Thursday April 23, 07:31 PM
Russian economy contracts, central bank drops rates
By Nick Coleman
MOSCOW (AFP) - A top official on Thursday warned Russia's economy could shrink six percent in 2009 after a disastrous first quarter, as the central bank announced a half-point rate cut in a gesture of confidence.
Deputy Economy Minister Andrei Klepach said that a six percent contraction in GDP forecast by the International Monetary Fund for 2009 was "rather realistic."
The economy shrank by 9.5 percent in the first quarter compared to the same period a year ago and was heading for a similar fall of between 8.7 and 10 percent in the second quarter, he said.
"The picture that we are starting to see emerge is that of a significant fall in GDP," he said.
The gloomy prognosis came after an IMF report on Wednesday said that Russia and its neighbouring ex-Soviet region as a whole faced the "largest reversal of economic fortune" of any region in the world.
In one bright spot, the central bank announced a half-point cut in its main lending rate from 13 percent to 12.5 percent, the first cut since June 2007.
The move came after Prime Minister Vladimir Putin told the head of the country's central bank that lower inflation ought to permit an interest rate cut.
Inflation, which has stalked Russia's economy in recent years, has been in decline since the start of the year, with monthly inflation falling from 2.4 percent in January to 1.3 percent in March and set to fall further, according to officials.
Analysts said Thursday's cut was a token gesture of confidence that another big problem for the economy, the depreciation of the ruble, had been arrested, as well as being a reflection of lower inflation.
Unlike in the United States and United Kingdom, Russia's response to the winds of crisis has been one of quantitative tightening, aimed at ensuring stability rather than stimulating growth, said Chris Weafer, analyst at Moscow-based UralSib bank.
Though the ruble has stabilized after losing a third of its value last year, there remains a serious risk it could fall again if there is another drop in the price of oil, a central plank of the economy, Weafer said.
But he said Thursday's cut was good news, particularly for the country's banks, which have all but ceased to issue loans, in another headache for the government.
"It's much more a token move by the government to show they feel more confident about the currency," Weafer told AFP.
"The next priority is to bring stability to the banking system and try to encourage some form of lending.... The banks are very reluctant to resume lending operations. They're concerned about the problem of non-performing loans and bad debts and how much capital they may need," he said.
In recent weeks fears have risen about the health of Russia's banking sector, even as the authorities have won praise for their handling of other aspects of the crisis, notably the ruble devaluation.
The IMF on Wednesday urged governments in the former Soviet Union to pay close attention to the health of their banks.
"It will be crucial to carefully assess bank balance sheets with a view to writing off bad assets in a pro-active manner, determining which banks have sound medium-run prospects and replenishing their capital as needed," it said in its six-monthly World Economic Outlook.
Russia has a vast number of banks -- there were 1,112 banking licenses at the start of the year -- and Putin and other officials have said they hope to use the crisis as a chance to streamline the sector.
At the start of April, Putin unveiled a series of crisis measures that are expected to lead to a budget deficit for the first time in several years -- equal to 87 billion dollars (67 billion euros).
Finance Minister Alexei Kudrin also said this week that the country's Reserve Fund, a trove of accumulated oil wealth, would be completely spent by next year in combating the crisis.
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