Russian Economy Will Contract 4.5% This Year, World Bank Says

By Paul Abelsky

March 30 (Bloomberg) -- Russia’s economy will probably shrink 4.5 percent this year after oil prices slumped and global contagion spread, driving up unemployment and pushing more people into poverty, the World Bank forecast.

“As the crisis continues to spread to the real economy around the world, initial expectations that Russia and other countries will recover fast are no longer likely,” the bank said in a report today. In November, it saw growth of 3 percent, based on oil prices of $75 a barrel and global expansion.

The slump may last longer and be deeper than in the aftermath of the 1998 government’s $40 billion debt default and 70 percent ruble devaluation, which triggered bank runs and wiped out citizens’ savings. The contraction may be prolonged because of the credit squeeze and low oil prices, with unemployment rising and incomes falling, the bank said.

“In the short term, the authorities will face twin challenges of containing the social impact and managing the new round of the real economy’s impact on the financial sector,” the report said.

Inflation will be between 11 percent and 13 percent this year as higher import prices offset falling consumer demand, the unavailability of loans and capital outflow, the bank said.

Russia’s government says the economy will shrink 2.2 percent this year after a decade-long expansion. The Cabinet this month approved a revised budget with the first deficit in 10 years of 2.98 trillion rubles ($88.2 billion), or 7.4 percent of projected gross domestic product.

The revision was calculated on an average price of $41 a barrel and an inflation rate of about 13 percent. The budget contains 1.6 trillion rubles in anti-crisis spending.

‘Twin Challenges’

The government’s anti-crisis response should shift from a focus on the financial sector and companies toward targeting small and medium-size businesses, infrastructure and “cushioning the impact on the vulnerable” the bank said.

“The deeper and more prolonged economic crisis is likely to have a major social impact, already spreading fast,” the bank said in the report.

Russia should earmark additional funds, equivalent to about 1 percent of gross domestic product for one year, to provide a temporary fiscal boost on programs including child allowance, unemployment benefits and pensions.

The spending program would increase the deficit by 0.75 percent this year because it will extend into 2010.

The number of jobless people will probably rise by 2.7 million people in 2009, growing to more than 12 percent of the working population, the World Bank said. The number of poor may climb by 2.75 million, resulting in a 16 percent poverty rate.

Growing Poverty

The bank estimates about a quarter of the population is vulnerable to poverty. Russia also faces a severe housing shortage, with about 7 percent sharing living space with other households and one in two persons having less than 10 square meters (108 square feet) per capita.

While the government has said it will maintain planned spending levels on priority programs in education, public health and housing this year, Russia needs to implement quicker measures to contain the crisis in the short term.

Russia’s international reserves are sufficient to finance the projected budget shortfall, though the need to preserve funds for next year means “the space for more fiscal stimulus this year appears limited,” the report said.

At the same time, the focus on tax relief in Russia’s stimulus package may undermine the revenue base as oil tumbles.

Banking Pressures

The foreign-currency stockpile, the world’s third-largest after China’s and Japan’s, has been eroded by 36 percent from an August record of $598.1 billion, as Bank Rossii sold dollars and euros to manage a 30 percent “gradual devaluation” of the ruble against the dollar.

The World Bank predicts new pressures on Russia’s banking sector as credit markets remain frozen and bad loans increase. The share of non-performing loans may exceed 10 percent of the total by the end of this year from 3.8 percent in January.

Scheduled repayments by Russian lenders and companies will probably exceed $135 billion in 2009, with more than $30 billion due in the first quarter of this year, according to the bank.

Russia has allocated 555 billion rubles of budget money to aid lenders and may also allow banks to swap shares for sovereign ruble bonds to help them boost capital, Finance Minister Alexei Kudrin said last week.

To contact the reporter on this story: Paul Abelsky in St. Petersburg at pabelsky@bloomberg.net.