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. Last Updated: 07/27/2016

Manufacturing Boom Ends, Economy Slows

MTA woman raising the value of the ruble at an exchange point downtown Wednesday.
Manufacturing contracted in November for the first time in six years, the latest sign that contradictory government policies and waning business confidence could be undermining the longest boom since the fall of the Soviet Union.

Moscow Narodny Bank's Purchasing Managers Index published Wednesday showed manufacturing slowed for the first time since November 1998 as prices for materials and energy rose and capital became harder to attract.

The index fell to 49.8 from 51.5 in October, the fifth straight month of decline. A reading above 50 indicates growth, below 50 contraction.

Wednesday's manufacturing figures were just the latest in a string of indicators showing evidence of a slowdown. Economic Development and Trade Minister German Gref told lawmakers Wednesday that his ministry had pared its forecast for economic growth this year to 6.8 percent from 6.9 percent. The economy grew 7.3 percent last year.

Gref said investment in oil production, the engine of the economy, has plummeted this year, slowing output growth.

"The economy is clearly still adjusting to the worsening investment climate, the result of errors in economic policy this year that presented Russia with a banking crisis, an escalation of the Yukos affair, growth in oil sector taxation and an unclear economic strategy," Troika Dialog said in its monthly overview of the economy. The investment bank said growth would slow even further this year, to 6.4 percent.

Gross domestic product has more than doubled in nominal dollar terms since 1999, while high prices for oil, gas and metals have driven a massive turnaround in state finances, with record foreign currency reserves and five straight years of budget surpluses.

But now many economists -- including Gref -- say the government's behavior is threatening to undermine the best external conditions the country has seen in decades. In the past year, confidence has been hit by mixed signals from the Kremlin, the summer banking crisis, stalled reforms and fears of further attacks on big business after the hammering of Yukos, Russia's top oil producer.

"We have been sending conflicting signals from the beginning of this year," Gref told deputies, adding that previously the government had sought to free up the economy. "But the signals that came after this have brought tensions to the relationship between business and the authorities. We have seen a pause of some kind, and in fact, the pause continues."

Gref warned lawmakers about the growing influence of the state in the economy, particularly Gazprom, the national gas monopoly that plans to bid for Yukos' main production unit later this month. He added that imports have been growing faster than domestic production as consumers choose foreign goods. Rising prices for goods and energy, according to Moscow Narodny Bank, are hitting domestic producers.

The competitive advantage Russian exporters gained from the ruble devaluation in 1998 is all but gone. The currency, which has gained 4.5 percent against the dollar since October, hit a fresh four-year high Wednesday, breaking through 28.

"There were again widespread reports of difficulties in accessing working capital in the latest survey period, which was closely linked by a number of panelists to the effects of sharply rising input costs," Paul Timmons, an economist at Moscow Narodny Bank, said in a statement.

While domestic companies are facing higher costs, oil companies have scaled back investments in production as oil export growth is constrained by a lack of capacity in pipelines.

Gref said investments in oil production dropped 20 percent in the first 9 months, cutting oil output growth from 9.8 percent in June to 7 percent in October, RIA-Novosti reported. Energy and metals make up 75 percent of the country's exports, according to the Economic Development and Trade Ministry.

Deputy Finance Minister Sergei Shatalov said the tax burden on oil and gas companies may be eased next year to allow higher investment in production.

"We understand that in the oil sector a situation has developed where under such high world oil prices, additional taxes paid by oil companies are so high that they take practically all the profits that they earn from these high prices," Shatalov said.

Shatalov said export duties could be lowered in January or February to help the situation, but no decision has been made yet.