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Regions & Municipalities

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Research

TRADE RESTRICTIONS HAVE AFFECTED DIFFERENT SECTORS OF THE ECONOMY IN DIFFERENT WAYS

The foreign trade restrictions faced by Russian regions in 2022 affected both regional and national average economic indicators, including inflation (especially for non-food products). Woodworking was one of the first industries to be hit by restrictions1. The industrial production index for the sector amounted to 87.5% in 2022 and has continued to decline in 20232, and some of the products of the woodworking sector produced for export entered the domestic market due to foreign trade restrictions, which had a disinflationary effect in some regions.

The base for calculating the consumer price index (CPI) for non-food products includes more than 200 items of goods. A number of them directly reflect the dynamics of prices for woodworking products (for example, wooden construction materials), while some of them, furniture in particular, convey them indirectly3. According to Rosstat’s method for calculating the CPI, the contribution of each product category to the aggregated index is determined based on the structure of consumer spending. In 2022, furniture and construction materials together accounted for more than 8% of consumer spending on non-food products. Only cars, gasoline and clothing accounted for a larger share of expenditures (18%, 12% and 11%, respectively); other goods accounted for about 12% of expenditures.

The trade restrictions imposed on the woodworking industry have affected the inflationary dynamics of regions to varying degrees, depending on the share of woodworking in the structure of their exports. For the purposes of this research, ACRA has singled out the regions where the share of exports of wood and pulp and paper products (hereinafter, wood) accounted for at least 4% in the total volume of exports and at least USD 20 mln in value terms (Appendix 1) in 2021 (latest available data).

As a rule, there were no particular inflationary dynamics in the timber-exporting region4. Fig. 1 shows that the dynamics of the chain CPI for non-food products in the group of regions selected according to the above criterion correspond to the dynamics of other regions5, but in 2022, the curve for the analyzed group is shifted down.


1 Based on Council Regulation (EU) 2022/576 of 8 April 2022 amending Regulation (EU) No 833/2014: “It shall be prohibited to purchase, import, or transfer, directly or indirectly, goods which generate significant revenues for Russia”. According to Annex XXI, the list includes products of the woodworking and pulp and paper industries, as well as furniture and its parts.
2 Wood processing and production of wood and cork products, except furniture, production of straw products and materials for weaving (Rosstat data).
3 The price of this group of goods, in addition to the cost of woodworking products, is influenced by other factors, such as the price of accessories, the country of manufacture, etc.
4 Hereinafter, the analysis is based on the CPI for the subgroup “non-food products” (change vs. the previous month).
5 The average value of the index for 2017–2019 was used, when there were no sharp external fluctuations that could affect the deviation of the trajectory of monthly inflation from its natural seasonality (such fluctuations in the future were lockdowns, the pandemic and post-pandemic recovery).

Figure 1. Foreign trade restrictions had a stronger disinflationary effect on timber-exporting regions*


* IPC for non-food products, % vs. the previous month.
Source: Rosstat 

In 2022, after the March surge in inflation, the timber-exporting regions began demonstrating price dynamics for non-food products that were different to those in other regions. First, their CPIs fell more rapidly, and then showed more subdued growth: the curve for these regions is shifted down relative to the curve for regions with a low share of wood in exports (Fig. 1). This indicates that the geopolitical changes that took place in March and April 2022 had a stronger disinflationary effect on timber-exporting regions. Companies of the sector, which experienced problems with exporting products, were forced to urgently revise export destinations and cut production. In total, in the woodworking and pulp and paper industry, the volume of shipped products of own production from March to September 2022 decreased by 7.3%6 compared to the indicator for the same period in 2021. It is likely that part of the products for export were redirected into the domestic market, which led to sharp growth in supply and put downward pressure on prices.

From March to September 2022, the average price of the set of products reflecting the price dynamics of the products of the woodworking industry7 declined by 3% in absolute terms on average for Russia. However, the economies of regions that depend on the export of wood recorded a more significant decline compared to other regions (4% vs. 2%).


6 Total volume of shipped own products, as well as well as self-performed work and services for certain types of economic activity: wood processing and production of wood and cork products (except furniture); sawing and planing of wood; production of wood products, cork, straw and materials for weaving; production of paper and paper products; production of pulp, wood pulp, paper and cardboard; production of paper and cardboard products (unit of measurement — RUB mln).
7 The specified set includes woodworking industry products, the prices of which are published by Rosstat: edged board, chipboard and oriented chipboard, a set of cabinet furniture, a wardrobe for dresses and linen, a dining table, a kitchen stool.

