Russia industry slowdown prompts new government action

Russia industry slowdown prompts new government action

By Gleb Bryanski and Denis Dyomkin

MOSCOW, Nov 18 (Reuters) – Russia pledged fresh efforts to boost its economy on Tuesday after data showed industry growth slumping and the World Bank said further weakness in the rouble looked inevitable.

Official statistics showed double-digit falls in production of materials such as rolled steel and cement, which slowed annual industrial output growth to 1.6 percent in October, well below a forecast of 3.7 percent and 6.0 percent a year ago.

Underlining the extent to which the global financial and economic crisis is hurting Russia’s economy, its biggest steelmaker Severstal cut its 2008 earnings forecast and said it would defer its $8 billion 2009-2011 investment programme because market conditions have worsened.

President Dmitry Medvedev said the country would need to spend more of its wealth, amassed when global demand for its commodity exports was booming, on helping the economy.

‘About 5 trillion roubles ($182.3 billion) will be spent on stabilisation measures. But this is not the final number. We understand that the scale of the problem is such that additional decisions will be needed,’ Medvedev said in a speech.

For the first time Russia’s top leadership acknowledged the crisis that it has previously described as global and financial is spreading fast into the heart of the Russian economy.

‘Today it is clear that the crisis is spreading, unfortunately, from the financial sector into the sectors of the real economy… Every industry is affected in its own way,’ Medvedev told reporters.

Russia’s reserves have already shrunk by a sixth in the last three months to $475 billion, largely due to official efforts to defend the rouble through three months of capital flight.

The World Bank praised Moscow’s response to the global crisis but halved its forecast for 2009 Russian economic growth to 3 percent due in part to the collapse of world oil prices.

‘The weakness of the oil market, the capital outflows, the weakening current account situation — obviously those forces are going to continue in the short term,’ Zeljko Bogetic, the bank’s lead economist for Russia, told journalists.

‘It’s not a question of if (the rouble weakens), it’s more a question of how it will be managed in the short term given the fundamental factors and also the need to maintain … reserves.’

HARD DATA

Tuesday’s data, together with releases on unemployment, producer prices and capital investment later this week, will enable economic planners to provide advice on the scale of the rouble’s depreciation and the bailout package.

‘This figure (industrial output) is the first hard data point on the impact on the real economy of the freezing of the financial system last month,’ said Rory MacFarquhar, managing director at Goldman Sachs (nyse: GS news people ) in Moscow.

Russia’s MICEX index recovered after a trading suspension prompted by falling prices and ended the day up 3.3 percent on Tuesday, tracking Wall Street gains and the oil price recovery. The index is still down 70 percent this year, hit by capital flight and a bleak outlook for Russian exports.

Earlier this month, Raspadskaya, Russia’s second-largest producer of coal for the steel industry, said fourth-quarter 2008 sales would reach only one-third of planned volumes after steel makers slashed orders.

Depositary receipts of construction firm PIK Group plummeted by 57 percent this week on debt worries. The World Bank estimates total corporate debt due in the fourth quarter 2008 at up to $65 billion including margin calls.

Prices for Urals, the country’s main export blend of oil, stood at $47 per barrel, the level last seen at the start of 2007. Russia’s energy minister Sergei Shmatko said companies could cut output and exports should they become ‘unprofitable’.

The rouble remained stable at 30.68 against the central bank’s policy basket made of 0.55 dollars and 0.45 euros after last week’s 1 percent devaluation.

Both Medvedev and Prime Minister Vladimir Putin, the country’s most influential politician, have engaged in a verbal attack against currency speculators, but more signs emerged that firms and ordinary Russians are no longer convinced the authorities can avoid more substantial devaluation.

Electricity producer OGK-3 said it had converted more than $560 million worth of roubles into dollars to hedge against a devaluation of the rouble and now had so much cash that the banks were asking the company for loans.

‘We are not speculators. We are not trying to get an extra profit, but are simply counting on avoiding the devaluation of the assets we have,’ the company’s financial director said.

(Additional reporting by Toni Vorobyova, Olga Popova, Gleb Gorodyankin and Melissa Akin; Editing by Ruth Pitchford) ($1=27.43 Rouble) Keywords: RUSSIA ECONOMY/

(gleb.bryanski@reuters.com ; +7 495 775 1242; Reuters Messaging: gleb.bryanski.reuters.com@reuters.net )

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