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. Last Updated: 07/27/2016

State Sees Economy Shrinking by 2.2%

Russia's economic outlook darkened on Tuesday, with a government forecast for a 2.2 percent contraction adding to a batch of gloomy data releases to pressure the ruble and stocks.

Wage arrears -- a cause of social unrest in the 1990s -- jumped nearly 50 percent last month, affecting half a million people. Statistics released Monday showed a record slump in industrial output in January, as companies idled factories and cut working weeks in the face of slumping demand.

The Economic Development Ministry responded by slashing its outlook for the once buoyant economy, despite keeping unchanged its oil price forecast of $41 per barrel for 2009 and an assumed currency exchange rate of 35.2 rubles per dollar. "The GDP forecast has worsened to minus 2.2 percent [from minus 0.2 percent]," Deputy Economic Development Minister Andrei Klepach said, Interfax reported.

Such a deterioration would be in sharp contrast with previous years, when gross domestic product grew by 6 to 7 percent. Even last year, the economy grew 5.6 percent despite a sharp downturn in the fourth quarter.

The slump in oil prices, flight of investors from emerging markets and the drying up of foreign funding sources because of the credit crunch mean that Russia is heading for its worst year since the sovereign default and currency collapse of 1998. That year, GDP contracted 5.3 percent, according to the International Monetary Fund.

Worries about the economy and about companies' abilities to cope with some $500 billion in outstanding foreign debt have brought Russia's first sovereign downgrades in a decade -- Standard & Poor's in December followed by Fitch this month.

"Our expectations for 2009 for GDP -- it will fall nominally in dollar terms by 20 percent," Alexei Novikov, head of S&P in Russia, told a conference Tuesday, adding that currently, the size of the economy was around $1.3 trillion.

"The fall in GDP ... could be an extra factor of credit risk," he said.

In ruble terms, the real, inflation-adjusted GDP would likely contract 2 percent to 3 percent this year, he added.

The ruble has fallen by about 35 percent against the dollar since mid-2008 but strengthened a bit in early February after briefly touching the Central Bank's support level.

On Tuesday, it weakened again, drawing little cheer from the data, but also reacting to Central Bank comments that it would not allow large currency gains or excessive falls. The ruble fell 2 percent to 40.25 versus a euro-dollar basket, extending Monday's 1.5 percent fall and edging back toward the boundary of its 26-41 trading band.

"We will smooth out excessive volatility with our interventions," Central Bank First Deputy Chairman Alexei Ulyukayev said Monday, forecasting that the ruble would trade around 39-41 per basket in the near future.

The MICEX and RTS exchanges both fell more than 9 percent, prompting them to suspend share trade limit down for an hour.