Russian Stimulus Need Builds on Surprise Manufacturing Decline

Russian manufacturing unexpectedly shrank in July, putting pressure on policy makers to stimulate growth to reduce the risk of the world’s biggest energy exporter’s economy sliding into recession.

The HSBC Russia Manufacturing Purchasing Managers’ Index fell to 49.2 from a four-month high of 51.7 in June, the first contraction in almost two years, HSBC Holdings Plc. said, citing data compiled by London-based Markit Economics. That compared with the 50.9 median estimate of three economists in a Bloomberg survey.

The surprise drop is the latest sign that the economy is struggling to pick up pace, heightening pressure on newly installed central bank Chairman Elvira Nabiullina to widen monetary easing as inflation slows. That would supplement measures adopted last week by President Vladimir Putin’s administration to revive the economy.

“If you look at Russia’s rates, they are almost the highest in the emerging world,” Vladimir Miklashevsky, a trading desk strategist at Danske Bank A/S in Helsinki, said in a phone interview today. “Russia has had less ‘blood,’ or vital money supply, in the veins of the economy. It needs sustainable monetary easing to stimulate the economy.”

The benchmark RTS stock index climbed 1.5 percent to 1,333.3 as of 4:54 p.m. in Moscow. The dollar-denominated gauge has retreated 13 percent this year, compared with a 10 percent drop in the MSCI Emerging Markets Index.

First Contraction

PMI readings below 50 indicate contraction. The gauge of conditions in the industry fell to the lowest since December 2009, marking the first contraction in almost two years, according to HSBC.

Economic growth decelerated to half of last year’s pace in the first six months. Gross domestic product expanded 1.7 percent in the first half, according to Economy Ministry estimates, from 3.4 percent in 2012.

Signs are emerging that the economy is operating below potential, meaning fiscal or monetary stimulus may help bolster output, Economy Minister Alexei Ulyukayev said at a cabinet meeting July 25.

Government measures to spur growth are aimed at making loans more readily available to small and medium-sized businesses and stimulating investment. They also include spending more from budget reserves on infrastructure projects such as a planned reconstruction of the Trans-Siberian Railroad.

Rates Held

The central bank refrained from cutting its main lending rates for a 10th month in July as inflation remained above this year’s target range of 5 percent to 6 percent. Policy makers will keep the overnight auction-based repurchase rate at 5.5 percent at their next meeting August 9, according to the median estimate of 14 economists in a Bloomberg survey.

While the inflation rate remains above this year’s target range of 5 percent to 6 percent, Nabiullina told Putin that policy makers “hope” it will fall to within the goal by year-end.

Slowing price growth may create scope for monetary easing later this year. The refinancing rate will fall to 8 percent by the end of the third quarter and to 7.75 percent by year-end from 8.25 percent, according to the median forecast of 16 and 19 economists, respectively.

“There seems to be a consensus among policy makers that the economy isn’t running at full potential and that creates room for monetary easing,” Vladimir Kolychev, head of research at Societe Generale SA’s Rosbank unit in Moscow, said in a phone interview today. There may be a need “for a less tight response from the fiscal side as well.”

Recession Chance

The decline in manufacturing production follows a surprise contraction in service industries in June, adding to evidence the Russian economy is slowing. The drop, combined with signs of a weakening labor market and slower inflation, suggests stimulus measures may help revive growth, according to HSBC.

There’s a 30 percent chance of a recession next year, up from 20 percent a month ago, according to the median estimate of 13 economists in a Bloomberg survey published July 25.

Rail cargo volumes tumbled 2.2 percent in July from a year earlier, state-run OAO Russian Railways said today in an e-mailed statement. The contraction will probably slow to 1.5 percent in August, Chief Executive Officer Vladimir Yakunin told reporters yesterday outside Moscow.

“This should move forward cuts in key policy rates in Russia,” Alexander Morozov, chief economist for Russia at HSBC, said in the PMI statement. “Output, new orders and employment –- all key PMI indexes –- marked significant falls to below the 50 point no-change mark in July.”

Before it's here, it's on the Bloomberg Terminal.