Economic Growth Seen Slowing Down

Russia's economy will grow at a slower rate in the second half of the year because of higher borrowing rates in the wake of the conflict with Georgia and a slowdown in the construction industry, Alfa Bank said Thursday.

Interbank lending rates jumped as high as 10 percent as $7 billion left the country after Russia sent tanks into Georgia on Aug. 8. The government's pricing investigation of Mechel reminded investors of the state's assault on Yukos five years ago.

"The conflict with Georgia and the nervousness created by the government's criticism of Mechel have substantially damaged the [second half] economic outlook," Alfa's chief economist, Natalya Orlova, wrote in a note to investors. Those concerns justified Alfa's "conservative" forecast of 7.5 percent growth for the year, she said.

The Economic Development Ministry predicts growth of 7.8 percent in 2008.

The country's banking industry is already experiencing a liquidity shortage, with about 1.1 trillion rubles ($45.2 billion) of tax payments looming in October, Orlova said.

"The flight from the ruble, which occurred at the beginning of the conflict with Georgia, damaged local liquidity," she said.

If capital inflow isn't reestablished in September, the Central Bank could even be forced to reverse the hike in mandatory reserve requirements for lenders, she said.