Has Russia’s economy hit bottom?
Russia’s GDP fell by 10.5% in April 2009 relative to April 2008, and by 9.8% in the first four months of 2009 relative to the same period of 2008. These figures were announced by Deputy Economic Development Minister Andrei Klepach. He added that the downturn is slowing, but experts question this forecast.
Russia’s GDP fell by 10.5% in April 2009 relative to April 2008, and by 9.8% in the first four months of 2009 relative to the same period of 2008. These figures were announced on May 26 by Deputy Economic Development Minister Andrei Klepach. But these indications that the economy’s contraction is accelerating didn’t prevent Klepach from adding that the downturn is slowing. Klepach also confirmed that the Economic Development Ministry’s working forecast for GDP decline in 2009 is 6-8%. He said: “We are assuming that the economy is close to hitting bottom, but has not yet resumed growth.” According to the Ministry, declining investment is still the major factor in the Russian economy’s fall. Investment dropped by 16.2% in April and by 15.8% in the first four months of 2009. Retail trade indicators also deteriorated in this period.
When asked about recovery timeframes, Klepach noted that results for May won’t be of much use in determining whether a breakthrough has happened or the downturn is continuing. But Klepach didn’t rule out the possibility of contraction being halted in June.
Further bad news came in the form of reports that the budget deficit could be substantially higher than the 7.4% limit announced by President Dmitri Medvedev on May 25. A source from the Cabinet’s financial-economic bloc told journalists on May 26: “The budget deficit in 2009 will be 9% of GDP, despite the 7.4% deficit set down in budget planning.”
The government announcements on May 26 were the most negative news since the crisis began. But many independent experts predict that things will get even worse.
Mikhail Khazin, head of NeoCon, says: “The growth of budget spending certainly won’t lead to GDP growth. The anti-crisis measures are aimed at support, not incentives. But as the situation deteriorates – no later than autumn – those measures will stop working.” According to Khazin’s forecasts, GDP may fall by up to 25% in 2009 and the budget deficit may reach 15% of GDP.
Igor Nikolayev, head of the strategic analysis department at FBK, says the budget deficit increase is due to the mistaken forecasts of the government, which decided to base budget calculations on a GDP drop of only 2.2%. Nikolayev says: “A deeper crisis and the consequent tax revenue shortfalls cannot be compensated for even by higher than expected oil export revenues, with oil prices still above the budget’s figure of $41 a barrel.” According to Nikolayev, we can expect the contraction to slow in June, relatively, since industrial output figures for June 2008 were among the lowest in the pre-crisis period. “We haven’t hit bottom in this crisis at all. What’s more, the negative factors have become a stable trend, so we shouldn’t expect any recovery in the next few months.”
Experts say that the budget deficit increase is due not only to GDP decline, but also to the fact that the economy is retreating into the shadows. Alexander Orlov, managing director of Arbat Capital, says: “The causes of the increasing budget deficit include a steep drop in tax discipline, with companies resorting to ‘gray’ tax arrangements, paying workers in cash, and resuming barter.”