Russia stagnating, not in recession

Russia's economy minister said on Monday that dramatically slowing growth indicated the country had entered a period of possibly prolonged stagnation but that an outright recession was avoidable. Alexei Ulyukayev's comments came after the first initial estimate on Friday showed that second-quarter growth had slowed to 1.2 percent in annual terms from 1.6 percent in the first three months of 2013. The economy minister stressed that continuing exports of oil and natural gas would ensure that Russia would continue to enjoy expansion -- albeit at a fraction of the five-percent rate initially demanded by President Vladimir Putin. "There is no recession and there will be none. Stagnation is probably the appropriate term," Ulyukayev told the Kommersant business daily in an interview. But "there are many factors that enable us to say that (second-half) results will be better than they were in the first," he was separately quoted as saying by the RIA Novosti news agency. The London-based Capital Economics consultancy and Moscow's Higher School of Economics both estimated that Russia had already entered a recession -- defined as two consecutive quarters of negative quarter-on-quarter growth -- based on the January-June figures. The formal announcement of a recession would deliver a painful blow to Putin -- his immense powers and popularity already tested by a wave of street protests in 2011-2012. Putin had managed to bolster his support by unveiling a vast social spending and rearmament programme during his successful run for a third presidential term last year. But analysts question how these commitments can be met should the economy continue to stagnate and tax revenues fall short of their mark. Moscow's VTB Capital investment bank lowered its 2013 growth forecasts for Russia to 1.7 percent from 2.4 percent -- the downwardly-revised figure now favoured by the government. The finance house also criticised the central bank for refusing to pursue an easing policy and instead keeping interest rates at 8.25 percent for the past 11 months in order to bring inflation down to 4.5 percent by next year. Ulyukayev argued on Monday that an easing policy would in either case take six to nine months to take effect and was therefore not the panacea sought by the market. He instead prepared Russians for a more cautious approach that would see the government scale back spending over the coming three years -- a policy that clashes directly with Putin's election promises. "We are going to review our budget forecast for the coming three years and also our long-term forecast, which looks at the budget strategy through 2030," Ulyukayev told Kommersant. "It seems that in all these documents, we will have to make a more conservative assessment of future growth rates." Russia is suffering in particular from a sharp decline in investments and consumption as well as a continuing inability to solve corruption and economic mismanagement. The resulting slowdown has turned the energy giant into one of the worst performers among the major emerging markets -- its growth a shadow of the average 7.2-percent rate enjoyed by Putin during his first two terms as president in 2000-2008. The International Monetary Fund warned earlier this year that the economy was operating at full capacity and required urgent structural reforms to achieve more sustainable growth. Ulyukayev appeared to agree with the IMF's conclusion by noting that "the very slow rates of growth are explained by institutional, structural and macroeconomic factors." "And this is something we will have to work on for a very long time."