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Lev FreinkmanJuly 7, 2009
1
OutlineDepth of Russia’s crisis in comparative
perspectiveGuessing about the current stage of the
crisisMedium term prospects for RussiaRegional ImplicationsSome lessons from the global experience
Sources: WB Russian Economic Report, 19; IET
2
Global forecast for 2009-10 remains pessimistic
• Real GDP growth• -2,9% (2009)• +2,0% (2010)• This is lower than in the March forecast
• Global Trade • -9,7% (2009)• +3,8% (2010)
• Oil prices • USD 55,53 (2009 ) (Urals: $50 )• USD 62,95 (2010 ) (Urals: $55 -$60)
3
Scale of industrial decline
4
5
Industrial Production, Decline in January 2009 relative to July 2008, %
Some signs of stabilization
IMPROVEMENTS:•Capital inflows to developing countries•Commodity prices•Stock markets
6
Russia: sharp contractionAffected by: decline in commodity prices,
deterioration in access to finance, and compression in global demand
2006 2007 2008 Q1-2009 Jan-Apr Jan- May 09 09
GDP growth, % 7.7 8.1 5.6 -9.8 -9.8 -10.1*Industrial production % 6.3 6.3 2.1 -14.3 -14.9 -15.4 Fixed investment, %, 16.7 21.1 9.8 -15.6 -15.8 -17.7 Federal gov bal, % GDP 7.4 5.5 4.0 -0.6 -3.3 -3.1 Inflation (CPI), % change 9.0 11.9 13.3 5.4 6.2 6.8 Current account, bn USD 95.6 76.6 98.9 11.1 n/a n/a Unemployment, % (ILO) 7.2 6.1 6.4 9.4 9.6 9.7 Oil prices, Urals 61.2 69.5 95.1 44.1 45.5 47.8 Reserves, bn USD 303.7 478.8 427.1 383.9 383.9 404.2
* - preliminary estimate7
8
No sign of recovery, broad contraction
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But much stronger BOP than most people expected
Balance of payments (USD billions), 2006-2009 2006 2007 Q1-08 Q4-08 2008 Q1-09
Current Account Balance 94.7 77.0 38.0 8.6 102.3 11.1
Trade Balance 139.3 130.9 49.9 24.7 179.7 21.7
Capital & Financial Account 3.3 85.7 -25.7 -136.9 138.8 -29.9
Errors and Omissions 9.5 -13.8 -5.8 -2.8 -8.9 -12.3
Change in Reserves 107.5 148.9 6.4 -131.1 -45.3 -31.1
10
Stock market follows oil price developments
11
WB projections for Russia, 2009-10
2009 2010 World growth, % -2.9 2.0 Oil prices, World average, USD/bbl 56 63 GDP growth, % -7.9 2.5 Federal government balance, % -7.2 -6.0 Current account, USD bln. 32 36 Capital account, USD bln. -60 -30
12
Russian experts are even more pessimistic than this
“The crisis affects Russia much more heavily than the majority of other countries of comparable size. Even the word “catastrophe” could already applied with difficulty to what now occurs in the Russian industry.” [A.N. Illarionov]
GDP decline of 9% in 2009 is a common expectation
13
My own humble assessment
14
I am somewhat more optimistic than thisRussia will come out of the crisis relatively
stronger compare to its neighbors in ECAPerceptions among Russian industrialists are
more “positive” than this -7-9% forecastSeveral factors will help Russian economy to
perform better in H2, 2009Russia is too much dependent upon world
market to get through on its own. Downside risks are huge.
Nobody knows
Factors of Russian StrengthFiscal reserves, massive program of fiscal
stimulus(4% of GDP), heavily underutilized so far
Effect of devaluationContraction in late 2009 was partially driven
by panic, not just by fundamentals, over-shooting
Small financial sectorFlexible labor markets makes adjustment in
the real sector much easier15
Alternative survey estimates: Changes in industrial output
16
IET’s Survey ResultsMonthly surveys of about 1000 industrial
enterprises since 1992. Proved track record of stat accuracy
Drastic slowed down in the rate of industrial decline
Still a declineExpectations are positive. On average
enterprise managers do not expect further decline in industrial output and demand
17
While employment is expected to decline
Employment plans of industrial plans remains quite negative
This may have implications for remittances
18
Comparative importance of factors that hamper growth
(Frequency of mentioning, %)
Jan 2009 Base Domestic demand 67 26 Q3, 07
Export demand 36 11 Q4, 07
Shortage of working capital 46 34 Q1, 07
Arrears 39 10 Q4, 07
Pressures from imports 11 32 Q3, 08
Labor shortages 16 49 Q2, 08Источник. ИЭПП
19
Risks for RussiaA possibility of banking crisis in Q3, 2009Crisis could be too short. It may be over
before its lessons are learned. Inadequate government policies:
Readiness to spend too much in non-systemic and non-transparent ways
Instincts for nationalizationWeakness for lobbyism by large
businessInability to implement its own decisions
in due time 20
Quick erosion of devaluation effect
Real Ex Rate Index, 100 = January 2002
Almost half of the gains were lost since March
Ruble already reached its strength of late 2007
21
Slow budget executionThe rate of
budget spending is slow
30% of annual budget after 5 months
26% for national economy spending
22
Monthly federal budget spending, trln rbl
Impact on Russia’s neighbors in the CIS
Russia’s is 8th largest economy in the world. Major export market, etc.
In Jan.-April 09 imports from the CIS - only 51% of 2008 level, loss of $5.5 bln in export proceeds
Exports to Russia are unlikely to recover in 2009, even for countries that went through competitive devaluation.
I would expect that 2009 exports to Russia would remain at the 60% of 2008
The effect on remittances in 2009 could be similar because it reflects a decline in both construction and employment in Russia, up to 35% in US$ terms
23
Russian imports from the CIS, Jan-April, mln US$
24
Remittances from Russia to the CIS: decline in both total value and
average size of transfers
25
Lessons from the financial crisesLessons from World Bank Research on Financial Crises (WPS
4779, Nov. 2008)Countries with competitive elections did not face less or more
frequent crises, but they deal with them in a more efficient way They react to a crisis in more timely mannerSuffer from a smaller decline in outputSpent less money on anti-crisis programsLess prone to spend public money under anti-crisis programs
to bailout large owners and creditors
26