August 11, 2009 / 2:05 PM / 8 years ago

WRAPUP 1-Russian GDP fall deepens in Q2 to worst on record

*10.9 pct annual Q2 fall raises doubts about turn in economy

*Rouble weakens to lowest in almost a month

*Moscow rushes to borrow before federal government

By Dmitry Zhdannikov

MOSCOW, Aug 11 (Reuters) - Russia’s economy shrank by a sharper than expected 10.9 percent in the second quarter of this year in its worst annual fall on record, raising questions over government assurances that it has found a floor.

Russia is weathering its first recession in a decade, hit by a slump in world demand, weaker prices for its oil and commodity exports, investor flight from emerging markets and the local business repercussions of the global credit crunch.

The country, which built the world’s third largest reserves during the boomtime years, plans to run a budget deficit of over $100 billion next year after a similar gap this year and would need to borrow heavily at home and abroad. [ID:nLAG003612]

The city of Moscow, Russia’s top regional borrower, rushed on Tuesday to raise its borrowing plan ahead of the federal government to cover its own budget gap. [ID:nLB701659]

Russia’s statistics service said on Tuesday its preliminary estimates showed gross domestic product grew 7.5 percent in the second quarter from the first quarter, when GDP contracted by 9.8 percent on an annual basis. A Reuters poll of analysts had forecast an annual contraction of 10.4 percent for the second quarter. [ID:nRUPOLL]

The economy ministry had earlier also forecast a 10.4 percent drop, saying the fall slowed somewhat in June and recovery would start in the third quarter. [ID:nLN328737]

“While China’s GDP growth is expected to now reach close to 10 percent for 2009, there remains a big question mark over how big will be the decline in Russia,” said Chris Weafer, chief strategist at Uralsib brokerage.

He said Russia’s sharp economic fall was one of the reasons why its stock market traded at a 13 times price/earnings ratio or only half those of the Indian or Chinese markets.

Evgeny Nadorshin from Trust bank said he believed the economy had bottomed in May, when it contracted by 11 percent, and maintained his full-year forecast of a 8.5 percent fall, saying industrial output and capital investment exceeded his expectations in June.

“We expect that improvement of economic indicators will become a trend in the third quarter,” he said.

ROUBLE FALLS

The Russian stock market traded 0.6 percent down at 1250 GMT while the rouble slipped versus the euro-dollar basket RUS=MCX, used by the central bank to guide its monetary policies, to 38.2, its weakest level in almost a month.

Alexei Borishchev, a dealer at ING, said he believed the central bank had sold around $500 million on Tuesday to support the national currency. “Given the lack of currency sales from exporters, we can say the central bank was present today,” he said.

Finance Minister Alexei Kudrin said last month he expected to see economic growth of about 1 percent in 2010, in a forecast coinciding with data from the International Monetary Fund. [ID:nSP436444]

But he said the economy was unlikely to return in the next four to five years to pre-crisis levels, when Russia was enjoying growth of up to 7 percent a year thanks to high commodities prices and a domestic consumer boom.

Russia has so far avoided any major political unrest over the economic crisis, but analysts warn that could change if the economy does not turn the corner and unemployment and wage arrears continue to rise.

Some analysts say social unrest could radiate from the automotive sector, where firms have been forced to lay off workers, cut wages and shorten work weeks since the financial crisis began last fall.

While major economic data for July is not expected to come out before next week, Weafer noted there were signs things were not improving as fast as government officials would like to see, such as car sales in July falling 58 percent, even more than in June. [ID:nLA369832] (Reporting by Dmitry Zhdannikov; Editing by Ruth Pitchford)

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