Russian Industrial Production Shrinks Most Since 1998 Collapse

Russian Industrial Production Shrinks Most Since 1998 Collapse


Dec. 16 (Bloomberg) -- Russian industrial production shrank the most since the economic collapse of 1998 in November as the global slowdown reduced demand for steel, pipes and fertilizers and pushed the nation to the brink of recession.

Output contracted an annual 8.7 percent after growing 0.6 percent in October, the Moscow-based Federal Statistics Service said. Production shrank for the first time since new methodology was introduced in 2003 and posted the biggest decline since 1998, when the government defaulted on $40 billion in debt, according to Vladimir Osakovsky, chief economist at UniCredit Bank.

Russia’s economy will sink into recession in the first three quarters next year, Barclay’s Capital said on Dec. 10, after the global financial crisis shattered the economic growth outlook for emerging markets. Global trade will go into reverse for the first time in 25 years next year, the World Bank predicted on Dec. 9.

“This was triggered by the production cuts in the steel sector and this affected other, related areas: steel products and mining,” Osakovsky said before the numbers were officially released today. The Interfax news service reported the same numbers yesterday, citing an unidentified government official.

The contraction was almost five times sharper than the median forecast of 12 economists surveyed by Bloomberg for a drop of 1.8 percent. Production fell a monthly 10.8 percent compared to growth of 2.8 percent in the previous month.

‘Systemic Contraction’

“In conditions of a global economic crisis, this systemic contraction in demand will, of course, affect Russia,” Finance Minister Alexei Kudrin said yesterday.

Manufacturing fell an annual 10.3 percent compared with growth of 0.3 percent in October, as steel pipe production dropped an annual 36.9 percent and coking coal output fell 38.7 percent, the service said. Truck and car production dropped 58.1 percent and 7.2 percent respectively.

OAO Severstal, Russia’s largest steelmaker, cut output by half and plans to reduce spending 20 percent in 2009 as Japan and Europe enter a recession and the U.S. suffers the worst slump since the Great Depression. The steelmaker, also the fourth- largest producer in the U.S., will delay $8 billion of investments planned for 2009 to 2011.

Ford Motor Co. said on Dec. 8 it will close its factory near St. Petersburg between Dec. 24 and Jan. 21 to reduce output amid falling demand. Ford, the first international carmaker to produce in Russia since the fall of the Soviet Union in 1991, will pay affected workers two-thirds of their salaries, the company said.

Sales, Layoffs

Fertilizer output fell by an annual 51.6 percent as OAO Uralkali, Russia’s second-largest potash producer, cut output in half and lowered its forecast for fertilizer sales in the fourth quarter.

Chelyabinsk Pipe Works and Pervouralsky Novotrubny Works, the Russian pipe producers controlled by billionaire Andrei Komarov’s ChTPZ Group, may cut as much as 25 percent of their workers next year as demand slows, the companies said last month. ChTPZ may cut nearly 5,000 jobs in total at the two companies.

“I’m still hoping that we won’t have mass unemployment,” Prime Minister Vladimir Putin said in a nationwide call-in show this month. “Although looking at the labor market, we can of course expect more people to lose their jobs for some time.”

Unemployment will rise by 10 percent to 11 percent in Russia next year, from 6.1 percent currently, according to a report by VTB Capital.

The central bank devalued the ruble twice in a week after policy makers spent $161 billion of reserves trying to defend the currency. Russia has drained 27 percent of its reserves, the world’s third-largest, trying to stem a 16 percent decline in the currency against the dollar since August as investors pulled $211 billion out of the country, BNP Paribas SA estimates.

Crisis Measures

The price of oil, Russia’s key export, has fallen 69 percent and Standard & Poor’s cut its credit rating on Russia for the first time in nine years last week.

Putin yesterday pledged that 1,500 companies would be eligible for state support as the crisis intensifies. The state may buy equity stakes in key companies, restructure tax debts and provide loans and guarantees, Putin said.

Kudrin said yesterday that the government has drawn up a list of about 300 companies, accounting for about 85 percent of gross domestic product that employ more than 4,000 people, and whose output is valued at more than about 16 billion rubles a year, that will get special consideration if they apply for financial help.

As industry shrinks, the nation’s consumer boom is set to stumble, said Nikolai Kashcheev of MDM bank in Moscow. Wage arrears jumped 33 percent in October.

‘Less Pleasant’

“I’m not sure retail trade will be able to hold GDP back from general recession,” he said. While sectors including home repair, restaurants and tourism remain buoyant, “the situation in the first quarter next year will be much less pleasant,” Kascheev said.

Mining and quarrying contracted an annual 1.6 percent in November and 5.8 percent in the month, the statistics service said. Electricity, gas and water output shrank 9.3 percent in November compared with growth of 2.6 percent in the previous month.

Total industrial production increased an annual 3.7 percent in the year through November.

BLOOMBERG