In the cycle of analytics “Beneficiaries of the war”, we are going to write about those sectors of the economy and strata of the Russian population that have become beneficiaries as a result of the war and its consequences (sanctions, mobilization, transformations of budgetary and economic policy, etc.).
Our first study in this cycle is dedicated to the construction industry, which really showed unprecedented results by the end of 2022 and, according to the statements of the top officials of the Russian state, including president Putin, will continue its rise in 2023.
What were the prerequisites for the growth of the construction industry last year and whether there are grounds to believe that the results of 2023 will be similar, we will address these issues in this analysis.
Construction is an industry that often becomes a beneficiary in times of crisis. Governments are beginning to act in Keynesian logic, seeking to replace the falling private demand with the public one, and launching large infrastructure projects: the construction of roads, bridges, housing, etc.
As a rule, two results may be expected from such projects:
– the momentary effect (jobs creation, demand growth in related industries, income and consumer demand growth);
– creating a base for future growth (logistics development, improvement of living conditions of the population, etc.).
And although 2022 cannot be called a classic crisis year for the Russian economy (in terms of the state of the trade balance and budget), nevertheless, the construction industry turned out to be the beneficiary of the war, and the subject of our studies in this analytical cycle.
Despite the fact that Russia’s GDP decreased by 2.1% by the end of 2022, some industries showed an increase in the index of physical volume of value added. Among them is the construction industry, which is in second place following agriculture.
Let’s turn to statistics:
• By the end of 2022, the added value in construction increased by 5% YOY and amounted to 7.2 trillion rubles, which is equivalent to 4.8% of Russia’s GDP in 2022.
• The volume of work in the construction industry increased by 5.2% YOY (in comparable prices) and amounted to 12.9 trillion rubles.
• At the same time, the situation in the country can be described as heterogeneous – a decline was recorded in 35 out of 85 regions (excluding the so-called annexed territories). Thus, the dynamics is very different from region to region.
By construction sectors:
1. Housing construction. In 2022, 102.7 million square meters were commissioned (+11% by 2021), which is a record since 1990.
However, there are several important moments here:
a) First, strong indicators are a consequence of the preferential mortgage program, which had been launched back in April 2020 (as a tool to support the economy during COVID-19). In 2022, the program was expanded, and preferential mortgage loans were issued in the amount of 1.9 trillion rubles, which is almost 20% more than in 2021.
b) Second, this year the trend was downward – if in January and February 2022, the increase in housing commissioning was more than 80% compared to the same months of 2021, then in spring it was already about +30-40% YOY, in summer +6-8% YOY, and since September, a year-on-year decline was recorded. Moreover, in November, the decline was almost 40% YOY. In December, the decline slowed to 17% (Rosstat data). In the last month of the year, the demand for preferential mortgages increased, as its cancellation was expected from 2023 (at the end of the year, the government announced the extension of the program until July 2024).
c) And the third point is that 55% of all housing commissioning is individual housing construction1, which grew by 16.5% YOY and made the highest contribution to the 11% growth of all housing. The commissioning of high-rise buildings increased by only 4.7% by 2021 (Rosstat data).
2. Road construction. In 2022, 170 million square meters of new roads were built, which is 19.7% more than in 2021, a total of 1.2 thousand km of roads were built and reconstructed.
This is precisely where we see the result of the Keynesian approach, which suggests increased financing of infrastructure projects as an anti-crisis tool (the Roosevelt course, the Biden infrastructure plan).
In the Russian budget, the costs of road construction are “built in” into the “national economy expenditure”, and it is not possible to allocate exactly how much goes to the construction of roads, and bridges. According to Russian economists, in 2022 the subsidies to regions from the federal budget increased 1.5 times, part of which was directed specifically to road construction. In addition, the Ministry of Finance allowed the regions to spend part of the budget loans on infrastructure projects.
The detailed expenditures of the Russian budget is closed data, but according to the Sherpa Group, federal infrastructure expenditures in 2022 could grow by more than 35%, and the total volume of federal and regional budget infrastructure expenditures for 9 months of 2022 amounted to 1.6 trillion rubles.(+9% compared to the same period in 2021).
In addition to the budget, there is another channel for financing infrastructure projects – money from the National Welfare Fund (NWF)2. In 2022, 412 billion rubles were allocated from the NWF for their implementation.
All this suggests one thing – infrastructure construction has become the main state project to save the Russian economy, and it was literally flooded with money. And the high oil and gas revenues of the budget made it possible to do this without any problems: in 2022 they increased to 11.6 trillion rubles from 9.1 trillion in 2021.
3. Industrial construction. Here the situation was different since in the commercial segment financing is mainly provided by private investment. The trend was mainly downward in view of the general slowdown in business activity in the country, unprecedentedly high uncertainty, the departure of foreign companies from Russia and a general reduction in investment. Mainly projects related to import substitution were implemented.
There is another direction – construction works on the occupied territories of Ukraine or as they are called in Russia “annexed territories” (Mariupol and other cities of the Donetsk region, cities of Luhansk, Zapororizhia, Kherson regions). Their restoration and construction are carried out at the expense of budgetary funds, but the sums of money spent on them are “closed”.
