Russian shrinkage: Economy contracts in November

Posted at 4:58 PM, Dec 29, 2014

LONDON — The Russian economy has officially got a shrinkage problem.

New data from the Ministry of Economic Development shows the country’s gross domestic product shrank in November, marking the first time the economy has contracted in the last five years.

The contraction was widely expected — and is forecast to get much worse — as Russia suffers from a sharp fall in oil prices and a squeeze from Western sanctions.

“I think it’s fairly obvious that this is only the beginning of Russia’s GDP contraction, and we’ll see a much sharper downturn in 2015 as consumption, investment and government expenditure all collapse,” said Craig Botham, an emerging markets economist at Schroders.

GDP declined by 0.5% in November compared to the same period last year.

Earlier this month, Russia’s finance minister Anton Siluanov reportedly warned GDP could contract by 4% in 2015. Former finance minister Alexei Kudrin issued a similar warning.

The ruble extended it’s slide Monday by another 6%. The currency has plunged by over 40% since the start of the year.

The benchmark RTS stock market index dipped by about 4%. The Micex index edged up by 1%.

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But the economic dip in November looks worse on paper than in real life, warned senior economist Dmitry Dolgin from Alfa Bank in Moscow.

“November 2014 … had two work days less than November 2013, so the year-over-year figures underestimate the actual [economic] activity,” he told CNNMoney.

Dolgin forecasts December GDP data will actually get a boost since consumers felt compelled to spend more on goods and ‘stock up’ this month. As the value of their currency plunged, imports including the iPhone 6, for example, became far more expensive.

But brace yourself for a true economic shock in 2015, when GDP could decline by “double digits” in the first quarter of the year, said Dolgin.

How did this Russian crisis start?: Russian President Vladimir Putin has faced two main problems this year that are wreaking havoc on his country’s economy:

1. Sanctions: The international community has imposed harsh sanctions over Russia’s decision to support separatist rebels in Ukraine. This has slammed Russia’s economy and encouraged investors to pull their money and run.

2. Oil prices: Oil prices plunged by about 50% over the course of six months and even though prices are stabilizing, the drop has hurt Russia, which depends on a healthy oil industry. Roughly half of Russian government revenue comes from oil and gas exports.

These two factors have caused a variety of knock-on effects, including a sharp fall in the ruble and spiking inflation.