A worker in Tagmet steel works, in Rostov-on-Don, on April 6, 2007.
Photo: Sergey Veniavsky
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Industrial Brute Strength
// Six-Month Growth of Production in Russia Comparable to Asian Tiger Economies
Rosstat has reported that industrial production in Russia grew by 10.9% in June, on top of a 7.7% increase in the first half of 2007, and the manufacturing sector grew by 15.6% and 12.2% in those two periods, respectively. Such blistering rates of growth, which are comparable to the so-called "Asian tiger" economies, have never before been recorded in Russia. To explain this increase in production, economists point to a rise in consumer and investor demand, especially at the beginning of an investment program being launched by UES. They also cautiously suggest that Russian industry is adapting successfully to the expensive ruble, largely thanks to the investment boom.
According to data published yesterday by the Russian governmental statistics agency, Rosstat, the Russian economy has set yet another record for growth. The growth rate of industrial production in June 2007 was 10.9%, the largest since August 2004. This is hardly an accident. For the first half of 2007, in comparison to the same period of 2006, the manufacturing index rose by an unusual 7.7%. Such six-month growth rates have not been seen in Russia for the entire period that Rosstat has been tracking the economy. Last year, production grew only half as fast: in comparison to data from 2005, production in 2006 increased by only 3.9%.
Monthly indicators have been surprising economists since the beginning of 2007, particularly since they are significantly higher than the official predications made by the Russian Trade and Economic Development Ministry (MERT). For 2007, the ministry predicted 4.3% growth, revised it to 4.7%, and then corrected it again to 5.2% after it became clear that investment in the Russian economy was growing faster than had been expected.
Other economists also did not guess at what the future would bring. Most of their predictions were either just slightly higher than those made by MERT, or they were on the level of predictions for 2006.
Deutsche UFG analyst Yaroslav Lisovolik emphasizes that such production growth is much more typical of the countries of Southeast Asia, the "Asian tigers," which have some of the highest production growth rates in the world. In China, for example, GDP is growing at more than 11%, and production growth exceeds 18%.
The most striking aspect of the Russian boom is in the manufacturing industry: in June, it grew by a record 15.6%, and it grew by 12.2% over the first half of 2007. On one hand, consistent growth is being shown by the production of various construction materials and similar products destined for investment: cement, bricks, reinforced concrete. On the other hand, import substitution is continuing on a "wide front": the production of meat, printed goods, and especially household appliances is strongly outstripping average growth indicators.
The highest growth rates were posted by steam and hydraulic turbines: between January and June 2007, they produced 1.1 and 0.9 million kW of energy, respectively, 1.9 and 2.7 times more than in the same period of 2006. Experts interviewed by Kommersant directly linked this jump with the beginning of the realization of a large-scale investment program in electrical energy. Alexander Morozov of HSBC mentions that "until 2007, such massive investment in the retrofitting of electrical energy [equipment] had not been done." A representative of UES explained to Kommersant that in 2007 the company plans to invest 520.5 billion rubles, although since "contracts are constantly being signed," it is unknown how much of that has already been spent.
Investment by players in the energy sector became apparent in the data on production on in June, but high indicators of industrial manufacturing have been being observed since the beginning of this year. As Kommersant has already mentioned several times and as all of the economists consulted yesterday emphasized, two main factors are evident. The first is consumer demand, which is based on increasing incomes and access to credit among the population. The second is an increase in investment demand, which is fueled both by government investment and by an influx of foreign capital.
However, economists are not rushing to correct their predictions for industrial growth for the whole of 2007. By way of an explanation, Alexander Morozov points to the "volatility of monthly figures": in 2006, for example, industrial growth in May was very rapid, but in June it slowed almost to zero. He is certain, however, that growth really will accelerate to a "very high" 6-7%. Vladimir Salnikov from TsMAKP says that it is difficult to predict growth, but he suggests that we can "hope for 6.5-7%," explaining that "the transportation and power engineering sectors are protected from imports."
For his part, Yaroslav Lisovolik remembers the doubts that accompanied the strengthening of the ruble and the worries that it might hurt the competitive capacity of Russian industry. In 2007 alone, for example, such fears have been voiced several times by President Vladimir Putin. Now these fears should been diminished: it turns out that Russian industry is successfully adapting to the expensive ruble.
Maxim Shishkin and Alexei Shapovalov
All the Article in Russian as of July 19, 2007
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