According to investigative journalists, the costs of restoring the occupied territories in the federal budget can be “sewn up” in the wording “special infrastructure project” and amount to 377 billion rubles in 2023-2025: 97 billion rubles in 2023, 139 billion rubles in 2024 and 141 billion rubles in 2025.
In addition to these amounts, there is money that is allocated by the Russian regions. For example, in 2022, the Leningrad Region allocated 1.2 billion rubles to the separate cities of Donbas, the Perm Region – 500 million rubles, Sakhalin – 309 million rubles.
The total amount of funds that can be directed to infrastructure projects on the occupied territories is estimated at 3,3 – 3.5 trillion rubles.
Obviously, not all the money will reach its ultimate goal, given the high corruption component of
the Russian economy, but the ambition of the plan is obvious.
Who are the beneficiaries
The aforementioned figures give an idea of the scale of the potential “cutting” and the benefits of the end beneficiaries, which include the so-called “curator of the restoration of Donbas” Deputy Prime Minister Marat Khusnullin’s affiliated structures.
Khusnullin’s name is closely associated with the current mayor of Moscow, Sergei Sobyanin. According to the information provided in open sources, Khusnullin and Sobyanin share a long history of cooperation in various infrastructure projects, including the reconstruction of Moscow metro. In November 2022, Sobyanin and Khusnullin held a joint meeting of the working group of the State Council of Russia, which discussed the restoration of housing and infrastructure on the occupied territories.
Results of 2022
So, summing up the results of 2022, we can identify four factors that became the driver of the construction industry growth last year:
1. The impact of preferential mortgages launched back in 2020 (during the corona crisis).
2. Budgetary and extra-budgetary (from the NWF) financing of infrastructure projects, including the ones within the framework of national projects (as an anti-crisis tool).
3. The seizure of new territories (and the political need to finance their restoration).
4. Import substitution (as an element of the narrative “the Russian economy is self-sufficient and can do without the West”).
Prospects of 2023
The so–called “big construction” will continue in 2023 – this was one of Putin’s main theses in his address to the Federal Assembly on 02/21/2023.
It is clear that it is a tool to support the economy, which lies on the surface, and which any politician is in a hurry to resort to when the economy is in crisis, and 2023 for the Russian economy to a greater extent than 2022 will look like a classic crisis with a decrease in the inflow of export earnings, an increasing budget deficit, devaluation pressure and problems of financing the entire economy.
There is a desire and a need, but the question is whether there are funds to implement such ambitious projects.
Budget opportunities 2023
If we look at the news of the beginning of 2023, we will see that the government is already starting to cut planned funding and refusing to implement certain highway construction projects.
In one of our weekly digests on RF, we wrote that the Russian budget deficit in 2023 is most likely to be higher than the pre-planned 3 trillion rubles. (2% of GDP) and may well amount to 5-6 trillion rubles. This will not be critical from the point of financing the deficit: there is money from the National Welfare Fund, bonds of the internal state loan, options with tax increases and/or devaluation, and even emissions if it comes to that. But from the point of continuing to pour money into large infrastructure projects, it is a challenge.
As a rule, when budget sustainability is in question, first of all, they begin to “cut” spending on economic development, or if we are talking about the Russian budget, then these are “expenditures on the national economy”, which include transport development, maintenance and repair of road facilities, and other municipal programs.
Given the strategy of the West – to limit the RF oil and gas revenues as much as possible through the price ceiling – it is highly likely that the costs of federal roads and infrastructure construction will be reduced in 2023.
The war is costly, the regime needs to “pull the resource” for military purposes. From the budget, they have to pay security forces, guards, and Putin’s guards. Oligarchs (Putin’s inner circle) “feed” on oil and gas. In addition, it is necessary to make social payments (pensions, allowances), pay state employees, and support the poorest electorate, which is even more impoverished considering the inflation. It is estimated that about 60% of the population of Russia is “fed” by payments from the state budget.
The expected reduction in oil and gas budget revenues in 2023 (-25-40% YOY) seriously worsens the opportunities for financing the so-called “big construction”.
As for housing construction, the main factor here is a decrease in the population demand (even despite the extension of the preferential mortgage).
It is important to understand that sanctions are working (contrary to the wish of many), but as the West had apparently planned – slowly and gradually, but systematically and purposefully, pushing the Russian economy towards archaization, technological backwardness and decades of stagnation.
The incomes of the population in such an economy inevitably shrink, which, in fact, has been happening in Russia for the last 10 years. The real incomes of the population are now estimated at the level of 2012-2013. A reasonable question arises – who will buy housing?
Thus, two factors – the “thinning purse” of an average Russian consumer and the growing budget deficit (and as a consequence, the forced need to cut budget expenditures) – are what can seriously worsen the prospects of the construction industry in 2023 and partially offset the effect obtained in 2022.
. The housing sector in Russia is divided into individual (one-family household) and multi-apartment block (more than one-family household). Individual housing construction is the construction of houses by citizens with their direct participation or at their expense, the result of which is a detached residential building with no more than three floors, designed for one family.
. Purchase, at the expense of the National Welfare Fund of bonds of various companies, including Rosavtodor for road construction.