WRAPUP 2-Russia firms give in to heat, shoppers undeterred

* Capital investment, housing completions down sharply

* Unemployment up, but 2nd best reading in 20 months

* Retail sales growth picks up

(Adds analysts comments, rouble, CIS comparisons)

By Toni Vorobyova

MOSCOW, Aug 18 (Reuters) - Russian companies slashed investment and put building projects on hold in the face of a record heatwave in July, but retail sales growth accelerated despite toxic smoke in Moscow, data showed on Wednesday.

Consumer prices rose 0.2 percent for the second week in a row in the week ended Aug 16 as people continued to stock up on cereals and flour in the face of a drought which has destroyed about a quarter of Russia’s grain crop, according to a separate release. [ID:nMOS007615]

A poor harvest is also pressuring prices in neighbouring Ukraine, where the central bank on Wednesday forecast an end to four months of deflation in August [ID:nLDE67H0WD].

As well as pushing up inflation, analysts expect the heatwave could cut up to 1.0 percentage point off economic growth this year [ID:nLDE67902C] as drought hits agriculture, while the heat and smoke from wildfires temporarily discourage companies from producing.

Wednesday’s data showed housing completions fell by a quarter year-on-year in July and by 39 percent month-on-month, while capital investment fell by more than 10 percent, disappointing analysts’ expectations for continued solid growth. [ID:nLDE67H19K] [ID:nLDE67H18C].

The numbers followed a weaker-than-forecast industrial production figure earlier this week. [ID:nLDE67F19L]

“On the whole, the picture is as expected,” said Yaroslav Lissovolik, chief strategist at Deutsche Bank in Moscow.

“Construction suffered from the heat, there were probably work stoppages. The fall in investment is linked to the fact that construction is a fairly important component.”

Natalya Orlova, chief economist at Alfa Bank, said government-sponsored programmes to rebuild housesdamaged by wildfires should stem the sharp slowdown in construction.


Consumers, though, appear to be shrugging off the heat and the smoke, possibly enticed by the a number of newly-built air-conditioned shopping centres.

Retail sales rose a bigger-than-expected 6.6 percent year-on-year -- their best showing since November 2008 -- and were up 3 percent from June. [ID:nLDE67H195]

“For now, consumers are not feeling too bad, but they will suffer in future as inflation rises,” said Alfa Bank’s Orlova.

The sales increase may also have in part been driven by people stocking up on dry goods in expectation of a surge in prices -- sales of salt and sugar posted double-digit growth from the previous month, while flour, cereals and pasta all rose. Fridge and freezer sales were up by a third.

Analysts expect the heat and drought to knock back growth by up to a percentage point this year, but it is not expected to halt Russia’s recovery from its worst recession in 15 years, and there was little in the data to suggest otherwise.

Unemployment edged up to 7.0 percent, but still posted its second best reading in the past 20 months. [ID:nMOS007615]

“It is important to distinguish between one-off factors, including climate, and the long-term trend,” said Lissovolik, forecasting that the economy could still grow 4 percent in 2010.

Given the one-off nature of the inflationary pressures, the central bank is not expected to step in with interest rate hikes, though some analysts reckon it could allow greater appreciation of the rouble to contain prices.

So far, the Russian currency has largely shrugged off the threat to the economy from drought, closing largely flat at 34.35 against a euro-dollar basket on Wednesday RUS=MCX. (Editing by Stephen Nisbet)