabardino-Balkarian Republic;
11.   Stavropol Krai;
12.   Republic of Bashkortostan;
13.   Republic of Tatarstan;
14.   Udmurt Republic;
15.   Perm Krai;
16.   Kirov Region;
17.   Kurgan Region;
18.   Sverdlovsk Region;
19.   Zabaykalsky Krai;
20.   Khabarovsk Krai

Figure 1. After a one-time drop, turnover in public catering is recovering in different ways*

* Month of the current year to the corresponding month of the previous year in nominal terms.
Sources: Federal State Statistics Service, ACRA

Retail trade turnover is recovering rapidly

Retail trade has also declined amid pandemic restrictions imposed on trade in non-food products. According to the Federal State Statistics Service, turnover in retail trade in non-food products fell in April to about 65% of the average monthly values of 2017 with a rapid recovery by July.

However, due to food retail, the decline in the sector as a whole was not as strong as in catering or services consumed by the public. In April 2020, retail turnover averaged 76.6% compared to April 2019, and 80.8% in May. The lowest values were observed in the North Caucasus Federal District (in the Republic of Dagestan, Kabardino-Balkarian Republic, Karachay-Cherkess Republic, Republic of North Ossetia-Alania, and Stavropol Krai, the index in April was 62−67%), with turnover decreasing the least in Ufa and SFD. In some regions of Siberia, the decrease was no more than 10% compared to the same month last year (Tomsk and Novosibirsk regions, Kemerovo Region-Kuzbass, Altai Krai, Republic of Khakassia). In Moscow, the drop was one of the deepest, but recovered as soon as June.

Figure 2. Retail showed the fastest recovery*

* Month of the current year to the corresponding month of the previous year in nominal terms.
Sources: Federal State Statistics Service, ACRA

However, as Figure 2 demonstrates, not all regions recovered. In just twenty-six regions, retail turnover in September of this year was no lower than September 2019. In Siberia, despite the smallest drop in turnover in April, the recovery is slowest due to both pandemic measures and lower incomes.

Real income dropped by almost 8%

The decline in demand for services and the closure of a number of businesses could not but affect the income of the population. As a result, in Q2 2020, real income decreased by 7.7% compared to the same period in 2019.

According to Q2 results, real income increased only in the Chukotka Autonomous Okrug, Yamalo-Nenets Autonomous Okrug, as well as in the republics of Khakassia and Kalmykia.

Real income decreased most significantly in Q2 in the Republic of North Ossetia-Alania (by 16.8% compared to Q2 last year), Krasnodar Krai (15.5%), Bryansk Region (14.5%), Tambov Region (13.4%), Kabardino-Balkarian and Karachay-Cherkess republics (13% each), Stavropol Krai (12.7%) and Republic of Dagestan (12.6%).

Cash income is income from business activities, wages, social payments, interest on deposits, securities, dividends and other income.

Due to a small increase in Q1 (+0.9 p. p.), the decrease in real income for H1 2020 was only 3.1% compared to the same period last year.

Due to the positive results in Q1, real income increased in more regions in H1 2020 than in Q2. This includes the Belgorod and Tula regions in the Central Federal District, the Vologda, Pskov, and Murmansk regions in the Northwestern Federal District, the Republic of Kalmykia in the Southern Federal District, the Republic of Mordovia and Chuvashia and Saratov Region in the Volga Federal District, Yamalo-Nenets Autonomous Okrug in the Urals Federal district, Kamchatka Krai, Chukotka Autonomous Okrug, Magadan and Sakhalin regions in the far Eastern Federal district and almost two thirds in SFD.

The fastest rate of growth in real income in H1 was in the Yamalo-Nenets and Chukotka Autonomous Okrugs (3.4% and 4.4%, respectively), whereas in the vast majority of the above regions, the growth is very conditional at 1.5% or lower.

Real income is cash income adjusted for CPI.

Real income has declined amid growth in nominal wages. For 8M 2020, wages increased by 5.6% compared to the same period last year (in August, growth was 3.7% compared to August last year). In the structure of monetary income, wages account for a little less than 60%, with social payments accounting for the remaining part (just over 20% this year), then income from business activities, property, and so on.

Dynamics for these types of income broken down by region are not available, but it is obvious that social payments increased in Q2 and Q3. However, income from business activities declined, as evidenced indirectly by a decline in food, services, and retail turnover, as well as property income (at least due to lower interest rates).

Demand for goods and services in Q2 decreased much more than the income of the population. Unrealized demand during this period resulted in a small increase in savings and cash for the population. The purchase of goods and services in the structure of monetary income use usually accounts for about 75−80%. However, due to a strong decline in consumption of goods and services in Q2, their share decreased to 68%. The unused difference generated an increase in savings and cash. However, in Q3 after some restrictions were lifted, Russians spent more, including by withdrawing their savings.

Unemployment rate is two times larger than vacancies

The decline in income has been joined by unemployment, with the coronavirus setting Russia back about nine years in terms of this indicator. Despite the fact that formally non-working days should not have been accompanied by layoffs or wage cuts, in the face of a sharp decline in turnover, many companies were obviously forced to take these measures. As a result, in February–April, unemployment according to the ILO’s methodology increased by 0.4 percentage points to 5.0%, and in June–August it had already reached 6.3%.

Officially registered unemployment in Russia had increased by more than five times by August, to 4.8%, which is comparable to unemployment registered according to the ILO’s methodology (6.3%).

In September, official unemployment continued to grow, reaching 4.9%. However, it is likely that the main period of growth in unemployment finished with the easing of restrictive measures.

