Russian Retail, Car Sales Tanking

This is not the picture of an economy in good shape. The country’s Federal Statistics Service showed that gross domestic product (GDP) fell 3.4% in the first six months of this year and that the decline of 2.2% in the first quarter more than doubled to 4.6% in the second quarter.

Capital investment dropped 8.5% year over year in July, following a decline of 7.1% in June.

The chairman of the Association of European Businesses, a trade group that promotes foreign businesses in Russia, said in the group’s monthly report on auto sales in Russia:

The fundamental performance of the automotive market continues to disappoint though, in the framework of a struggling economy and falling consumer incomes. Purchase incentives provided through government programs and by the market participants themselves have proven instrumental in avoiding an ever sharper decline, however would need to be enhanced significantly to be able to reverse the trend in a substantial manner.

The cause of the country’s falling fortunes is the low price of crude oil, Russia’s main export. Russian crude now sells for about half its five-year average, and because oil accounts for about half of Russia’s GDP the shortfall in revenues is crippling. The collapse of the ruble has made an already bad situation worse, as have international sanctions against Russia for its actions in Ukraine.

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The country has tried to overcome its oil revenue decline by increasing production, a tactic it has used since the first oil embargo in the 1970s. This time, however, the glut in the world markets cannot make room from Russian crude. Increased production usually drives increased drilling, but a lack of capital investment slows down new development as well.

Low oil prices, a declining currency and limited capital investment form a triple whammy on the economy, and Russian citizens are paying the price: real wages, as adjusted for inflation, tumbled 8.2% year over year in July, after falling by 7.2% in June. Real disposable incomes declined by 2.0% in July.