The Ukrainian Crisis of the Russian Industry

The Ukranian crisis which began in the past few days has already caused a dramatic and volatile reaction on the stock and foreign exchange markets. What are the expectations and mood in the Russian industry now? How did the Ukrainian crisis affect (may affect) the real sector of the economy?

To assess the first reaction of the Russian industry to the Ukrainian crisis, The Business Surveys Department of the Gaidar Institute carried out an express-survey of managers of enterprises. The outputs of the survey permitted to understand how the negative scenario of military and political developments over Ukraine may affect the output volumes of the Russian industry.

Enterprises' feedback split nearly fifty-fifty between the answers: "there will be no particular effect" (50%) and "the output will decrease" (46%). So, the industry faces a large-scale reduction of output due to the Ukrainian crisis. The factors behind that can be different. Firstly, consumers of Russian products in Ukraine may reduce import of those products due to internal economic problems which are going get worse due to the direct and indirect Russian involvement in the crisis. Secondly, worsening of the relations between Russia and Ukraine may result in closure of borders, growth in political risks for suppliers and a refusal to ship goods. However, on the contrary, Russia calls now for preservation of economic ties and tries to revive the economic cooperation with individual regions of Ukraine.

Enterprises' comments show that at the first stage of the crisis the Russian industry assesses mainly the direct consequences of reduction of the demand on the part of Ukraine in case of a negative developments scenario. More distant and indirect losses of production output due to slowdown of economic activities in the Russian economy are difficult to be assessed adequately at the moment.

The iron and steel industry, the chemical industry and engineering may face more serious problems than other sectors of the economy.

In case of the escalation of the crisis, the minimum drop in the output will take place in the state sector of the Russian economy where only 1% of enterprises expect output reductions. More than 40% of joint-stock companies may face losses, while 70% of limited liability companies may cut their output.

The likelihood of output reduction increases with the size of an enterprise. If among small and mid-sized enterprises 30% of respondents expect losses, in the big business group and very big business group (with personnel of over 1,000 workers) 39% and 48% of respondent expect a drop in their output, respectively.

Few Russian industrial enterprises (about 4%) expect growth in their output; according to comments such expectations are related to the fact that their Ukrainian competitors will leave the markets of finished products or primary products.

Thus, it can be stated with a high degree of certainty that the Russian industry cannot smoothly overcome the Russian escalation of the Ukrainian crisis. The Ukrainian sales market and the market of primary products are highly important to the real sector. In conditions of scarcely discernable economic growth rates, it is hardly possible to find a substitute. The Russian stagnation may end up with the "Ukrainian" crisis.

Sergei Tsukhlo. PhD (Economics), Head of the Business Surveys Department