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Russia Seen on Verge of Recession as PMI Shows Contraction

Russia’s economy is on the brink of a technical recession this quarter after gauges of manufacturing and services showed that seasonally adjusted output probably shrank between January and March for the first time since 2010.

The composite purchasing managers’ index dropped to 47.8 last month from 50.2 in February, HSBC Holdings Plc said today in a statement, citing data compiled by London-based Markit Economics. A reading below 50 indicates contraction. Business expectations in the services industry were close to a record low seen at the end of 2008, HSBC said.

“Unless geopolitical risks subside, the Russian economy will likely enter a technical recession in the second quarter,” Alexander Morozov, a Moscow-based economist at HSBC, said in the report. “The Russian economy is still going in the wrong direction, in contrast to the global economy which continues to improve its growth momentum.”

The fallout from the crisis in Ukraine is moving to the forefront of policy debates in Russia as sanctions leveled against some individuals and companies stoke capital flight, extinguishing a rebound in the economy. While growth unexpectedly accelerated in the fourth quarter before tensions with Ukraine intensified, gross domestic output expanded at a 1.3 percent pace in 2013, the slowest since a 2009 recession.

A technical recession is defined as two straight quarters of contraction on a quarterly basis.

Policy Response?

The ruble is down 7.5 percent against the dollar this year, the worst-performer after Argentina’s peso among 24 emerging-market peers tracked by Bloomberg. It traded 0.3 percent weaker at 35.5275 per dollar as of 7:49 p.m. in Moscow.

Policy makers are limited in their ability to respond to a faltering economic outlook. The central bank will probably remain “hawkish in order to stabilize the currency and financial markets,” HSBC said.

The central bank won’t cut its key rate until at least a meeting in June, Chairman Elvira Nabiullina said yesterday at a banking conference. Economic growth is “likely” to decelerate below 1 percent, falling short of the regulator’s forecast for 1.5 percent to 1.8 percent expansion, she said.

Russia probably won’t experience a technical recession, Deputy Economy Minister Andrey Klepach told reporters today.

More Stagnation

“According to our estimate our economy isn’t in crisis, but it’s in stagnation,” Klepach said at a conference in Moscow. “If earlier we expected this stagnation to end in the first quarter or by the middle of the year, now there are risks that it may run over, if other measures are not taken.”

The key one-week auction rate was kept on hold March 14 after what policy makers called a temporary interest-rate increase the previous week. The benchmark was increased to 7 percent from 5.5 percent on March 3.

The three-month MosPrime rate, which large Moscow banks say they charge one another, may decline 38 basis points, or 0.38 percentage point, in the next three months, according to forward-rate agreements tracked by Bloomberg. That’s a reversal from 40 basis points of increases seen as of March 14.

GDP will expand 1.2 percent in 2014, according to the median estimate of 37 economists in a Bloomberg survey. The probability of recession in the next 12 months is 45 percent, the highest since Bloomberg started to track the measure in June 2012, according to the median estimate of 11 economists.

“The Russian economy is indeed in for a rocky period ahead -- with no real evidence in my mind of an easing in tensions with the U.S.,” Timothy Ash, a London-based economist for emerging markets at Standard Bank Group Ltd., said by e-mail. “This would suggest in my mind that Russia could in fact post a negative real GDP print this year.”

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