Russia economy lurched into contraction

THE damage inflicted on Russia by sanctions was on full display in April as the economy swung into a contraction, with industrial production dropping and retail sales suffering their worst crash since the coronavirus pandemic.

Gross domestic product contracted 3 percent in April from a year earlier, according to an estimate by the Economy Ministry, after recording growth of 1.3 percent in March. The Ministry blamed the swing on “the unprecedented sanctions pressure,” which hit transport links and consumer demand.

Retail sales fell in April for the first time in a year, sliding an annual 9.7 percent, according to a separate release from the Federal Statistics Service. That was worse than all but one forecast in a Bloomberg survey of economists, whose median estimate was for a 5.8 percent drop.

Panic buying by Russians in the weeks after the invasion of Ukraine three months ago initially obscured the crisis in consumer spending. But hardship from the sweeping trade and financial restrictions imposed by the US and its allies only continued to spread as faster inflation sapped incomes, prompting more households to turn frugal while businesses adjusted to emerging shortages of imported goods.

“April was the first month to reflect the recession in full,” Sofya Donets, economist at Renaissance Capital in Moscow, said before the data release. “Consumption sank to a significant degree after a frenzied increase in March.”

The hit to industry and cargo shipments was also worse than expected in April, with factory output slipping 1.6 percent from a year earlier. Real disposable incomes shrank 1.2 percent in the first quarter.

By contrast, the labor market remained stable, with unemployment even surprising with a slight downtick to 4 percent in April. Dozens of foreign companies pulled out of

Russia in the wake of the invasion but most have kept paying workers at least temporarily.

What Bloomberg Economics says

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“Sanctions are squeezing Russia’s economy. Policy makers have averted a sharper crash by stabilising the financial system, but output will contract further as the impact spreads beyond external facing sectors.” –Scott Johnson, Russia economist.

The world’s most-sanctioned economy is already on course to shrink in two consecutive years for the first time since the collapse that followed the Soviet breakup three decades ago.

A Bloomberg survey of analysts published Tuesday showed expectations are turning even more grim for next year even as some anticipate a more shallow contraction in 2022. GDP will shrink 10 percent in 2022 and 1,5 percent the following year, according to the poll.

The spread of the crisis to the consumer economy heightens risks for Russia because spending by households accounts for more than half of gross domestic product.

Nearly every ninth Russian company is affected by sanctions, according to a survey published this week. Mining and manufacturing shrank in April, with the latest data showing car output shrank 61.5 percent from a year earlier.

But there are some indications the economy may be starting to see some respite.

A rally in the ruble and slower inflation have allowed the central bank to reverse much its emergency increase in interest rates. Consumer prices didn’t grow in the seven days ended May 27 following a rare decline the previous week.

In another sign of stabilisation, a gauge of manufacturing published earlier on Wednesday by S&P Global showed the sector unexpectedly returned to growth with a rebound in business confidence.