Russia has overtaken the United States and China in terms of manufacturing competitiveness helped by a fall in oil prices and the country’s currency, according to a report by the Boston Consulting Group (BCG).
The report from BCG evaluates the competitiveness of the world’s top 25 export economies, which account for nearly 90 percent of world exports of manufactured goods, based on the index of production costs. The lower the index is, the lower the production costs are, which raises the competitiveness of a country in comparison with the U.S., the world’s largest economy.
The index comprises of four components: wages, labor productiveness, energy prices, and national currency exchange rates.
According to the report, Russia’s 2015 manufacturing cost competitiveness rating is at 90 points, whereas China’s rating was at 97 points. The U.S. rating is considered as 100.
Indonesia ranks at the top of the list of manufacturing cost competitiveness with a rating of 83, followed by India and Thailand tied with a rating of 88, and Russia and Mexico tied with a rating of 90.
Over the past 10 years since 2004, U.S. competitiveness has continuously grown in comparison with all other countries, except for Mexico. However, in 2015 the strengthening dollar brought this trend to an end as the dollar began to rise against other currencies, and U.S. production costs rose.
From mid-2014 to mid-2015, the euro fell 18 percent against the dollar, and as a result, the majority of European exporters improved their positions as production costs decreased.
Meanwhile, in 2014 the ruble exchange rate fell by 8 percent in comparison with 2013, and then in the first half of 2015 the ruble fell by another 17 percent in comparison with the first half of 2014.
So, it’s hardly a surprise that with the Russian ruble falling over 30 percent against the dollar and crude prices tumbling 45 percent in a year that Russia’s manufacturing cost competitiveness rating grew.
But this could be just a temporary phenomenon, according to Justin Rose, Partner and Managing Director at BCG. “The fundamental trends that made the U.S. competitiveness in terms of the levels of production costs grow continuously over the last decade, have not changed.”
“Manufacturers understand that the national currencies that significantly depreciated against the dollar, can quickly win back their positions,” he added.
Despite its manufacturing competitiveness, operating conditions in Russia’s manufacturing sector have been in contraction for seven consecutive months, according to a report from Markit Economics. In June Russia’s manufacturing output, new orders, and employment all fell.
Amid falling volumes of new work, employment in Russia fell in June and extended the current run of its employment contraction to exactly two years, according to Markit.
There was also a continuation of declining new export orders from Russia in June, which was the twenty-second in succession, Market added.
The slump in Russia’s manufacturing sector comes as its economy struggles with its first recession since 2009, and has been starved of investment due to U.S. and European Union sanctions over the conflict in Ukraine which has limited their access to international capital markets.
On Thursday, Oil relapsed back into a bear market as resilient U.S. output, rising OPEC supply, and threats to Chinese demand keep a global glut in place.
The latest downturn in the global oil market means Russia’s recession could stretch into the next year, in which would mark the longest slump in two decades.
With a slump in investment and its dependence on commodities, Russia will have a hard time recovering from its record economic slump as global oil prices could remain lower for a long time, according to rating agency Moody’s.
As much as a quarter of Russia’s gross domestic product and two-thirds of its exports are linked to the energy industry, according to the rating agency.