Here it is worth mentioning that the growth of registered unemployment is partially due to the change in the size of unemployment claims. They were increased in April as part of the anti-crisis measures, and it was in April (the first full month of the quarantine) that a massive increase in registered unemployment was recorded. However, growth in the real number of unemployed, according to the dynamics of the unemployment rate as per the ILO, still took place.

The number of officially registered unemployed quite quickly equaled, and then overtook the number of vacancies.

Figure 3. Labor market balance in 2020, per thousand people

Sources: Federal State Statistics Service, ACRA

Table 2. Leading regions in terms of the share of registered unemployment and growth of registered unemployment

Sources: Federal State Statistics Service, ACRA

Regions whose IPI* was lower than 100% during eight out of nine months of 2020:

1.   Tver Region (minimum in April — 86.3%);

2.   NAO (minimum in September — 69.9%);

3.   Perm Krai (minimum in May — 91.5%);

4.   Samara Region (minimum in April — 86.1%).

Regions whose IPI was lower than 100% during nine out of nine months of 2020

1.   Kostroma Region (minimum in April — 69.7%);

2.   Republic of Kalmykia (uncharacteristic minimum in January — 84.5%);

3.   Republic of Tyva (minimum in April — 53.8%);

4.   Krasnoyarsk Krai (minimum in March — 85.5%);

5.   Kemerovo Region — Kuzbass (minimum in January — 93.7%).

* Month on month of the previous year. The analysis is based on official statistics.

For more details on the revision of sector data, see ACRA’s analytical commentary “A significant positive revision of industry data is the norm for Russia and many other countries” from October 20, 2020.

Food and masks: which sectors suffered the least

Industry accounts for around a third of the profit tax revenues and a quarter of the income tax revenues of regional budgets. The state of this sector, which formally has not been subject to limitations during the pandemic, continues to have a defining impact on the economies of Russia’s regions.

Analyzing the industrial production index (IPI) of Russian regions is complicated by the fact that this October, Rosstat revised its industrial production data for Russia as a whole in terms of all types of economic activity. However, regional statistics are yet to be revised.

Although preventative measures were only deployed in Russia in March, already by the end of the month the IPI in 31 regions was lowered than 100% compared to March 2019. Every month since April this has applied to no less than 49 regions.

A decline in industrial production was recorded in a number of regions in January 2020 too, while in March the number of regions experiencing a rather deep decline in IPI (below 85% compared to the same month in 2019) increased. In March, this applied to six regions, and since April there have been eight to twelve of them every month.

Figure 4. In 2020, there are a lot more regions where IPI has declined substantially than in 2015

Sources: Federal State Statistics Service, ACRA

During the six months of restrictive measures and downtime (April–September), approximately two-thirds of cases (out of all cases observed) the IPI was below 100%, and in 12% of cases it was below 85%.

Nevertheless, the extent to which the IPI declined is not comparable to the depth of decline in the turnover of public catering, the volume of services consumed by the public , and even the turnover of catering in certain months.

Despite the completely different nature of this year’s crisis and, for example, that of 2015, the number of regions where the IPI has fallen is comparable. However, this year a larger number of regions have faced deep declines in the index.

In some of the regions, the decline was only temporary, and recovery began after April–June, yet in others the IPI was below 100% (month on month of the previous year) for eight out of nine months. Furthermore, in some regions the IPI was consistently below 100% for the entire period.

Despite the decline in demand for power and falling oil prices, not all the regions listed above are focused on mining. This, in turn, means that the current crisis has significantly affected various sectors of the economy.

Nevertheless, the fall in oil and gas production was one-time and the most synchronous — from May, when the new OPEC+ agreement came into force, to September inclusive, the indices were in the negative zone. The most affected regions are not the largest oil producers: the Tomsk Region, the Republic of Bashkortostan, the Nenets Autonomous Okrug, and the Republic of Sakha (Yakutia), which, however, produces not only hydrocarbons.

Table 3. Maximum decline in the IPI by type of economic activity “Mining” — oil and gas production*

* IPI by type of economic activity “Mining” for individual regions, grouped by the share contributed by each subtype of activity to the volume of shipped products for the specified type of activity, in January to September 2020 (month on month of the previous year).
Sources: Federal State Statistics Service, ACRA

Regions specializing in the extraction of metallurgical ores suffered less. The Republic of Khakassia recorded growth thanks to new projects being implemented in the region.

Judging by the current (unrevised) data, among the regions where manufacturing occupies a significant share, the ones that were hit the hardest were those where oil production, vehicle and equipment manufacturing (Appendix) and woodworking account for large shares in the structure of shipped products. However, this may change after data is revised at a regional level.

Regions that specialize in food production are in the best shape, with almost of them recording IPI growth as early as June.

The Ivanovo Region, where the textile industry plays a large role, has also recorded growth in the index since June. It appears that this is the result of increased production in medical products (masks), which was announced in the spring. Going into the pandemic, enterprises that were able to switch production to medical products had the possibility to increase (or at least maintain) production volumes.

Metallurgical production also suffered to a lesser degree.

The economic downturn is global, and this means that both internal and external demand are falling. Therefore, a rapid recovery of regional economies is not possible. Based on the structure of production, it is already noticeable which regions’ economies will suffer more than others this year, which, in turn, implies a larger blow to their budget revenues.

However, due to the fact that the restrictive measures of this fall are much milder than those of the spring, a similar large-scale decline in economic activity should not be expected in the second and any subsequent wave of the pandemic. This allows us to count on a slow recovery of revenues by the end of the next year and the beginning 2022.

Appendix

Table 1. IPI by type of economic activity “Manufacturing” for individual regions, grouped by the share contributed by each subtype of activity to the volume of shipped products for the specified type of activity, in January to September 2020 (month on month of the previous year)

* Regions with a significant share of other subtypes of manufacturing.
Sources: Federal State Statistics Service, ACRA

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