Russia's Growth Slows to 1.2% in Blow for Putin

Russia's growth slowed sharply in the second quarter despite President Vladimir Putin's efforts to reverse the trend before he hosts the G20 summit next month, initial estimates showed on Friday.

The first growth reading from the Federal State Statistics Service dealt a heavy blow to the government by revealing that the economy had expanded in the second quarter of this year from the same period in 2012 at a rate of just 1.2 percent.

The government admitted it may now be forced to revise down its already sluggish prediction for full year growth and analysts warned final data could show Russia was already in recession.

The reading is well below both the first quarter's already-disappointing growth rate of 1.6 percent and the economic ministry's own second-quarter forecast of 1.9 percent.

It is also much too slow not only to meet Putin's initial 2013 growth target of five percent but also the economic ministry's downwardly-revised forecast of 2.4 percent.

Deputy Economy Minister Andrei Klepach conceded that the initial reading "provided an argument for a downward revision" of the annual forecast.

"Second quarter GDP data from Russia were not only much weaker than expected -- according to our estimates they are also consistent with the economy having fallen into recession during the first half of this year," London-based Capital Economics said.

A recession is defined as two consecutive contractions of quarter-on-quarter growth. These figures will only be published when the statistics office gives the final reading for the second quarter.

Analysts noted that the figure was part of a broader negative trend that began in 2011 after nearly a decade of rapid expansion during Putin's first two terms as president in 2000-2008.

"This is the slowest pace of expansion since the fourth quarter of 2009 and the sixth consecutive quarterly decline in (the) GDP" growth rate, the Moscow-based Renaissance Capital investment bank said in a note to clients.

"It is likely that the poor number is driven by an across-the-board slowdown in consumption, investment and net exports."

The damage for Putin -- who has already stared down a wave of protests that preceded his return to the presidency in May 2012 -- will be especially keenly felt when he hosts the G20 summit in his native city of Saint Petersburg on September 5-6.

The Russian leader had been hoping to use the high-profile event to showcase Russia as an example for Western powers now grappling with record unemployment and overwhelming state debt.

Russia's own state debt figure stands at just 10 percent of gross domestic product thanks to a hawkish policy that has seen revenues from the country's vast energy exports saved up in two rainy-day funds.

But the poor economic readings may throw a wrench into Putin's plans and underscore Russia's current standing as one of world's worst-performing emerging markets.

The International Monetary Fund -- its own 2013 growth forecast for Russia now set at 2.5 percent -- has warned that Russia's economy was in fact operating at full capacity and therefore in urgent need of deep-rooted structural reforms.

Friday's growth report is also certain to raise pressure on the central bank to cut interest rates in the coming months.

Governors at the bank decided earlier in the day to keep the main refinancing rate unchanged at 8.25 percent for the 11th month running.

The bank has been grappling with the dilemma of anemic growth and inflation that has outpaced the year's 5.0-6.0 percent target.

But inflation slowed to 6.5 percent in July from 6.9 percent in June -- a positive trend that the central bank underscored on Friday.

Analysts quickly predicted a main refinancing rate cut of at least 0.5 percentage points in the months to come.

Friday's central bank statement "provides some hints that the authorities are moving -- albeit slowly -- towards a looser policy stance," Capital Economics said.

But economist also expressed extreme disappointment that the central bank had decided not to take any action until its next meeting on September 13 at the earliest.

"The rate decision by the central bank of Russia unfortunately demonstrates how disconnected the central bank has become from what transpires in the real economy," Renaissance Capital said.

"This is hard to justify, in our view."