STRONG CONSUMER DEMAND PROPELLING RUSSIA’S INDUSTRIAL RECOVERY…

Although the pace of industrial production moderated somewhat in July, according to the state statistical committee Goskomstat, the year-on-year results in February through June have taken most economists by surprise. Industrial growth has been boosted by domestic demand, while export performance has been better than anticipated in light of slowing economic growth worldwide and the ruble’s continued strengthening, which has had an adverse effect on the competitiveness of Russian exporters. For the first seven months of this year, gross industrial output registered a 5.5 percent increase. Aggregate exports increased 5.9 percent in the first half of 2001, up from the 5.0 percent for the first quarter but still only a fraction of the 39.5 percent export growth attained for all of last year, when prices of energy exports soared and exports of Russian manufacturers benefited from a weaker ruble. Output of fuels increased by 6.0 percent year-on-year in the first seven months of 2001.

As real wages and incomes rose solidly, real retail trade turnover was up by more than 10 percent year-on-year in the first seven months. Soaring dollar and euro wages and incomes provided for sharp increases in the purchasing power of Russian consumers for imported products. The ruble strengthened against the dollar in July 2001 by 11.9 percent year-on-year in terms of the real effective exchange rate, that is, when corrected for the differential in rates of inflation for the two currencies. The appreciation of the ruble against the euro was even more dramatic over the period: 15.1 percent in real effective terms. As a result, imports of a variety of consumer items from outside the CIS were up sharply year-on-year in July. For example, imports of textiles and shoes from outside the CIS increased 52.8 percent, while imports of food and raw materials for food rose 62.8 percent (Goskomstat, August 2001).

Despite stiffening competition from imports, it is notable that domestic consumer goods producers were able to expand production. Substantial increases in output in July took place in food processing and light industry, sectors largely producing for domestic consumers. In fact, industrial branches producing primarily for the domestic market have been setting the pace for the recovery of Russian industry this year, with better than anticipated performances in almost all consumer goods branches.

…WHILE STRONG INVESTMENT DEMAND HELPS BOOST OUTPUT OF CAPITAL GOODS.