Russia’s Incredible Shrinking Economy

Business Week reports:

On 9 December, Russia’s State Statistics Service revealed the GDP growth figures for the third quarter. And – lo and behold – they are “surprisingly bad”, “below market expectations”, etc. (Read the reports in The Moscow Times, Bloomberg and Reuters).

You might think that by now economists would no longer be surprised by the stream of dire economic news. For anyone who has been closely following what has been happening in Russia’s economy over recent weeks, it’s increasingly obvious that it has essentially stepped off a cliff. As Danske Bank economist Lars T. Rasmussen writes in a research note: “The question is whether there will be any economic growth at all in Russia next year.”

“But surely 6.2% growth in the third quarter isn’t so bad?” I hear you say. Think again.

That figure is the year-on-year change, not the quarterly change. In other words, it includes the rapid growth that took place in the first half of this year and the fourth quarter of 2007, when Russia’s GDP was still growing by 8%. The month-on-month trends show that output is already contracting. Russia’s GDP fell by 0.4% in October, according to government officials.

Now, the signs are that production in Russia is not simply stagnating: It is in fact plummeting like a stone. Industrial output, generally an early indicator of GDP trends, has been falling over recent months. And the output decline appears to have accelerated dramatically in November and December. According to the latest government figures, cited in the Moscow Times article, manufacturing production will have plummeted by an additional 10% by the end of the year.

The latest business surveys also confirm the dramatic speed and scale of the economic deterioration. These show that the situation facing Russia’s service industries (not recorded in the industrial output figures), is even more dire than in manufacturing.

The gloomy official figures only confirm what has been apparent from anecdotal evidence for weeks. In sector after sector, Russian companies are reporting sharply declining orders and massive lay-offs. Construction, banking, metallurgy and the automotive industry are all in deep and obvious crisis. Russian railways has reported a 20% decline in freight volumes, reflecting the nationwide slump in industrial production. As for the oil industry: that was reporting declining output and insufficient funds months ago, long before the financial crisis escalated and the oil price plunged.

The risk of a GDP contraction has already been highlighted by longtime Russia watcher Anders Aslund, perhaps the first economist to warn of the current Russian economic slump. In October Aslund suggested that Russia’s GDP could fall by 5% next year.

Now those views, which once appeared heretical and extreme, are becoming mainstream. Barclays Capital now predicts “acute declines in output in the first months of the year”.

Nouriel Roubini, a US economist who became famous for accurately predicting the global credit crunch, is also weighing in on Russia’s economy. He writes that the current global outlook “signals a sharp recession in advanced economies, and a very likely recession in Russia too”.

Meanwhile Bloomberg cites Alexander Lebedev, one of Russia’s top businessmen, saying that the economy would “definitely” go into recession next year, and that it is “quite possible” that it will contract by as much as 10%.

Even the dreaded “D” word is now beginning to be heard. In comments cited in The Moscow Times, leading Russian economist Evgeny Gavrilenkov warns that if the latest government figures are accurate, they mean that Russia is now heading into a “severe depression”.

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