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FEATURE STORY

Russian Economic Report 18: Refocusing Policy on Households

March 30, 2009


STORY HIGHLIGHTS
  • The global outlook remains extremely uncertain, with declines in world global output and trade, and very limited capital flows to developing countries this year and world oil prices.
  • As a result, Russia’s real GDP is likely to contract in 2009 by 4.5 percent, compared with the positive 5.6 percent growth in 2008. The fiscal surplus from last year will turn to a sizeable deficit.
  • Unemployment could reach 12 percent by year end. And the crisis threatens to undo some of the large poverty reduction gains of recent years.

The World Bank’s Moscow office has released its Russian Economic Report No. 18 at the press launch in Moscow, on Monday, March 30, 2009.

Klaus Rohland, Country Director for Russia chaired the event. Zeljko Bogetic, Lead Economist and PREM country sector coordinator for Russia, the team leader and the main author presented the report and was accompanied by the core team of economists, Karlis Smits, Sergey Ulatov, Marco Hernandez and Olga Emelyanova. Marina Vasilieva, Senior Communications Officer, has managed the preparation of the event and communication and the post-launch dissemination strategy. The event was well attended by the leading Russian and world media and news agencies.

The World Bank has traditionally been a strong partner of Russia although our partnership has changed from the time of our financial assistance in the 1990s to more knowledge-oriented and advisory assistance today, assistance that is more in line with current needs of large, developing middle-income countries such as Russia, said Klaus Rohland, World Bank’s Country Director for Russia. Russian Economic Reports are a cornerstone of our regular analytical work on monitoring Russian economic developments and policy analysis. We hope that by focusing on facts and evidence - based policy analysis, it can provide a modest contribution to informed policy debate and, ultimately, better policy choices in the Russian Federation.” Introducing the report, Mr. Rohland noted: “This Report is written at time of exceptional turbulence in the world economy. It talks about the difficult times ahead but also about the light at the end of the tunnel, the role of prudent fiscal policy so far and options for future policy response in order to cushion the impact of the crisis on the Russian people.”

“The crisis is truly global and no country is spared and Russia is no exception – said Zeljko Bogetic, the World Bank’s Lead Economist for Russia and the main author of the report but despite these difficult economic and social conditions, Russia’s prudent fiscal policy and large fiscal reserves make it better prepared to deal with the impact of the crisis than in the past.   Faced with severe growth impact but strong initial fiscal position and large reserves, Russia’s fiscal policy response has been larger than that of many G-20 countries and greater than the internationally recommended 2 percent of GDP”. Commenting on the options for future policy response during the crisis, Mr. Bogetic noted: “The issue is that accelerating social impact – rapidly rising unemployment and poverty – now requires greater focus on social protection measures in the short term to cushion the impact of the crisis on the poor and vulnerable Russian citizens. Also, investing in most critical infrastructure bottlenecks and small and medium size enterprises sector will help economic recovery and long-term diversification.”

Highlighted

  • The Report emphasizes that the world has entered the first global recession since the Second World War with ongoing, simultaneous declines in global output and trade and large drops in industrial production and manufacturing. The impact of the crisis worldwide is proving far deeper and broader than previously thought. The global outlook remains extremely uncertain, with likely declines in world global output and trade and very limited capital flows to developing countries throughout this year. World oil prices are expected to remain in the USD40-50 range during 2009-10. World output could recover in 2010 but the pace of recovery is likely to be gradual and protracted. The much deeper-than-anticipated global crisis has meant that the triple shock affecting Russia – oil price collapse, capital outflows, and sharply deteriorating external borrowing conditions – has been much stronger than expected just a few months ago.
  • As a result, Russia’s outlook for 2009 suggests that real GDP is likely to contract in 2009 by 4.5 percent, a massive growth deceleration compared with the positive 5.6 percent growth in 2008. As a result, the fiscal surplus from last year will turn to a sizeable deficit. Unemployment could reach 12 percent by end-2009, starting from full employment in September 2008. And the crisis threatens to unwind some of the large poverty reduction gains of recent years. Without additional targeted support, as many as 2.75 million Russians could be pushed into poverty as a result of the crisis. The impact on Russia has been accentuated by its structural vulnerabilities: dependence on the oil and gas sector, and narrow industrial base and small and medium-size enterprise sector.
  • Reflecting the early crisis impact, fiscal policy response has so far focused on supporting the financial sector and enterprises, with rather limited support to households. But with significant social impact now unfolding, the focus of fiscal policy should shift towards cushioning the impact on the poor and vulnerable. Preliminary estimates suggest that a modest, temporary increase in the three social protection programs (costing about 1 percent of GDP) focused on child allowance, unemployment benefits and low-end pensions – targeting some of the most vulnerable groups at risk of poverty – could provide significant relief to the poor and help reduce social tensions, especially in the most affected regions.
  • In addition, addressing most critical infrastructure bottlenecks and providing support for small and medium-size businesses – with additional modest support even during the crisis – would help the economy in the recovery stage with beneficial impact on medium-term growth and diversification.
  • In the long term, accelerating structural reforms geared towards broad-based growth remains crucial for restoring growth in employment and incomes for the middle class and reducing overall poverty. But improving the effectiveness of social and regional policies become important in reaching the chronic poor and reducing the vulnerability to poverty.


Russian Economic Reports are periodic assessments of Russia’s recent economic developments and policies, providing evidence-based analyses of key policy issues. Report No. 18 features three parts: (i) a review of the international environment, macroeconomic developments and outlook for Russia, (ii) an analysis of Russia’s fiscal policy response, and (iii) a summary of a larger study of poverty, inequality and vulnerability in the pre-crisis period.Russian Economic Reports are periodic assessments of Russia’s recent economic developments and policies, providing evidence-based analyses of key policy issues. Report No. 18 features three parts: (i) a review of the international environment, macroeconomic developments and outlook for Russia, (ii) an analysis of Russia’s fiscal policy response, and (iii) a summary of a larger study of poverty, inequality and vulnerability in the pre-crisis period.


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