The Russian aggregates industry is on the verge of a serious crisis due to sanctions imposed by the West following Russia’s military intervention in Ukraine, writes Eugene Gerden.
The trade sanctions imposed on Russia are biting hard.
The huge nation’s military intervention in Ukraine has already resulted in the West’s ban on the supplies of certain equipment and technologies to Russia from abroad and the restriction on imports of some types of aggregates, crucial for the Russian construction industry.
The ban has posed a serious threat to the continual development of the Russian aggregates sector. In recent years, a significant number of the country’s more than 1,000 estimated aggregates producers have announced plans to modernise their production facilities and significantly increase their production volumes. However, the imposed ban may prevent implementation of these plans.
According to Yevgeny Vysotsky, a senior analyst of Construction Materials Pro, one of Russia’s analyst agencies in the field of construction materials and aggregates, the current level of depreciation of fixed assets in the Russian aggregates industry is one of the highest among all segments of the national construction industry. In this regard, the industry is an acute need of modernisation.
This is reflected by the fact that the level of depreciation at some industry plants reaches 90%, due to the fact that the majority of their equipment was supplied during the period of 1960-1970’s.
In addition, the majority of national enterprises often use outdated processing technologies, which have been used by them since the 1970s, and even more outdated mining technologies.
According to an official representative of the Russian Ministry of Industry and Trade, the level of technical equipment currently used by the majority of aggregates industry enterprises does not comply with international standards, while the degree of automation of enterprises’ production processes is very low.
An official representative of the Ministry, who asked not to be named due to fear of dismissal, as was the case with Sergey Belyakov, Russia’s former deputy minister of economic development, who was recently fired because of public criticism of the latest decisions of the Russian government, said: “The decision of Western countries to restrict imports of high-tech equipment for many segments of Russian industrial production, including aggregates, will definitely have a negative effect on the majority of industry enterprises. There is a shortage of quality equipment in the industry. The majority of it is imported from abroad, as the volume of domestic production currently remains insignificant.”
According to the official Ministry representative, further escalation of tensions between Russia and Western countries may result not only in the imposition of a ban on the imports of industry equipment, including equipment linked to the aggregates industry, but may also result in the restriction of imports of other items, such as specialty vehicles, which are used by different industries’ enterprises and a significant part of which are also currently imported from abroad. This may lead to a crisis in the entire Russian construction industry.
David Melik-Guseinov, director of the Center of Social Economy, one of Russia’s leading analysts in the field of construction, said: “The imposition of an entire ban on the imports of the equipment and technologies for the national aggregates industry may result in the appearance of monopolies in the local market, which will start to dictate prices to the industry’s players and will increase prices for their range.”
In the meantime, the Russian government from its side has no plans to make concessions to Western countries, considering the possibility of the imposition of its own ban on the imports of industrial equipment from abroad. It is planned that the ban will mostly affect the EU states which, so far, have been the biggest suppliers of engineering products to the Russian market.
According to a source in the Russian government, such a decision will be taken in the event of further toughening of sanctions against Russia by Western countries. This was recently confirmed by Russia’s Prime Minister Dmitry Medvedev. However, he stated that these measures should be taken carefully, in order to avoid negative consequences for Russia.
According to Arkady Dvorkovich, Russia’s Deputy Prime Minister, the imposition of a ban on the importation of industrial equipment from abroad is an acute need, as it will provide an impetus for the development of the national industry of machine building and will provide new orders to it. According to Dvorkovich, this would also encourage foreign manufacturers of equipment to localise their production within the country.
At the same time, in addition to a forthcoming industry ban on the supplies of foreign equipment, the situation in the aggregates industry is also aggravated by the sharp decline of imports of some types of aggregates to Russia. So far, a significant part of aggregates has been supplied to Russia from Ukraine, which accounted for 80% of the overall structure of aggregates’ imports to the country. However, there is a possibility that due to ongoing military conflict further imports will be suspended. Granite rubble makes up most of the Ukrainian aggregates exports to Russia, as Russian production of rubble is limited by a small number of fields.
The majority of Ukranian rubble is supplied to the Moscow and Moscow region construction markets, which are the largest in Russia in terms of value. Termination of the imports may lead to the disruption of major construction projects in the region. Analysts predict that the imposition of sanctions will result in the process of consolidation in the market and the appearance of monopolies. This may also result in the increase of prices in the Russian aggregates market. At the same time prices will also rise, due to ever growing production and logistics costs. Despite the existing problems, Denis Manturov, Russia’s Minister of Industry and Trade, believes that the situation in the industry remains under the control of the government.
According to him, the demand for aggregates in Russia during the next few years will significantly increase, driven by the implementation of numerous housing projects in the country. According to the Russian Federal State Statistics Service (Rosstat), last year the total volume of housing commissioned in Russia reached 69.4million m – 10.3% more than in 2012. Meanwhile, these volumes will significantly increase over the coming years as the existing state program known as ‘Provision of affordable and comfortable housing and communal services to Russian citizens by 2020’ is delivered. The state affordable housing program stipulates that the volume of commissioned of new housin
g in Russia should reach 76 million m by 2015, and 93 million m by 2017. By 2020 this figure should reach 100 million m.
This is expected to result in a significant increase in demand for aggregates in the country. In addition, according an official spokerperson of the Russian Association of Aggregares’ Producers, the demand for aggregates in Russia will also increase, due to planned commissioning of new football stadiums prior to the World Cup in Russia in 2018. Among other Russian mega projects are the building of the Moscow – St. Petersburg highway, the Moscow Central Ring Road and the construction of the Kerch bridge.
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