Russian Domestic Manufacturing is Booming

In the first 7 months of 2014 imports were down 5.1% (almost all of which are manufacturing and machinery) compared to domestic production of the same produce which was up 2.4%.

The reasons for this are two-fold; first, a weaker ruble actually stimulates the industrial part of the Russian part economy while for many years has been crowded out by an over-valued exchange rate, and second, the long-term dynamics of domestically producing has attracted a raft of investment. 

For instance, the auto market shows an enormous divergence between domestic and imported growth rates. Domestic car production has fallen by 0.7% in the first seven months of the year as a result of poor demand, but this is nothing compared to the more than 30% fall in imports. Domestically made cars are simply more cost competitive. 

The trend is set to continue even as the demand side of the market recovers, domestic car production is expected to expand by 2.5% next year while imports are expected to fall a further 7.2%.

The sector has seen large investment as foreign companies realize the potential for Russia to become a major car producing nation. A highly educated workforce, the largest market in Europe, cheap energy and labor make Russia extremely attractive place for auto investment. 

Kaluga region is one of the main auto producing regions in Russia. Industrial Production here has grown by almost 7 fold in Ruble terms since 2006, and even grew throughout the 2008-2009 recession. The region's growth in industrial production has slowed given how large it has become but it is still expected to grow by around 9% a year until 2017! 

Even through the Ukrainian crisis, the region (and Russia as a whole) has received some major new investments into its auto production sector.  Last week Chinese producer Lifan announced a new 150 million USD investment into new auto production in Russia and back in May another Chinese producer Great Wall Motor announced a similar 500 million USD investment. 

The sanctions here are also a blessing in disguise. For instance, Russia's decision to ban food imports from the EU. As a consequence of this, Valio - Finland's largest yogurt and dairy maker, has decided to relocate its manufacturing to Russia in order to keep the Russian market which is critical for its business viability.