Heading for a new reality: what happened to the economy of the South in 2022
The economy of the South and the Caucasus went through 2022 better than expected. Experts predict a difficult future, but for regions with a diversified economy, difficult times will pass more smoothly than for raw materials and industrial
Extremely negative, catastrophic forecasts for the beginning of 2022 did not come true - both experts and market players note that the economic downturn in most regions turned out to be lower than expected. Against the background, the South and North Caucasus look better than other parts of the country, paradoxically in part due to less involvement in international trade, in part to a small share of the most affected industries, and in part to a diversified economy.
The current crisis is based on geopolitical reasons, says Krasnodar economist Alexander Polidi. Therefore, initially it was impossible to give accurate forecasts, the expert believes. Those assessments that were made at the beginning of the year turned out to be far from the real trends. In particular, inflation was expected to be more than 20%, economic recession - at the level of 10-15%. The main risk factors were the disruption of supply chains, sanctions and the exit of foreign companies. But in the end, the decline at the country level will be 3.5-4%, inflation is expected at 10%.
“The situation has had a destructive effect both on the entire economy of the country and on the regions of the South. Such factors that led to such destructive processes, our country has not met for a long time. They are unprecedented in duration and surpass the crisis of the 1990s. Therefore, it is not necessary to talk about positive processes. But for a number of regions, and in particular the Krasnodar Territory, the influence was less. The decline is much lower than the national average,” says Polidi.
According to him, Kuban has benefited from a consumer-oriented economy dominated by those industries that have suffered the least. Among them are agro-industrial complex, resorts, industry and logistics.
The other side of globalization
“In the South and the Caucasus, there are no entities whose economy would be concentrated in the sectors most affected by the sanctions - automotive production, coal mining or the timber industry, and some others. Therefore, among them, only Crimea can be called a region that has found itself in the most vulnerable situation due to geopolitics. But the general economic conditions - the deterioration of logistics, sanctions, changes in the consumer behavior of the population and inflation have affected all regions," the ACRA press service commented.
In addition to the small share of industries most affected by the sanctions, diversification and low integration into the global economy played a role. This is especially true in relation to the republics of the North Caucasus Federal District, says Dmitry Zemlyansky, DIRECTOR of the Research Center for Spatial Analysis and Regional Diagnostics of the IPEI RANEPA.
“In the regions of the Southern Federal District and the North Caucasus Federal District, dependence on imports was not so high, especially for the republics of the North Caucasus, which were less integrated into the international economy. Focusing on domestic demand and processing of local raw materials has allowed the industry of the macroregion to be quite stable,” he notes.
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“Better than others, regions that have retained their traditional industry, able to work without imported supplies of components, as well as regions with an increased role of defense complex enterprises, are adapting better than others. For example, Dagestan, following the results of three quarters, showed an increase in industrial production by 15%,” says Zemlyansky.
I agree with this point of view and Evgeny Kutsenko, director of the Russian Cluster Observatory Center at ISSEK NRU HSE. According to him, the regions of the North Caucasus, which are not so strongly integrated into the world economy, not only suffered less, but also recovered faster.
Tourism pulled retail
Consumer demand has declined in all segments due to falling household incomes, rising inflation and a number of other factors.
“The import of goods has become more difficult due to the deterioration of logistics conditions. All in a complex negatively affected the consumer sector in most regions. But in the South and North Caucasus, the opposite process also worked simultaneously - the rise in the cost of import tours led to an increase in the popularity of domestic Russian tourism, ”says Zemlyansky.
According to him, as a result, the decline in retail trade in the Southern Federal District and the North Caucasus Federal District turned out to be significantly lower than the national average. Krasnodar Krai, Rostov Oblast and some republics of the North Caucasus helped to improve performance in the districts.
“The closure of a number of airports, including in the Krasnodar Territory, Rostov-on-Don, Simferopol and Elista, had a different effect on the regions: there was a redistribution of the tourist flow from Crimea to other regions, which created an additional demand for labor resources there. Dagestan, where tourism is booming for at least the second year in a row, and the Stavropol Territory can be especially singled out,” ACRA notes.
At the same time, the tourist flow to key tourist locations in the South did not decrease, but returned to pre-crisis levels. Moreover, the events of recent years, starting with the pandemic, have spurred the interest of investors — in particular, in the Krasnodar Territory, the share of projects in this area and the total investment in the segment have sharply increased. Difficulties with outbound tourism have led to the growth of domestic destinations.
Budget Paradox
As for regional budgets, they showed growth against the background of economic instability. The RANEPA notes that experts predicted a decline in the spring, but the budgets of many subjects of the Federation showed stability due to the payment of income tax in advance, stabilization of employment and a number of other factors.
“Approximately half of the regions of the Southern Federal District and the North Caucasus Federal District, following the results of nine months, show the dynamics better than the national average. This is especially true of the Astrakhan region and Stavropol. At the other “pole” there are several republics (Dagestan, North Ossetia, Kalmykia, Ingushetia), whose incomes have not grown so much, noticeably worse than the national average, due to the high role of informal employment and the shadow economy, which do not allow receiving adequate budgetary effects from the growth of industry and tourism,” notes Zemlyansky.
