RUSSIAN ECONOMIC REPORT

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RUSSIAN ECONOMIC REPORT 18Russia in the
Global Storm Refocusing policy on
householdswww.worldbank.org/ru

• Zeljko Bogetic
• Lead Economist for Russia
• Tuesday, April 21, 2009
• Carnegie Russia Eurasia Program
• Carnegie Endowment for International Peace
• Washington D.C.

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• The global storm
• Russias storm
• Policy response
• What more can be done?

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I. The worst global crisis since WWII

• Deep, synchronized, global crisis with financial
  crisis

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Global Economic Outlook for 2009-10 Grim

• Real GDP growth
• -1.7 (2009)
• 2.3 (2010) (highly uncertain)
• World trade
• -6.1 (2009)
• 3.9 (2010) (highly uncertain)
• Oil prices
• USD 47.8 (2009) Urals 45
• USD 52.7 (2010) Urals 45 -48

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Capital flows to developing countries drying out,
oil prices to remain low
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II. RUSSIAS STORM TRIPLE WHAMMY

• Before the storm economy overheating
• Oil from 140 to 40 per barrel
• Capital from 80bln (07) to -130 (08)
• Financing sharp drop, high spreads

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INTO THE STORM Stock market, financial sector
liquidity crunch, growth, industrial production
collapse
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Demand sources of Russias growth (in percent)
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Across-the-board slowdown, then deep recession in
ealry 2009

• Both tradable and non-tradable sectors hit
• Dramatic drops in early 2009.
• Construction -18.8 (Jan-Feb)
• Transport -18.2 (Jan-Feb)
• Retail trade -2.4 (Feb)
• Manufacturing -18.3 (Feb)

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Why was the impact on Russia so strong?

• Dependence on
• Oil, gas and metals
• Capital inflows, and
• Short-term external borrowing by banks and
  enterprises
• Small SME sector
• Narrow economic structure and low value added
• Low competitiveness
• Unexpectedly deep drop in world demand

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Labor marketsadjusting rapidly
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Employment changes in tradable and non-tradables
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Balance of paymentsweakening due to massive
terms of trade shock and capital outflows

• Current account balance
• 98 billion (year 08)
• 8 billion in q4 08
• Capital account balance
• 82 billion in 07
• -130 billion in 08

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Many Russian banks were relying excessively on
foreign borrowing
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Monetary-Exchange and Fiscal policyaiming to
limit the impact of the crisis

• Monetary-exchange policy
• Initially supporting liquidity
• Now supporting ruble, preserving reserves
• Fiscal policy
• Fiscal support to banks and enterprises

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Outlook for Russia, 2009-10
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Fraternal twins Russias two crises 1997-98 and
2008-09
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III. RUSSIAS FISCAL POLICY RESPONSEinitially
supporting banks and enterprises

• Total fiscal support 2008-09 ( GDP)
• Total 6.7
• Financial sector 3.3
• Real economy 2.5
• Social protection 0.2
• Regional transfers 0.7
• Source World Bank staff estimates, Russian
  Economic Report No. 18.

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Support to the financial system

• Total support to fin sector 2008-09 ( GDP)
• Total 3.3
• Subordinated loans 2.3
• Recapitalization 1.0

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Supporting the real economyusing direct support
and easing the tax burden

• Total fiscal stimulus in 2008-09 ( GDP)
• Total 3.4
• enterprises 2.4
• households 0.4
• Regions 0.6

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Some features of fiscal support to enterprises

• Emphasis on tax reduction
• Limited infrastructure spending
• Limited support to SMEs
• Limited interventions in the labor market
• Potential support to strategic enterprises

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How does Russias fiscal stimulus compare with
G-20 countries?
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Social impactspreading fast
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Projected amount of poor people before and after
the crisis (in millions), 2008-09
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What more can be done?

• Targeting households, infrastructure, and small
  and medium enterprises
• Additional social package must be
• Affordable
• Cost efficient in alleviating poverty
• Scaleable
• Using exisiting SSN mechanisms

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The additional social package is constructed so
as to maximize impact on poverty
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PROPOSED PACKAGE
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What more?

• IN SUM, we propose in the short-term
• Social protection package (1 of GDP)
• Infrastructure and SMEs (0.5 of GDP)
• And

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Back to the future Accelerating structural
reforms

• Banking sector modernization
• Public administration and governance reform
• Improving investment climate
• Infrastructure
• WTO agenda
• Improving effectiveness and targeting of the
  safety net

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DOWNSIDE RISKS FOR THE WORLD ECONOMY AND RUSSIA
REMAIN

• Social impact and associated social tensions
• Second round effect on financial sector
• Prolonged depression of global demand
• Therefore, policy must remain vigilant, flexible
  and ready to respond quickly to changing
  conditions.
• In a downside scenario, well designed and
  implemented public works programs may be needed.

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Thank you!