The country’s unemployment rate rose to a seven-month high, and retail sales grew at their weakest annual pace in more than two years in October, with analysts saying that Friday’s data was a harbinger of much worse to come. Russian companies have started cutting production, jobs and salaries as the global slowdown crimps demand, falling energy and commodity prices eat into profits in the economy’s dominant sectors and the credit crunch makes it virtually impossible to attract funding from abroad.
“October is the first month when we see the hit of the crisis. … It is the very tip of the iceberg,” said Elina Rybakova, chief Russia economist at Citibank. “It will get much worse from here.”
Companies reduced capital investment by 1.9 percent in October, the monthly report from the Federal Statistics Service showed. The jobless rate rose to 6.1 percent with 4.6 million people unemployed — the highest number since March. Retail sales grew just 12.3 percent in October, their slowest annual pace since May 2006 and undershooting a consensus forecast of 13.8 percent, while housing completions slumped 19 percent during the month. “It seems that the first reaction in September, when people — faced with concerns about the global crisis and fears of a ruble devaluation — rushed to buy goods, has passed. Now, we are entering a period of slowing sales growth,” said Alexander Morozov, chief economist for Russia and CIS at HSBC.
During October, X5 Group, the country’s top food retailer, said it would lay off up to one-third of its managerial workers, and Renaissance Group announced 100 job cuts. Magnitogorsk Iron & Steel Works said it is considering shedding 3,000 jobs at the country’s largest steel plant, while truck maker KamAZ shortened its working week. Job cut announcements have continued in November, with a survey from Levada Center this week showing that 21 percent of respondents or their families have already experienced delays in salary payments and 17 percent are reporting wage cuts.
Data earlier this week showed wage arrears rising to their highest level in a year in October, while annual industrial output growth was revised down to just 0.6 percent, the lowest since mid-2002. Politicians are waking up to the fact that the country’s natural resource wealth and $450 billion reserves stockpile do not make it invincible in the face of world economic problems. Analysts say growth prospects for next year hinge on the resilience of the domestic consumer sector, the speed of the global economic recovery and, above all, on the price of oil, which has already fallen below half of the $95 a barrel factored into next year’s budget. Goldman Sachs forecasts that the Russian economy will grow 6.2 percent this year. Next year, it sees growth of 4 percent as long as oil averages $85 and stagnation if it averages $50.
The MT reports more bad news, exemplifying the loss of jobs, namely the shutdown of a major construction project:
Construction of the Russia Tower, a 600-meter-tall steel-and-glass symbol of new Russian wealth and power designed by Norman Foster to be Europe’s tallest building, has been halted for lack of funding, its developer said Friday. “Say thanks to Alan Greenspan and George Bush,” oil and real estate magnate Shalva Chigirinsky said.
The end of the era of cheap global credit orchestrated by former U.S. Federal Reserve Chairman Alan Greenspan has hit the country’s developers hard, and many have frozen all but a few key projects. Chigirinsky’s comments appeared to take Foster’s London-based firm by surprise. “The project isn’t on hold as far as we are concerned,” a spokeswoman said in an e-mailed comment.
Russia’s answer to London’s Canary Wharf or La Defense in Paris, the Russia Tower was to crown Moskva-City, a skyscraper development that rises from an old industrial site surrounded by a highway, a railway and the Moscow River, surrounded by cargo yards and Soviet-era apartment blocks. Chigirinsky enlisted Foster, architect of the London Swiss Re building popularly known as the Gherkin, as he was garnering a huge following in the former Soviet Union. Foster + Partners’ web site describes it as the tallest naturally ventilated tower in the world, with 118 occupied floors, and one of the greenest new buildings in Europe. It calls the project an “investigation into the nature of the tall building” like Foster’s Tokyo Millennium Tower.
The first stone was laid in 2007, and the tower was due for completion in 2012. It now shares the fate of U2 Tower, planned for Dublin’s Docklands as Ireland’s tallest building by a consortium of Foster and the Irish rock band. Negotiations on U2 Tower were suspended for 12 months because of financial market uncertainty. The glitzy new Russian commercial district was to give rise to a new international financial center, a dream of President Dmitry Medvedev’s administration.
Earlier this month, one of the anchors of the project, VTB, announced that it would put off its move into the Federation Tower, the second-largest building in the development, to keep costs down. Mirax, developer of the Federation Tower, which like the Russia Tower is a multiuse building with offices and apartments, said last month that resilient demand for high-end real estate would soak up its $5 million apartments with interiors by Giorgio Armani. Chigirinsky, born in Georgia and ranked last spring by Forbes among the country’s richest people with a fortune of $1.6 billion, said he could not predict the future of real estate and the resilience of wealthy Russians’ spending power. “Even if we had funds [to complete the building], we still wouldn’t know what to do with it,” he said.
Foster has designed two more Chigirinsky projects: the Zaryadye cultural, residential and business center to replace the Hotel Rossiya and New Holland Island, a stadium complex on an artificial island in St. Petersburg’s Neva River delta.
Chigirinsky did not give the status of those projects.
And Bloomberg offers still more vividly depressing evidence of the apocalypse and its collateral damage:
While Russia’s oligarchs have lost hundreds of billions of dollars in the global financial crisis, a less-noticed threat to the nation’s economy comes from 24-year-old Georgy Mironov.
