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Analysis & Opinion
29.06.11 Industrial Downturn
By Tai Adelaja

To comprehend why President Dmitry Medvedev’s modernization drive got off to such a slow start, one needs look no
further than the current state of the Russian industry. A large part of the country’s industrial production equipment is obsolete, according to a new study by the Center for Macroeconomic Research (CMR), the research arm of Sberbank. The report, which polled 698 industrial enterprises in 72 regions nationwide, cited sluggish expansion
potential and slow-paced structural reforms as some of the reasons behind the current deceleration in the nation’s industrial growth.

The study portrays Russia’s industrial base as completely outdated. About 60 percent of Russian companies said they would need to upgrade over the next three years to keep the existing equipment working, as well as maintain and tighten their grip on the domestic market. For many more, competition in foreign markets or even with foreign-made goods is completely out of reach and unachievable in the nearest future. Thirty-six percent said they have no plans to expand production within the next five years; 38 percent said they might expand on the domestic market, while 19 percent are eyeing “near-abroad” or CIS countries for expansion. Only nine percent of Russian firms see themselves expanding abroad as part of a long-term perspective.

Most Russian enterprises also remained domestic-oriented, in part as the only way to maintain a competitive edge in an increasingly competitive global market. Eighty-three percent of respondents say they could only sell their products in the domestic market, while 88 percent said Russia is their main supplier of raw materials and equipment. But, despite such a limited focus, many complained of cut-throat domestic competition. "The fact is that many products being made by the country's manufacturing enterprises are not marketable elsewhere," Nadezhda Ivanova, who co-authored the report, told Russia Profile. “The poor quality of those products simply renders them uncompetitive in international markets.” Ivanova dismissed the suggestion that orientation on the domestic market might be a conscious strategy by manufacturers to take advantage of high profit margins at home. “With the possible exception of steel and aluminum producers, there’s nothing to write home about in the quality of Russian-produced merchandize,” Ivanova said.

Russia inherited the bulk of existing industrial assets, including machine tools and railroad locomotives, after the
1991 collapse of the Soviet Union. Long before high oil and commodity prices softened the pace of industrial growth,
Russian heavy industries churned out important products such as vehicles, aircrafts, heavy machinery and precision
equipment, as well as heavy-duty nuclear power equipment. But despite the industrial sector receiving priority in terms of investment, labor and materials, growth has been sluggish, as most of the investment was later diverted to
ensure the flow of energy and raw materials.

Russia's industrial production experienced sluggish growth for the fourth month in a row in May, the weakest pace
since output began expanding in November 2009, figures from the Federal State Statistics Service (Rosstat) show.
Annual industrial production growth decelerated to 4.1 the same month, following a 4.5 percent increase in April,
Rosstat said. Manufacturing rose five percent in May from a year earlier, the smallest gain since November 2009,
compared with 5.3 percent in April, according to the statistics service. Output from mines, including oil and gas fields, grew an annual 2.1 percent last month from 1.4 percent in April.

Economic growth also slowed in the first quarter, with gross domestic product growing an annual 4.1 percent after gaining 4.5 percent in the previous quarter. President Dmitry Medvedev, who has made modernizing and diversifying the economy the centerpiece in his presidency, has been seeking to boost economic growth to ten percent within five years to match the pace of the fastest-growing developing economies. Medvedev would also like Russia to achieve the very high rates of growth that are more typical of other advanced economies. “I believe we should be thinking about developing the consumer market in general by creating good modern products, both consumer products and industrial products,” the Russian President told Bloomberg Television earlier this year. “And we should not go for gigantic projects only, like it was in the Soviet times, making just aircraft or rockets.”

But such prodding has had little effect on stimulating industrial production or turning around the country’s hard-to-reform industrial base. Despite oil-fuelled growth in the pre-crisis years, the nation's manufacturing sector remained largely undeveloped. More than two-thirds of the respondents in Sberbank’s survey consider the condition of their equipment as average or bad. Only 26 percent of enterprises underwent a complete overhaul of equipment in the past five years, while 30 percent said they did so the last time during the Soviet era.

Despite an uptick in demand for commodities, producer prices – an indicator of inflation – grew at a faster pace in May, and economists say this could further hamper investment and put Medvedev’s modernization goals at risk. Prices of goods leaving factories and mines jumped an annual 19.2 percent, growing for a 19th consecutive month, after a 20.2 percent advance a month earlier, Rosstat said. The median forecast of five economists surveyed by Bloomberg was for an increase of 19 percent. Factory-gate prices climbed 1.2 percent in May from the previous month after a two percent monthly rise in April, the service said.

The adoption of innovative technology, so crucial to president Medvedev’s modernization efforts, is also not a priority for most companies. Only ten percent of enterprises polled believe that innovative technology is crucial to their success, while 39 percent said they continue to rely on own in-house research and development efforts. In several other cases, technological innovation has been both slow and sluggish, as cumbersome restraints on research projects lead to deficiencies and decline in the country's share of machinery markets. The survey also revealed that
design limitations and lengthy project completion times have plagued industrial-base growth, causing investments to
be less productive.

Only one in every six enterprises said it invested in new technology in the past five years. One in four companies with foreign competitors made serious investment in technology, but only one in ten companies without foreign competitors considered investing in high-tech. More than half of all enterprises in woodworking, forestry and
construction materials industry never bothered to invest in production technology during the eight years of Vladimir
Putin's presidency between 2000 and 2008. However 17 percent of respondents said they will invest in foreign
technology over the next three years, while 18.6 percent said they would introduce domestic technological know-how
over the same period. Sixty percent said they plan to invest in new equipment, a plan economists say will bring no
fundamental changes to the country’s industrial base.
The source
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