Russian Drought, Heat Wave May Boost State Role in Economy, Alfa Bank Says

Russia’s record heat wave and worst drought in 50 years may make economic growth more reliant on state support as factories suspend production and consumer demand slows, Alfa Bank’s chief economist said.

“We might not see a negative effect in terms of end-of- year growth figures,” Natalia Orlova said by telephone in Moscow today. “But a negative change in the structure of the economy will be obvious.”

The importance of government stimulus, such as financing to help people rebuild homes destroyed by fires that have scorched 667,460 hectares (2,577 square miles) so far this year, will increase relative to consumer demand as a driver of economic expansion, Orlova said. Alfa, Russia’s largest private bank, forecasts growth of 5 percent this year, one point higher than the government estimate.

The government has pledged 5 billion rubles ($165.7 million) to rebuild homes destroyed in the fires and may spend more, in addition to paying 200,000 rubles to people who lost property, Prime Minister Vladimir Putin said on Aug. 2. Non- working pensioners affected by the blazes will receive 25,000 rubles from the Russian Pension Fund.

Putin today said about 2,000 houses have been destroyed by fires so far this year and about 4,000 people left homeless, RIA Novosti reported from Voronezh. Wildfires are raging in 17 Russian regions, and a state of emergency has been declared in seven. Forty-eight people have died.

Service Slowdown

The drought and heat have hit agriculture hardest, forcing the government to declare a state of emergency in 27 crop- producing regions. Agriculture accounts for approximately 4 percent of Russia’s gross domestic product, according to Moscow- based VTB Capital.

Expansion of service industries from hotels to supermarkets slowed in July in part because of the heat wave, VTB Capital said. The Purchasing Managers’ Index was at 54.2 last month, compared with 55.4 in June, VTB Capital said in an e-mailed statement today. The index, based on a survey of about 300 purchasing managers, shows expansion with a reading above 50.

Sales at Le Pain Quotidien, a Belgian bakery-café chain in Moscow, saw sales drop 25 percent last week, according to Ian Zilberkweit, the company’s Russia chief. “Everyone is staying in, hiding from the smog and the brutal heat and this adds to the fact that many have left for their summer vacations,” he said by e-mail.

Threat to Crops

Industrial output may also suffer in July and August from extreme weather, especially as major automakers temporarily halt production, according to VTB Capital.

OAO AvtoVAZ, the nation’s largest automaker, suspended production through Aug. 8 because of extreme heat in Togliatti, southern Russia.

Russia’s drought, which drove wheat prices to the biggest jump since 1973, will continue this month and threaten more crops and winter-grain sowings, according to the state weather service. Rainfall last month in central Russia and along the Volga River, the areas hardest hit by fires, was 10 percent to 30 percent of the long-term average, the center said.

Temperatures in most parts of central Russia will be 8 degrees Celsius above average through Aug. 12, rising as high as 42 degrees Celsius (108 degrees Fahrenheit), according to the state weather service. “High” or “extreme” fire danger will persist in the central and Volga federal regions, where most wildfires are burning, at least to Aug. 5, the service said.

Inflation Slows

“At this stage, it is unclear what the impact on aggregate agricultural output will be and how this might affect food prices,” Evgeny Gavrilenkov and Anton Stroutchenevski, economists at Troika Dialog in Moscow, said on Aug. 2. “Inflation expectations are high, opinion polls suggesting that more than 70 percent of Russians expect prices to rise.”

Inflation decelerated to an annual 5.5 percent in July, the lowest level on record, according to the Federal Statistics Service. The government sees inflation reaching between 6 and 7 percent at year-end.

VTB Capital forecasts annual inflation of 7.6 percent this year. Deutsche Bank AG’s Yaroslav Lissovolik estimates inflation may quicken to 8.1 percent by year-end.

Alfa’s Orlova estimates a jump in global grain prices will contribute 1.7 percentage points to the current inflation rate. Higher inflation is set to eat into the rate of real wage growth, which means lower consumer demand, she said.

“If inflation indeed accelerates, then rate hikes can be expected,” Troika said, adding that it’s not “certain” that price-growth will accelerate “to a level at which rate increases become unavoidable.”

Federal Antimonopoly Chief Igor Artemyev ordered his agency to monitor prices more closely to avoid “unwarranted” increases in the cost of food during the drought, according to a statement on the FAS website yesterday.

To contact the reporters on this story: Maria Levitov in Moscow at mlevitov@bloomberg.net

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