Positive momentum in Russian construction output will speed up in 2021

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PMR’s latest report, entitled “Construction sector in Russia H1 2021. Development forecasts for 2021-2026”, suggests that between 2014 and 2017, the Russian construction industry observed negative growth rates in construction output every year, recording a cumulative reduction of 9.1% during the period in question. Nevertheless, an upward trend re-emerged in 2018 and continued in 2019 and 2020, with another positive figure predicted for 2021.

The Russian construction output recorded a surprising growth in 2020, despite of the widespread impact of the COVID-19 outbreak. Official data indicate that Russian construction output increased by 0.1% last year, following a 2.1% increase in 2019 and 6.3% surge in 2018. Furthermore, an increase of over 2% is predicted for 2021.

The weak dynamics in construction activity observed in Russia in recent years can also be attributed to:

• Subdued economic growth in recent years. Between 2013 and 2019, Russia’s GDP expanded by only 7.5% overall, following a major contribution from the 2.8% increase achieved in 2018. Also, the country’s GDP increased by only 2.0% in 2019. However, in 2020, Russia’s GDP contracted by 3.0%, overwhelmingly due to the impact of COVID-19 pandemic, which resulted in a cumulative GDP growth of only 4.2% between 2013 and 2020. Furthermore, the country’s GDP is not expected to rebound notably in 2021, we predicting a growth rate of only about 3.4% for this year.
• A sizeable reduction in the purchasing power of the population, with real disposable income falling every year between 2014 and 2017. The figure decreased by 3.0% in 2020, following 7.1% cumulative reduction between 2014 and 2019, and will rebound by no more than 2.5% in 2021. However, the 3.0% contraction in real disposable income in 2020 indicates an aggregate reduction of 9.9% for the period 2014-2020.

In 2020, the substantial official upsurge in construction output in the Yamal-Nenets Autonomous District was boosted mostly by the implementation of many oil and gas infrastructure projects, particularly by the construction of Novatek’s Arctic LNG-2 plant. In Moscow Province, it was boosted overwhelmingly by the construction of Moscow’s Central Ring Road. Also, the 11% growth in Amur Province was propelled by the construction of Gazprom’s Amur Gas Processing Plant near the town of Svobodny, which will become one of the largest gas processing facilities in the world, and by the construction of Sibur’s gas chemical complex.

Furthermore, Rosstat has reported that overall construction output in Russia rebounded by 3.5% year over year in real terms in January-May 2021, with positive growth being observed in five out of Russia’s eight federal districts (FD). According to Rosstat, in January-May 2021 the total value of construction output registered in the country reached RUB 3,029bn (€33.7bn).

The 3.5% growth in the first five months of the year was achieved, to the greatest extent, thanks to the impressive result officially reported for the Central FD, which accounted for 29% of the country’s construction output over the period in question. Central FD, which traditionally is the largest construction market among other Russian FDs, reportedly registered a 15.5% year-over-year growth in terms of construction output in January-May 2021, mostly because of the 37.4% year over year upsurge officially indicated for the City of Moscow alone. Rosstat presented that the City of Moscow made up 49.8% of the Central FD’s construction output in January-May 2021.

The construction industry’s business confidence index surged notably in Q2 2021, and improved in comparison with the figure published in the previous quarter by 3 percentage points. Furthermore, in the second quarter of 2021, the index was more than 8 p.p. higher in comparison with the figure reported for the corresponding quarter a year before (-12% in Q2 2021 against -20.5% in Q2 2020), when the result was reported shortly after the WHO declared the COVID-19 outbreak a global pandemic.

Furthermore, by May 2021, the share of overdue payments in the total value of corporate loan debt outstanding in the banking system had fallen to 5.9%, the lowest since February 2015, and to 1.1% for mortgages. The share of overdue corporate loans as a proportion of the total outstanding corporate loans in Russia stood at 4.3% in January 2014. However, the figure was calculated at 7.2% in February 2020, before the coronavirus outbreak. Nevertheless, surprisingly, the rate has eased gradually to 6.4% by the end of 2020 and further to 6.1% by the end of Q1 2021. However, the situation in construction is substantially worse, with overdue loans accounting for 16.1% of the total value of the outstanding debts of construction companies at the end of Q1 2021, but being lower in comparison with 24.7% recorded at the beginning of February 2020 and also 6.1 p.p. lower than the proportion recorded in the corresponding period a year before. It is worthy of note that the proportion was only about 5% at the beginning of 2014. PMR calculated that the average proportion of overdue debt observed among construction companies in Russia at the beginning of February 2020 (i.e. 24.7%) was the highest share recorded, at least since early 2009.

For more information, see the latest PMR report: “Construction sector in Russia H1 2021 Market analysis and development forecasts for 2021-2026”