Reduction in production of goods dependent on imports more likely scenario thus far than import substitution - CBR analysts

MOSCOW. Sept 8 (Interfax) - A gradual decline in the production of goods dependent on investment imports, which has declined due to external restrictions, so far looks a more realistic scenario than active import substitution, analysts at the Central Bank of Russia (CBR) said in their Talking Trends bulleting published by the regulator's Research and Forecasting department.

"Imports of intermediate and investment goods are recovering more slowly than consumer imports. In the future this will lead either to an active growth of domestic production of such goods (import substitution), or to a decrease in the production of goods that required such imports, as stocks previously created are exhausted. On the short-term horizon, the second option is more likely," the CBR analysts said.

However, there are reserves for import substitution in some industries, they said.

Overall, they estimate that economic activity trends "remain heterogeneous and unstable due to high uncertainty," the CBR said. "The simultaneous effect of multidirectional trends and factors may have different effects on individual enterprises even within the same industry. Nevertheless, their combined effect resulted in some expansion of business activity in the Russian economy as a whole in July-August. There was no deepening of the economic recession," the bulletin said.

In Q2 2022, Russian GDP declined 5.6% without taking into account seasonal factors, the CBR said.

"Preliminary statistics suggest that the decline in business activity in Q2 as a whole was less severe than expected in late Q1 and early Q2 immediately after the change in external conditions. Moreover, by July-August business activity had rebounded somewhat. At the same time, the recovery process is uneven and is accompanied by multidirectional reaction of industries to the structural adjustment of the economy and external constraints," the report indicates.

Amid restrictions, the supply of goods and services "is likely to shrink with a shift in the inventory matrix in favor of alternatives not previously represented or poorly represented in the Russian market," the CBR said. "This process will be accompanied by a decrease in the average qualitative characteristics of goods and services (consumer properties, functionality, durability, service support, and so on). Therefore, with the narrowing of the range of goods on sale, the overall decline in production volumes ("in units") will be smaller. As a result, the depth of the production recession in the economy will be less substantial than could be assumed would there have been no options to adjust the range of goods," the regulator said.