1. Russia in the Global Economic Storm Based on Russian Economic Report No. 18 www.worldbank.org/ru Zeljko Bogetic Lead Economist for Russia Wednesday, May 6, 2009 European Policy Centre Brussels

2. I.The global economic storm II.Russia’s storm Initial conditions External shocks Economic impact Social and regional impacts III.Policy response IV.What more can be done?

3. I. The worst global crisis since WWII Deep, synchronized, global crisis with financial crisis

4. The context for the global economic storm: a complex story –Macro Low interest rates Global imbalances Credit boom and overleveraging Asset price bubbles-housing, subprime, credit, derivatives –Regulatory SIVs and the end of investment banking model Large and vulnerable Innovation –Micro Corporate and risk management Compensation and incentives

5. Global Economic Outlook for 2009-10: Grim Real GDP growth -1.7% (2009) +2.3% (2010) (highly uncertain) World trade -6.1% (2009) +3.9% (2010) (highly uncertain) Oil prices USD 47.8 (2009) [ Urals: $45 ] USD 52.7 (2010)[ Urals: $45 -$48]

6. Capital flows to developing countries drying out, oil prices to remain low

7. II. RUSSIA’S STORM: TRIPLE WHAMMY Before the storm: economy overheating Oil: from $140 to $40 per barrel Capital: from +$80bln (07) to -$130 (08) Financing: sharp drop, high spreads

9. The size of oil and capital account shocks were much larger than during the 1998 crisis

10. INTO THE STORM: Stock market, financial sector liquidity crunch, growth, industrial production collapse

11. Demand sources of Russia’s growth (in percent)

12. Across-the-board slowdown, then deep recession in erlyy 2009 Both tradable and non-tradable sectors hit Dramatic drops in early 2009. –Construction: -18.8% (Jan-Feb) –Transport: -18.2% (Jan-Feb) –Retail trade: -2.4% (Feb) –Manufacturing: -18.3% (Feb)

13. Why was the impact on Russia so strong? Dependence on –Oil, gas and metals –Capital inflows, and –Short-term external borrowing by banks and enterprises Small SME sector Narrow economic structure and low value added Low competitiveness Unexpectedly deep drop in world demand

14. Labor markets—adjusting rapidly

15. Employment changes in tradable and non-tradables

16. Balance of payments—weakening due to massive terms of trade shock and capital outflows Current account balance –+$98 billion (year ’08) –+$8 billion in q4 ’08 Capital account balance –+$82 billion in ‘07 –-$130 billion in ’08

17. Many Russian banks were relying excessively on foreign borrowing

18. Monetary-Exchange and Fiscal policy—aiming to limit the impact of the crisis Monetary-exchange policy: –Initially supporting liquidity –Now supporting ruble, preserving reserves –Blance of risks shifted from inflation to real economy and social sectors Fiscal policy: –Fiscal support to banks and enterprises

19. Outlook for Russia, 2009-10

20. Fraternal twins: Russia’s two crises 1997-98 and 2008-09

21. III. RUSSIA’S FISCAL POLICY RESPONSE—initially supporting banks and enterprises Total fiscal support 2008-09 (6.7% GDP)

22. Support to the financial system Total support to fin sector 2008-09 (% GDP) Total 3.3 –Subordinated loans:2.3 –Recapitalization1.0

23. Supporting the real economy––using direct support and easing the tax burden Total “fiscal stimulus” in 2008-09 (3.4% GDP)

24. Some features of fiscal support to enterprises Emphasis on tax reduction Limited infrastructure spending Limited support to SMEs Limited interventions in the labor market Potential support to “strategic enterprises

25. How does Russia’s fiscal stimulus compare with G-20 countries?

26. Social impact—spreading fast

27. Projected amount of poor people before and after the crisis (in millions), 2008-09

28. Regions most affected by poverty are likely those with large employment and real wage losses

29. What more can be done? Targeting households, infrastructure, and small and medium enterprises Additional social package must be: –Affordable –Cost efficient in alleviating poverty –Scaleable –Using exisiting SSN mechanisms

30. The additional social package is constructed so as to maximize impact on poverty

31. Targeted emergency social protection

32. What more? IN SUM, we propose in the short-term: Social protection package (1% of GDP) Infrastructure and SMEs (0.5% of GDP) And…

33. Additional social protection cum infrastructure stimulus would have greater imact on demand

34. Back to the future: Accelerating structural reforms –Banking sector modernization –Public administration and governance reform –Improving investment climate –Infrastructure –WTO agenda –Improving effectiveness and targeting of the safety net

35. DOWNSIDE RISKS FOR THE WORLD ECONOMY AND RUSSIA REMAIN Social impact and social tensions Second round effect on financial sector Prolonged depression of global demand Therefore: –policy must be vigilant, flexible and ready to respond quickly –In a downside scenario, well designed and implemented public works programs may be needed. Relevance for other countries?

36. Thank you!