Russian growth slows in quarter

Putin’s sanctions reprisal bodes ill for GDP of neighbors

A young woman holds a bag with T-shirts with images of Russian President Putin, which she has just bought, at GUM (the State Department Store) in Moscow, Russia, Monday, Aug. 11, 2014.  Putin’s popularity in Russia has soared following his decision to annex Ukraine’s Crimean Peninsula. Putin's image is on the T-shirt at right. (AP Photo/Ivan Sekretarev)
A young woman holds a bag with T-shirts with images of Russian President Putin, which she has just bought, at GUM (the State Department Store) in Moscow, Russia, Monday, Aug. 11, 2014. Putin’s popularity in Russia has soared following his decision to annex Ukraine’s Crimean Peninsula. Putin's image is on the T-shirt at right. (AP Photo/Ivan Sekretarev)

Russia said Monday that its second-quarter economic growth slumped, underlining the risks to a recovery in the region as President Vladimir Putin retaliates after penalties imposed over the deepening conflict in Ukraine.

Gross domestic product advanced 0.8 percent in the second quarter from a year earlier after 0.9 percent growth in the first three months of the year, the Federal Statistics Service said, citing preliminary data. The Economy Ministry in Moscow had projected 1.1 percent expansion. GDP growth in Poland, Hungary and the Czech Republic probably slowed in the April-June period on a quarterly basis, according to analysts surveyed by Bloomberg.

The economies of former Soviet satellites are getting caught up in the crossfire of sanctions, compounding months of sagging Russian demand for their exports, after Putin imposed import bans on an array of foods last week. The fallout is ricocheting, with Finland, Poland and Lithuania planning to ask the European Union for compensation to ease the economic pain.

Regional economies from the Baltics to Poland will be "much more affected by the food ban that Russia imposed than Russia's slowdown," said Ivan Tchakarov, an economist at Citigroup Inc. in Moscow. Russia's "risks of recession are certainly higher for the second half of the year as we suspect that investment spending will re-enter negative territory while consumer spending may continue to slow on the higher inflation, including because of the food import ban."

Investors are punishing many former communist nations. The cost to insure the Polish government's debt against nonpayment widened 22 percent, the most in the past five days among the 19 developing economies tracked by Bloomberg. Russian five-year credit-default swaps widened 9.6 percent in the same period.

Russian countersanctions "definitely are going to affect emerging economies in eastern Europe because Russia is an important market," said Juri Kren, an economist at IdeaGlobal in London. "Russia can avoid a recession this year, but, in any case, growth is going to be very weak and close to zero."

On the basis of data from Eurostat, Russia was the destination for 19.8 percent of Lithuania's exports last year. For Latvia, Estonia, Finland and Poland it was 16.2 percent, 11.4 percent, 9.6 percent and 5.3 percent, respectively.

The ban may knock 0.2 percentage points off Lithuania's GDP growth, according to the country's economy minister, and inflict about the same damage in Estonia, its central bank said Monday.

Putin and his government have struggled to kick-start the $2 trillion economy as fighting rages next door in eastern Ukraine. The standoff with the U.S. and the European Union has spurred ruble devaluation and capital flight.

Russia's GDP may grow 0.5 percent this year, according to the median estimate of 38 economists surveyed by Bloomberg July 18-23, unchanged from the previous month's results. The economists cut their 2015 growth forecast to 1.6 percent from 1.8 percent.

The government estimates the economy will gain 0.5 percent this year, the slowest pace since a 2009 contraction.

"More depressed domestic demand is probably the main reason for the economic slowdown in the second quarter," said Vladimir Tikhomirov, chief economist at BCS Financial Group in Moscow. "The fourth quarter may bring a negative surprise, as there will be more significant effects from sanctions and an inflation jump due to Russia's sanctions."

Penalties levied against Russia were having a "serious indirect influence" on the economy even before the U.S. and the European Union broadened sanctions to include banks and the energy industry, according to Deputy Finance Minister Sergey Storchak.

Consumer demand, the mainstay of Russia's recovery in recent years, is cooling as expansion of real wages slows. Retail sales decelerated for a third month in June, growing the least since January 2010, and real wages rose 1.7 percent, the weakest since February 2011.

"Even before the Ukraine crisis, consumption, the main source of growth, was flagging," Vladimir Bragin, head of research at Alfa Capital in Moscow, said by email before the data was published. "The deceleration of consumption is the result of the household debt load and the slowing growth of real wages."

Information for this article was contributed by Zoya Shilova and Vladimir Kuznetsov of Bloomberg News.

Business on 08/12/2014

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