Russian GDP Growth Slowest Since 2009 as Investment Wanes

Russian Economy Expanded 3.4% Last Year, Slower Than Estimated
Gross domestic product expanded 3.4 percent in 2012, down from 4.3 percent a year earlier, the Federal Statistics Service in Moscow said in an e-mailed statement today. Photographer: Andrey Rudakov/Bloomberg

Russia’s economy grew slower than analysts forecast last year, expanding at the weakest pace since a 2009 contraction after record oil prices failed to offset $56.8 billion of net capital outflows and investment sagged.

Gross domestic product expanded 3.4 percent in 2012, down from 4.3 percent a year earlier, the Federal Statistics Service in Moscow said in an e-mailed statement today. That missed the 3.6 percent median forecast of 18 analysts in a Bloomberg survey and the Economy Ministry’s estimate of 3.5 percent.

The slowdown sets the stage for an escalation in rhetoric between the central bank and the government as President Vladimir Putin and top Cabinet members press policy makers to deploy monetary stimulus to spur corporate investment, the main drag on growth. Barring a 7.8 percent slump in 2009, last year’s growth was the slowest since the economy shrank in 1998 after the government defaulted on $40 billion of debt.

“There’s a lot of pressure from the government to push the central bank to decrease interest rates,” said Dmitry Savchenko, a senior analyst at Nordea Bank in Moscow. “We expect that inflation will drop in the next few months and the central bank will understand that it has to support the economy. Companies are waiting for this step.”

Lagging Behind

Russian stocks lagged behind other emerging markets, with the MSCI Russia Index advancing 9.6 percent in 2012, trailing a 15 percent jump in the MSCI Emerging Markets Index. The ruble-denominated Micex Index of 50 stocks climbed 0.2 percent to 1,546.76 at the close in Moscow. The gauge trades at 5.7 times projected earnings, making it the cheapest of 21 emerging markets tracked by Bloomberg.

Russian investment unexpectedly contracted in December from a year earlier, dropping for the second time in four months. Sluggish spending by companies to boost output has become the “Achilles heel” of the economy, Deputy Economy Minister Andrei Klepach told reporters Jan. 29. Companies have held back on investment plans as they anticipated oil prices will stagnate and interest rates will remain high, according to Nordea’s Savchenko.

The central bank raised borrowing costs in September, becoming the largest emerging market to do so last year. First Deputy Chairman Alexei Ulyukayev said this month he doesn’t see any potential gains from reducing interest rates.

Government Campaign

The government began an open campaign this month to push the central bank to lower rates, a step the regulator is resisting because of concerns the economy is already growing near its potential. Capital flight restrained economic output even as oil prices rose, with Brent crude futures posting a record annual average of $111.68 a barrel last year, buoyed by international sanctions on Iran and the risk that the conflict in Syria would spread throughout the region.

“We expect more political pressure on the central bank and more loud calls from the markets and the government for monetary easing,” Julia Tsepliaeva, head of research for BNP Paribas in Moscow, said by e-mail. “We particularly attribute this slowdown to poor investment demand. Although the government plans for more aggressive stimulation of investment demand in 2013, we see some resource constraints which could affect implementation of this idea.”

Stuttering growth highlights the challenges facing the world’s largest energy exporter as prices for oil, its main export, are forecast to stagnate this year and Europe’s recession undercuts demand for commodities.

‘Exhausted’ Model

“The potential of development in the framework of a traditional export-oriented model has practically been exhausted,” Prime Minister Dmitry Medvedev said at a government meeting in Moscow today. “The main risks aren’t external, but domestic.”

Putin, 60, elected for a third term in the Kremlin last March, ordered the government in May to boost investment to 25 percent of annual economic output by 2015, up from 21 percent in 2011.

While “policy was very loose in the run-up to presidential elections last March, it has subsequently been tightened,” Tim Ash, an economist at Standard Bank Group Ltd., said by e-mail. “And this, combined with the weak global backdrop, is now acting as a significant drag on the economy.”

Agricultural output shrank 3.8 percent last year from a 16.9 percent surge in 2011 after a drought ravaged crops. Natural resources production advanced 0.9 percent, down from 2.9 percent in 2011, while construction rose 2 percent in 2012, compared with a 4.5 percent gain the previous year.

‘Critically Important’

Russia faces a “critically important” period over the next five years as the government targets “steady economic growth” of at least 5 percent a year, Medvedev said today. Speaking at the same event, Putin pointed to the economy’s “slowdown” over the last two quarters and said high interest rates are affecting bank lending.

GDP probably expanded 2.4 percent in the final three months of last year compared with the same period a year earlier, according to the median of 17 estimates in a Bloomberg survey. Growth reached an estimated 2.2 percent, Klepach said.

The government is looking to investment as a source for growth amid signs that household consumption, which accounts for about half the economy, is stumbling. The government has taken steps including hiring Goldman Sachs Group Inc. to deliver that message to foreign investors.

Russia’s growth is falling behind emerging-market peers including China, whose GDP rose 7.9 percent in the fourth quarter from a year earlier, accelerating for the first time in two years. Russia’s economy will grow a little more than 2 percent in the first six months of this year and just over 4 percent in the second half, Klepach said Jan. 29.

Easing Help

Potential growth is between 4 percent and 5 percent, and the central bank may help by easing monetary policy, according to Klepach.

Even so, Russia’s economy had a “very respectable” showing last year, said Ivan Tchakarov, chief economist for Russia at Renaissance Capital in Moscow.

“We are of the view that this is a solid and respectable performance given the significant headwinds that Russia faced last year,” he said by e-mail. “Domestically, the fraught political cycle blunted investment spending, while, externally, continuous periphery Europe fears, softening China growth and U.S. fiscal cliff concerns led to heightened volatility that bit high-beta Russia.”

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