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Russian Economic Report 23: Growth with Moderation and Uncertainty

November 2, 2010

Moscow, November 2, 2010 – With moderating global and Western European growth and oil prices and volatile capital flows, Russia is likely to grow by 4.2 percent in 2010, followed by 4.5 percent in 2011 and 3.5 percent in 2012 as domestic demand expands in line with gradual improvements in the labor and credit markets says World Bank’s Russian Economic Report No. 23 launched today in Moscow.

The new Report provides up-to-date analysis of recent economic developments and policies in Russia, as well as the economic and social outlook for 2010-11.

The global economy has entered the period of growth with moderation and uncertainty, but the feared ‘double dip’ recession remains unlikely. The Europe and Central Asia region — hardest hit by the crisis — is growing slower than the rest of the world. In Russia, growth is being led more by domestic demand –– consumption and investment –– and credit is beginning to flow.

“The good news is that Russia continues to grow out of this global recession and we expect this to continue next year, especially as credit begins to flow more rapidly, which is beginning to happen. But with the onset of the winter, seasonal unemployment is likely to get worse before it gets better later in 2011 as growth in domestic demand gathers steam. While there is huge diversity across Russia’s regions in the patterns of labor market recovery, smaller regions with a larger share of SMEs, better investment climate, more FDI, and stronger financial sector presence show a more robust recovery. This may point the way for Russia’s modernization and diversification challenge as a whole”-- said Pedro Alba, World Bank’s Country Director for Russia.

The way Russian policymakers manage the short-term macroeconomic risks of fiscal spending and inflation—and the long-term challenge of competitiveness and diversification under tighter budget constraint—will determine Russia’s medium-term prospects.

"Fiscal risks have risen with downside risks to oil prices, lower contingency cushion in the budget due to a much smaller gap between the oil price planned in the budget and the current forecast than in the past several years, making the budget more vulnerable to new oil shocks and expenditure pressures. Given the global and Russia’s outlook, it will, therefore, be important for the authorities to consider more conservative budgeting with respect to the price of oil, public expenditures, and revisit the speed of fiscal adjustment in the next few years” – emphasized Zeljko Bogetic, World Bank’s Lead Economist for Russia and the main author of the Report.

Sergei Ulatov, a World Bank economist and member of the core team, noted that “the industrial sector, supported by a gradual pickup in investment, and inventory restocking in particular, has continued healthy growth in the third quarter (6.4 percent) led by manufacturing (9.5 percent). Gradually recovering domestic demand has finally provided a welcome boost to non-tradable sectors and this is good news for small and medium enterprises”.

“Given the current trends, inflationary pressure could intensify toward year-end. But tightening of the monetary conditions could contain inflation later in 2011 and 2012. CPI inflation in 2010 is projected in the range of 8 to 9 percent, reflecting the substantial monetization of the economy and a one-off effect of rising food prices. The upside risks for inflation will remain in 2011, reflecting the lag between the current money supply growth and its impact on prices, as well as possible monetization of the remaining fiscal gap” – concluded Karlis Smits, a World Bank economist and member of the core team.

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The report was prepared by a World Bank team consisting of Sergei Ulatov (Economist), Karlis Smits (Economist), Olga Emelyanova (Research Analyst), Victor Sulla (Economist), and Zeljko Bogetic (Lead Economist for Russia and the team leader). Annette de Kleine, and Shane Streifler (Senior Economists) contributed on the international environment and the global oil market. Victor Sulla (economist) and Ken Simler (Senior Economist) authored the note in focus on unemployment. The team expresses gratitude to the World Bank Global Economic Prospects team lead by Andrew Burns (Manager, DECPG) for close collaboration and discussions on global economic environment and its linkages with Russia.

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