Moscow: Russia’s recession this year may be 50% deeper than during the 1998 crisis, a senior finance ministry official said on Tuesday, a day after President Dmitry Medvedev called for a conservative approach to forecasts.
Russia’s once buoyant economy has been undermined by lower oil prices, the fall in world demand for its commodities, and the worldwide credit crunch which has left companies struggling to refinance foreign loans secured in better days.
Under a pessimistic scenario, the economy could shrink 6.0-8.0% this year, deputy finance minister Oksana Sergiyenko told reporters - significantly weaker than previous official forecasts. Such a contraction would cut budget revenues by up to an extra 300 billion roubles ($9.66 billion) and raise the deficit to 9% of gross domestic product (GDP).
The current budget is based on a deficit of 7.4% and an economic contraction of just 2.2%. But Medvedev said on Monday the slowdown will likely be deeper than that and the Economy Ministry has already forecast it could reach 6%.
“It doesn’t necessarily mean that the economy will develop in this way, but we must take risks into account,” Sergiyenko said.
At 8.0%, the contraction would be about 50% sharper than the 5.3% during the last recession in 1998, but Russia’s economy is much bigger now. The International Monetary Fund forecasts suggest it will end the year at least four times bigger in dollar terms than it was a decade ago.
A survey by Russian pollsters Levada showed this week that 42% of Russians are struggling to make ends meet or living beyond the poverty line, but this compares with nearly 70% in 1998-1999.
The slowdown accelerated to 10.5% year-on-year in April from 9.5% in March, deputy economy minister Andrei Klepach said on Tuesday.
The overall performance was probably dragged down by a record contraction in industrial output and a continued slowdown in retail sales as Russians face job cuts and salary reductions.
“Clearly, despite the bounce back in oil prices, the Russian economy is proving slow to respond,” said RBS analyst Tim Ash.
The price of its export Urals oil blend has averaged $44.6 a barrel in the first four months of this year - less than half of its price tag in the same period of 2008 but better than the $41 level factored into the budget.
On Monday, Medvedev said official forecasts for the resource-focused economy should be based on conservative assumptions about the price of its commodity exports.
There was some encouragement for investors looking for the first green shoots showing that the slowdown has bottomed.
May likely saw net capital inflows of $2 billion, marking the first month of inflows since July 2008, Sergiyenko said.
The April trade surplus hit a 3-month high of $7.5 billion as exports picked up - perhaps thanks to a slight recovery in crude prices - while imports were reined in, Klepach said.
“We are working on the basis that the economy is near the bottom,” Klepach said. “The depth of the slowdown, the scale of the fall is still increasing, but the pace is slowing down.”
He added that inflation could be as low as 0.6% in May after 0.7% in April and 1.3% in March. Lower inflation gives Russia more room to cut interest rates in a bid to encourage commercial banks to offer more affordable loans.
“I don’t think there is a silver lining (in the GDP data), but I really think that the economy has reached a stable level but at a low equilibrium,” said Ivan Tchakarov, economist at Nomura in London.