Why Russia’s profitability margins are under pressure

Market Realist

Key signs that Russia is attempting economic growth (Part 2 of 4)

(Continued from Part 1)

Russia’s inflation

On the prices side of the PMI survey, Russian inflation continued increasing both in the inputs (cost) side as well as in the outputs (prices charged) side. However, the increase in costs was once again faster than the prices charged rate of increase, which leads to margin squeezes.

On seasonally adjusted terms, costs rose for the sixth month in a row, making a record high since October 2012. While the rate of growth was faster versus the previous two years, the rate is low compared to the long-term average. The rate of inflation in prices charged, while faster than in recent months, remains below the longer-term average. As a matter of fact, the yearly rate of inflation as of August was equal to the rate as of July, which was lower than in previous months. However, it seems that inflation may face upward pressure in the coming months.

Consumer prices’ failure to keep up with producers’ costs will certainly hurt profitability, and Q3 earnings may see a hit, which will have an adverse effect on Russian equities (RSX).

Limited signs of replenishment

Both the backlogs of work as well as the stocks of finished work dropped, signaling that spare capacity is being used to work down the backlog. But, at the same time, there’s no apparent build-up of finished product to address future increased demand. Nonetheless, the rate of purchases grew just marginally and stocks of purchases declined, which may show that (at least in a limited fashion) there is some replenishment of inventory.

Continue to Part 3

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