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Analysis & Opinion
30.05.12 Growth Without Gain
By Tai Adelaja

Many business people seem increasingly disillusioned with the Kremlin, which keeps its guns drawn with the country’s middle-class protesters while sending mixed messages to investors about its long-awaited economic reforms. A series of economic indicators published by Russia’s Economic Development Ministry on Monday show that economic activity is declining, a further indication that investors' appetite for the country's assets is also waning. Along with poor economic growth dynamics, consumer demand – the main driver of Russia’s industrial growth – is also declining, the ministry said in its monthly report.

The year-to-year growth in gross domestic product was 3.7 percent in April, a slowdown compared with a 3.9 percent growth in March, the ministry’s monthly macro-economic statistics show. For the second month running, the economy has been gradually losing steam. Seasonally adjusted fixed investment fell by 1.4 percent in March compared with April, while seasonally adjusted industrial output declined by 0.1 percent. "The slower pace of growth in April was due mainly to [weak] dynamics of industrial production [and] low investment on the demand side," experts from the ministry wrote in their report.

While the modest decline in industrial production in April fueled concerns that the overall economy has contracted, it was actually an improvement over the previous month, when industrial output dipped by 1.5 percent. Of greater concern are the widespread declines across most of the extractive industry, analysts say. The country's metallic mineral output fell by 0.2 percent in April, while the production and distribution of electricity, gas and water was down 0.9 percent. One bright spot in the report is a 0.1 percent growth in manufacturing in April after a 1.6 percent decline in March – a little consolation, analysts say, after unexpectedly robust growth in the first quarter.

The construction sector, which earlier showed strong signs of rebounding, is now showing signs of fatigue, according to the report. The building and construction industry grew by 1.8 percent in April, following anemic growth a month earlier, according to published key indicators such as cement production and finished steel consumption. However, the situation in the housing sector actually worsened in April because fewer new buildings are being commissioned. The total volume of construction output between January and April of 2012 fell by 5.6 percent compared with the same period in 2011. In March, construction slumped by a whopping 24 percent, according to the latest figures.

Despite the Kremlin’s spending to promote short-term economic growth, there has been a marked slowdown in retail turnover. In February, turnover declined by 0.69 percent, followed by a 0.3 percent decline in March and virtual stagnation in April – evidence of a lack of progress in the growth in real disposable income per household. The growth in Russians' real disposable income was zero in April, according to the latest figures. In its report, the ministry estimated that the GDP expanded by 4.6 percent in the first four months of 2012, below an estimate of 4.9 percent growth in the first quarter made by the State Statistics Service earlier this month. Last month, the ministry revised downward its GDP growth forecast to 3.4 percent this year, less than the previous forecast of 3.7 percent. Ministry officials are expected to make a fresh assessment in August, Nezavisimaya Gazeta reported on Tuesday.

Even as many investors remain anxious about Russia’s future economic prospects – spooked by a wave of middle-class protests in the recent months – the Kremlin is not helping matters by sending mixed messages about the country's privatization plans, analysts say. Last week, Russian President Vladimir Putin signed a decree adding stakes of power giant Rushydro, power grid FSK, grid operator MRSK Holding and state-controlled oil firm Rosneft to a list of strategic assets, potentially making asset sales in them less likely. At the same time, the Russian president has instructed the government to develop a plan for privatization from 2013 to 2015 of the energy assets owned by Rosneftegaz, adding to uncertainty about which business will be sold and when. Fitch Ratings said last week that Putin's decrees, while sending mixed signals, "do not change our ratings rationale and we will await the announcement of specific plans for privatization."

Business executives believe, however, that the new figures from the Economic Development Ministry suggest creeping stagnation in the country's industrial sector. Cheaper global oil prices are sure to dampen hopes for better GDP indicators, while a tighter budgetary policy will scuttle plans to boost consumption and increase Russians' real disposable incomes, business leaders said. "Gas production is declining, oil production is not growing, and manufacturing is at a standstill," noted Svetlana Romanova, CEO of the Nexia Pacioli Group of Companies. "The planned increases in tariffs for natural monopolies starting July 1 are bound to add to Russia's laundry list of woes."
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