Russian economy shrinks 0.4% in H1 but capital investment rises

By Thomson Reuters Aug 31, 2022 | 11:06 AM

By Andrey Ostroukh

MOSCOW (Reuters) – The Russian economy shrank 0.4% in the first six months of 2022 compared with a year ago but capital investment, one of the main economic growth drivers, rose 7.8%, data from the federal statistics service Rosstat showed on Wednesday.

The export-dependent economy is plunging into recession, hit by sweeping Western sanctions for what Moscow calls “a special military operation” in Ukraine. But the depth of contraction has so far been not as big as initially thought.

In 2022, the economy will shrink by less than 3%, a top government official said this week. His call contrasts with the earlier assumption from the economy ministry that had warned of a drop of more than 12% – which would have been the biggest fall in economic output since the mid-1990s crisis following the collapse of the Soviet Union.

In the second quarter alone, capital investment rose by 4.1% year-on-year after a 12.8% increase in the first quarter, Rosstat data showed, with mining and manufacturing sectors accounting for the bulk of the increase in the first half of the year.

Rosstat data contradicts expectations of many economists who had predicted the Russian economy would collapse this year under the weight of unprecedented Western sanctions, which had frozen around half of Russia’s gold and forex reserves.

With higher prices for its oil exports cushioning the impact of Western sanctions, the economy has avoided the meltdown six months after Moscow sent its forces into Ukraine. But hardships are emerging for some Russians.

Official unemployment stood at the record low of 3.9% in July, Rosstat data showed on Wednesday, but real wages, which are adjusted for inflation, shrank 3.2% year on year in June.

Data also showed that retail sales, the gauge of consumer demand, declined 8.8% in July in year-on-year terms after a 9.6% fall in the previous month.

Russian consumer prices extended their decline for the eighth week running, Rosstat data showed, after prices for nearly everything jumped sharply in the aftermath of Feb. 24.

The decline in the consumer prices index may open the door for more rate cuts by the central bank needed to help the economy.

(Reporting by Andrey Ostroukh; Editing by Emelia Sithole-Matarise and Jonathan Oatis)