Mironov was let go from his managerial position at a Moscow advertising agency last month as business declined, helping push the jobless rate to 6.1 percent in October. Job cuts are a recent phenomenon in a country where average wages rose sixfold and unemployment fell in the past nine years, while growth averaged 7 percent.
“There’s no telling what tomorrow will bring,” Mironov said. “The market is filled with people looking for work.”
The unemployment rise, announced last week, is the latest blow to Prime Minister Vladimir Putin’s plan to expand the middle class and make the economy, currently the world’s 10th largest, one of the top five by 2020.
“A spike in unemployment will be the dominant trend of the next six months,” said Konstantin Kosachyov, head of the lower house of parliament’s international affairs committee. Russia can’t allow “crashes, defaults or other shakeups, which would yet again knock the nascent middle class flat on its back.”
Almost half of Russians worry they will be unemployed in the next three months, a survey published on Nov. 6 by state-run pollster VTsIOM showed.
Higher wages and expanding employment sent ordinary Russians to shopping malls that sprang up during the recovery from the 1998 debt default and ruble devaluation. Shoppers packed Inditex SA’s Zara stores and Benetton Group SpA’s outlets, stormed new Ikea stores — often at malls with ice-skating rinks — lined up at Metro AG and Groupe Auchan SA supermarkets and renovated their apartments.
Retail sales, fed by rising consumer borrowing, increased at an average annual rate of about 13 percent. Loans to individuals rose 58 percent last year, reaching 2.97 trillion rubles ($110 billion) on Jan.1.
Putin’s economic-growth plan, announced in June 2007 when he was president, anticipated that the ranks of the middle class would swell and the average monthly wage would exceed $2,000 from the current $660. Putin sounded less optimistic last week.
“What began as a financial crisis became an economic one before our eyes,” Putin said at the Nov. 20 congress of his United Russia party in Moscow. “In the current situation, we must be prepared for structural changes in the labor market.”
The global financial turmoil and ensuing slowdown have sent the Micex stock index down 61 percent since Aug. 1, while the ruble weakened 17 percent against the dollar. The price of Urals crude, Russia’s biggest export earner, has fallen 67 percent since this year’s July 3 high to $46.47 a barrel on Nov. 26.
Growth may slow to 3 percent in 2009 from about 7 percent this year, according to President Dmitry Medvedev’s economic aide, Arkady Dvorkovich. The jobless rate may rise to 6.5 percent next year from an estimated 6.2 percent at the end of 2008, according to the median forecast of six economists surveyed by Bloomberg.
“Unemployment will take a bite out of consumption, the biggest contributor to growth,” said Elina Ribakova, chief economist at Citigroup Inc. in Moscow. Consumer spending contributes about 60 percent to gross domestic product.
Anna Muravina, 40, owner of Moscow-based interior-design firm MuGu-Interiors, said some of her clients have frozen projects and stopped paying for items they’ve ordered.
‘State of Shock’
“They are in a state of shock because they don’t know what will happen next,” she said. Several contracts the company was about to sign with new clients have fallen apart in the last two months, Muravina said.
“It’s obvious that we won’t see the high levels of consumption growth we’ve been seeing,” said Alexander Morozov, chief economist at HSBC Bank in Moscow. Unemployment benefits are so small they will do little for consumer spending, he said.
The government will boost the maximum monthly jobless payment to 4,900 rubles ($177.19) next year, an increase of 1,500 rubles, Putin said on Nov. 20.
Lawmakers are urging companies to minimize the damage.
“No one has lifted the responsibility for the stability of our society from the shoulders of employers,” said Boris Gryzlov, speaker of the lower house of parliament. “Our entrepreneurs shouldn’t be troubled by the problem of choice. They simply don’t have one. Job creation and the well-being of their workers are the path that will lead them through the crisis.”
Such advice isn’t resonating with brokerages, steelmakers and the retail industry, where service companies contracted in October for the first time in more than seven years.
Troika Dialog, Russia’s oldest investment bank, X5 Retail Group NV, Russia’s largest food retailer, and OOO Evroset, the largest mobile-phone retailer, plan to cut jobs. OAO Magnitogorsk Iron & Steel, the third-largest Russian steel company, and OAO Razgulay Group, a Russian grain and sugar producer, will also shed staff and said they may decrease wages for some remaining workers.
Just seven months ago, Economy Minister Elvira Nabiullina was warning that labor was “overvalued.”
“Candidates ruled the roost, now it’s a company-hiring market,” said Teri Lindeberg, chief executive officer of Staffwell, a Moscow-based recruiting agency. “Employers are going to take the opportunity to scale back and cut people on probation, poor to average performers, employees who aren’t justifying their over-inflated packages.”
About 1,070 Russian companies have announced plans to cut an estimated 45,000 jobs this year, the government’s official newspaper, Rossiyskaya Gazeta, said on Nov. 14. The budget next year assumes 1.6 million Russians will register for unemployment benefits, compared with 1.25 million this year.
“The middle class will be greatly affected, but so will the low-income individuals employed in construction, retail and other industries,” HSBC’s Morozov said. “There will be social consequences. The longer it takes to find a way out of the current situation, the more severe they may become.”