GDP Beats Forecast but Bad Debts Loom

The economy contracted by a less-than-expected 10.1 percent in the first half of 2009, the Economic Development Ministry said Wednesday, but an OECD report warned of tough times ahead if Russia doesn’t deal with bad debt.

Economic Development Minister Elvira Nabiullina said gross domestic product had shrunk by 10.1 percent compared with the 10.2 to 10.4 percent previously forecast by the government and would end the year at minus 8 to 8.5 percent.

The Organization for Economic Cooperation and Development predicts that Russia’s economy will contract by only 6.8 percent this year, a fact that Nabiullina noted in her remarks at a presentation of the organization’s report.

Russia “possesses the potential to develop itself through a reduction of energy consumption and an increase in labor efficiency and competitiveness,” Nabiullina said.

“These measures coupled with government initiatives to stimulate domestic consumption and support banks will lead Russia to more sustainable development,” she said.

While the OECD forecast is more optimistic than the government’s, the Paris-based group told the government that it needed to take urgent and decisive measures to deal with the country’s first recession after a decade of strong growth.

“The near term challenge is to limit the severity and duration of the downturn,” it said in the report prepared by its economics department.

A major challenge, it said, is the growing specter of bad debt overwhelming the banking sector.

“The government tries to spur credit growth, but a major threat to it arises from declining capacity of borrowers to repay the bank loans,” the report said.

The Central Bank said Wednesday that overdue bank loans in June reached 4.6 percent of all loans, an increase of 0.4 percent from May.

Alfa Bank chief economist Natalya Orlova said 4.6 percent for overdue loans appeared too low and probably reflected overdue interest payments, not nonperforming loans where interest and principal payments have been postponed by mutual agreement between banks and borrowers.

Nonperforming loans alone account for about 5 percent of all loans, she said, calling them hidden defaulted loans because they don’t generate any cash flow for banks.

In the worst-case scenario, Orlova said, the banking system could face bad debt of $130 billion over the next 12 months, with some $200 billion in corporate debt coming due, although corporations only expect to make a net profit of $70 billion in that time.

Bad debt will spark a second wave of the crisis in October or November, but only the banking sector will be affected, said Troika Dialog president Pavel Teplukhin.

Teplukhin said 90 percent of loans issued just before the financial crisis would come due this fall because most were issued for a 12-month period.

“Companies won’t be able to pay. As a result, there will be an accounting operation called the second wave,” he said at a news conference, Interfax reported.

Clemens Grafe, chief economist for Russia with UBS, said he doubted bad loans would spark a second crisis because bank lending is “not the most important issue for the Russian economy.”

Unlike in developed Western economies, bank lending has never been a factor that seriously contributed to the growth of the Russian economy, Grafe said.

He said bank loans contribute no more than 10 to 11 percent growth to the Russian economy, while the rest lies within real economy. “Lately, the Russian economy has expanded by itself, not because of banks,” he said. “If and when the economy finds sources for recovery, the bad loans issue will become easier.”

The OECD report offers three remedies for the ailing economy: “strengthening the macroeconomic policy framework, improving the functioning of the financial system and raising the levels of competition throughout the economy via streamlined state involvement and lower barriers to entry.”

The report is a regular survey on Russia published every 1 1/2 to two years.