Russian drought to slow economic recovery

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Russia's worst drought on record will take a substantial chunk out of growth and increase inflation risks just as the economy manages a fragile recovery after recession, an official said Tuesday.

Deputy Economic Development Minister Andrei Klepach told reporters that the drought would cut at least 0.7-0.8 percentage points from 2010 growth, in the first official estimate of the cost of the disaster.

The drought has destroyed one quarter of Russia's crops, leading the government to slap a controversial blanket ban on grain exports earlier this month which caused commodity prices, especially wheat, to soar.

Klepach acknowledged that the drought would cause inflation to tick higher as the supply of key agricultural goods shrinks, a factor which could also affect consumer demand.

"The effect of the drought will be minus 0.4-0.5 percentage points as a direct effect and, as a whole, minus 0.7-0.8 percentage points, if not higher," Klepach said, according to Russian news agencies.

Russia saw record temperatures throughout July and early August which also sparked hundreds of wildfires that claimed over 50 lives and have only now been controlled.

He said the government was sticking with a forecast for growth of some four percent in 2010, adding that without the effects of the drought, it would have been higher at 4.4-4.7 percent.

Industrial production was expected to rise sharply higher than previously forecast at 7.6 percent, he added.

Klepach said there were risks that growth would be as low as 3.6-3.8 percent this year but the government was expecting a rebound later in the year which would bring growth up to four percent.

"Inflation risks as a result of the drought have grown considerably," Klepach warned, forecasting inflation of 0.5 percent for August.

He said inflation would now be higher than the previous estimate of 6.0-7.0 percent but would still be lower than the 2009 figure of 8.8 percent. Inflation in Russia has been on a steady decline in the last years and was 13.3 percent in 2008.

State statistics organisation Rosstat has said inflation for the week August 10-16 was 0.2 percent sequentially and 0.4 percent since the start of the month, considerably higher than the rate before the heatwave.

From August 10-16, prices of the staple Russian food buckwheat jumped 7.3 percent while flour was up 2.8 percent.

The Federal Anti-monopoly Service (FAS) says retail prices for bread in Russia could jump 10-15 percent in late August and early September following the record drought.

Anecdotal evidence has suggested mark-ups of up to 60 percent in the price of buckwheat and also sharp rises in milk and the authorities will be keen to keep any popular discontent on prices in check.

The grain export ban was justified in part by the need to ensure adequate supplies for Russia's own domestic market, thereby helping to keep price pressures in check.

Russia's hydrocarbon-dependent economy was hard hit by the global economic crisis, suffering a 7.9 percent contraction in 2009 after growth of 5.6 percent in 2008.

Recoveries in several of its debt-laden EU partners have been hit by austerity measures adopted to strengthen the public finances while Russia has returned to positive growth on the back of rising oil and other commodity prices.

However, the authorities have warned it will take years for Russia to recover its pre-crisis growth rates. Growth was 2.5 percent in July when compared with the same month a year earlier, Klepach noted.

© 2010 AFP

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