Russian Economic Report 22: A Bumpy Recovery

June 16, 2010

MOSCOW, June 16, 2010 ― Againstheightened global uncertainties, Russia is experiencing a bumpy economicrecovery supported by rising household consumption, but with continued highunemployment and limited credit and investment activity, says the World Bank’s Russian Economic Report No. 22, launched today in Moscow.

Thenew report provides up-to-date analysis of the recent economic developments andpolicies in Russia, as well as the economic and social outlook for 2010-11,given future possible policy initiatives.

Withslower-than-expected recovery in the first quarter of 2010, and new downsiderisks to global economic recovery, the real GDP in Russia is expected to growby 4.5 percent in 2010 followed by a 4.8 percent growth in 2011.

“Overall, developments in early 2010 indicate that Russia isrecovering, but the ride has been bumpier than forecasted at the beginning ofthe year,” said Pedro Alba, the World Bank’sCountry Director for Russia “Theslower-than-expected recovery in domestic demand, coupled with the risks ofbroader contagion of the Greek crisis to other Western and Eastern Europeaneconomies, has increased uncertainties over the recovery of the Russianeconomy.”

Albaadded that “In thisenvironment, macroeconomic policy must carefully balance the objectives ofimplementing the required fiscal consolidation, while also supporting thenascent recovery and dealing with the remaining social and regional issues.”

Inthe first quarter of 2010, real GDP increased by only 2.9 percent compared tothe year before, which is less than expected.  The growth momentum of thesecond half of 2009, which was supported by the fiscal stimulus, declined inthe first quarter of 2010.  The most recent output statistics for April2010, however, display more positive dynamics, with manufacturing industriestaking the lead and non-tradables likely gaining momentum.

Witha bumpy recovery and weak demand conditions, unemployment remained high in thefirst quarter of 2010, followed by a drop in April, likely reflecting seasonalgains in employment. Real incomes grew mainly due to the increases in wages,pensions, and social benefits.

 “As expected, householdconsumption supported by the gains in real incomes and wages drove year-on-yeargains in domestic and aggregate demand.  But with sluggish creditactivity, the pace of recovery is gradual and has not yet spread significantlyto other components of demand,” said Zeljko Bogetic, the World Bank’sChief Economist for Russia andthe main author of the Report. “Thelow investment activity indicates that the majority of companies have yet notreturned to a more active investment strategy in the environment of highuncertainty and limited credit.”

Thebalance of payments position in Russia improved as a result of higher oil andgas prices and increased demand for non-oil exports, but capital flows remainvolatile both in the banking and nonbanking sector, reflecting the movement inoil prices and the remaining uncertainties regarding the recovery of globaldemand.

 “The recent shift in oilprices is reflected in the exchange rate dynamics,” said SergeiUlatov, World Bank economist andmember of the core report team. “Theexchange rate has been volatile due to the fluctuations in oil prices andgrowing uncertainty as a result of higher risk aversion associated with thedebt crisis in Europe.  However, with the more flexible monetary-exchangepolicy now in place, the impact on Russia’s external accounts should not belarge.”

Inflationcontinued to slow down in 2010. The remaining output gap, the slow recovery indomestic demand, and the previously depressed money supply remain the mainfactors keeping inflation in check. At the end of April 2010, the 12-monthinflation rate dropped to 6.0 percent, down from 8.8 percent at the end of2009.

Followingthe sizeable expenditure stimulus in 2009, the government now aims to graduallywithdraw the fiscal stimulus and strengthen the fiscal position in the mediumterm.

 “Looking to the rest of2010, while a fiscal consolidation is necessary and important, there is a riskthat a significant part of the adjustment will again fall on the much-neededinfrastructure maintenance expenditures,” said KarlisSmits, World Bank economist andmember of the core report team. “Dilapidatedinfrastructure, especially in transport, could pose a risk to competitivenessand longer-term growth prospects.”

Thedebt crisis in the West European periphery has increased downside risks toglobal recovery and oil prices. Assuming that the measures in place in theEuropean Union prevent a default or major restructuring of sovereign debt,global GDP is projected to increase 3.3 percent in 2010 and 2011, and 3.6percent in 2012 as private capital flows to developing countries rise fromaround 3.0 percent of their GDP in 2009 to 3.5 percent in 2012. Oil prices areexpected to average US$ 78 a barrel in 2010 and slip to US$ 74 a barrel in2011.

TheRussian outlook discussed above is based on this global scenario presentedrecently in the Global Economic Prospects of the World Bank. Nevertheless,downside risks of the debt crisis in Europe remain. While Russia’s fiscal anddebt outlook is much less pressing than in other countries because both fiscaldeficits and debt-to-GDP ratios are much lower, the possible contagion and thebroader debt crisis in Europe could transmit new shocks to Russia through two keychannels: oil prices and financial/capital flows.

Prepared by a World Bank team led by Zeljko Bogetic, LeadEconomist for Russia and PREM (Poverty reduction and economic management)Country Sector Coordinator. The RER core team members were: Sergei Ulatov(Economist), Karlis Smits (Economist), Olga Emelyanova (Research Analyst), andVictor Sulla (Economist). Chorching Goh (Senior Economist) authored chapter IIIon monocities and Igor Pilipenko prepared box 3.4. Cristina Cavescu(Economist), Annette de Kleine, and Shane Streifler (Senior Economists)contributed the box on the international environment and the global oil market.The team expresses gratitude to the World Bank Global Economic Prospects teamlead by Andrew Burns (Manager, DECPG) for close collaboration and discussionson global economic environment and its linkages with Russia.

Media Contacts
In Moscow
Marina Vasilieva
Tel : +7 (495) 745-7000 ext. 2045
In Washington DC
Elena Karaban
Tel : +1-202-473-9277