Why Russia’s economic weakness is hurting producers
Currency depreciation and Russia’s commodities
Several Russian firms reported that the weak ruble increased the prices of imports, also increasing costs. Most global commodities are priced in U.S. dollars. Since recently, the dollar has strengthened. Given hopes of tapering at the next FOMC (Federal Open Mark Committee) meeting, local emerging market currencies have depreciated versus the dollar.
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While certain sectors of the Russian economy (RSX) that sell commodities will benefit from this development, many other manufacturers use commodities as inputs, and so their margins get squeezed. Given competitive pressures, producers can’t pass along to consumers the full increase in costs.
HSBC’s chief economist for Russia, Alexander Morozov, stated:
- “Positive growth numbers on demand and output are more important as lead indicators for future manufacturing performance due to their forward-looking qualities. A first decline in inventories in four months registered in August is also encouraging.”
- “Cost-push inflation intensified in August, getting impetus from the weaker currency. Yet weak demand still does not allow manufacturers to pass rising costs on to customers, with factory prices rising only moderately.”
Employment rate decreases
Plus, the employment sub-index of the PMI points towards a contraction in staff numbers, likely an effort by producers to sustain profitability margins. The employment rate of decrease is now at a four-year maximum.
Given that consumer goods seem to be driving demand, the drop in employment is likely to hurt domestic demand and may slow down the meager growth hopes analysts observed this time around.