"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 ruble."

The report said the ruble has appreciated by 7.3 percent over the first nine months of the year against a basket of currencies, meaning that the competitive advantage created by the ruble's devaluation with the 1998 government default and economic collapse has disappeared.

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Since the crash, the economy has made a remarkable turnaround, in large part thanks to high oil prices. But growth slowed from 7.3 percent 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 that to occur, his economic development minister, German Gref, has said.

While the retail sector, construction, communications and catering sectors are doing well, eight of the 13 main manufacturing industries reported a "substantial decline in their growth rates," the World Bank said, citing state data.

In US 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 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 (HK$35.1 billion) in the first half, the oil sector needs a hefty injection of cash. The sector suffers from fears of re- nationalization spurred by the politically charged carve-up of oil giant Yukos, and from very high taxes and duties.

Putin's concerted effort to address investor fears this year has "unquestionably improved" market sentiment, the report said.

But it warned that the influx of petrodollars into government coffers was creating massive public pressure to spend, and potentially fuel inflation.

With parliamentary elections in 2007 and a presidential vote in 2008, analysts say the temptation to spend could prove hard to resist. Russia has already lifted its 2006 budget spending.

The bank expects inflation of more than 12 percent this year compared to a government target of 8.5 percent.

ASSOCIATED PRESS