Russian economy slides despite Putin's positive spin

Russia's economy is continuing its slide, defying the message from president Vladimir Putin that the worst of the crisis was over.

Monthly statistics published on Friday showed that consumers turned even more bearish in March despite the recent stabilisation of the rouble, and economists estimated that gross domestic product is likely to have contracted by between 2 and 4 per cent in the first quarter.

The figures came a day after Mr Putin spent the first hour of a marathon televised call-in show to reassure citizens over the economic situation. "Nothing has failed and everything is working," he said, and claimed that "we have passed the peak of our problems."

Members of Mr Putin's economic policy team have been talking up the economy for several weeks as the Russian currency has strengthened. "Overall, the situation is not bad," deputy prime minister Arkady Dvorkovich told the FT this week.

After losing more than half of its value to the dollar last year amid plummeting oil prices and bringing the country to the brink of a currency crisis in December, the rouble has become one of the best-performing currencies in the world this year.

The rouble weakened to 51.68 to the dollar on Thursday, down 3.5 per cent on the day, but still up from 68 to the dollar at its low point in December.

Mr Dvorkovich said that while western capital market sanctions were barring companies from attracting sufficient external financing to increase investment, Russian corporations were increasing efficiency and cutting costs. He said the government expected GDP to fall by no more than 3 per cent this year and grow between 0.5 per cent and 2.5 per cent next year.

Others paint a much less rosy outlook. Alexei Kudrin, the former finance minister who is one of Mr Putin's economic advisers, told the FT that he expected GDP to drop by 4 per cent this year and to continue contracting in 2016. His forecast is based on the assumption that investment will drop by up to 12 per cent and real incomes by up to 6 per cent this year.

"It is a fully pessimistic forecast. It is not a catastrophe. But it is a contraction and a recession," Mr Kudrin said.

In March, investment dropped by 5.3 per cent compared with the same month last year. Industrial production contracted by 0.6 per cent, held up by import substitution in the food and chemical industry sectors.

But the main downward drag comes from consumers, who helped sustain growth last year. In March, retail sales contracted by 8.7 per cent. The official consumer sentiment index in the first quarter plummeted by 14 percentage points compared to the previous quarter - its worst since the last financial crisis in early 2009.

This comes despite unemployment being far lower than during the last crisis. "Last time we started with about 7 per cent, and it went up to 9.5 per cent, this time we started with 5 per cent," Mr Dvorkovich said. "And we have the financial capacity to support people who need it."

Consumers' main concern is inflation, which soared following the rouble depreciation and the embargo Russia imposed on western food imports last year. Mr Dvorkovich argued that although inflation was "a heavy burden, [consumers] can sustain this for a few months, until the situation is better."

This week, inflation slowed for the first time since the start of the food embargo, bringing the annualised rate to 16.8 per cent. But analysts believe it will be several more months until the economy turns a corner.

"The second quarter or the third quarter, depending on this year's harvest, could be the bottom," said Vladimir Tikhomirov, chief economist at BCS Financial, the Moscow brokerage. He estimates that GDP contracted by about 2 per cent in the first quarter.

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