April 3, 2014 10:57 am

Russian economy shrinks, survey suggests

Workers prepare a bogie trolley chassis for rolling stock during wagon manufacture at the Tikhvin Freight Car Building Plant in Tikhvin, Russia, on Friday, Oct. 25, 2013. The Tikhvin Freight Car Building Plant is operated by billionaire Alexander Nesis's ICT Group. Photographer: Andrey Rudakov/Bloomberg©Bloomberg

Russia’s economy appears to have contracted in the first three months of this year, according to a survey of purchasing managers released on Thursday, pointing to a sharp fall in activity last month in both the manufacturing and services sectors.

The composite PMI output index for Russia, released by HSBC bank, dropped from 50.2 in February to 47.8 in March as businesses particularly in the service sector grew more worried about the future, bringing their expectations close to the historical low during the financial crisis in late 2008. Index readings below 50 indicate a contraction.

The indicator is the latest in a flurry of warnings that the crisis over Russia’s annexation of Crimea is suffocating an economy that was already struggling to grow.

Last week, Russia’s economy minister said growth might slow to just 0.6 per cent this year from 1.3 per cent in 2013, down from a January forecast of 2.5 per cent. The World Bank said under a worst-case scenario the Russian economy could contract by 1.8 per cent this year, which would be the first annual contraction since 2009.

Although US sanctions slapped on 20 Russian officials and tycoons and one bank last month appear to be applied narrowly, allowing many companies linked to them to continue to do business with the US, the lack of clarity over the legal risks and fears of more tension to come are driving many businesses to adopt a wait-and-see attitude.

Alexander Morozov, chief economist for Russia at HSBC, said the country’s gross domestic product was likely to continue falling in the second quarter, technically putting the economy in recession.

BCS, the largest independent broker on the Moscow Stock Exchange, said the PMI reading “presages a hard landing for the Russian economy” in the second and third quarter.

The Russian economy’s biggest problem has been sluggish investment as high borrowing costs and risks to private property rights deter companies and long delays in modernising infrastructure and manufacturing equipment have left the economy with little capacity to grow even if demand were stronger.

Even before the sanctions started to bite, a recovery hoped for at the end of 2013 had fizzled out.

GDP grew by just 0.1 per cent in January and 0.3 per cent in February, according to the government.

“What is more, the slowdown appears to have been driven by a renewed fall in investment,” said Liza Ermolenko an economist at Capital Economics.

In addition, the fears over sanctions and the political crisis have exacerbated Russia’s perennial problem of capital flight, adding downward pressure on the rouble and fuelling inflation. The economy ministry last week estimated capital outflows from the country to reach up to $70bn in the first quarter, more than the amount that left Russia in all of last year.

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