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Russia GDP Growth Slows to 4.1% on Outflows, Below Estimates

May 16 (Bloomberg) -- Russia's economic growth slowed in the first quarter as corporate investment stagnated and the biggest quarterly gain in oil prices for two years failed to offset $21.3 billion of capital outflows.

Gross domestic product rose 4.1 percent from a year earlier after increasing 4.5 percent in the previous three months. The median estimate in a Bloomberg survey of 15 economists was 4.2 percent. The Economy Ministry estimated growth at 4.5 percent, and Prime Minister Vladimir Putin put it at 4.4 percent.

President Dmitry Medvedev, whose term ends next year, seeks to boost growth to 10 percent within five years to match the pace of the fastest-growing developing economies. Capital flight and slowing domestic demand restrained economic output even as commodity prices rose, stoked by unrest in the Middle East, which produces about 35 percent of the world's oil.

"The GDP number is surprisingly poor and reflects, in our opinion, the diminishing link between oil prices and Russian economic growth," Tatiana Orlova, an economist at Nomura Holdings Inc. in London, said by e-mail.

The 30-stock Micex Index was little changed after the report, trading at 1620.04 as of 5:46 p.m. in Moscow, down 0.8 percent for the day. The ruble weakened 0.8 percent to 28.1625 per dollar and gained 0.2 percent to 39.8300 against the euro.

Net capital outflows totaled $21.3 billion in the first quarter and $38.3 billion in 2010, more than the central bank's forecast of $22 billion. That compared with $56.9 billion a year earlier, central bank data show. The country last had a net inflow in 2007, when it reached $81.7 billion.

'Political Uncertainty'

Political uncertainty before parliamentary elections in December and a presidential poll next year are spurring capital flight, German Gref, chief executive officer at OAO Sberbank, the nation's largest lender, said in an April 15 interview.

"Persistent" outflows affect growth "via very weak fixed investment," Orlova said. "In the atmosphere of political uncertainty, profits are repatriated and invested into assets abroad rather than into domestic production."

Brent crude, the grade that underpins prices for Russia's Urals blend, gained 24 percent in the first quarter.

Oil at more than $100 a barrel is no longer stoking Russia's economy, the slowest-growing among the so-called BRIC nations. Finance Minister Alexei Kudrinsaid April 21 that oil has "exhausted its potential" to serve as a "locomotive for growth" in the world's biggest energy exporter.

'Sluggish Recovery'

Medvedev, 45, is seeking foreign investors for projects such as a technology hub outside Moscow as he campaigns to diversify Russia's economy and reduce the country's "humiliating" dependence on oil and natural gas revenues.

The price of Urals has fallen $12.70 a barrel since peaking at $122.88 on April 8, further threatening the recovery. It fell 1.8 percent to $109.28 at 10:51 a.m. in London.

Russia's budget revenue falls by 62 billion rubles ($2.2 billion), or about 1.5 percent of GDP, for every $10 drop in the oil price, the International Monetary Fund said in a May 12 report.

"Russia has experienced only a sluggish recovery from the recession thus far," the IMF said in the report, estimating that GDP will grow 4.8 percent this year. Outflows of capital "likely reflected investors' renewed focus, in the wake of the crisis, on the lack of progress in addressing the economy's fundamental underlying problems."

The faltering expansion hampered first-quarter output of steelmakers including OAO Novolipetsk Steel and OAO Severstal. OAO Magnit, Russia's largest food retailer by market value, saw profit decline 7.5 percent in the period on higher fuel costs.

'Rouse the Economy'

Real wages fell for the first time in 16 months in March and disposable income dropped 3.4 percent, compared with a 0.6 percent decline in February. Fixed-capital investment shrank in the first three months of the year after 10 consecutive monthly gains.

"It's very difficult to rouse the economy after the credit crunch," Nikolai Kashcheev, head of research at the treasury department of Moscow-based OAO Sberbank, Russia's biggest lender, said in an interview before GDP report. "The banking system is building up reserves and remains very selective when it comes to lending, favoring the most reliable borrowers."

The economy grew 4 percent last year after shrinking 7.8 percent in 2009. The Economy Ministry expects GDP to rise 4.2 percent this year before the expansion slows to 3.5 percent in 2012. Growth averaged almost 7 percent from 1999 to 2008.

Cargo Volumes

Rail cargo turnover indicates the economy trails the pre- crisis level by "slightly more than" 10 percentage points, OAO Russian Railways Chief Executive Officer Vladimir Yakunin said April 25 in an interview in Moscow. Rail shipments are seen as a proxy for changes in output because railroads carry about 85 percent of the nation's cargo, excluding products transported by pipeline, according to VTB Capital.

Metals and energy make up about 84 percent of exports from Russia, the world's largest oil producer and the biggest exporter of natural gas, nickel and palladium. Energy sales contribute almost half of Russia's budget revenue.

"Our view is that growth will strengthen this year, led by a recovery in consumption," Alina Slyusarchuk, Morgan Stanley's London-based economist, said May 13 in an e-mailed reply to questions. "Economic growth only marginally slowed in the first quarter."

Article ©2011 BLOOMBERG L.P. ALL RIGHTS RESERVED; article first appeared at http://www.bloomberg.com/news/2011-05-16/russian-economic-growth-rate-falls-to-4-1-on-outflows-missing-estimates.html

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