The Russian economy will shrink by 7.9 percent in 2009 despite a recent rise in commodity prices, the World Bank said on Wednesday, a much sharper contraction than the 4.5 percent it forecast earlier.

 

Russia’s economy contracted by 10.2 percent in January-May 2009, according to Economy Ministry estimates, and First Deputy Prime Minister Igor Shuvalov told Reuters on Tuesday the annual contraction may reach 9 percent.

 

“Given a much larger gross domestic product contraction in the first quarter of 2009 than anticipated, Russia’s economy is likely to contract by 7.9 percent in 2009, despite higher oil prices assumed in the current forecast,” the World Bank said in its quarterly country report.

 

Russia, the world’s largest energy producer, has been hit hard by the plunge in global demand for commodities, while its banks and many businesses that had borrowed heavily abroad have been squeezed by the global credit crunch.

 

The World Bank’s lead economist for Russia Zeljko Bogetic told a news conference there was a “natural lag” before the recent upturn in commodity prices would have an impact on Russian growth, “provided that it holds, of course, which is not entirely clear.”

 

The World Bank forecast Russia’s jobless rate to rise to 13 percent by the end of this year, from its 9.9 percent May level, and said single factory towns will be the hardest hit by rising unemployment and wage arrears.

 

“Some stabilisation (in the jobless rate) is related to seasonal factors and job shedding is not over,” Bogetic said.

 

The World Bank projected Russia would return to moderate growth of 2.5 percent in 2010 and 3.5 percent in both 2011 and 2012 in a “gradual and prolonged” recovery.

 

“The speed of the subsequent recovery in Russia will to a great extent depend on the revival of global demand and the global financial system,” the report said, adding that Russia will reach pre-crisis growth rates only at the end of the third quarter of 2012.

 

FISCAL DEFICIT High oil prices may keep Russia’s fiscal deficit lower than initially forecast but the report noted spending risks linked to recapitalising the banking sector and extra social costs.

 

The report saw the fiscal deficit at 7.2 percent this year, and at 6.0 percent in 2010. The World Bank based its forecasts on average Russian Urals crude prices URL-E URL-NWE-E of between $ 56 per barrel this year and $ 63 per barrel in 2010.

 

Bogetic said Russia needed to reduce the amount of aid going to people who do not really need it, and boost the budget’s revenue base through raising liquor and tobacco excise duties.

 

The World Bank said a delay in Russia’s accession to the World Trade Organisation caused by a decision to form a customs union with Belarus and Kazakhstan could undermine benefits from a rules based trading regime.

 

The report said lower inflation has created room for more official interest rate cuts, which should help investment in the second half of 2009. But it also warned that overvaluation of the rouble could hurt the recovery.

 

It expects inflation to reach 11-13 percent this year. The nation’s current account surplus is forecast at $ 32 billion in 2009 and $ 36 billion in 2010.

 

The World Bank said capital outflows will total $ 60 billion this year and decline to $ 30 billion in 2010.

 

Non-performing loans could reach 10 percent of the total in banks’ portfolios, the report said, adding that consolidation in the sector should be accelerated.

 

Source: Agencies

 

Kavkaz Center