Russian Investment Unexpectedly Falls on Weakening Growth

Russian investment unexpectedly contracted in December from a year earlier, dropping for the second time in four months, as the dimming economic outlook prompted businesses to cut back spending.

Fixed-capital investment fell 0.7 percent in December, the biggest drop since January 2011, the Federal Statistics Service in Moscow said in a report today. Economists estimated an increase of 0.8 percent, according to the median of 14 estimates in a Bloomberg survey. For the year, investment advanced 6.7 percent from 2011.

Less spending is compounding the effects of weak external demand in choking the economy of the world’s largest energy exporter. Real wages grew at the slowest pace in more than three years, suggesting the consumer spending that accounts for about half of Russian gross domestic output may be stumbling.

“It looks like Russian business, especially the private sector, isn’t ready to invest a lot, and that’s very important for longer-term growth,” Evgeny Nadorshin, chief economist at AFK Sistema, a Russian investment company with assets ranging from telecommunications to oil, said by phone. “These numbers definitely confirm that the Russian economy has been decelerating and probably still is.”

The Micex Index of 50 stocks maintained gains and closed up 0.7 percent at 1,544.02, the highest close since April 3. The gauge has advanced 4.7 percent this year, compared with a 1.2 percent advance for the MSCI Emerging Markets Index.

Economy Slumps

Economic growth slowed to 2.4 percent in the fourth quarter compared with the same period a year earlier, the weakest pace since the start of a recovery in 2010, according to the median estimate of 15 economists in a Bloomberg survey. Industrial output slowed in December to the weakest pace in eight months, the service said earlier this week.

Russia wants to maintain economic growth at a stable 5 percent, Prime Minister Dmitry Medvedev said in a speech last week. President Vladimir Putin ordered the government in May to boost investment to 25 percent of annual economic output by 2015, up from 21 percent in 2011.

“We have not seen any significant attempts from the government to start new investments, and business is not keen to invest,” said Vladimir Miklashevsky, an economist at Danske Bank A/S in Helsinki.

Unemployment Falls

Unemployment unexpectedly slowed to 5.3 percent, just above the record-low 5.2 percent seen in August and September, the service said. Economists forecast an increase to 5.6 percent, according to the median of 13 estimates in a Bloomberg survey.

The improving jobless rate amid a weakening economy “drives me crazy,” Ariel Chernyy, an analyst at Allianz Rosno Asset Management in Moscow, said by e-mail. The trend raises questions about the reliability of the service’s unemployment data, he said.

Real wages, which strip out the effects of inflation, rose 0.3 percent in December compared with a year earlier, the service said. Economists forecast an increase of 6.8 percent, according a Bloomberg survey. For the full year, wages grew 7.8 percent, according to the report.

Even so, retail sales unexpectedly quickened, advancing 5 percent in December, the fastest pace in five months, the service said. Sales were forecast to rise 4.3 percent, according to the median of 15 estimates in a Bloomberg survey.

Encouraging Data

“Stronger-than-expected data on the labor market and retail sales looks encouraging,” Dmitry Polevoy, chief economist for Russia at ING Groep NV in Moscow, said in an e-mail. Still, the pace may not be maintained because of “nearly stagnating real-wage growth, moderating lending dynamics, around 7 percent headline inflation and a high base effect.”

The central bank is resisting calls to cut interest rates, sparking a “huge argument” with the government over priorities, First Deputy Prime Minister Igor Shuvalov said in a Jan. 18 interview. The government has been increasingly vocal in its debate with Bank Rossii, with Finance Minister Anton Siluanov and Deputy Economy Minister Andrei Klepach arguing for easier credit last week.

‘Counterproductive’ Easing

Relaxing monetary policy with lower rates would be “counterproductive” and “likely to produce new imbalances, new risks for different segments of the economy,” central bank First Deputy Chairman Alexei Ulyukayev said Jan. 16 in comments at the same economic forum where Siluanov and Klepach spoke.

With inflation above the central bank’s “still high” target range of 5 percent to 6 percent, there is little scope to boost growth through easing credit, said Alexander Morozov, chief economist for Russia at HSBC Holdings Plc in Moscow. Fiscal or monetary stimulus may undermine potential growth rates over the medium term, he said in a research note today.

“The only policy response that can and should be employed in this environment is economic liberalization, business climate improvement, and structural reforms,” Morozov said.