•Russian Economy Contracted by Record 10.9% Last Quarter as Slump Deepened

...a 44% annualized decline; simply incredible.

http://www.bloomberg.com/apps/news?pid=20601068&sid=aLm0d8eNVK_0

Russia GDP Shrank 10.9% Last Quarter as Slump Deepens (Update2)
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By Paul Abelsky and Alex Nicholson

Aug. 11 (Bloomberg) -- Russia’s economy contracted the most on record last quarter as rising unemployment sapped consumer demand, bank lending stalled and the government failed to approve a stimulus package until just two months ago.

Gross domestic product contracted an annual 10.9 percent in the second quarter, the Federal Statistics Service said today, citing preliminary data. The median estimate in a Bloomberg survey of seven economists was for output to shrink 10.2 percent. The service’s data go as far back as 1995.

Russia’s economic decline is worsening after output contracted 9.8 percent in the first quarter, ending 10 years of expansion that averaged close to 7 percent. The worst global financial crisis since the Great Depression undermined demand for Russia’s oil, natural gas and metals. Industrial production plunged as companies depleted stocks and struggled to raise funds during the credit crunch.

“We can’t develop like this any longer,” President Dmitry Medvedevsaid yesterday during a meeting with political party leaders in the Black Sea resort of Sochi. “It’s a dead end. And the crisis has placed us in a situation where we will have to make decisions on changing the structure of the economy.”

The ruble weakened for a fifth day versus dollar, its longest losing streak since February, slipping 1.4 percent to 32.2419 per dollar in Moscow, the lowest level since July 13. The currency lost 1.4 percent against the euro to 45.7151. Those movements left the ruble at 38.2879 against the central bank’s target currency basket.

Russia ‘Crumbled’

Russia “crumbled” after commodity prices collapsed, Medvedev said. Energy, including oil and natural gas, accounted for 68.8 percent of exports to the Baltic states and countries outside the former Soviet Union in the first six months of the year, Russia’s Federal Customs Service said last week.

Urals crude oil, Russia’s chief export earner, averaged $61.03 a barrel during the last quarter after reaching a record $142.5 in July 2008.

Russia failed to free itself of its reliance on commodities during Prime Minister Vladimir Putin’s tenure as President between 2000 and 2008, said Natalia Orlova, chief economist at Alfa Bank, Russia’s biggest privately-owned lender.

“Because of high oil prices, capital came in; banks transferred this capital into the economy,” she said. “Rising wages fed consumer growth, so there was no reason to invest or create new production. Now capital has stopped coming in and consumption has stopped. This model has ceased to exist. We don’t have a new one.”

Putin

Putin, 56, stepped down in May 2008 after two terms in office and became prime minister under his hand-picked successor, Medvedev.

The government has done “catastrophically little” to diversify the economy in the decade since the 1998 financial crisis, Sergei Voloboev, a Credit Suisse economist in London, said by phone. GDP probably shrank a seasonally adjusted 0.2 percent in the second quarter compared to the first three months, according to Credit Suisse.

“The economy approached the bottom in the second quarter, basically it hit the bottom around May, June,” said Tatiana Orlova, an economist at ING Groep NV in Moscow. “We should see some better-looking data” in the coming quarters.

Russian stocks were little changed after losing as much as 1.3 percent earlier today after the release. The 30-stock Micex index was trading at 1100.31 at 3 p.m. in Moscow after yesterday’s 1.3 percent retreat. The RTS Index lost 1.3 percent to 1051.45 today.

Stocks

The Micex Index, which is mostly made up of energy companies, slipped into a bear market in June after falling more than 20 percent from its high on June 1, on concern a prolonged recession will cut demand for fuel. It gained 8.4 percent in July and is up 79 percent this year.

The world’s biggest energy exporter may run a budget deficit as wide as 9.4 percent of GDP this year, the country’s first shortfall in a decade, as plummeting demand for commodities threatens to cut revenue by a third, according to the Finance Ministry.

Russia has earmarked 2.51 trillion rubles ($79 billion) in spending to battle the slump, including funding designated for carmakers, agriculture and construction. The “anti-crisis” program was signed into law by Putin on June 19.

‘Might Fail’

“The planned fiscal relaxation might fail to stimulate private consumption in the face of significant uncertainty about future income,” the International Monetary Fund said in a report published on Aug. 7. “Absent a more determined policy intervention, there is a risk that banks will continue to struggle to adjust balance sheets, stifling credit expansion and impeding a recovery.”

Russia’s economy will need between four years and five years to match last year’s pace of growth, Finance Minister Alexei Kudrinsaid yesterday. GDP in 2008 grew at the slowest pace since 2002, expanding 5.6 percent compared with 8.1 percent a year earlier. The IMF forecasts a 6.5 percent economic contraction for Russia this year, followed by growth of 1.5 percent in 2010.

The central bank’s five interest-rate cuts since April 24 have failed to spur lending as banks hold back on concern borrowers can’t repay loans. Lending to consumers dropped 1.1 percent in June for the fifth consecutive monthly decline and banks shrank their corporate loan books by 1.2 percent, according to central bank data.

Subsistence Level

By the end of 2009, 17.4 percent of the population, or 24.6 million people, will be living beneath the subsistence level of $185 per month, almost 5 percent more than before the crisis, the World Bank said in a report released in June.

Rising numbers of jobless and falling wages will cut the country’s nascent middle class by 10 percent, or 6.2 million people, to about 51.2 percent of the population, the Washington- based lender said. Household consumption, “the main source of growth in recent years,” is “collapsing,” it added.

The economy may start to show signs of recovery in the third quarter this year, Deputy Economy Minister Andrei Klepach said on July 23.

GDP expanded a non-seasonally adjusted 7.5 percent from the previous quarter after contracting 23 percent in the first three months, the office said.

To contact the reporter on this story: Paul Abelsky in St. Petersburg at pabelsky@bloomberg.net.
Last Updated: August 11, 2009 07:06 EDT