IP posted a 2.4% YoY increase in April (vs. 1.4% in March), which came above consensus (0.8%) and our estimates (0.8%).
Sector-wise, manufacturing was once again the main driver, accelerating further towards 3.9% YoY in April. the drop in utilities output moderated to 1.9% YoY, while growth in mining sector remained flat at 1.0% YoY.
While welcome, this advance in manufacturing is unlikely to be sustained in the near term.
* Around half (or 1.7pp) of this 3.9pp annual gain was due to surging oil refining (near 10% YoY) – to a large extent a consequence of the favourable base effect as the maintenance period at some refineries started earlier than usual last year.
* Another 1.0pp is the result of an upsurge in fertilizers output (14.2% YoY), whereby the switch to a volume-over-price strategy helped Russian producers to grab global market share. The base effect was particularly pronounced, hence YoY gains are set to moderate.
* Normalised for the extraordinary output gains in oil refining and fertilizers, manufacturing would be up 2.0% YoY, which looks more like a tribute to the data revisions that lowered the statistical base in 2013 rather than a material improvement in growth momentum.
* On a positive note, there are signs of strengthening import substitution, particularly in steel and food processing. Whether this is linked to a weaker RUB or trade restrictions (EU, Ukraine, etc.) is impossible to distinguish.
* A weaker RUB is likely to help import substitution, but in the short term this is unlikely to offset the drop in business spending and slower consumption (the persistent output decline across investment related sectors being a case in point).
* Following further weakness in domestic demand, destocking might accelerate in the coming months, especially as tighter financial conditions could additionally squeeze producers to optimise working capital.
However, even if a one-off, this strong start to 2Q14 does reduce the downside risks to our 0.0% FY14 GDP growth estimate.