Russian Manufacturing Eases for First Time Since 2004

By Alex Nicholson

Sept. 1 (Bloomberg) -- Russian manufacturing contracted in August for the first time in almost four years as businesses won fewer new orders and companies cut jobs.

VTB Bank Europe's Purchasing Managers' Index fell to 49.4 from 50.4 in July, the fifth consecutive monthly decline and the first contraction since November 2004, the bank said in an e- mailed statement today. A figure above 50 indicates growth. The bank surveyed 300 purchasing executives.

``The major factor underpinning the weakening in activity has been a decrease in new orders, which fell for the first time in almost 10 years,'' Dmitri Fedotkin, an economist at VTB Bank Europe Research, said in the statement.

Growth this year may miss the Economy Ministry's forecast of 7.8 percent as foreign investors pull money out and corporate borrowing costs rise as a result of international tension over Georgia, Alexander Morozov, chief economist at HSBC Bank in Moscow, said on Aug. 29. Industrial output rose an annual 3.2 percent in July, a slower pace than economists expected.

``With output requirements set to fall in light of the drop in new work received during the month, Russian manufacturers shed staff on average in August,'' the report said without giving details. The workforce shrank for the fourth consecutive month, it said.

Affecting Demand

New orders placed in August could have fallen because of a drop in the pace of wage growth and high inflation, at an annual rate of 14.7 in July.

``It may have got to the point where this is affecting demand,'' Fedotkin said by telephone from Moscow.

OAO GMK Norilsk Nickel, the world's largest producer of the metal, has said it may halve the 11,400 member workforce at one of its two largest Russian units to cut costs. Russia's biggest steelmaker, OAO Severstal, has also said it will eliminate as many as 3,000 jobs after costs climbed 23 percent last year.

``This could be a very negative indictor of the future trend,'' said Vladimir Tikhomirov, chief economist at UralSib Financial Corp. While there is a ``broad consensus between government and the market'' that economic growth will slow this year, ``new factors'' have emerged, he said.

``We've seen a correction on global energy and raw- materials markets, and we've also seen political problems, which have led to an outflow of short-term investment,'' Tikhomirov said. ``This has put some investment projects on hold.''

GDP Contribution

Manufacturing accounted for 16.2 percent of gross domestic production in the first quarter, he said, compared with 18.3 percent for retail and wholesale trade, the largest contributor. The natural resources industry directly contributes 9.4 percent, though the industry indirectly drives 30 percent of the country's economic activity, Tikhomirov said.

Finance Minister Alexei Kudrin said on Aug. 17 that investors pulled $7 billion out the country between Aug. 8 and Aug. 11 after Russia's military incursion into Georgia.

The war was sparked by Georgian attempts to retake its breakaway province of South Ossetia, where most citizens have Russian passports. Russia sent troops, tanks and warplanes into the former Soviet republic before President Dmitry Medvedev ended military operations on Aug. 12. He subsequently recognized the independence of South Ossetia and Abkhazia, another separatist region, a step that angered the U.S. and Europe.

EU Summit

EU leaders are holding an emergency summit in Brussels today to consider a joint response to Russia's recognition of the two regions. Their options are limited, as Europe gets a quarter of its natural gas from Russia, and some leaders have played down the threat of sanctions.

Still, businesses in the PMI survey said costs eased in August even as transport, energy and metals prices rose.

``Input price inflation slowed more sharply than in any period in the 11-year survey history,'' the report said.

The cost of goods leaving factories and mines surged an annual 33.7 percent in July, the fastest pace in 3 1/2 years, led by fuel and coking coal prices, the Federal Statistics Service said on Aug. 21.

The PMI is derived from indexes which measure changes in output, orders, employment, suppliers' delivery times and stocks, according to VTB.

To contact the reporter on this story: Alex Nicholson in Moscow at anicholson6@bloomberg.net.