“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. A contraction may be prolonged by a drop in household consumption and a “second wave” of non- performing corporate loans, Zeljko Bogetic, the World Bank’s Moscow-based lead economist, said today in Moscow.
“There is a risk of further deterioration in the world economy and in Russia,” Bogetic said. “The real economy has deteriorated more than expected. I’d call it a silent tsunami, a more gradual tsunami than the one we’ve seen, with the steady increase of non-performing loans that will be potentially damaging for the global economy and Russia.”
Capital Outflow
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.
“We disagree with the World Bank forecast, it’s too pessimistic for Russia,” First Deputy Prime Minister Igor Shuvalov said in Moscow today.
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.
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.
Net capital outflow may reach $170 billion as Russian banks and companies pay off more than $130 billion of external debt and foreign direct investment dwindles to less than $5 billion this year, Bogetic said. Russia’s central bank estimates that less than $83 billion will be taken out of the economy this year, First Deputy Chairman Alexei Ulyukayev said March 27.
Help the ‘Vulnerable’
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.
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 bank said. 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.
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.
Limited Space
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 after the price of oil tumbled. Oil will probably stay at about $40 to $50 a barrel this year, easing pressure on the ruble, and rise to $75 in the “medium term,” Bogetic said.
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.
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.
-- With reporting by Anastasia Ustinova in Moscow. Editors: Chris Kirkham,
To contact the reporter on this story: Paul Abelsky in St. Petersburg at pabelsky@bloomberg.net.
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