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Wednesday, August 16, 2006

Russian Industry, Always Creaking, Grinds to a Halt

Reuters reports that, faced with direct foreign competition, Russian industry cannot stand the globalization heat and is getting out of the kitchen. If Russian industry were to be forced to pay market prices for energy rather than being subsidized by the Neo-Soviet Kremlin, industrial activity would no doubt enter recession. If Russian industry performs like this at the height of the business cycle and in the midst of an oil windfall, what will happen to it under less favorable circumstances? Pretty scary prospect indeed.

MOSCOW, Aug 15 (Reuters) - Russia's industrial output grew at a slower than expected annual rate in July, according to data published on Tuesday, as manufacturers struggled to compete with growing imports. Industrial production fell by 0.4 percent in month-on-month terms, while the year-on-year growth rate was 2.9 percent, unchanged from June and well below consensus expectations in a Reuters poll of 4.8 percent. The data, released by the Federal Statistics Service, showed manufacturing output grew by 2.5 percent year-on-year in July, compared with 2.8 percent in June, while mineral extraction output grew by 3.1 percent from 2.4 percent in June.

"The figure is disappointing, below our expectations," said Stanislav Ponomarenko, analyst at Raiffeisen Bank in Moscow. Despite the moderate rate of growth, he said he remained optimistic about industry's prospects for the full year. "In principle, we do not see substantial reasons for a further slowdown in coming months, as industry is supported by state firms which actively invest in production," Ponomarenko said. But he added: "We are not that optimistic about the private sector, as the main threat here is a further rouble strengthening, which curbs the competitive advantages of Russian producers.

The rouble has appreciated by 7.9 percent so far this year against a currency basket and is expected to strengthen further to help the government curb inflation, which has been fuelled by record prices for Russia's oil, gas and metals exports. "The major factor behind the slowdown is increasing competition from imports," said Julia Tseplyaeva, analyst at ING Bank in Moscow. "If you look at the services sector, which doesn't compete or competes very little with imports, you will see a solid rate of growth," she added.

Industrial output has risen by 4.2 percent so far this year, up from 3.5 percent in the same period last year. In 2005, industrial output rose by 4.0 percent.

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