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Analysis & Opinion
24.09.09 False Economic Hopes
By Graham Stack

Rumors of imminent economic growth may be exaggerated by dubious inventory statistics. A chorus of analysts is attributing Russia’s ten percent GDP contraction this year to companies selling inventories rather than producing, and is gung ho about growth restarting as soon as inventories empty. But others are warning against drawing strong conclusions from Russia’s deceptive national estimates.

Alexei Moiseev, a macroeconomic analyst at Renaissance Capital, speaks for a number of analysts arguing that Russia’s astonishing GDP collapse of 10.2 percent in the first half of 2009 was the result of a huge sell-down of inventories by industrial enterprises, rather than demand collapse. “Very expensive money resulted in massive de-stocking in the fourth quarter 2008,” he said. “The trend intensified in the first quarter of 2009, with the negative contribution to GDP in this quarter exceeding seven percentage points of a total decline of 9.8 percent.”

Similarly, Anton Nikitin of UralSib claims that “the fall of GDP and the slowdown in industrial production was mostly driven by the huge disposal of inventories,” which started in late 2008 and continued into early 2009. Citibank’s Elina Rybakova also estimates that at least one third of the collapse in production in the first half of this year resulted from destocking.

Since GDP is a pure production statistic, it plummets when enterprises en masse stall production lines to sell down inventory, even if turnover stays steady. And the harder they come, the harder they fall: overheated growth in 2008 brought about unprecedented stockpiling due to anticipated future demand. “Spiraling costs of raw materials in 2007 to 2008 also caused companies to massively build up their inventories,” said Rybakova. Moiseev spoke of “a crisis of overproduction” starting in the first quarter of 2008, with inventories at 150 percent of their 2007 value.

If destocking rather than demand collapse was so much to blame for the economic disaster this year, then logically, when inventories are empty, stalled production will start up again. According to Moisseev, “some of the damage done to the economy has resulted from overheating in the first quarter of 2008, and some of the damage will be easy to recover. Unfortunately, inventory statistics come with a significant delay, so we have no way of knowing what has been happening since, but historical experience suggests de-stocking cannot last for longer than two to three quarters.”

But as Moiseev admitted, the catch with betting on emptying inventories to kick-start growth is that no one knows very much about them. The problem is that the Russian Federal State Statistics Agency (Rosstat) reports inventory statistics only intermittently, on a quarterly basis and aggregated across the economy. The next figures won’t appear until October, meaning that forecasting growth on their basis is very speculative.

“The question of inventories has advanced to be the one of the key questions, especially because the Economy Ministry has focused on it,” said Vladimir Salnikov of the Center of Macroeconomic Analysis. “But the problem is that inventories are not counted directly and there is a high level of statistical error involved. It is very difficult to separate the real inventory level from the margin of error.”

According to VTB Capital analyst Aleksandra Evtifyeva, “Rosstat only provides quarterly aggregate inventory figures that don’t allow close analysis. The Economy Ministry has a wider base of statistics available and said in August that inventories were drying up. However, we don’t know, for instance, if oil companies are included in their statistics or not.”

The Kommersant business daily has reported that Bank of Moscow analysts believe that inventories have remained stable over the last three quarters, and that as a proportion of turnover, inventory has grown by a third compared to 2006 to 2008. If true, this would point to a collapse in demand, which Salnikov also feels has been underestimated. “It seems to us to be the case that markets have contracted more than is reflected in statistics,” he said.

Rybakova admitted that the quality of inventory statistics provided by Rosstat is very poor. However, she said that “the magnitude of the production collapse in the first quarter of 2009 is hard to explain by any other factor. It was more severe than in 1998. However, restocking won’t be a panacea to cure the economy,” she added. “Instead, we are seeing an adjustment down to a new production level, meaning inventory will never return to pre-crisis levels.” Rybakova believes that restocking could add one to three percent to annual GDP growth, but not before 2010. Instead, the consumer demand will pull Russia back up, if it strengthens. Salnikov also prefers demand as a growth factor – but tips deferred demand for investment goods instead of consumers.

With the government still holding out for growth driven by an end to destocking, skeptical voices are growing stronger. The Finance Ministry’s forecast for August was for 1.5 percent growth, but the result disappointed at zero percent. Electricity consumption statistics, a proxy for the industry, show demand still contracting.

Timothy Ash of the Royal Bank of Scotland is consequently dismissive about the talk of growth. “Brokers seem to be jumping over themselves at the moment to talk up the Russia story, that recovery has begun, and that Russia will bounce back quickly. While favorable base period effects should come into play in the final few months of the year, the data flow is far from convincing,” he said.
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