CAUSES OF SLOWDOWN: ENERGY SHORTFALLS, STRENGTHENING RUBLE AND BASE EFFECTS.

A number of factors seem responsible for Russia’s manufacturing slowdown. The energy sector may be cracking under the strain of supplying Russia’s energy-intensive manufacturers–many of whom pay for their electricity and fuel in barter, promissory notes or other monetary surrogates. Gazprom’s output of natural gas in May was 4 percent below its May 1999 level, while thermal energy produced during the first five months of 2000 was some 2 percent below January-May 1999 output. These pressures are also driving up energy prices: Year-on-year inflation rates for fuels and natural gas in April were 138 percent and 53 percent, respectively. By contrast, consumer price inflation is about 20 percent. In addition to these higher prices, Russian manufacturers are facing pressures from Gazprom and UES–Russia’s natural gas and electricity monopolies–to pay in cash rather than noncash surrogates. Gazprom in February had managed to collect 85 percent of its total receipts in cash, while UES’s share had risen to 53 percent. These shares were up from 53 and 22 percent, respectively, in February 1999. Energy-intensive industrial branches without a lot of political influence–like building materials and glass products–may be the first to feel the energy constraint. Output growth in the building materials branch had fallen to only 5 percent in May, while glass production last month was 1 percent below its May 1999 level.

A stronger ruble may also be slowing Russia’s output growth. The ruble remains much weaker than it was before the August 1998 financial crisis: When compared to producer price inflation trends, the ruble lost approximately half of its value between July 1998 and April 2000. But between January 1999 and April 2000, the ruble appreciated in real terms by more than 40 percent. Manufacturing branches like machine building (as well as building materials and glass products), which produce largely for the domestic market using domestically produced components, could be feeling the squeeze of the stronger ruble. After growing 13 percent in the first quarter of 2000, machine building slowed to only 6 percent in May.

Base effects are also slowing Russia’s reported industrial growth. Russian industry went into recession in May 1998, when the large government budget combined with panicking foreign investors caused the Central Bank of Russia to boost refinancing rates to 150 percent. These high rates diverted cash which could have financed output growth to the government bond market instead. Russia’s industrial recession during the second half of 1998 then lowered the basis for calculating growth in industrial output during the second half of 1999, thereby making it easier for Russian industry to report rapid production growth late last year. These base effects are now coming to an end. Because industrial output levels in the second half of 2000 will be compared to the high levels recorded after mid-1999, base effects will serve to reduce reported industrial growth rates going forward.

IS RUSSIA’S ECONOMIC RECOVERY PETERING OUT?