Russian Economic Report No. 23

Zeljko BogeticLead Economist and Coordinator for Economic Policy for Russia, The World Bank

November 2, 2010Moscow

Growth with moderation and uncertainty

I. Recent Economic Developments

II. Economic and social Outlook for 2011-2012

Key messages

• Moderating growth with uncertainty• Moderate oil prices, downside risks• Rising fiscal risks

Global industrial production and trade have recovered to pre-crisis levels but there has been a “pause” in growth in recent months

Global Industrial production

Source: Global prospects, World Bank.

Non-bank capital flows to developing countries continue to grow, but bank flows

remain weakCapital flows to developing countries

Source: Global prospects, World Bank.

Most economies in Europe and Central Asia contracted in 2009 …..

Source: WB staff estimates.

––but then returned to growth in 2010, albeit less robust than in other regions

Source: WB staff estimates.

RUSSIA’S RECENT ECONOMIC DEVELOPMENTS

• Domestic demand—regaining momentum

• Labor markets––a temporary decline in unemployment

• Balance of payments––improved, but then deteriorating due to a rapid growth in imports

• Monetary policy–– in search of a fine balance to contain inflation and support growth

• Fiscal policy––rising fiscal risks

With stronger domestic demand, the Russian economy regained momentum in the second quarter 2010

Source: World Bank staff calculations based on Rosstat data.

 2006 2007 2008 2009 Q1-

2010Q2-2010

GDP growth 8.2 8.5 5.2 -7.9 3.1 5.2Tradable sector 3.0 3.5 0.3 -10.1 11.9 10.3 Agriculture, forestry 2.7 1.3 7.3 0.2 2.7 1.1 Extraction industries -2.9 -2.2 1.7 -0.9 11.7 5.2 Manufacturing 6.6 7.5 -2.2 -15.8 13.4 15.3Non-tradable sector 12.5 12.8 9.1 -7.2 -0.3 3.5 Electricity, gas, water production and distribution 4.5 -3.4 -0.3 -4.3

9.0 3.7

Construction 12.8 13.0 11.2 -17.2 -8.9 -0.3 Whole sale and retail trade 14.1 11.7 9.4 -10.3 -0.1 3.7 Transport and communication 9.7 4.8 5.1 -3.0 9.5 9.6 Financial services 25.4 29.1 13.5 2.4 -7.3 -1.2

GDP growth by main sectors (value added): 2006–2010 

A sizeable but temporary grain shock: impact on poverty

Poverty increase due to changes in grain prices

Source: World Bank staff estimates using household survey data.

Labor markets – unemployment lower but still unsettled situation

Labor productivity, disposable income, wages, and unemployment

Source: Rosstat.a Data for the first half of 2010.

  2006 2007 2008 2009 2010

  Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan – Sep Sep

GDP growth, percent, year on year 8.2 8.5 5.2 -7.9 4.2a n/a

Total employment, million people 68.8 70.5 70.9 69.4 69.7 71.1

Employment growth, percent, year on year 0.8 2.4 0.5 -2.1 0.3a -0.1Labor productivity growth, percent, year on year 7.3 6.0 4.7 -5.9 3.9a n/aReal disposable income growth, percent, year on year 13.5 12.1 1.9 1.9 4.8 1.5

Real wage growth, percent, year on year 13.3 17.2 11.5 -2.8 5.0 5.1

Average monthly wage, USD 392.5 533.2 692.1 593 678.2703.

2

Unemployment (percent, ILO definition, e-o-p) 6.9 6.1 7.8 8.2 6.6 6.6

• Unemployment elevated, varies widely across Russia’s regions• Bigger regions show less improvement• Smaller regions with larger shares of SME and FDI show

improvementRatio of Regional Unemployment rates 2010*/2008

Source: Rosstat; World Bank staff estimates .*Data for January - August.

Balance of payments––improved, but then deteriorating due to a rapid growth in imports

Balance of payments (USD billions), 2007–2010

Source: CBR. a Preliminary estimates.

