Russian economy shrinks for first time since 2009

29th December 2014, Comments 0 comments

Russia's economy shrank in November for the first time in five years, the government said Monday, illustrating the sharply changing fortunes of President Vladimir Putin's rule as he faces falling oil prices and Western sanctions.

The figures were the latest indication that Russia was sliding into recession -- and potentially a deep one should oil prices remain low -- presenting a major challenge to Putin amid his current showdown with the West.

In the latest move to combat the crisis, Prime Minister Dmitry Medvedev said on Monday he had signed off on a 1 trillion ruble ($17.9 billion) capital boost for the banking sector.

Medvedev's announcement came as the economy ministry said gross domestic product for the month contracted by 0.5 percent year-on-year for the first time since October 2009.

Under pressure from the low oil price and Western sanctions over the Kremlin's support for separatists in Ukraine, Russia is heading for a sharp recession complete with the collapse of the ruble and double-digit inflation.

"This is the beginning of a recession," Ruslan Grinberg, director of the Institute of Economics at the Russian Academy of Sciences, told AFP.

Vladimir Osakovsky, chief economist for Russia at Bank of America Merrill Lynch in Moscow, struck a similar tone.

"We believe that Russia will post negative growth from the fourth quarter of this year until the end of the next year," he told AFP.

The economy ministry chalked up the negative growth to a slowdown in sectors including services, agriculture, extraction of mineral resources and construction.

Households' real disposable incomes went down by nearly 3 percent in November compared to October when they were up 2.4 percent, the ministry's figures showed.

- 'Band-aid solutions'? -

Putin's pact with voters has for years been based on relative prosperity and high oil prices.

He has dismissed the financial troubles as temporary, saying the economy would adjust to the low oil price and rebound in two years at most.

But many economists said such statements exposed a lack of a firm plan to deal with the crisis, which has also seen the ruble fall some 40 percent against the dollar this year.

On Monday, the ruble was down by around 6 percent against the greenback at the opening but later recovered some of the losses and traded at around 56 rubles to the dollar in afternoon trading.

Russia's national currency fluctuated wildly this month, forcing Russians to snap up imported goods ahead of expected price hikes.

On December 16, swiftly dubbed "Black Tuesday", the currency crashed to unprecedented lows of 80 rubles to the dollar and 100 rubles to the euro.

To buttress the beleaguered currency, the government ordered state-controlled exporters to sell part of their foreign exchange holdings and the central bank raised interest rates to 17 percent from 10.5 percent.

Grinberg disparaged the authorities' response as "band-aid solutions".

"There is no systemic anti-crisis programme. They are not ready yet to react to this in a serious manner."

Economy minister Alexei Ulyukayev admitted this month the government lacked an anti-crisis plan, saying Russia had found itself in the midst of a "perfect storm."

The central bank has warned of a contraction by up to 4.8 percent in 2015 based on current oil prices, with a recovery not expected until 2017.

Finance Minister Anton Siluanov said last week that the economy could shrink 4.0 percent next year based on oil prices of around $60 a barrel and predicted a budget deficit of 3.0 percent.

He said the government would have to further reduce expenses or tap into its reserves, noting that a planned 10 percent spending cut was not enough.

-'Risks ever more pronounced'-

But Bank of America's Osakovsky said the situation was "not catastrophic," adding that a floating ruble would allow risks stemming from the falling oil prices to be minimised.

Some observers said the fact that Medvedev has managed to keep his post means that the economy has not reached a tipping point, at least in Putin's eyes.

"Despite all their might, the authorities prefer to mobilise resources to crush internal domestic threats instead of implementing structural reforms in the economy," wrote political analyst Tatyana Stanovaya in an apparent reference to the opposition.

"This means that the development of the country is becoming ever less predictable and the risks for each of us ever more pronounced."

© 2014 AFP

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