Russian Economy Plummets 10.1% in 1H09

Russia’s economy shrank 10.1 per cent in the first half of this year, the economy minister said yesterday, its worst decline since the early 1990s.

The credit crunch, falling commodity prices and a gradual rouble devaluation have shattered 10 years of rapid growth but there are signs that the pace of econ-omic decline is slowing.

Industrial production contracted at its slowest year-on-year pace in six months. At 12.1 per cent in June the fall was less than government forecast and an improvement on May’s 17.1 per cent fall in output.

“We can, with caution, talk about some moderation of the pace of contraction,” said Elvira Nabiullina, economy minister. The economy ministry forecasts overall gross domestic product contraction of 8 per cent to 8.5 per cent this year, with growth resuming in 2010 but at only 1 per cent.

Economists said Russia was nearing the bottom of a precipitous collapse as oil prices steadied at about $60 a barrel, after falling as low as $35 at the beginning of the year. The economy ministry’s revised forecast for inflation is still high, at 12-12.5 per cent, but down from 13.3 per cent last year.

“Higher oil prices have created a sense of stability. But essentially we’re talking about a much slower rate of decline rather than growth,” said Rory MacFarquhar, senior economist at Goldman Sachs in Moscow.

Increased revenues owing to higher oil prices are yet to find their way into the rest of the economy as the banking system remains paralysed by fear over the growth in bad loans. Overall lending fell again in June by 0.3 per cent, said Gennady Melikyan, first deputy central banker, despite the government’s efforts to pump budget money through the biggest state banks as private banks, fearful of bad loans, cut back lending.

Profits at Sberbank plummeted 98 per cent in the first quarter, the state-controlled savings bank said this week, as it increased bad loan provisions 12-fold. “Even as the rest of the world is seeing more green shoots, the structure of the Russian economy is such that 2010 and throughout the rest of the year is still going to be difficult,” Anton Karamzin, the bank’s chief finance officer, told investors.

The central bank predicts that bad loans might reach 12 per cent, a level that would wipe out bank profits. But bankers say they could reach as high as 20 per cent of credit portfolios

Russia’s government is still debating how to fund growing budget deficits. The government is expected to rack up a budget deficit of 7.4 per cent of GDP, and 7.5 per cent next year, above the 5 per cent it originally planned for 2010.

Dmitry Pankin, deputy finance minister, said yesterday Russia was still deciding how it was going to fund the gap - by borrowing on international markets or by spending its rainy day reserve fund.

But economists say even increased government spending is failing to stimulate the economy, with most funds covering holes in regional budgets that are suffering from falling revenues, for social needs and for recapitalising state banks, while government investment is being cut.