  2007 2008 2009 H1-09 H1-10 Q3-2010a

Current account balance 77 103.7 49.4 17.9 52.2 8.7

Trade balance 130.9 155.4 111.6 43 86 28.5

Capital and financial account 84.8 -131.3 -43.49 -29.3 -2.3 -4.4

Monetary and exchange rate policy•Monetary conditions remain loose

•Trade off: low policy rates or inflationary pressures

•Gradual recovery in credits

•CBR has further widened the exchange rate corridor

Stock of credits to companies and households in 2007–10

Source: CBR; World Bank staff estimates.

Fiscal policy––smaller-than-expected deficit due to favorable oil prices …

  2009 2010 2011* 2012* 2013*

Revenues (Consolidated) 34.4 33.4 35.0 34.0 32.8Of which Federal budget 18.8 17.3 17.4 16.5 16.1Expenditures (Consolidated) 40.6 39.1 38.7 37.0 35.2Of which Federal budget 24.7 22.7 20.9 19.6 19.0Federal budget Non-oil deficit -13.6 -13.7 -11.6 -10.5 -9.8Federal budget balance -5.9 -5.4 -3.6 -3.1 -2.9Consolidated budget balance -6.2 -5.7 -3.7 -3.0 -2.4

Medium term fiscal framework

*Draft Budget 2011 – 2013. Source: World Bank staff estimates based on draft budget documents, the Ministry of Finance.

2006 2007 2008 2009 2010 2011 2012 201338

48

58

68

78

88

98

Initital oil price (Urals oil) projections assumed in the federal budget, $/bbl

Actual oil price (Urals oil), $/bbl (WB forecast used for 2011 - 2013)

• Downside risk to oil prices• Dwindling “oil cushion” in the budget (the difference between the forecast and planned oil price in the budget) and fiscal reserves

This makes budget more vulnerable to new oil shocks If the oil prices were to fall to an average of $60 in 2011, the deficit

would increase to 5-5,.5 % of GDP range • Rising expenditure pressures before the election

Source: State Duma database, Bloomberg, WB.

…but rising fiscal risks

Economic and Social Outlook for Russia, 2010-2012

The summary of the global outlook

Source: Russian Economic Report, The World Bank.

2009(actual) 2010 2011 2012

World-2.1 3.5 3.2 3.6

High income countries

-3.3 2.5 2.3 2.8Developing countries

1.8 6.6 5.9 6.1China

8.7 9.5 8.5 8.2Japan

-5.2 2.4 1.6 2The United States

-2.6 2.6 2.3 2.9Euro area

-4.1 1.3 1.7 2.1

Oil prices are expected to remain stable but with downside risks

World Bank oil price forecast. Average crude (Brent, Dubai and WTI), simple average, $/bbl

71.12

96.99

61.75

76.4

73.3

73.1

25

50

75

100

125

2007 2008 2009 2010 2011 2012

World Bank oil price forecastAverage crude (Brent, Dubai and WTI), simple average, $/bbl

Source: World Bank Staff

Outlook for Russia: 2010 - 2012

2010 2011 2012

World growth, % 3.5 3.2 3.6

Oil prices, average, USD/bbl 76.4 73.3 73.1

Russia

GDP growth, % 4.2 4.5 3.5

Consolidated government balance, %

-4.4 -4.0 -3.1

Current account, USD bln. 70 30 18

Capital account, USD bln. -10 23 54

Source: Global Economic Prospects (World growth and oil prices), and Russian Economic Report, The World Bank.

Sources of growthDemand sources of Russia’s real growth, by quarter, 2008–10 (percent change year to year)

Source: Rosstat; World Bank staff estimates.

•

Q1 1999

Real GDP Level (Index, seasonally adjusted): 1998 vs 2008-09 crises

Russia’s output to return to pre-crisis level only in 2012; long-term growth likely to be much more moderate than

before the crisis

Source: Rosstat, WB staff calculations.

In Summary …• Moderate growth with downside risks to oil • Domestic demand driven growth • Unemployment to get worse before it gets better • Smaller regions with greater share of SMEs and larger flows

of FDIs, and better investment climate lead employment recovery

• Sizable but temporary grain price shock • Monetary - exchange policy - a balancing act

Looking ahead• Short-term: Fiscal risks rising: oil prices, the dwindling “oil

cushion” in the budget, rising expenditure pressures, contingent liabilities

• Long-term constraints: infrastructure, institutions, investment climate

Thank you!