Russian Third-Quarter Growth Slows as Crisis Spreads

By Alex Nicholson

Dec. 9 (Bloomberg) -- Russia’s economy expanded in the third quarter at the slowest pace in three years as the spreading global financial crisis choked investments and put the brakes on retail and construction growth.

Gross domestic product grew 6.2 percent, compared with 7.5 percent in the previous quarter, the Moscow-based Federal Statistics Service said in an e-mail. The median forecast of 10 economists surveyed by Bloomberg was for growth of 6.8 percent.

Russia’s economy is faltering more than China and India, two other emerging markets, and may go into recession next year after Urals crude tumbled 70 percent from a July record of $142.5 per barrel and investors withdrew $190 billion since August, BNP Paribas SA estimates. Standard & Poor’s cut Russia’s long-term debt rating for the first time in nine years yesterday, citing the outflows and a “rapid depletion” of currency reserves.

“Russia is much more dependent on commodity revenues,” said Chris Weafer, a chief strategist at UralSib Financial Corp. in Moscow. “Its economy is the least diversified.”

The economy, which has averaged over 7 percent growth since 2000, is stumbling, even as the government deploys a $200 billion emergency bailout package. A seizure on global credit markets is cutting companies’ access to funding and curbing demand for energy and metals.

Construction, Retail

Construction growth slowed to 9.3 percent in the quarter from an annual 18.7 percent in the previous three months. Retail sales growth slowed to 8.4 percent from 11.7 percent in the previous period. Investments grew an annual 7.9 percent in August, in the middle of the quarter, the lowest rate since February 2006.

The Economy Ministry has a forecast of 6.8 percent to 7 percent growth this year, implying 5 percent growth in the fourth quarter, Weafer said.

“The way things are looking right now, that’s optimistic,” he said.

Russia’s Micex Index of shares fell 1.17 percent by 2:23 p.m. to 611.05.

“This kind of number suggests that the effect of the crisis already started to appear in September and, it was stronger than we thought,” said Vladimir Osakovsky, the chief economist at UniCredit bank in Moscow. He had predicted growth of 6.5 percent for the quarter.

New Lows

Manufacturing shrank more in November than during the 1998 financial collapse as the current global crisis drove output and new orders to record lows and companies cut jobs, VTB Bank Europe said at the start of this month.

Industrial production in October grew at the slowest annual pace since the Federal Statistics Service changed its methodology at the start of 2003. The unemployment rate rose to 6.1 percent from 5.3 percent in September. That rate will rise further next year to between 10 percent and 11 percent, said VTB Capital in a report.

“What began as a financial crisis became an economic one before our eyes,” Prime Minister Vladimir Putin said at the Nov. 20 congress of his United Russia party in Moscow. “In the current situation, we must be prepared for structural changes in the labor market.”

Ford Motor Co. said yesterday that it will close its factory near St. Petersburg, Russia, between Dec. 24 and Jan. 21 to reduce output amid falling demand for automobiles. Ford, the first international automaker to produce cars in Russia since the fall of the Soviet Union in 1991, will pay workers affected by the production halt two-thirds of their salaries, the company said.

Recession Forecast

Russian billionaire Alexander Lebedev yesterday said the economy of the world’s biggest energy exporter will “definitely” be in recession next year and it is “quite possible” it may contract by as much as 10 percent as oil fell below the $70-a- barrel average needed to balance the 2009 budget.

Growth in China’s booming economy, which expanded by 9.9 percent a year for three decades, may slow to 7.3 percent in 2009, says China International Capital Corp., a Beijing investment bank. China’s economy grew 9 percent in the third quarter, the slowest pace in five years.

Growth in India may drop to 6.5 percent in 2009 from 9 percent in the year ended March 30, according to CLSA Asia-Pacific Markets, part of the French bank Credit Agricole SA. Growth in the third quarter was 7.6 percent, the least since December 2004.

“Its now very evident that the slowdown has extended into the small and medium enterprises and the broader economy,” UralSib’s Weafer said. “The biggest problem is that they just can’t access credit, and end-user customers are more inclined to keep their money in foreign currency, at home, under the mattress.”

To contact the reporter on this story: Alex Nicholson in Moscow at anicholson6@bloomberg.net.