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Russia Industry Unexpectedly Shrinks in May as Gloom Spreads

June 18 (Bloomberg) -- Russian industrial production unexpectedly shrank for the first time in three months, putting pressure on policy makers to counter a downturn in foreign demand and weak domestic spending.

Output at factories, mines and utilities declined 1.4 percent in May from a year earlier after a 2.3 percent increase in April, the Federal Statistics Service in Moscow said today in an e-mailed statement. The median estimate of 22 economists in a Bloomberg survey was for a 0.6 percent increase.

Industry is grinding to a halt in a sign sluggish growth is extending into the second quarter after gross domestic product grew at the weakest pace in the first three months since a slump ended in 2009. While the International Monetary Fund warned today against the danger of stoking inflation with fiscal stimulus and the government remains split over policies to right the course of the economy, Finance Minister Anton Siluanov said last week that a weaker ruble may be used to revive growth.

“We expect more debates around economic acceleration and more pressure on the central bank and Finance Ministry to make policy more aggressive,” Julia Tsepliaeva, head of research for BNP Paribas in Moscow, said by e-mail. “The sectors oriented toward investment demand delivered the poorest results in May, which was not surprising as investment demand is souring. We do not expect their significant rebound in the coming months.”

Ruble Slump

The ruble weakened for a fourth month against the dollar in May, the longest stretch of monthly declines in three years, according to data compiled by Bloomberg. The Russian currency fell to 32.52 per dollar on June 11, the weakest level since Aug. 31, before rebounding to 32.0050 at 6:54 p.m. in Moscow.

Slowing global economic growth is sapping demand for Russia’s commodities exports, hurting valuations of steelmakers including Evraz Plc, the country’s biggest, which has plunged 55 percent this year in London while OAO Severstal has lost 42 percent.

Russian manufacturing dropped 4.4 percent from a year earlier in May for the biggest monthly decline this year, compared with a 1.2 advance in April, according to the statistics service. Mining grew 2.3 percent while production at utilities increased 0.5 percent.

Unexpected Drag

“The drag expectedly came from the manufacturing sector,” said Dmitry Polevoy, chief economist for Russia at ING Groep NV and the second-most accurate forecaster of Russian industrial output in the last two years based on data compiled by Bloomberg. “All this could reignite talks on central bank policy easing already at its July meeting.”

Bank Rossii kept is main rates on hold for a ninth month at a June 10 meeting, Sergey Ignatiev’s last as chairman. President Vladimir Putin’s chief economic aide, Elvira Nabiullina, will take over after Ignatiev steps down on June 24.

“May statistics will probably be among the weakest this year,” Vladimir Tikhomirov, chief economist at Otkritie Financial Corp. in Moscow, said by phone yesterday. There were three fewer working days in the month compared with a year ago “and it’s very significant for manufacturing,” he said.

GDP grew 1.6 percent in the first three months from a year earlier, decelerating for a fifth quarter and missing the medium-term target of 5 percent set by Prime Minister Dmitry Medvedev. Exports failed to grow in real terms for an eighth quarter, Economy Minister Andrei Belousov said last month.

Car Sales

Deteriorating domestic demand has taken a toll on carmakers, with sales of new vehicles dropping 12 percent in May from a year ago, according to the Association of European Businesses in Russia. That was the biggest drop since February 2010, according to data compiled by Bloomberg.

May’s data can be explained by the high base effect, with industry surging 3.7 percent in the year-earlier period, according to Polevoy.

Lower corporate incomes and profitability led to a “sharp” decrease in income-tax intake in May after four months of increases, Finance Minister Anton Siluanov said yesterday at a government meeting.

“There aren’t too many prospects for recovery,” Vladimir Osakovskiy, chief economist for Russia at Bank of America Corp. in Moscow, said by phone yesterday. “Export demand is stagnating and domestic demand is not really growing.”

To contact the reporter on this story: Olga Tanas in Moscow at otanas@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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