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. Last Updated: 07/27/2016

Fradkov Urges Cash Support for Industry

The country should inject more cash into its industry, Prime Minister Mikhail Fradkov said Monday after second quarter economic growth data showed manufacturing was lagging behind services.

Growth in gross domestic product accelerated in the second quarter to an annual rate of 7.4 percent as construction and services boomed, putting the Cabinet on track to meet its annual GDP target of 6.6 percent.

However, manufacturing and raw materials extraction posted more modest growth, highlighting a dilemma in which the government has to choose between the strong ruble -- a powerful ally in a fight against inflation -- and domestic industry.

Fradkov told a Cabinet committee the time was ripe to increase state spending to boost industrial growth regardless of the efficiency.

"Macroeconomic stability and the opportunity to allocate additional funds allow us to take on the task of stimulating industrial production, without concentrating too much on the cost," Fradkov said.

Fradkov admitted the efficiency of state investments could be low but said Russia had other priorities.

"Diversification of our economy and moving away from our dependence on energy resources are much more important," Fradkov said.

The country earns $600 million per day from oil and gas exports.

Petrodollar inflows are forcing up the ruble's exchange rate, inflating prices for real estate and fueling an unprecedented consumer boom -- all factors driving growth.

"It is the secondary effects of the high oil price -- higher incomes create increased demand for services. If it weren't for services, we would have seen pretty bad [GDP growth] results," said Peter Westin, chief economist at MDM Bank.

Construction roared back to life in the spring quarter, posting year-on-year growth of 12.3 percent, up from just 1.6 percent in the first quarter.

Trade grew by 10.1 percent, transport and telecoms by 7.9 and real estate transactions by 8.9 percent, a breakdown of the official figures showed.

However, relatively little of the country's oil wealth trickles down into the real economy, which is suffering from underinvestment, poor infrastructure and corruption.

Growth in manufacturing and raw materials extraction was 7.1 and 3.5 percent respectively.

Economists said the economy, despite demand fueled by high oil prices, could struggle to maintain the higher pace of growth over the second half of the year. "It looks like a 7.4 percent growth rate is the maximum for this year. I believe that in the third quarter growth in the manufacturing sector will slow as a consequence of the strengthening ruble," said Yevgeny Nadorshin at Trust Bank.

The ruble has appreciated by over 4 percent against the currency basket of dollars and euros used as a guide by the Central Bank. It is up by 7.5 percent against the dollar.

The stronger ruble makes imports cheaper and reduces the need for the Central Bank to intervene by buying dollars, which oil companies bring into the country and convert into rubles to pay salaries and taxes.

Exporters, especially aluminum tycoon Oleg Deripaska, whose profits are dented by the rising ruble, have lobbied hard against further ruble appreciation.

Fradkov joined the chorus of industrialists attacking the Central Bank for not using weapons other than the ruble's exchange rate to fight inflation.

"This problem becomes worse when we fight inflation, not using all the available tools but concentrating on tools we have close to hand," Fradkov said.