World Bank Predicts 4.5% Contraction for Russia’s Economy, Possible “Social Crisis” 

By Mike Caggeso
Associate Editor
Money Morning

After nearly a decade of double-digit economic growth, Russia's economy is facing the prospect of a 4.5% contraction this year that will drive unemployment and poverty to "social crisis" levels, the World Bank said.

This is a quick and drastic reversal of the World Bank's previous forecast of 3% growth in Russia, but Russia's "real economy has deteriorated more than expected," said Zeljko Bogetic, the World Bank's Moscow-based lead economist.

Earlier projections were based on oil prices of $75 a barrel. The revision was calculated using an average price of $41 a barrel and an inflation rate between 11% and 13%, the bank said.

Russia's troubles are so deep that its current slump could sink deeper and extend further than the government's $40 billion debt default in 1998 that caused a 70% currency devaluation and eviscerated savings accounts across the country. At its worst point a decade ago, Russia's economy shrank by 5.3%

The current contraction could worsen as household consumption continues to fal and non-performing corporate loans enter a "second wave."

"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," Bogetic said. 

The World Bank's forecast is much lower than Russia's government, which believes the economy will shrink 2.2% in 2009.

Social, Political and Investment Fallouts

The World Bank also had some tough words to swallow about Russia's economic social situation, encouraging the government to boost unemployment subsidies by 220%, child subsidies by 70%, and pensions for the poorest pensioners by 20%, Reuters reported.

Russia's total number of unemployed jumped 20.6% year-over-year in February to over 6.4 million people, or 8.5% of the economically active population, according to the Federal State Statistics Service. That's a 4.9% increase from January 2009.

The extra suggested spending - which would be the equivalent to 1% of the gross domestic product (GDP) - over the next 12 months could save more than 4 million people from falling into poverty, the World Bank estimates.

"The social situation has worsened so rapidly and so unexpectedly that it is important to shift the focus of the anti-crisis policy to the population," Bogetic said.

Politically, the oil-driven economy Prime Minister Vladimir Putin built during his term as president is collapsing, causing a good deal of fallout in his popularity.

"The transition of the [economic] crisis into the political arena has already begun happening," Gleb Pavlovsky wrote in Russia's Moskovski Komsomolets. "The sources of social protest should be sought in the corridors of power."

Also, Russia's continuing weakness is causing emerging market investors to look elsewhere. Since their high last spring, Russia's stock prices are down nearly 80%, and Money Morning Contributing Editor Martin Hutchinson has crossed the Russian markets off his list of growth opportunities.

"Russia is neither emerging, nor a market," Hutchinson said. "Unless oil prices recover rapidly, or the country undergoes a sudden conversion to secure property rights, it seems fated to remain impoverished, and to have its economic vigor diverted into military adventurism. It should be on nobody's list of growth opportunities."

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