Russian GDP Growth at 1.6% as Economy Weakest Since 2009

Russia’s economy grew at the weakest pace since 2009 in the first quarter as the euro area’s longest recession hurt demand for commodity exports and investment at companies including OAO Gazprom cooled.

Gross domestic product rose 1.6 percent from a year earlier, slowing for a fifth consecutive quarter, the Federal Statistics Service in Moscow said today in an e-mailed statement. That compares with a median estimate of 1.2 percent in a Bloomberg survey of 23 economists and a 2.1 percent pace in the final three months of 2012. The Economy Ministry estimated first-quarter growth at 1.1 percent.

The economy of the world’s largest energy exporter is grinding to a halt as the recession in the euro area, which accounts for about half of Russian trade, extended into a sixth quarter. That’s prompting companies to trim investment, while government spending on the 2014 Sochi Olympics is drawing to a close and public-wage growth slows.

“The main reasons for the slowdown are the generally negative environment and, as a result, weak exports,” said Vladimir Osakovskiy, chief economist for Russia at Bank of America Merrill Lynch in Moscow. “There’s also a fairly noticeable stagnation in investment demand, primarily because of the weak exports.”

Lagging Behind

Russian stocks have underperformed emerging- and developed-market peers, with the Micex Index down 2.5 percent in the first three months, compared with a 2 percent decline in the MSCI Emerging Markets Index and a 10 percent advance for the S&P 500. Russia’s benchmark was up for the first time in six days, rising 2.1 percent to 1,401.79 at the close in Moscow.

The ruble recorded first-quarter depreciation for the first time since 2009, weakening 0.4 percent against the central bank’s target basket of dollars and euros. It was little changed at 35.4228.

The GDP slowdown prompted the Economy Ministry last month to cut its 2013 growth forecast to 2.4 percent from 3.7 percent. That is slower than last year’s 3.4 percent expansion. The ministry reiterated the forecast in an e-mailed statement today, saying a review of the forecast was planned in September at the earliest.

Russia probably won’t slide into recession without an external shock, such as a downturn in the global economy, according to Deputy Economy Minister Andrei Klepach. While the euro area is stagnating, some improvement there is expected in the second half, he told reporters yesterday.

Stagnation Evil

“For us, stagnation and low growth are no less of an evil and no less of a threat,” Klepach said after a government meeting in Moscow. “Accelerating the pace of growth without starting serious, national macroeconomic projects is impossible.”

The government this week submitted a draft plan to revive the economy to President Vladimir Putin, with measures including lowering bank lending rates and slowing increases in utilities tariffs.

“With the slowdown being driven in part by structural factors, we fear there is little fiscal or monetary policy can do to boost growth without stoking inflation pressures,” Liza Ermolenko, an emerging-markets economist at Capital Economics in London, said in a research note. “One of the most striking features of the recent slowdown is that growth slowed despite the fact that oil prices have remained high.”

Urals crude, the country’s main export blend, averaged $110.77 a barrel in the first quarter, compared with $116.67 a year earlier, according to data compiled by Bloomberg. The price for exports via northwest Europe was $102.73 today.

Investment Contracts

Fixed investment fell 0.8 percent from a year earlier in March, the second contraction in four months, according to the statistics service. Investment by Russia’s biggest infrastructure companies dropped 10 percent last year and may tumble 12 percent to 13 percent in 2013, led by Gazprom, Economy Minister Andrei Belousov said yesterday.

The slowdown has set off an argument between the government and central bank about whether interest rates are to blame. The Economy Ministry has called for lower borrowing costs and higher investment spending by the state to stimulate domestic demand. Bank Rossii has argued that unemployment near record lows and consumer-lending growth at almost 40 percent mean cheaper loans would only fuel inflation.

“Low expectations for the first quarter have been formed by the Economy Ministry, which estimated GDP growth at 1.1 percent,” said Julia Tsepliaeva, head of research at BNP Paribas SA in Moscow. The ministry may have been aiming to trigger “aggressive” economic stimulus to stave off recession risks, she said in a note to clients.

Holding Rates

Monetary-policy makers led by central bank Chairman Sergey Ignatiev, who steps down next month, have resisted calls to lower Russia’s key rates as inflation remains more than one percentage point above their 5 percent to 6 percent target range. They kept the refinancing rate at 8.25 percent for an eighth month this week.

“The outlook is not looking positive for Russia at this stage,” Piotr Matys, an emerging-market economist at 4cast Ltd. in London, said by phone. “The government will seriously have to start implementing some bold structural reforms to reduce corruption, improve investment sentiment.”

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