Russia's Economic Expansion Slowed in Second Quarter

By Maria Levitov

Sept. 10 (Bloomberg) -- Russia's economy expanded at a slower pace in the second quarter as lower investment and the strong ruble hurt domestic producers.

Gross domestic product grew 7.5 percent, compared with 8.5 percent in the previous three-month period, the Moscow-based Federal Statistics Service reported in an e-mailed statement. The figure is not seasonally adjusted. The median forecast of 10 economists surveyed by Bloomberg was for growth of 7.6 percent. The economy grew 8.1 percent in the second quarter of 2007.

Eastern Europe's economic outlook is deteriorating because of spillover problems from the global slowdown and high inflation, with average growth in the region set to slow to a six-year low of 5.8 percent this year from 6.9 percent in 2007, according to Fitch Ratings.

``Lower capital inflows have already played a role. Their effect on growth will be felt more in the coming months,'' Yaroslav Lissovolik, chief economist at Deutsche Bank AG in Moscow, said by telephone today. ``High raw materials prices, high salaries'' and other rising costs for companies also slowed expansion, he said.

Growth Slipping

Russia's growth may slip to 7.8 percent this year from 8.1 percent in 2007, according to the Economy Ministry, as accelerating inflation saps domestic demand and erodes gains in average wages. Industrial output rose in June at the slowest pace in 5 1/2 years and a gauge of manufacturing output compiled by VTB Bank Europe declined throughout the second quarter.

Growth lagged behind India and China, at 7.9 percent and 10.1 percent respectively, though GDP was more than five times higher than in the euro region, which had a 1.4 percent economic expansion in the second quarter.

Vladimir Osakovsky, an economist at UniCredit SpA in Moscow, said ``an influx of imports also hit producers'' because the strong ruble made it harder for them to compete.

The ruble gained 5.22 percent against the dollar this year through July 1, according to Bloomberg data. Foreign direct investment totaled $11.1 billion in the first half, a 30 percent decline from last year, according to the statistics office.

The managed currency snapped a nine-day decline against the dollar and was slightly weaker versus the euro after the data. The ruble was at 25.5724 per dollar by 12:45 a.m. in Moscow, from 25.5841 yesterday, when it fell to 25.6301, the lowest level since September 2007. The ruble was at 36.2105 per euro, from 36.1597.

Accelerating Prices

Accelerating consumer and producer-price inflation alongside slowing real income and investment growth are ``dangerous'' signs of an economic slowdown, said Petr Aven, the president of Russia's Alfa Bank.

Producer-price growth surged an annual 33.7 percent in July and the inflation rate rose to 15 percent in August, close to a 5- year high. Real wage growth declined from an average rate of 16.2 percent last year to 12.8 percent this year.

``This could be a change of trend,'' Aven told an investment conference yesterday.

OAO Wimm-Bill-Dann, Russia's largest dairy company, cut its annual revenue and earnings forecasts last month because of rising raw material costs and lower sales volumes.

OAO Lukoil, Russia's biggest independent oil company, also said that a stronger ruble and higher operating expenses ate into profit in the first half. A significant part of Lukoil's revenue is denominated in U.S. dollars, while most of its costs are settled in rubles.

Growth `Still High'

Still, even with a slower pace of expansion in the second quarter, GDP will probably increase 7.8 percent this year, according to Lissovolik.

Growth ``is still high'' and the recent decline of the ruble will help domestic producers, UniCredit's Osakovsky said.

Russia's central bank sold foreign currency last week to prop up the ruble, which was slumping because of investors pulling money out after the conflict with Georgia, the dollar's rally and a drop in commodities prices. Net capital outflow reached $4.6 billion in August, according to the central bank's preliminary estimates.

To contact the reporter on this story: Maria Levitov in Moscow at mlevitov@bloomberg.net