Russian Industrial Output Plunges

• Russian industrial output in November worse than expectations
• Mining sector reverses long run of month-on-month rises
• Depressed oil prices continues to weigh on sector
• Rouble spikes to over 71 against dollar as real wages decline
• New round of Turkey sanctions could see another hit in December

Russia's industrial output figures in November were nasty and December could usher in an even bigger freeze as mining output slips and Turkey sanctions start to weigh.

In November, Russia's industrial output was down 3.5% year-on-year, worse than analysts' forecast of minus 2.8% y/y, according to Interfax.

Industrial output accounts for about a quarter of Russia's GDP.

The drop on last year is not a surprise and November was actually a better month than October (down 3.6% y/y). The problem is that industrial output in November last year was very weak (low base). Besides, Russia's industrial production has shrunk in two consecutive months. It was down 0.6% month-on-month in November after a 0.2% m/m drop in October (seasonally adjusted).
Russia's industrial output and its components, % y/y.

Industrial Output

Source: www.gks.ru

One of the disappointments is the mining sector, dominated by theoil and gas industries. It contracted 0.1% y/y for the first time since June. Russian oil output was marginally down m/m in November, just off its peak level of 10.78 million barrels/day (reached in October 2015).

Oil companies might struggle to keep it up, especially if Brentremains below $50/b. Brent spot was at $37.10/b at 0755 GMT today.

The manufacturing sector also seems to have stalled in November. There was virtually no change in output on the previous month (+0.2% m/m), after a couple of promising numbers for September (+5.6% m/m) and October (+2.6% m/m). On last year, manufacturing contracted 5.3% y/y in November 2015, a somewhat disappointing result given a very low base last year.
Manufacturing sector by industry, % y/y.

Manufacturing

Source: www.gks.ru

The food industry and, to a lesser extent, chemical production remain bright spots in manufacturing, compared to last year. Elsewhere, it seems to be flatlining at the current levels, rather than showing a recovering trend.

The outlook for December is not too encouraging. Russian industrial output was remarkably strong in December 2014 (+3.9% y/y). A year ago, Russian producers responded with alacrity to a surge in consumer demand, as Russians swept goods off the shelves, trying to beat inflation and the rouble devaluation (the output of electric white goods was up 6% y/y in December last year, for example).

The change in taxation meant a spike in the oil output in December 2014 with a chain reaction in the petrochemical and plastic industries.

It looks very different for manufacturing this December. Oil production is flat and consumer demand is weak. It is unlikely that Russians will embark on a massive buying spree this December, however wobbly the rouble might be looking at the moment. USD/RUB spiked above 71.00 overnight.

Prices are galloping, consumer inflation was up 0.4% in the first two weeks in December and 12.5% year-to-date. Just released stats for November show that nominal wages are up 5.1%, but in real terms (adjusted for inflation) were down 9.2% for the first 11 months of 2015.

And instead of seasonal cheer, December might bring more economic chill. Russian's disposable cash is spread more thinly as inflation rises.

The negative economic impact of sanctions against Turkey might start showing in December statistics. Importers of Turkish goods, including assembly parts for Russian car and white goods manufacturers, had difficulties getting their imports through the Russian customs well into mid-December.

It would not be surprising if some Turkish businesses have cut back on their activities and started packing their bags, getting ready for much tougher work permit regime and abolition of visa-free travel imposed by Russia from January 1, 2016.
Moreover, there is talk of a second round of anti-Turkey sanctions, according to Kommersant. Any new contract between a Turkish and a Russian company would be a subject to official registration and monitoring.

There could also be a ban on Turkish companies bidding for Russian government tenders. There might be further restrictions on imports of construction, hotel and tourist services from Turkey (there is an already existing ban on selling packaged tours to the country).

Some of the large companies in retail, food and drink and haulage industries remain officially unaffected, but the goal seems to be to make the normal conduct of Turkish business in Russia as uncomfortable as possible.

It is hard to quantify the impact of anti-Turkish sanctions, but it is bound to have both a direct and a falling-domino-effect throughout the Russian economy. It could mean more negative surprises for Russia's industrial output, GDP and inflation, not just in December but well into the new year.There could be another round of sanctions against Ankara after the shooting down of a Russian fighter jet over the Turkey/Syria border last month, but it's hurting Moscow too