TIMBER-EXPORTING REGIONS FACED TASKS OF VARYING COMPLEXITY IN MARCH 2022

The influence of external trade restrictions on the inflation dynamics in timber-exporting regions was heterogeneous and depended on export geography. ACRA has outlined three categories of regions by the criteria of their export dependence on countries that deployed sanctions against Russia in 2022 (Table 1):

  • Regions that had to significantly revise their export destinations: for these regions, the share of wood exports to countries that introduced trade restrictions exceeded 50% in 2021;

  • Regions that had to partially revise their export destinations: for these regions, the share of exports described above ranged from 30% to 50%;

  • Regions that did not need to seriously revise their export destinations: they had less than a 30% share of wood exports to the above countries.

Table 1. Categories of timber-exporting regions by share of wood exports to countries that introduced trade restrictions on Russia in 2022 (data for 2021)

CATEGORY

REGION

SHARE OF WOOD EXPORTS TO COUNTRIES
THAT INTRODUCED TRADE RESTRICTIONS ON RUSSIA
IN 2022 IN TOTAL EXPORTS

SHARE OF WOOD EXPORTS
TO CENTRAL ASIA
IN TOTAL EXPORTS

I

Yaroslavl Region

86%

1%

Tver Region

79%

0%

Pskov Region

78%

5%

Novgorod Region

70%

4%

Vladimir Region

65%

9%

Ivanovo Region

65%

6%

Vologda Region

59%

6%

Bryansk Region

58%

22%

Smolensk Region

58%

9%

Leningrad Region

57%

11%

Republic of Karelia

56%

3%

Republic of Mordovia

55%

3%

Arkhangelsk Region

53%

4%

II

Tyumen Region

49%

10%

Kostroma Region

47%

16%

Penza Region

46%

2%

Udmurt Republic

41%

17%

Kirov Region

41%

5%

Saint Petersburg

39%

7%

Mari El Republic

35%

6%

Komi Republic

35%

9%

Kaluga Region

31%

45%

Nizhny Novgorod Region

30%

4%

III

Irkutsk Region

23%

3%

Primorsky Krai

21%

0%

Perm Krai

21%

11%

Khabarovsk Krai

20%

0%

Sverdlovsk Region

15%

38%

Krasnoyarsk Krai

12%

7%

Moscow Region

11%

30%

Republic of Bashkortostan

9%

65%

Republic of Buryatia

4%

3%

Novosibirsk Region

4%

18%

Kurgan Region

1%

69%

Altai Krai

1%

78%

Tomsk Region

0%

83%

Astrakhan Region

0%

0%

Sources: customs data, ACRA

The higher a region’s share of wood exports to countries that imposed trade restrictions on Russia in 2022, the greater the volume of goods produced but not exported west had to be redirected to alternative markets (either to the external market, but in other directions, or to the domestic market), and the higher the degree of oversaturation of the domestic market and the reduction in the cost of the set of goods in the woodworking industry.

Figure 2. Timber-exporting regions saw uneven price declines for the set of wood products from March to September 20228



8 Calculations were made by comparing the total price for the analyzed set of goods in March 2022 and in September 2022, following which the dynamics were averaged for the groups of regions.
Sources: Rosstat, ACRA

For wooden construction materials, the described dependence is more pronounced than for furniture products, and their prices decrease more noticeably.

Figure 3. Prices for wooden construction materials and furniture declined or grew slightly from March to September 2022


Sources: Rosstat, ACRA

The prime cost structure had a restraining effect on the rate of decline in furniture prices, namely, its dependence not only on cheaper raw materials, but also on the growing price of imported accessories. In this regard, weak positive dynamics of prices for furniture products have formed in the country as a whole and in those regions that do not focus on timber exports. In the timber-exporting regions, the disinflationary influence outweighed the pro-inflationary one due to a more significant decline in timber prices.

RETALIATORY RESTRICTIONS INTRODUCED IN NOVEMBER–DECEMBER 2022 IMPACTED INFLATION

As part of the analysis of the CPI dynamics for non-food products, ACRA notes that since September 2022, in category I regions, which were forced to revise their export destinations most significantly, there has been an acceleration in the growth rates of prices for non-food products and their convergence with the growth rates in regions that do not export timber. In December 2022, in regions that do not export timber, the growth of prices for non-food products gradually slowed down compared to November due to the natural seasonality of this indicator. In the timber-exporting regions of categories I and II, December’s CPI showed the lowest values in comparison with other regions due to the internal restrictions imposed at the end of November on timber exports9. Prior to that, exports to certain western destinations were hampered but still possible10, but the retaliatory restrictions imposed in November completely banned timber exports from Russia to any countries except Belarus, Kazakhstan, and Kyrgyzstan.


