PMR insight: Questionable rebound in construction output in 2018

Vitalie Iambla, Construction Analyst, PMR

The Russian construction output recorded a surprising rebound last year. Official preliminary data indicate that Russian construction output grew by 5.3% in 2018, after four years with negative growth rates. However, according to PMR, the key factor contributing to the rebound in construction output growth rate is Rosstat’s methodology on settlement of construction output. However, regardless of the suggested rebound in construction output, domestic production of many key building materials observed reduction in 2018. Preliminary data indicate that production of cement logged a 1.9% reduction, that of ceramic building bricks dropped 4.8%, of ready-mix concrete contracted 1.6% and production of hot road asphalt-concrete mix observed a 6.3% decrease.

It is believed that in 2018, Rosstat registered the total value of construction output for several expensive civil engineering projects completed last year as a lump sum on completion, instead of using the percentage-of-completion method. The rebound was instigated decisively by official triple-digit growth rates in the Yamal-Nenets Autonomous District and in the Republic of Crimea. PMR estimates that the construction output in Russia observed a reduction of about 4.4% in 2018 when the two above-mentioned regions are excluded from the country’s official annual result. A substantial upside revision was also noted for the Moscow Province, for which preliminary data indicated a 6.1% growth for the period January-September 2018 and after revision the growth rate was increased to 16.9%.

In 2018, the whopping official upsurge in construction output in the Yamal-Nenets Autonomous District was boosted mostly by the completion of Yamal LNG plant. Its construction started in 2014 and was completed in November 2018.  The project’s total cost is estimated at about $27bn, with statistical registration of probably most of related construction output recorded in 2018. It is worthy of note that the plant boasts a capacity of 16.5 million tonnes (3 x 5.5 million tonnes), of which the first phase was put into operation in December 2017 and the second phase was activated in August 2018. These were followed by the third phase in November 2018. Before the recent questionable revision, Rosstat estimated that the value of construction output in the Yamal-Nenets Autonomous District totalled RUB 128.9bn (€1.95bn) in 2017 and RUB 97.0bn (€1.32bn) in January-September 2018. After revision, the figures were boosted to RUB 157.5bn (€2.39bn) for 2017 and to a whopping RUB 337.5bn (€4.61bn) for the first three quarters of 2018, indicating a more than threefold increase to the preliminary estimate in the latter period. Given that the Yamal-Nenets Autonomous District was responsible for around 5.4% of the country’s construction output in 2018 (up from 2.1% in 2017), the significant positive performance of this administrative region last year, out of 85 regions in Russia when Sevastopol and the Republic of Crimea are also included, increased the value of construction output strikingly.

The official 5.3% rebound in 2018 was also supported substantially by the 141% growth in the Republic of Crimea, which was boosted overwhelmingly by the construction of infrastruction related to the the Kerch combined road and railway bridge as well as by the construction of the Tavrida federal road. The 251 km long route is being built in Crimea to connect Kerch, Simferopol and Sevastopol. The project is planned to cost RUB 149.3bn (€2bn). Its construction officially began in May 2017 and is to be completed in 2020. Official estimates indicate that the project was only about 50% complete in December 2018. It is worthy of note that the value of construction output in the Republic of Crimea totalled RUB 47.4bn (€721m, +466% y-o-y) in 2017 and RUB 146.4bn (€2bn, +141% y-o-y) in 2018. Last year, the Republic of Crimea was responsible for 1.7% of Russia's construction output, whereas in 2017 it covered only 0.6%.