Russia's economic outlook darkened on Tuesday, with a government forecast for a 2.2 percent contraction adding to a batch of gloomy data releases to put pressure on the rouble and stocks.
Wage arrears — a cause of social unrest in the 1990s — jumped nearly 50 percent last month, affecting half a million people, and officials said they would even cut spending on hosting the 2014 Winter Olympics, previously seen as sacred.
The previous day brought news of a record slump in industrial output in January as companies idled factories and cut working weeks in the face of slumping demand.
The Economy Ministry responded by slashing its outlook for the once buoyant economy, despite keeping unchanged its oil price forecast of $41 per barrel for 2009 and a currency exchange rate assumption of 35.2 rouble per dollar.
"The GDP forecast has worsened to minus 2.2 percent (from minus 0.2 percent)," Interfax news agency quoted Deputy Economy Minister Andrei Klepach as saying on Tuesday.
Such a deterioration would be in sharp contrast with previous years when gross domestic product grew at between 6 and 7 percent. Even in 2008 it grew by 5.6 percent despite a sharp downturn in the fourth quarter.
The slump in oil prices, flight of investors from emerging markets and the drying up of foreign funding sources due to the credit crunch mean that Russia is heading for its worst year since the sovereign default and currency collapse of 1998.
In 1998, Russian GDP contracted 5.3 percent, according to the International Monetary Fund data.
"Winter may be approaching an end in some parts of the northern hemisphere but in Russia it is likely to get worse before improving," Uralsib analyst Chris Weafer said in a client note. "The same can be said about the economy, except that the fact of worse to come is a certainty rather than just likely."
CREDIT RISK
Worries about the economy and about companies' abilities to cope with some $500 billion in outstanding foreign debt has brought Russia's first sovereign downgrades in a decade — Standard & Poor's in December followed by Fitch this month. "Our expectations for 2009 for GDP — it will fall nominally in dollar terms by 20 percent," Alexei Novikov, head of S&P in Russia, told a conference on Tuesday, adding that currently the size of the economy was around $1.3 trillion.
"The fall in GDP…could be an extra factor of credit risk."
He said that in rouble terms real, inflation-adjusted GDP would likely contract 2-3 percent this year.
The rouble has fallen by around 35 percent against the dollar since mid-2008 but strengthened a bit in early February after briefly touching the central bank's support level.
On Tuesday, it weakened again, drawing little cheer from the data, but also reacting to central bank comments that it will not allow large currency gains as well as excessive falls.
The rouble fell 2 percent to 40.25 versus a euro-dollar basket, extending Monday's 1.5 percent fall and edging back towards the boundary of its 26-41 trading band.
"We will smooth out excessive volatility with our interventions," the central bank's first deputy chairman Alexei Ulyukayev told Reuters on Monday, forecasting the rouble will trade around 39-41 per basket in the near future.
Russian main stocks indexes, MICEX and RTS, fell over 5 percent, prompting the exchanges to suspend share trade limit down for an hour.
"Against that backdrop, and the unrelenting flow of bad news in international markets, there is simply no prospect of an extended rally in equities at this time," Uralsib's Weafer said.
The economic crisis has also heightened political tensions in Russia, as politicians argue over how much of the remaining $400 billion of reserves should be spent on helping the economy, and which sectors or measures should be prioritised.
Moscow's mayor Yuri Luzhkov accused the federal government on Tuesday of making the financial crisis worse with its economic policies, renewing a battle between economic liberals and rivals who favour a bigger state role.
Tensions over spending mean that a month-and-a-half into the year, officials are still working on a revised 2009 budget, which is expected to see a sharp cut in infrastructure spending.
