1. Russian Economic Report No. 23 Zeljko Bogetic Lead Economist and Coordinator for Economic Policy for Russia, The World Bank November 2, 2010 Moscow Growth with moderation and uncertainty

2. I.Recent Economic Developments II.Economic and social Outlook for 2011-2012

3. Key messages Moderating growth with uncertainty Moderate oil prices, downside risks Rising fiscal risks

4. 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.

5. Non-bank capital flows to developing countries continue to grow, but bank flows remain weak Capital flows to developing countries Source: Global prospects, World Bank.

6. Most economies in Europe and Central Asia contracted in 2009 ….. Source: WB staff estimates.

7. ––but then returned to growth in 2010, albeit less robust than in other regions Source: WB staff estimates.

8. 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

9. With stronger domestic demand, the Russian economy regained momentum in the second quarter 2010 Source: World Bank staff calculations based on Rosstat data. 2006200720082009 Q1- 2010 Q2- 2010 GDP growth 8.28.55.2-7.9 3.15.2 Tradable sector 3.03.50.3-10.1 11.910.3 Agriculture, forestry 2.71.37.30.2 2.71.1 Extraction industries -2.9-2.21.7-0.9 11.75.2 Manufacturing 6.67.5-2.2-15.8 13.415.3 Non-tradable sector 12.512.89.1-7.2 -0.33.5 Electricity, gas, water production and distribution 4.5-3.4-0.3-4.3 9.03.7 Construction 12.813.011.2-17.2 -8.9-0.3 Whole sale and retail trade 14.111.79.4-10.3 -0.13.7 Transport and communication 9.74.85.1-3.0 9.59.6 Financial services 25.429.113.52.4 -7.3-1.2 GDP growth by main sectors (value added): 2006–2010

10. 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.

11. 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. 20062007200820092010 Jan-Dec Jan – SepSep GDP growth, percent, year on year8.28.55.2-7.94.2 a n/a Total employment, million people68.870.570.969.469.771.1 Employment growth, percent, year on year0.82.40.5-2.10.3a-0.1 Labor productivity growth, percent, year on year7.36.04.7-5.93.9 a n/a Real disposable income growth, percent, year on year 13.512.11.9 4.81.5 Real wage growth, percent, year on year13.317.211.5-2.85.05.1 Average monthly wage, USD392.5533.2692.1593678.2703.2 Unemployment (percent, ILO definition, e-o-p)6.96.17.88.26.6

12. Unemployment elevated, varies widely across Russia’s regions Bigger regions show less improvement Smaller regions with larger shares of SME and FDI show improvement Ratio of Regional Unemployment rates 2010*/2008 Source: Rosstat; World Bank staff estimates.*Data for January - August.

13. 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. 200720082009H1-09H1-10Q3-2010 a Current account balance77103.749.417.952.28.7 Trade balance130.9155.4111.6438628.5 Capital and financial account 84.8-131.3-43.49-29.3-2.3-4.4

14. 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.

15. Fiscal policy––smaller-than-expected deficit due to favorable oil prices … 200920102011*2012*2013* Revenues (Consolidated)34.433.435.034.032.8 Of which Federal budget18.817.317.416.516.1 Expenditures (Consolidated)40.639.138.737.035.2 Of which Federal budget24.722.720.919.619.0 Federal budget Non-oil deficit-13.6-13.7-11.6-10.5-9.8 Federal budget balance-5.9-5.4-3.6-3.1-2.9 Consolidated 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.

16. 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

17. Economic and Social Outlook for Russia, 2010-2012 The summary of the global outlook Source: Russian Economic Report, The World Bank. 2009(actual)201020112012 World -2.13.53.23.6 High income countries -3.32.52.32.8 Developing countries 1.86.65.96.1 China 8.79.58.58.2 Japan -5.22.41.62 The United States -2.62.62.32.9 Euro area -4.11.31.72.1

18. 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

19. Outlook for Russia: 2010 - 2012 201020112012 World growth, %3.53.23.6 Oil prices, average, USD/bbl76.473.373.1 Russia GDP growth, %4.24.53.5 Consolidated government balance, % -4.4-4.0-3.1 Current account, USD bln.703018 Capital account, USD bln.-102354 Source: Global Economic Prospects (World growth and oil prices), and Russian Economic Report, The World Bank.

20. Sources of growth Demand sources of Russia’s real growth, by quarter, 2008–10 (percent change year to year) Source: Rosstat; World Bank staff estimates.

21. 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.

22. 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

23. Thank you!