Russia's Economy Is Doing Much Worse Than We Thought

Russia's third-quarter growth rate fell well below expectations on Friday in a fresh blow to government hopes of avoiding the worst economic performance since the 2008-2009 global crisis.

Deputy Economy Minister Andrei Klepach said Russia's $1.95-trillion (1.41-trillion-euro) economy expanded by 1.2 percent between July and September compared to output in the same period in 2012.

The annual rate -- the slowest among the big emerging markets and about half the pace enjoyed in the United States -- was the same as in the second quarter and slower than the 1.6-percent rise witnessed in the first three months of the year.

"The third quarter was not one of economic revival," Klepach admitted.

"The stagnation continues. There is a pause in growth."

Klepach said a closer look at the figures revealed disappointing signs of an economy that was actually losing momentum rather than gathering pace.

Seasonally-adjusted growth slowed by 0.1 percent in September from August. The figure for that month was 0.1-percent less that the one in July.

Both the government and economists had expected Russia's output to pick up in the second half of the year and reach an annual rate of about 1.8 percent.

But Klepach said that figure will now be reached only if fourth-quarter performance suddenly accelerates to 3.4 percent.

"We could see a small rebound in the fourth quarter," said Klepach.

"We are not yet revising the 1.8-percent forecast. But it does look optimistic."

President Vladimir Putin had initially promised growth of 5.0 percent in 2013 -- a figure that was meant to improve on the 3.4-percent to 4.0-percent yearly performances witnessed between 2010 and 2012.

Bank of America Merrill Lynch had predicted growth of 1.6-1.7 percent in the third quarter -- a slight downgrade from its own earlier estimate.

It attributed Russia's latest disappointment to a poor harvest that was damaged by one of the wettest autumns in years.

"We think that the disappointing rate of improvement can be attributed partly to the poor weather conditions, which have constrained potentially strong agricultural output this year," said Bank Of America Merill Lynch analyst Vladimir Osakovsky.

He noted that a large part of a harvest that was expected to grow by 30 percent on last year "seems now to have been lost."

But most analysts believe Russia's economic problems run much deeper.

Moscow's VTB Capital investment bank highlighted "a sharp deceleration in retail sales, declining employment and contracting investments" as the most immediate challenges facing Putin's government.

The International Monetary Fund has recommended that Russia "protect growth-enhancing investment spending" by overhauling the outdated pension programme and limiting spending on inefficient projects.

It also urged the central bank to stamp down harder on interest rates -- now at the top of 5.0 to 6.0-percent annual target after spending the summer above 7.0 percent -- by keeping any monetary easing policies in check.

Klepach said he did not expect to see any rate cuts before next year.

The bank's board of governors has called Russia's economic problems primarily structural and warned that a sudden cash infusion could result in higher inflation while producing no growth benefits.

Standard and Poor's agreed in late September that "the economy is reaching the limits of its capacity" and needs a quick business climate improvement that could generate lacking investment growth.