Russian Economy Shrinks Less Than Forecast as Crisis Peters Out

  • GDP dropped 0.6% last quarter, the least since recession began
  • Hurdles for recovery include cheaper oil, weak consumer demand

Russia’s economy shrank the least since a contraction began at the start of last year, putting it on the cusp of exiting the longest recession in two decades.

Gross domestic product lost 0.6 percent in the second quarter from a year earlier after a decline of 1.2 percent in the previous three months, the Federal Statistics Service said on Thursday, citing preliminary data. That was better than all but four forecasts in a Bloomberg survey of 19 economists, whose median estimate was for a 0.8 percent drop.

The challenge for the world’s biggest energy exporter now is to gain traction as consumer demand continues to sag and oil remains in a bear market after closing below $40 a barrel last week for the first time in almost four months. Russia may now be approaching a turning point as capital-intensive businesses come to life after a record drop in investment that followed the collapse in crude prices.

“Russia is not out of the woods yet,” Cristian Maggio, the London-based head of emerging-market research at Toronto Dominion Bank, said before the data release. “So after the recovery, the risk is a long period of quasi-stagnation.”

Investor Appetite

The improving outlook is driving appetite for Russian assets. The ruble was the second-best performer in emerging markets last quarter with a gain of 4.8 percent against the dollar. It traded little changed at 64.8225 against the dollar as of 3:36.m. in Moscow. Ruble volatility is at the lowest level since 2014, with investors seeking close to four times the government debt tendered at an auction on Wednesday.

Unlike the recessions in 1998 and 2009, which set the stage for sharp rebounds, the economy has been slower to retool this time. With parliamentary elections a month away, authorities are under pressure to ease the plight of households after a currency crisis and a spike in inflation eviscerated their earning power. The government is already running the widest deficit since 2010.

As consumer demand, which powered Russia’s economic recovery in the years after the 2008-2009 crisis, continues to languish, agriculture, industry and transport carried Russia last quarter, according to the Economy Ministry, which also estimated that GDP lost 0.6 percent.

‘Slow Growth’

Central bank Governor Elvira Nabiullina in June put Russia’s potential growth at no more than 2 percent in the medium term and called for improving the business climate and structural reforms to harness the nation’s potential. GDP may expand 0.4 percent in the third quarter from the previous three months, according to the central bank’s research and forecasting department.

“Expectations for the beginning of a slow economic recovery in the third quarter have strengthened,” it said in a report on Monday. “The economy is expected to enter a trajectory of slow growth in nearest months if there’re no new external shocks.”

— With assistance by Zoya Shilova

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