Updated April 16, 2008

   Federal State Statistics Service (Rosstat) data about the industry state in January-March confirms the recovery of industrial production growth in Russia. It totaled 6,2% in annual terms in 1Q of 2008. The Russian industry grows due to the processing sectors, while oil production has been reducing in Russia. Some economists are convinced that stagnation in the oil industry is predetermined by tax and political pressure on oilmen, and the industry should be already supported by tax deductions and stimuli to deposits exploration.

   According to the Rosstat data published in March, 2008, the industry has upped by 6,5% as compared to March, 2007. "The result is very good, more than it has been expected", marks Vladimir Salnikov from the Center for Macroeconomic Analysis and Short-term Forecasting. The growth would have been higher, if it had not been the one working day as March, 2008 was one day shorter than last year. According to 1Q of 2008 results, the industrial production has upped by 6,2%, but it still falls behind the 2007 results (in 1Q of 2007 – 7,2%).

   The main driving factor of the industrial growth is the processing industry. In March, 2008 the processing has upped by 10,4%, by March, 2007 it has increased by 8,7% for 1Q. The economists explain the rapid growth of processing industry as the result of investment policy in 2007. "Investment demand remains at the high level, in processing industries particularly. Capital investments grow significantly. If take into account the lag between investments and the growth, the industrial growth will be high in the nearest prospect", says Sergey Ulatov from the World Bank. The most rapid growth is observed in the food industry, production related to the construction industry, as well as in the engineering. The increase of population earnings has resulted in the production growth of meat – by 19,7%, sausages – by 10%, butter – by 19,2% in 1Q of 2008. Also in 1Q has upped the production of cars – by 14,4%, tower cranes – by 22%, tractors – 2,1 times, brick – by 10,7%, reinforced concrete constructions and products – by 8,4%. We will mark that a noticeable recovery can be also observed in the production of furniture. According to Rosstat data, the production of tables and closets has upped by 28% and 31% respectively.

   However, the indices of the extractive industries continued to slow down due to the reduction of oil production on the background of the rapid processing growth in 1Q of 2008. So, if in 1Q of 2008 the extraction of gas has increased by 1,4%, coal – by 4,8%, iron-ore – by 3,7% as compared to 1Q of 2007, the oil extraction has reduced by 0,2%. "Oil production decline is a very unpleasant point. The industry shows the real stagnation", says Vladimir Salnikov. "Moreover, it happened first within several years in the quarterly terms". However, as Ekaterina Malofeeva from Renaissance Capital marks, the oil extraction decline has been long ago observed by the branch statistics. "The level of the Russian oil extraction has reached its peak and will not go back to the previous levels. The oil extraction growth in Siberia is over", stated Lukoil vice-president Leonid Fedun. According to him, in 2007 the volume of oil extraction has totaled 10 million barrel a day – "the largest indices I have ever seen for all my life".

   Vladimir Salnikov considers that the fundamental factor that affected the oil extraction reduction is "depletion of old fields, and the rates of new deposits development are very slow". Economists mark that the main reason of small industry attraction is high taxes and absence of tax incentives to explore and develop new fields. "The only thing that can help the industry is tax incentives", Ekaterina Malofeeva underlines. However, Mr. Salnikov names one more factor that did not contribute to the investments growth into the oil extraction – "these issues have not been of high priority in terms of ownership move in the industry".

   We will remind that according to the main tax policy directions for 2009-20011 approved by the government at the beginning of April the Mineral Extraction Tax formula at oil extraction has been changed. Now a tax is not deducted from the first $9 of oil barrel cost, the Ministry of Finance suggests increasing the level by $15. By the agency estimations, such adjustment will permit reducing the fiscal loading on companies by more than RUR 100 billion a year. It is not known yet whether this compensation is enough to recover the growth in oil extraction.