Russian Economy Probably Slowed to Three-Year Low in 2012

Russia’s economy probably grew last year at the weakest pace since a contraction in 2009 and is set to slow further, casting doubt on President Vladimir Putin’s drive for an investment-led acceleration in output.

Gross domestic product expanded 3.6 percent in 2012, down from 4.3 percent the previous two years, according to the median of 18 estimates in a Bloomberg survey. The Economy Ministry estimated growth at 3.5 percent. The Federal Statistics Service in Moscow will report the data this week.

The slowdown highlights the challenges facing the world’s largest energy exporter as oil prices are forecast to stagnate this year and Europe’s stumbling economy saps demand for Russian commodity exports. 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.

“We need a government that is more proactive on the reform side,” Peter Westin, chief strategist at Aton Capital in Moscow, said by phone. “The central bank is doing a good job, but the government is definitely behind the curve when it comes to what needs to be done to stimulate the economy.”

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 Micex Index of 50 stocks was little changed, trading 0.1 percent lower at 1,542.73 at 2:32 p.m. The ruble-denominated gauge trades at 5.7 times projected earnings, making it the cheapest of 21 emerging markets tracked by Bloomberg.

‘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, Prime Minister Dmitry Medvedev said at a government meeting in Moscow 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.

“The main risks aren’t external, but domestic,” Medvedev said. “The potential of development in the context of a traditional export-oriented model has practically been exhausted.”

Economy Slumps

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, Deputy Economy Minister Andrei Klepach told reporters Jan. 29.

The deceleration is likely to continue well into next year, according to Evgeny Nadorshin, chief economist at AFK Sistema, a Russian investment company with assets ranging from telecommunications to oil.

“Russia’s economy is hitting the brakes, and the December data show growth slowing in the very important areas” of investment and consumer demand, Nadorshin said. “Economic growth is not only at its potential, but the room to increase output is exhausted. We’re close to the point of overheating that we neared before the crisis.”

‘Achilles Heel’

Fixed-capital investment contracted in annual terms in December for the second time in four months, the Federal Statistics Service in Moscow said in a report last week. Sluggish spending by companies to boost output has become the “Achilles heel” of the economy, according to Klepach.

“Interest rates for companies today are at a level that is really stifling investment,” Economy Minister Andrei Belousov told reporters yesterday in Moscow.

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.

The joblessness rate fell to 5.3 percent in December, putting it below the full employment rate of about 6 percent, according to Aton’s Westin. That means competition for workers may start to push up wages, stoking inflation that overshot the central bank’s 6 percent target last year.

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. Real wages advanced at the slowest pace in more than three years in December, which may sap buying power.

Putin’s Target

Putin, 60, ordered his government on May 7, the day of his inauguration for a third term as president, to increase investment to 25 percent of economic output by 2015, up from 21 percent in 2011. The government has taken steps including hiring Goldman Sachs Group Inc. to deliver that message to foreign investors.

Still, policy makers are a long way from meeting Medvedev’s target for stable 5 percent growth, said Alexander Morozov, chief economist for Russia at HSBC Holdings Plc in Moscow. In a best-case scenario, steps taken now may have an effect on the economy in 2014, he said.

“It’s impossible to do instantaneously,” Morozov said. “They need to change their policy, focusing not so much on stimulating modernization and innovation as on serious steps to reduce obstacles for business.”

Egypt, Pakistan

Russia is 112th in the World Bank’s Ease of Doing Business Index, behind countries including Egypt, Pakistan and Papua New Guinea. Putin ordered his ministers in May to boost Russia’s standing to 50th by 2015 and to 20th by 2018.

The 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. Potential growth is between 4 percent and 5 percent, and the central bank could help by easing monetary policy, he said.

“We take this statement as negative guidance for 2013, suggesting a lack of new growth drivers,” Natalia Orlova and Dmitry Dolgin, analysts at Alfa Bank in Moscow, said in a research note yesterday. “We do not rule out deceleration of GDP growth to below 2 percent year-on-year in the first quarter.”

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