June 22 (Bloomberg) -- Russia’s economic slump may deepen in the second quarter to an annual contraction of 10.9 percent because rising oil prices won’t spur growth without a recovery in lending, according to Goldman Sachs Group Inc.

“Russia’s deep output decline, in our view, is less the direct impact of lower commodity prices and more the effect of the sudden stop in capital inflows that the country suffered beginning in the third quarter of 2008,” Rory MacFarquhar, Moscow-based economist at Goldman, said in a report today.

The world’s biggest energy supplier is falling into its first recession in a decade after the global decline sapped demand for commodities while capital flows to riskier markets dried up. A stimulus package has failed to spur lending even as the central bank cut interest rates three times since April.

Capital investment in May fell an annual 23.1 percent, the biggest drop since December 1998, as industrial output declined a record 17.1 percent last month. Russian retail sales slid an annual 5.6 percent in May, the fourth consecutive decline and the biggest since September 1999.

The economy contracted a record annual 9.8 percent in the first quarter. High borrowing costs contributed to a downturn in manufacturing and construction, while the lack of retail loans led to a drop in consumer demand, MacFarquhar wrote.

Lending Decline

Lending to households and companies declined in the fourth quarter of last year by the equivalent of 5 percent of gross domestic product and fell 6 percent of GDP during the first three months of 2009 from a year earlier, according to Goldman.

In previous years, the non-financial sector expanded borrowing by over 20 percent of GDP annually and Russia’s external debt grew by 30 percent every year, the report said.

The rise in oil prices will result in a stronger ruble and increase nominal GDP, leading to a budget shortfall of 6.2 percent this year, compared with an official forecast for a deficit of more than 10 percent, according to Goldman.

Urals crude oil, Russia’s chief export earner, traded at more than $71 a barrel this month after falling to a low of $32.34 in December. The higher oil prices won’t spur growth because the profits are largely collected by the government in taxes, MacFarquhar wrote.

The economy will begin to gradually recover in the third quarter and may show quarterly growth faster than the record pace in 2007, the report said.

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

Last Updated: June 22, 2009 05:30 EDT