The Federal State Statistics Service said in a preliminary report that growth had slowed from the 5.2-percent recorded on an annual basis in the second quarter of 2010.

Russia has penciled in a 4.0-percent figure for the year.

"We expected growth to come in at less than three percent," said Uralsib Bank's chief strategist Christopher Weafer.

"This was slightly lower but not too far off. Economists had already reduced their expectations for the third quarter because of the effects of the drought," Weafer said.

The Russian ruble declined by 0.26 percent against the dollar in evening trading while the main dollar-denominated RTS index fell by 1.13 percent on the day.

But Weafer and other analysts predicted an end-of-year pickup in investment activity that should lead to stronger consumption and a general rebound in economic performance next year.

Russia's economy usually performs closely in line with fluctuations in the global energy markets. Europe depends on Russia for a quarter of its natural gas imports and the country was also the world's second-largest exporter of oil last year.

But a 2009 nosedive in global energy prices saw Russia's economic performance drop by 7.9 percent that year, a performance that was on a par with the worst years of its post-Soviet transition.

Its recovery from this collapse was hampered by continued tremors on global financial markets and an unprecedented drought that stretched not only over Russia but also continental Europe.

The Russian Agriculture Minister said in July that the heatwave had destroyed some 10 million hectares of land.

This accounts for about 20 percent of all of Russia's arable land and according to the economy ministry could cost the country about 0.8 percent in annual growth.

The World Bank has already cut Russia's 2010 performance figure on two occasions. Its November downgrade to 4.2 percent cited volatile capital flows and oil price uncertainties.

Russia has lagged badly behind the other so-called BRIC countries that also include China, India and Brazil. All three are recording year-on-year growth rates of at least 8.8 percent and have been the preferred choice of Western investors.

A partial recovery in oil prices this year has in fact helped Russia avert the more serious problems plaguing some of its European Union counterparts.

But economists warn that Russia's trade balance will still struggle to support growth as imports accelerate and local production stalls.

The tepid performance has forced Russia to scramble as it seeks to find savings in this year's budget. The finance minister on Friday reported a federal deficit of 2.1 percent of GDP for the first ten months of the year.

Some of the shortfalls were attributed to disappointing revenues from Russia's energy exports. These accounted for less than half of all the budget revenues in October. The figure usually comes in at at least 50 percent.

But economists also saw a likely recovery in bank lending that should boost household consumption in first half of 2011 and lead to stronger investment activity in the second half of the year.

"All in all, we see (the second half of 2010) as being the biggest struggle for the Russian economy in recovering the the severe drop in GDP in 2009," Danske Bank bank concluded.

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