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Lev Freinkman July 7, 2009 1. Outline Depth of Russias crisis in comparative perspective Guessing about the current stage of the crisis Medium term prospects.

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Presentation on theme: "Lev Freinkman July 7, 2009 1. Outline Depth of Russias crisis in comparative perspective Guessing about the current stage of the crisis Medium term prospects."— Presentation transcript:

1 Lev Freinkman July 7,

2 Outline Depth of Russias crisis in comparative perspective Guessing about the current stage of the crisis Medium term prospects for Russia Regional Implications Some lessons from the global experience Sources: WB Russian Economic Report, 19; IET 2

3 Global forecast for 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

4 Scale of industrial decline 4

5 5 Industrial Production, Decline in January 2009 relative to July 2008, %

6 Some signs of stabilization IMPROVEMENTS: Capital inflows to developing countries Commodity prices Stock markets 6

7 Russia: sharp contraction Affected by: decline in commodity prices, deterioration in access to finance, and compression in global demand Q Jan-Apr Jan- May 0909 GDP growth, % * Industrial production % Fixed investment, %, Federal gov bal, % GDP Inflation (CPI), % change Current account, bn USD n/a n/a Unemployment, % (ILO) Oil prices, Urals Reserves, bn USD * - preliminary estimate 7

8 8

9 No sign of recovery, broad contraction 9

10 But much stronger BOP than most people expected Balance of payments (USD billions), Q1-08 Q Q1-09 Current Account Balance Trade Balance Capital & Financial Account Errors and Omissions Change in Reserves

11 Stock market follows oil price developments 11

12 WB projections for Russia, World growth, % Oil prices, World average, USD/bbl GDP growth, % Federal government balance, % Current account, USD bln Capital account, USD bln

13 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

14 My own humble assessment 14 I am somewhat more optimistic than this Russia will come out of the crisis relatively stronger compare to its neighbors in ECA Perceptions among Russian industrialists are more positive than this -7-9% forecast Several factors will help Russian economy to perform better in H2, 2009 Russia is too much dependent upon world market to get through on its own. Downside risks are huge. Nobody knows

15 Factors of Russian Strength Fiscal reserves, massive program of fiscal stimulus(4% of GDP), heavily underutilized so far Effect of devaluation Contraction in late 2009 was partially driven by panic, not just by fundamentals, over-shooting Small financial sector Flexible labor markets makes adjustment in the real sector much easier 15

16 Alternative survey estimates: Changes in industrial output 16

17 IETs Survey Results Monthly surveys of about 1000 industrial enterprises since Proved track record of stat accuracy Drastic slowed down in the rate of industrial decline Still a decline Expectations are positive. On average enterprise managers do not expect further decline in industrial output and demand 17

18 While employment is expected to decline Employment plans of industrial plans remains quite negative This may have implications for remittances 18

19 Comparative importance of factors that hamper growth (Frequency of mentioning, %) Jan 2009Base Domestic demand6726 Q3, 07 Export demand3611 Q4, 07 Shortage of working capital4634 Q1, 07 Arrears3910 Q4, 07 Pressures from imports1132 Q3, 08 Labor shortages1649 Q2, 08 Источник. ИЭПП 19

20 Risks for Russia A possibility of banking crisis in Q3, 2009 Crisis 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 nationalization Weakness for lobbyism by large business Inability to implement its own decisions in due time 20

21 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

22 Slow budget execution The 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

23 Impact on Russias neighbors in the CIS Russias is 8 th 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

24 Russian imports from the CIS, Jan-April, mln US$ 24

25 Remittances from Russia to the CIS: decline in both total value and average size of transfers 25

26 Lessons from the financial crises Lessons 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 manner Suffer from a smaller decline in output Spent less money on anti-crisis programs Less prone to spend public money under anti-crisis programs to bailout large owners and creditors 26

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