Russian Economy Shrinks 10.9%

GDP, however, increased 7.5%

In a worse than expected plunge, Russia's economy contracted 10.9% in the second quarter of 2009, official data showed on August 11.

Gross domestic product (GDP), however, increased 7.5% from output in the first quarter, the Russian statistics office said.

In the first quarter, the economy shrank 9.8% on a 12-month basis and 23% from the previous quarter.

The government is forecasting a contraction of up to 8.5% in GDP in 2009, in a dramatic end to the robust growth the country enjoyed over the last half decade on the back of high energy prices.

Russia has been hit harder than other major developing economies by the economic crisis which has shown up its failure to implement reform to reduce dependence on hydrocarbon exports.

"It's much worse than what the market expected," said Chris Weafer, chief strategist at the Uralsib investment bank in Moscow, saying consensus was for a contraction of only 10.2%. "The underlining problem is the fact that there is very little bank lending taking place beyond the biggest companies accessing loans from big state banks due to uncertainty about non-performing loans and bad debts."

The problems are a far cry from the hectic growth of the last years which saw Russian GDP grow 7.7% and 8.1% in 2006 and 2007, almost exclusively due to high energy prices.

President Dmitry Medvedev had on August 10 made an unusually frank diagnosis of Russia's economic woes, saying the economy risks hitting "a dead end" unless it sees rapid reform. "As soon as the crisis took place, (the economy) crumbled. And worse than in many other countries. Why? Because we did not change the structure of our economy," the president said.

"Russia stands out completely from the crowd... with such a big decline. That is reflected by investors staying away from Russian markets," said Weafer. "Ultimately, the most important thing in the economy is the fact that almost no diversification has taken place in the last 8-10 yrs, since the last crisis," he added.

Copyright Agence France-Presse, 2009

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