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. Last Updated: 07/27/2016

GDP Shrinks 9.8% in 15-Year Record

MTA sign says "Closing. Everything must go." Official statistics showed a worse-than-expected first-quarter slump.
Russia's economy contracted the most in 15 years in the first quarter after industrial production plunged and the government's 3 trillion rubles ($97 billion) in stimulus spending failed to boost companies and banks.

Gross domestic product tumbled an annual 9.8 percent, compared with growth of 1.2 percent in the previous quarter, the State Statistics Service said Sunday. The preliminary estimate on May 15 was a 9.5 percent contraction.

"The government may be forced to devalue the ruble further to bolster exporters and spend its stimulus package more aggressively," said Danila Levchenko, chief economist at Otkritie. "The results are worse than any forecasts as the economy is being derailed by a slump in manufacturing and property development."

Russia is falling into its first recession in a decade after the global slowdown sapped demand for its commodities and companies struggled to find funds. The government's stimulus package has failed to spur bank lending, even as the Central Bank cut its main interest rates three times since April.

"Aggressive cuts in official interest rates over the past six months have not fed through to lower borrowing costs," Neil Shearing, an analyst at Capital Economics, wrote in a report last week. "A sustained recovery is unlikely much before the second half of next year."

GDP may slump as much as 8 percent in 2009, Economic Development Minister Elvira Nabiullina said last month, after growth of 5.6 percent in 2008 and 8.1 percent the year before.

President Dmitry Medvedev said June 6 that the economy will rebound "more quickly than had perhaps been expected."

The economy contracted in May at the slowest pace since October, shrinking 6.8 percent from a year earlier, as slumps in manufacturing and service industries eased after record declines in April, according to VTB Capital.

The deficit, Russia's first in a decade, may reach 10 percent of GDP this year amid falling oil prices, according to the Finance Ministry.

Urals crude, Russia's chief export blend, has averaged $49.43 a barrel this year. The country's revised 2009 budget is based on an average price of $41.

The recovery in oil prices is unlikely to bolster Russia's economic performance, Rory MacFarquhar, an economist at Goldman Sachs, said in a report last week.

"We have long argued that oil prices do not have a direct impact on activity since they are almost entirely taxed away by the state," he wrote. "In the past, high oil prices were accompanied by strong credit inflows, which do have a stimulative impact. But we do not expect a rebound in credit under current circumstances given the damage already suffered by both domestic and foreign lenders."