9 Resolution of the Government of the Russian Federation No. 2133 dated November 24, 2022 “On Amendments to Certain Regulations of the Government of the Russian Federation” amends, with Sub-clause b of Clause 1, Resolution of the Government of the Russian Federation No. 521 dated July, 15, 2010 “On Determining Checkpoints across the State Border of the Russian Federation for Departure from the Russian Federation of Certain Types of Goods” and introduces the following restrictions: some products of the woodworking industry “are exported from the Russian Federation to the Republic of Belarus only by rail through the Russian-Belarusian section of the state border of the Russian Federation, to the Republic of Kazakhstan and the Kyrgyz Republic — only by rail through railway checkpoints located on the Russian-Kazakh section of the state border of the Russian Federation”.
10 For contracts made before April 9, 2022, the EC permitted imports of Russian timber until July 10, 2022, after that date — according to quotas.

Figure 4. CPI for non-food products in category I regions declined again, month-on-month (%)


Sources: Rosstat, ACRA

At the end of 2022, the number of checkpoints through which it was possible to export timber to Central Asia was reduced11. Therefore, the Tomsk Region was added to the group of regions that needed a significant revision of export destinations. The region did not have a significant dependence on countries that imposed trade restrictions, since 83% of exports of woodworking products made in the Tomsk Region in 2021 were oriented to Central Asian countries. However, as a result of restrictive measures, the nearest export checkpoint turned out to be too far from the region, which made exports unprofitable.

After the introduction of internal restrictions, the price of the set of goods of woodworking and pulp and paper enterprises fell by a national average of 2.5% in the period from November 2022 to May 2023. It should be noted that in the timber-exporting regions, the price fall was more significant than in the regions that do not export timber (-2.6% vs. -2.4%).


11 Resolution of the Government of the Russian Federation No. 2552 dated December 30, 2022 “On the Procedure for the Transportation of Certain Types of Timber and/or Products of Its Processing by Trucks and on Amendments to Certain Regulations of the Government of the Russian Federation”.

Figure 5. Changes in prices for wooden construction materials and furniture from November 2022 to May 2023, %


Sources: Rosstat, ACRA

Prices for construction materials again responded to restrictions to a greater extent than furniture prices. After the April restrictions, prices for furniture items in the country maintained a weak but positive trend (their decline was observed only in the timber-exporting regions), but the retaliatory restrictive measures introduced in November–December 2022 shifted the balance of factors towards disinflationary area for all groups of regions.

2022 RESULTS AND PROSPECTS FOR 2023

Despite the continued downward price dynamics in H1 2023, the timber-exporting regions began to show signs of adaptation to trade restrictions, having reoriented their exports and adjusted their production volumes. The current CPI dynamics for the group of non-food products has begun to converge with its average dynamics for 2017–2019.

Figure 6. CPI for non-food products in timber-exporting regions has begun to converge with its average dynamics, month-on-month (%)


Sources: Rosstat, ACRA

In May 2023, the country average price for the set of products of woodworking and pulp and paper industry demonstrated positive dynamics for the first time since April 2022.

Figure 7. Price for the set of products of the woodworking and pulp and paper industry, % of previous month


Sources: Rosstat, ACRA

In June 2023, the list of road checkpoints along the border between Russia and Kazakhstan12 was expanded, through which woodworking products can be exported. In addition to the checkpoints in the Saratov, Chelyabinsk and Kurgan Regions, transportation is now permitted through checkpoints located in the Altai Krai and the Novosibirsk Region. This will the volume of timber exports from Siberia and the Far East to the Central Asia to be expanded and improve the economic performance of the woodworking industry in the near future. On the other hand, as the severity of domestic market oversaturation is expected to decline in the short term, pro-inflationary risks may arise.

Industry-wide revenue13 declined by 7% by the end of 2022. The loss dynamics were driven by the timber-exporting regions, where revenue decreased by 9.4%, although in regions that do not depend on timber exports, revenue showed a slight increase — by about 0.4%.


