Russia is facing a recession that could last more than two quarters, Russia’s deputy economy minister said on Friday, marking the the first time a senior official has acknowledged the economy is contracting.
“It [recession] has started already. I’m afraid it will not be over in the next two quarters,” deputy economic minister Andrei Klepach told reporters.
Any contraction would be a massive turnaround from the more than 7 per cent growth Russia has recorded for most of the year forcing Russian companies to announce massive lay-offs and scale back production. Russia has not faced a recession in the ten years since the August 1998 financial crash as the economy boomed on the back of high commodity prices.
But lending has now all but dried up despite a $200bn-plus government bailout plan as banks hoard cash or transfer it into dollars amid a run on the rouble due to a steep decline of more than 70 per cent in the oil price since it peaked this summer.
Russia temporarily halted trading on the rouble-denominated MICEX again on Friday because of the steepness of a sell-off as the market slid 5.6 percent following another drop in the oil price. The market is down more than 70 per cent since May.
Mr Klepach did not elaborate with a forecast for GDP but he said he forecast industrial output growth of 1.9 percent for 2008, despite the fact production had climbed 4.9 percent in the first ten months. Russia recently recorded the slowest third quarter GDP growth for three years at 6.2 percent.
Russia’s service sector contracted for the second time in a month in November, according to VTB Bank Europe’s purchasing manager’s index, which has now reached its lowest level in seven years.
Vladimir Putin, Russia’s prime minister, on Friday repeated his vow not to allow a sharp devaluation in the rouble
“We will do everything that depends on us to not allow a sharp change in the rouble rate,” Mr Putin said. He said GDP growth for 2008 would close at 6 per cent.
But pressure is mounting for a sharper devaluation than the incremental 1 per cent drops the central bank has allowed five times in the last month because the central bank has been haemorraging reserves in an effort to support the rouble. Data released on Thursday showed reserves fell another $17.9bn last week, bringing them down a total 27 per cent since highs of nearly $600bn in August.
Mr Putin has staked his political credibility on staving off a sharp devaluation for the Russian population which still has memories of the August 1998 devaluation which saw savings wiped out. But economists warn the government’s bid to enforce a gradual weakening is only strengthening a run on the rouble and increasing the pressure on reserves. They say a sharper devaluation could also boost the economy.
Standard & Poors downgraded Russia’s sovereign rating this week for the first time since the August 1998 financial crisis citing the “rapid depletion of reserves”. Moody’s changed its outlook on Russia’s debt from positive to stable on Friday also citing the pressure on reserves.