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Russian Economy Slows Sharply As Consumer Demand Falls Amid VAT Hike

Declining consumer demand amid a VAT hike helped reduce Russian economic growth in the first quarter.
Declining consumer demand amid a VAT hike helped reduce Russian economic growth in the first quarter.

Russia’s economy slowed sharply in the first quarter, with the government placing the blame on reduced consumer demand following an unpopular hike in value-added tax (VAT).

The Russian statistic service Rosstat said on May 17 that gross domestic product (GDP) rose just 0.5 percent in the first three months of 2019 from the same period a year earlier.

The figure was the lowest since late 2017, when growth was 0.3 percent.

The Economics Ministry had previously forecast GDP growth at 0.8 percent for the quarter. The central bank had predicted an even-stronger quarter, with growth seen at up to 1.5 percent.

After the data release, the Economics Ministry said the slowdown had been "expected and linked to the weakness of domestic demand coming on the back of a higher tax burden" following the hike of VAT from 18 to 20 percent.

President Vladimir Putin last year signed into law the measure to increase VAT as of January 1, 2019.

The government's proposal to raise VAT and a separate plan to raise retirement ages angered much of the Russian public, prompting a drop in approval ratings for Putin and the ruling United Russia party.

'Poor Investment Performance'

Capital Economics called the growth "much weaker than anticipated." The economic research company cited a "broad-based" weakness in the economy as "growth of industrial production, retail sales, construction output, and agricultural production slowed."

Russia’s economy only returned to growth in 2017 after suffering two years of recession in 2015 and 2016.

Tatiana Orlova, an economist at Emerginomics in London, told Bloomberg that “this is a disappointing reading. It shows not only weakness in domestic demand, which we expected due to the VAT hike, but also poor investment performance.”

Kirill Tremasov, a former ministry official and now head of research at Loko-Invest, told Reuters that the second quarter is unlikely to be much better, but he said economic activity could pick up in the second half of 2019.

The Economics Ministry is projecting the Russian economy will grow 1.3 percent for the full lyear.

The central bank has forecast growth at 1.2 to 1.7 percent for the year, with expansion possible near the end of 2019 as a series of projects to improve infrastructure and services goes into effect.

With reporting by AFP, Reuters, Bloomberg, and RFE/RL’s Russian Service
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