12 Resolution of the Government of the Russian Federation dated June 2, 2023 No. 917 “On Amendments to Resolution of the Government of the Russian Federation of Dec. 30, 2022 No. 2552”.
13 The revenue of companies whose core business is woodworking and the production of wood and cork products, except furniture, the production of straw products and materials for weaving, is taken into account.

Figure 8. Economic indicators of woodworking industry in timber-exporting regions declined in 2022 vs. 2021 more strongly than in regions that do not export timber


Sources: SPARK-Interfax, ACRA

Trade restrictions had a bilateral effect. Counterparties who, due to the sanctions, received less Russian timber than contracted were forced to substitute Russian raw materials and search for new suppliers. According to ACRA’s estimates, the amount of non-supplied timber can be roughly estimated by looking at the volume of deliveries made by Russian timber-exporting regions in 2021. According to customs statistics, in 2021, Russian timber-exporting regions supplied timber for a total of about RUB 384 bln14 to the countries with which trade was restricted in 2022. For the timber-exporting regions of Russia, this amount represents their potentially lost revenue. However, according to ACRA’s estimates, Russian enterprises managed to compensate about 60% of the income lost due to restrictions by the end of the year, by reorienting exports and expanding supplies to the domestic market. The total revenue of woodworking enterprises in the timber-exporting regions decreased by RUB 164 bln in 2022 compared to the previous year, which is equivalent to less than half of the potentially lost volume of wood exports. This, in turn, indicates that Russian timber-exporting regions were flexible enough to manage the changes in foreign trade conditions and to minimize their losses by reorienting sales markets and adjusting production and logistics chains.


14 Customs statistics are represented in USD. USD 5.2 bln converted into Russian rubles using the 2021 average exchange rate — RUB 73.7 per 1 USD.

APPENDIX 1. LIST OF TIMBER-EXPORTING REGIONS

REGION

SHARE OF TIMBER EXPORTS
IN 2021 TOTAL EXPORTS

EXPORT VOLUME IN 2021,
USD 
THOUSAND

TIMBER EXPORTS IN 2021,
USD THOUSAND

Arkhangelsk Region

70%

2,087,388

1,461,915

Republic of Karelia

63%

1,232,380

774,416

Komi Republic

60%

1,281,417

768,926

Tomsk Region

54%

426,017

232,105

Irkutsk Region

34%

8,390,594

2,877,555

Kirov Region

31%

1,258,517

387,587

Pskov Region

29%

256,354

73,490

Khabarovsk Krai

23%

2,537,384

590,782

Republic of Mordovia

20%

375,709

76,715

Kurgan Region

20%

141,830

28,234

Bryansk Region

19%

415,010

79,284

Mari El Republic

18%

324,612

57,865

Krasnoyarsk Krai

15%

7,201,817

1,067,545

Smolensk Region

15%

1,484,288

216,577

Tver Region

14%

603,586

87,075

Novgorod Region

14%

2,549,948

359,772

Vladimir Region

13%

1,137,661

151,852

Altai Krai

12%

1,148,005

136,113

Vologda Region

10%

7,165,756

737,823

Primorsky Krai

10%

3,405,533

343,864

Penza Region

10%

357,864

36,028

Leningrad Region

10%

8,369,827

817,105

Republic of Buryatia

10%

1,329,433

126,695

Udmurt Republic

9%

599,882

55,130

Ivanovo Region

9%

272,643

24,455

Perm Krai

7%

7,947,932

591,681

Astrakhan Region

7%

1,022,622

70,019

Nizhny Novgorod Region

7%

6,632,025

434,241

Kaluga Region

6%

1,513,261

89,667

Republic of Bashkortostan

5%

3,715,002

189,295

Yaroslavl Region

5%

1,134,564

57,679

Kostroma Region

5%

5,481,381

269,071

Moscow Region

4%

11,411,464

478,203

Saint Petersburg

4%

29,909,998

1,223,067

Tyumen Region

4%

1,621,286

65,129

Novosibirsk Region

4%

3,837,689

152,391

Sverdlovsk Region

4%

9,246,441

337,137

Analysts

Evgenia Trautman
Senior Analyst, Sovereign and Regional Ratings Group
+7 (495) 139 04 80, ext. 104
Elena Anisimova
Senior Director — Head of Sovereign and Regional Ratings Group
+7 (495) 139 04 86
Svetlana Panicheva
Head of External Communications
+7 (495) 139 04 80, ext. 169
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