But at the same time, the regions are accepting deficit budgets for the next three years - with a slight increase in income, even “rich” subjects, such as the Kuban and the Don, are waiting for an increase in spending and, accordingly, an increase in borrowing. In the Krasnodar Territory, the public debt by 2025 may reach 180 billion rubles, exceeding the record post-Olympic figures, when the region was among the leaders in terms of the absolute amount of debt.
Other regions of the Southern Federal District and the North Caucasus Federal District will also increase their debt obligations, although not in such volumes. In the ACRA agency, this is also associated with the need to finance, in addition to social tasks, programs to modernize the economy and prevent technological backwardness in various industries.
“Most experts expect next year a noticeable slowdown in growth rates for most sources of tax and non-tax revenues of regional budgets, including a significant decrease in the growth rate of subsidies. At the same time, experts expect a slight acceleration in spending growth. This situation will unbalance the regional budgets and lead to an increase in the deficit. Therefore, now many regions are adopting rather conservative budgets for 2023, realizing that it will not be easy to implement large-scale new projects, ”Zemlyansky believes.
Foggy future
Experts agree that the Russian economy has not yet fully felt the effect of the sanctions and the crisis will manifest itself in the coming years.
“The most serious challenge is the disruption of logistics and production chains. The disappearance of imported technologies, components and raw materials has become a serious challenge for business, and the complexity of exporting to unfriendly countries reduces the sales market. It is important to understand that we do not yet see the real effect of sanctions pressure, and it is premature to talk about it. However, it is worth noting that business has recently faced difficulties caused by the covid-19 pandemic , so today it is not as hard as it could be,” says Evgeny Panasenko, business development director of B1 in the Southern Federal District.
According to Alexander Polidi, in the short term, the same areas that have adapted as quickly as possible in 2022 will feel better. These are the agro-industrial complex, the EXPORT potential of which remains high, the tourism sector, where demand has reoriented due to restrictions. Trade and transport logistics complexes will continue to develop.
“Inevitably, demand will be reoriented to the southern ports. Turkey is the main logistics hub that connects us with Europe. And Europe is the country's largest trade and economic partner. Even if there is an accelerated reorientation to CHINA , sea transportation will remain relevant here, ”the expert believes.
Also in the field of promising industries for the South are the IT cluster and industry.
Dmitry Zemlyansky, Director of the Research Center for Spatial Analysis and Regional Diagnostics, IPEI RANEPA:
“In the spring of 2022, amid the uncertainty of the scale and duration of sanctions, many experts predicted a significant downturn in the economy of the country and most regions. It seemed that the main negative factors and risks would be rising prices in the domestic market, logistical restrictions, the withdrawal of foreign companies from the market and the corresponding increase in unemployment, a decline in regional budgets' own revenues, while spending increased. Now we can already say that not all of these factors have materialized.
First, the sanctions were introduced with a significant lag, most of them did not take effect immediately, but several months after they were introduced. On the one hand, this allowed business and the authorities to adapt, gave a transitional period. On the other hand, we still do not see all the consequences, and there is no reason to fall into euphoria either.
Secondly, at the level of the government of the country and regions, decisions were very quickly made to adapt measures of state support for employment, concessional lending, and reduce restrictions for the regions in terms of interbudgetary relations. This helped the business to rebuild at least partially.
Thirdly, several serious decisions were made to stabilize regional budgets, primarily aimed at replacing commercial debt, which has risen sharply in price and become unavailable. As a result, the decline turned out to be much less than the spring forecasts.”
Evgeny Kutsenko, Director of the Center "Russian Cluster Observatory" ISSEK NRU HSE:
“Any situation, even a negative one, simply changes the balance in the economy. Someone always wins, someone loses. Therefore, the crisis has created some opportunities. For the South, of course, this is agriculture and the food industry. A quarter of all Russian production falls on the Southern Federal District. The need for import substitution will continue to grow and open up opportunities for exports, as ports are located in the South.
Tourism has great prospects. There are certain infrastructural restrictions, and if the state helps, the segment can become a sustainable growth point.
Among the promising areas is light industry. Already now, for example, fur production is actively developing in the Stavropol Territory, the textile industry in Dagestan. Often these are small businesses in the shadows, which is typical for the South. Therefore, it is very difficult to assess the economic potential; we do not know much about the shadow business and employment. Therefore, entering the "white" is a big challenge, overcoming which we can talk about a radically different development of the economy.
The main trends that will affect the economy of the South in 2023:
1. Simplification as the main type of industry adaptation to new conditions in 2022. This carries the risk that the projects being implemented will become less technologically advanced and, therefore, competitive.
2. Reorientation to Asian markets, which will affect the territories of the South and North Caucasus. But the carrying capacity of the transport infrastructure in Siberia and the Far East is limited. This opens up significant opportunities for strengthening the role of the North-South international transport corridor, developing road and rail communications, and maritime transport in the Caspian. The development of the regions will largely depend on the rapid elimination of weak spots.
3. Possible transformation of interbudgetary relations, more stringent conditions for the distribution of transfers in the conditions of a deficit federal budget, which may affect highly subsidized budgets, especially in the regions of the North Caucasus Federal District.
4. The duration of the restrictions associated with the NWO and the situation in the area of operation, which may significantly interfere with the tourist season on the Black Sea coast.
Source: RANEPA