Industrial Output Shrinks by 10.8%

VedomostiKey sectors like manufacturing and construction contracted in November, raising fears of a severe economic slump.
Industrial output shrank 10.8 percent on the month in November while wage arrears doubled, data showed Tuesday, raising the specter of recession for the once-buoyant economy.

Many of Russia's biggest, export-focused firms have been forced to slash production as global demand drops and lower prices make some plants unprofitable.

These have included aluminum giant United Company RusAl and the world's top producer of nickel and palladium, Norilsk Nickel.

"[It was] so bad that I had to take a second hard look at the data to see if there wasn't a typo," Tim Ash, economist at RBS, said of the output data, adding that it "would suggest that the real economy may actually move into recession in 2009."

Recession has turned into a politically thorny issue in Russia, where economic growth has hovered around 7 percent for the past five years and contraction was last seen a decade ago.

Deputy Economy Minister Andrei Klepach this week became the first government official to acknowledge that the $1.3 trillion economy is shrinking, prompting denials from both Prime Minister Vladimir Putin and Finance Minister Alexei Kudrin.

Tuesday's data showed extraction of raw material contracting 5.8 percent on the month, as iron ore production halved.

Manufacturing shrank 15.3 percent in November, with sharp falls seen in fertilizers and a range of goods used in industry or construction, such as cement and metal-cutting machinery.

Year-on-year output shrank 8.7 percent, its steepest decline in a decade. The official data chimed in with the numbers leaked to Interfax on Monday and was in line with the Economic Development Ministry's forecast that production will grow just 1.9 percent for 2008 as a whole.

The manufacturing sector was also responsible for the bulk of the wage arrears — 40 percent of the total 7.8 billion rubles ($280.6 million). It was followed by transport, construction and agriculture.

In all, 600,000 people, or 2 percent of the work force, are affected by the wage arrears, which have doubled from October's 3.7 billion rubles to hit a near-three year high.

While demand for their goods slows, companies are also struggling to secure new funding and refinance existing debt in the face of the global credit crunch.

The vast majority of arrears were caused by a lack of own funds at the companies concerned, while around 5 percent were due to delayed payments from the federal or local budgets.

Last time Russia experienced a recession was a decade ago during the 1998 financial crisis, which saw a collapse of the banking sector and a sharp ruble devaluation.

Companies resorted to paying workers in goods, including wine, and by early 1999 wage arrears were $3.8 billion. Unpaid wages were a key reason for social unrest, and the repayment of arrears was an issue of Putin's 2000 presidential campaign.

Now the problem appears to be returning. In a Levada Center survey from in mid-November, 21 percent of respondents or their families had experienced delays in salary payments and 17 percent reported wage cuts.

"The swift shift in Russia's underlying fundamentals, from an economy that looked like it was poised to weather the global economic slump somewhat, to an economy that is experiencing a sharp deterioration in its broad based economy, points to very rough times going into the new year, more so than anticipated," BNP Paribas said in a research note.

Analysts said the weak data backed the case for continued weakening of the ruble, which has already witnessed six mini devaluations in the past five weeks.