GDP Falls 10.9% in Surprise Drop

MTGDP expanded a nonseasonally adjusted 7.5 percent this quarter after falling 23 percent in the first three months.
The economy contracted the most on record last quarter as rising unemployment sapped consumer demand, bank lending stalled and the government failed to approve a stimulus package until just two months ago.

Gross domestic product contracted an annual 10.9 percent in the second quarter, the State Statistics Service said Tuesday, citing preliminary data. The median estimate in a Bloomberg survey of seven economists was for output to shrink 10.2 percent. The service’s data go as far back as 1995.

The economic decline is worsening after output contracted 9.8 percent in the first quarter, ending 10 years of expansion that averaged close to 7 percent.

The ruble erased earlier gains against the dollar, weakening 1.4 percent to 32.2, the lowest in almost a month. The currency lost 1 percent against the euro to 45.5. Those movements left the ruble at 38.25 against the Central Bank’s target currency basket.

Russia failed to free itself of its reliance on commodities during Prime Minister Vladimir Putin’s tenure as president between 2000 and 2008, said Natalya Orlova, chief economist at Alfa Bank.

“Because of high oil prices, capital came in; banks transferred this capital into the economy,” she said. “Rising wages fed consumer growth, so there was no reason to invest or create new production. Now, capital has stopped coming in, and consumption has stopped. This model has ceased to exist. We don’t have a new one.”

GDP expanded a nonseasonally adjusted 7.5 percent from the previous quarter after contracting 23 percent in the first three months, the office said.

“The economy approached the bottom in the second quarter, basically it hit the bottom around May, June,” said Tatyana Orlova, an economist at ING Groep. “We should see some better-looking data” in the coming quarters.

Russian stocks maintained earlier gains as the 30-stock MICEX Index closed down 2.9 percent to 1069.31, adding on to Monday’s 1.3 percent retreat. The RTS Index lost 2.9 percent to 1033.72 on Tuesday.

Russian stock market moves are showing record correlations with oil futures traded in New York, based on daily changes over the past 90 days, according to data compiled by Bloomberg. The MICEX Index, which is mostly made up of energy companies, slipped into a bear market in June after falling more than 20 percent from its high on June 1, on concern that a prolonged recession will cut demand for fuel. It gained 8.4 percent in July and is up 79 percent this year.

The world’s biggest energy exporter may run a budget deficit as wide as 9.4 percent of GDP this year, the country’s first shortfall in a decade, as plummeting demand for commodities threatens to cut revenue by a third, according to the Finance Ministry.