Moscow, November 1:

Russian manufacturers are losing ground to imported goods as an inflow of oil money has strengthened the rouble and put the brakes on economic growth in Russia, the World Bank said in a report released on Tuesday.

“The slowdown in many sectors of the economy since the second half of 2004 remains visible,” the report said, adding that “2005 has brought even stronger evidence that this slowdown is related to increasing competitive pressures from the rapid real appreciation of the rouble.” The periodic report said the rouble has appreciated by 7.3 percent over the first $9 months of the year against a basket of currencies, meaning that the competitive advantage created by the rouble’s devaluation following the 1998 government default and economic collapse has disappeared.

Since the crash, the economy has performed a remarkable turnaround, in large part thanks to high oil prices. However, growth slowed from 7.3 in 2003 to 7.1 percent last year and is forecast at about 6 percent this year.

That has made President Vladimir Putin’s goal of doubling the size of the economy by 2012 look shaky. Annual GDP growth of more than 7 percent would be needed for the task to be met, his economic development minister, German Gref, has said.

While the retail sector, construction and communications and catering sectors are all doing well, eight out of thirteen of the main manufacturing industries reported a “substantial decline in their growth rates,” the report found, citing state statistics.

In dollar terms, imports have risen 28 percent in the first nine months of the year, with machine imports up 40 percent. “The primary concentration of growth in non-tradable sectors of the economy is consistent with symptoms of so-called Dutch Disease,” the report said, referring to a phenomenon coined when the discovery of North Sea gas raised the value of the Netherlands’ currency, making its manufactured goods less competitive. While foreign direct investment grew by 30 percent to US$4.5 billion (euro3.7 billion) in tle first half of the year, the oil sector needs a hefty injection of cash. The sector still suffers from fears of re-nationalization spurred by the politically charged carve-up of the Yukos oil company, and from extremely high taxes and duties.

A concerted attempt to address investors’ fears, launched by Putin this year, has left the attitudes of foreign and domestic investors “unquestionably improved,” the report said.

It warned that influx of petrodollars into government coffers was creating public pressure to spend the windfall, pouring money into the economy and potentially fuelling inflation.

With parliamentary elections in 2007 and a presidential vote in 2008,

analysts say the temptation to spend could prove to hard to resist. Russia has already hiked its 2006 budget spending. The bank said it expects inflation of over 12 percent this year compared to a government tavget of .5 percent.

“There is a perceived danger that Russia could fall victim to the common syndrome in resource-abundant countries that experience commodity price booms.”