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Russia Sticks to 4.1% Economic Growth Forecast after GDP Misses Estimates

Press Release: Published November 2011

Russia’s economic expansion will accelerate this year from 2010 even after gross domestic product grew more slowly than estimated in the third quarter, Deputy Economy Minister Andrei Klepach said.

Russia’s economic expansion will accelerate this year from 2010 even after gross domestic product grew more slowly than estimated in the third quarter, Deputy Economy Minister Andrei Klepach said.

The economy will increase 4.1 percent this year after 4 percent last year, Klepach said in a telephone interview yesterday, reiterating the official target. GDP rose 4.8 percent from a year earlier last quarter, missing economists' forecasts and the Economy Ministry's estimate of 5.1 percent.

The world's biggest energy exporter is relying on domestic consumption to balance shrinking sales abroad as Europe fights to staunch a debt crisis that threatens to throttle demand for commodities. Prime Minister Vladimir Putin, who will run for president next year, is seeking annual expansion of between 6 percent and 7 percent to turn the economy into one of the world's five largest.

"Growth of 4.8 percent is a positive result for the Russian economy and we can speak about it reaching a relatively high rate of expansion," Yaroslav Lissovolik, head of research at Deutsche Bank in Moscow, said in a telephone interview yesterday.

The ruble depreciated 0.5 percent to 30.6804 per dollar and was little changed at 41.6950 against the euro at 10:32 a.m. in Moscow. The 30-stock Micex Index retreated 0.6 percent to 1,475.67. The ruble-denominated gauge is down 13 percent this year, less than the 16 percent drop for the MSCI Emerging Markets Index.

Explaining the Discrepancy

The economy accelerated in the third quarter for the first time since last year. The government predicts GDP will slow in the fourth quarter, growing between 3.8 percent and 3.9 percent. The Economy Ministry will explain the discrepancy between its third-quarter estimate and the figure released by the statistics service when a breakdown of the contributions to growth becomes available, Klepach said.

Outflows of capital and insufficient investment are a drag on growth and present risks for Russia's economy, Klepach said. Net capital flight may reach $70 billion this year, up from a previous forecast for $36 billion of outflows, according to the central bank.

Fixed-capital investment surged 8.5 percent from a year earlier in September, while the unemployment rate fell to the lowest in more than three-years. Retail sales jumped 9.2 percent in the biggest increase since October 2008 after a 7.8 percent gain in August.

'Bounce Back'

"The third-quarter growth number confirms our view that the economy will bounce back," Vladimir Pantyushin, chief economist at Barclays Capital in Moscow, said in a e-mailed note to clients yesterday. "Investment recovery and solid consumer growth are taking the emphasis from industrial production, which has been slowing recently."

The sovereign-debt crisis in Europe, Russia's most important export market, is hurting demand for manufactured goods. Industrial production grew 3.9 percent in September from a year earlier, the slowest pace since it began expanding in October 2009.

Manufacturing stalled in the July-September period, posting the worst performance since the fourth quarter of 2009 and leaving producers to "face lasting stagnation" after foreign sales weakened, HSBC Holdings Plc said, citing data compiled by London-based Markit Economics.

Stronger External Demand

"Without stronger external demand, domestic demand growth would be unable to allow the economy to grow more than 3 percent next year," Alexander Morozov, chief economist for Russia and the Commonwealth of Independent States at HSBC Holdings in Moscow, said by e-mail.

Urals crude, Russia's chief export blend, declined for the second straight quarter, losing 8.2 percent in the July- September period. Russia depends on crude and natural gas for about 40 percent of budget revenue.

The economy will match its pre-crisis level by the end of this year, taking twice as long to recover compared with the 1998 crisis that followed the government's default, according to Renaissance Capital.

Russia's economy grew at an average annual rate of 7 percent during Putin's presidency from 2000 to 2008 before plunging 7.8 percent in 2009. The government forecasts a 3.7 percent expansion next year.

'Picked Up Strength'

"Economic activity has picked up strength from earlier in the year," Ivan Tchakarov, chief economist for Renaissance Capital in Moscow, said yesterday by e-mail. "Overall, this is broadly positive, but not very surprising print given the low base from last year when the economy felt the full brunt of the summer drought."

Russian farmers harvested 95 million metric tons of grain as of Oct. 25, according to the Agriculture Ministry. That's about 50 percent more than in the same period of 2010 and bolsters the industry following the country's worst drought in at least a half century last year.

Only the fourth quarter will show if faster growth can be sustained, Deutsche Bank's Lissovolik said.

"Agriculture's contribution to GDP is very high in the third quarter," he said. "That's why fourth-quarter data will be even more important for gauging the viability of economic growth."


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