Industrial output shortfall disturbs Russia’s bright economic future

Today’s Novaya Gazeta reports on the recently published data by the Russian Statistical Bureau, indicating that the industrial output grew by a mere 2.6 percent in 2012, which is less than the Ministry of Economy’s humble projection of 3.2 percent. What is more interesting is that the Russian Central Bank, known for its resistance towards loosening of the monetary policy, changed its views and does not exclude the possibility of changing its interest rates.

Industrial output grew by 1.4 percent year-on-year in December 2012, down from 1.9 percent in November and 2.5 percent in December 2011. Independent analysts confirm the negative tendency, stating that some sectors of industry still did not catch up to the pre-crisis levels – for example, manufacture of machinery and equipment in 2012 was 13.1 percent lower than before the 2008 crisis. On the other hand, oil and gas extraction, as well as production and supply of electricity and gas, surpassed their pre-crisis levels by 5.7 and 6.6 percent, respectively, thus lifting the overall industrial output to 2 percent above its pre-crisis level. However, such developments only increase Russia’s dependence on its oil and gas sectors. Industrial optimism index, developed and published by the Gaidar Institute for Economic Policy, fell to its three-year minimum in January 2013, indicating that it would be unrealistic to expect an increase in fixed capital investments in the immediate future.

Considering the recently published data on the Russian industrial output, it might be more than a coincidence that the Russian Central Bank changed its rigid attitude towards changes in monetary policy. Alexey Ulyukaev, Deputy President of the Central Bank, stated that the Central Bank allows the possibility of changing interest rates depending on the complex developments in the international environment. Only a week ago, Ulyukaev was quoted saying that the reduction of interest rates would be counterproductive and lead to increased risks in various sectors of the economy. At the same time, the Central Bank decided to keep its base refinancing rate at 8.25 percent (the history of Central Bank’s monetary measures can be found here. The Central Bank remained indifferent even to President Putin’s statement on the necessity to provide cheap long-term funds for the development of the economy. His request might have been contradictory in a sense that it called for a low inflation as well, which currently seems to be the main concern of the Central Bank. Ulyukaev stated that the year-on-year inflation at the beginning of 2013 could increase to 7 percent, higher than the desired target of around 6 percent. Analysts don’t expect the Central Bank to change its monetary policy anytime soon, as the risk of higher inflation currently outweighs the risk of an economic slowdown. With all this taken into account, Russian analysts expect that the industrial output will grow by about 1 percent in 2013.




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