Russian Manufacturing May Have Expanded for First Time in Year

By Paul Abelsky

Aug. 31 (Bloomberg) -- Russian manufacturing may have emerged from a year-long slump this month as external demand recovered, companies rebuilt stocks and the government ramped up spending to contain the worst downturn in a decade.

VTB Capital’s Purchasing Managers’ Index reached 50 in August for the first time since July 2008, according to the median estimate of 16 economists surveyed by Bloomberg. The gauge was at 48.4 in July. VTB will release the data at 8 a.m. in Moscow tomorrow. A figure above 50 indicates growth.

“There is likely to be further upward momentum in manufacturing in August as the ruble’s weakening coupled with improving external conditions raise demand for exports and offer more scope for recovery in the real sector,” said Yaroslav Lissovolik, chief economist in Moscow at Deutsche Bank AG.

Resurgent demand in parts of Europe and Asia, rising commodities prices and a pick-up in construction have boosted companies such as OAO Novolipetsk Steel, the largest steelmaker by market value, and metals company OAO Metalloinvest. The economy expanded for a second month in July, growing a seasonally adjusted 0.5 percent, the Economy Ministry says.

“The real economy saw a change in trends in June and July,” Alexei Ulyukayev, first deputy chairman of the central bank, said on Aug. 20. “The lowest point of the downturn was probably passed in May. The so-called bottom is behind us.”

Manufacturing Rebound

Gross domestic product contracted the most on record last quarter, shrinking an annual 10.9 percent after slumping 9.8 percent in the first three months. Declining inventories accounted for 80 percent of the drop in GDP in the first quarter, according to the Economy Ministry, which predicts output may drop as much as 8.5 percent this year.

Industrial output in July expanded 4.7 percent from the previous month, manufacturing grew 4.9 percent and mining and quarrying rose 5 percent, the biggest monthly gain since March.

Manufacturing received the largest amount of foreign direct investment in the first six months, the Statistics Service said on Aug. 21. Foreign investors brought $9.2 billion into the industry, including stock and bond purchases.

VTB’s index of Russian service industries ranging from banks to mobile-phone retailers shrank in July at the second- slowest pace since the contraction began in October.

Drought Over

Last month, a “credit drought” ended as funds available to the real sector increased as much as 1 percent after a nine- month contraction, Renaissance Capital said in a report.

As lending remained stalled because of banks’ concern that borrowers wouldn’t repay loans, the government approved 300 billion rubles in loan guarantees. Prime Minister Vladimir Putin called on state banks in late June to increase total loans by between 400 billion rubles and 500 billion rubles by October.

The central bank has cut its main interest rates five times since April 24, the first reductions since 2007. The refinancing rate was lowered to 10.75 percent on Aug. 7.

Credit conditions eased last month as banks loaned money to companies at the lowest rates in nine months. The average interest rate in July was 14.7 percent, compared with 15.4 percent in June, Bank Rossii said last week.

State banks made loans for a total of 500 billion rubles in July, German Gref, chief executive of OAO Sberbank, the biggest lender, told Putin on Aug. 24.

Anemic Recovery

While the economy probably reached the bottom in the second quarter, the recovery may be anemic as shrinking consumer demand and lenders hobbled with overdue borrowing sap growth.

“It’s still very much a case of the pace of contraction easing rather than the economy actually recovering,” said Neil Shearing, emerging-Europe economist at Capital Economics in London. “We’ll be lucky to get much more than stagnant growth next year.”

The government failed to take advantage of a decade-long boom to diversify the economy during Putin’s tenure as president between 2000 and 2008, said Natalia Orlova, chief economist at Alfa Bank, Russia’s biggest privately-owned lender.

Capital inflows followed higher oil prices, fueling consumer demand. “There was no reason to invest or create new production,” she said. “Now, capital has stopped coming in and consumption has stopped. This model has ceased to exist. We don’t have a new one.”

Urals crude oil, Russia’s chief export earner, has averaged $55.53 a barrel this year from a record $142.50 last July.

Even under the government’s most optimistic scenario, the economy won’t regain the pace of 2008 until 2012, the Economy Ministry said last month. GDP last year grew at the slowest pace since 2002, 5.6 percent compared with 8.1 percent in 2007.

Energy products, including crude oil and natural gas, accounted for 65.5 percent exports in the first half, while metals made up 12.1 percent. Levies on oil and gas producers accounted for more than two-thirds of corporate tax payments to federal and regional budgets last year, Troika Dialog says.

The decision to save windfall oil profits means Russia had a safety net of international reserves of $583.1 billion last August when commodity prices plunged.

“The 2008 crisis is the first crisis I can recall when the Russian financial system hasn’t collapsed,” said Alexei Moiseev, managing director of Renaissance Capital in Moscow.

To contact the reporter on this story: Paul Abelsky in Moscow at pabelsky@bloomberg.net.