Instabilities in Russian Corporate Enterprise Balances

CEIC Russia Data Talk: While Russias economic downturn in 2008 had a far-reaching impact on the economy at large, the effects of the crisis were not necessarily uniformly distributed. Despite heavy losses reported by many Russian firms for that year, the average industry trading results never strayed into the red. Companies in certain sectors even saw respectable profitability. Across the country as a whole, large and medium-sized enterprises suffered a dip in end-of-year profit-loss balances from RUB5.7 trillion in 2007 to RUB4 trillion in 2008. The bulk of the decline was caused by heavy losses in the wholesale and retail trade sector; its total end-of-year balance almost halved to RUB550 billion from RUB1.01 trillion during the same period. The financial intermediation sector in particular, among other small industries which suffered losses, saw a negative balance of RUB406 billion in 2008 from a positive balance of RUB233 billion during the previous year, effectively nullifying positive balances observed in other smaller industries including the agricultural, construction and other personal services. While other major sectors continued to report positive balances overall, these balances declined considerably with that of the real estate sector declining by as much as 61% during 2008. On the other hand, the mining and quarrying sector and the manufacturing sector remained relatively resilient during the 2008 downturn, each losing a mere fraction of their 2007 balances. This was primarily due to the lagged impact of external shocks to profit returns in these sectors. The longer production and processing time and the distributed nature of expenses in relation to the price changes caused the manufacturing sector’s collapse in the following year, from RUB1.7 trillion in 2008 to RUB970 billion in 2009. Taken in perspective, the overall trend of the Russian economy has been improving, judging by the trends in profitability of large and medium-size enterprises. Even during 2008 (at the height of the crisis) the corporate enterprise balance reached RUB4 trillion, which was still higher than the RUB3.8 trillion recorded for 2006. While the past three years are an indication of stable growth (as by the end of 2012 the balance reached RUB7.7 trillion), the fluctuations in profitability of individual sectors vary. For example, the real estate sector does not display a discerning trend. In 2005 it lost a quarter of its 2004 balance level to reach RUB128 billion. A sharp collapse of two thirds of its size followed in 2008. These movements, however, did not prove to be an effective forecast of the real estate profitability upsurge to RUB366 billion in 2010, and the increase of more than 50% in the sector’s profit-loss balance in 2012. For the most part, the core of the country-wide financial results is shaped by the wholesale and retail trade, transport and communications, and manufacturing sectors. They are the largest in terms of fixed assets, comprising 60% of the total fixed asset volume in the country, as of the first quarter of 2013. The next largest is the mining and quarrying sector with average fixed assets totalling RUB4.4 trillion, equivalent to 14% of the total volume. Since the variance in this sector’s total profit balance is more subdued, however, it usually contributes more to the systemic spikes rather than the lasting upturns or downturns. Since the overall economic state of the country is dictated mostly by its largest sectors, it is not always indicative of the situation in specific smaller sectors of the Russian economy. Their dynamic movements usually cancel each other out in the overall balance. Therefore, a more in-depth analysis is always required before making a conclusion on the trends in Russian enterprise profitability. Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. By Ivan Kostin - CEIC Analyst Back to Blog
26th July 2013 Instabilities in Russian Corporate Enterprise Balances