July 6 (Bloomberg) -- Russia’s economy slumped into a deeper recession last quarter after businesses cut inventories to adjust to shrinking markets, a gauge of the economy showed.

Gross domestic product contracted an annual 6.4 percent in the second quarter after a 5.4 percent decline in the first three months of the year, VTB Capital’s indicator showed. Output shrank 4.8 percent in June from a year earlier, compared with a contraction of 6.8 percent in May, according to VTB.

Russia’s industrial production dropped a record 17.1 percent in May as companies depleted inventories and struggled to raise funds. The economy shrank 10.2 percent in the first five months of the year, according to the Economy Ministry, which estimates that GDP will contract 8.5 percent this year.

“The GDP indicator suggests that the economic decline in the second quarter of 2009 is likely to be similar to, or slightly worse, than in the first quarter,” Aleksandra Evtifyeva, an economist at VTB Capital, said in the report. “However, the prospects for the second half look brighter.”

Rail cargo shipments, seen as a proxy for changes in industrial output, fell an annual 23 percent in the first half and may drop 19 percent in the year, Vladimir Yakunin , chief executive officer of OAO Russian Railways, the railroad monopoly, said last week. Railroads account for about 85 percent of Russia’s total cargo transport.

VTB’s index signaled a decline for the seventh consecutive month, short of the record nine-month slump between August 1998 and April 1999, after the Russian government defaulted on $40 billion of domestic debt and devalued the ruble.

‘Marked Pace’

“Despite some decline in the unemployment rate according to the official statistics, employment in the services and manufacturing sectors continues to decline at a marked pace,” VTB said in the report.

The country’s unemploymentrate jumped to 10.2 percent in April, the highest rate in more than 8 years, before dipping to a revised 8.5 percent the following month.

VTB Capital calculates the indicator by using output measures from its Purchasing Managers’ Indexes, which are surveys of business conditions in manufacturing and services industries.

Russia’s statistics office is due to publish official second-quarter GDP figures between Sept. 9 and 11. The economy shrank an annual 9.8 percent in the first quarter, according to the official data.

To contact the reporter on this story: Paul Abelsky in St. Petersburg at pabelsky@bloomberg.net.

Last Updated: July 6, 2009 00:56 EDT