RUSSIAN ECONOMIC REPORT #18 Russia in the Global Storm Refocusing policy on households Zeljko Bogetic Lead Economist for Russia Tuesday, April 21, 2009 Carnegie Russia & Eurasia Program Carnegie Endowment for International Peace Washington D.C.

I.The global storm II.Russias storm III.Policy response IV.What more can be done?

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

Global Economic Outlook for : 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]

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

II. RUSSIAS 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

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

Demand sources of Russias growth (in percent)

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

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

Labor marketsadjusting rapidly

Employment changes in tradable and non-tradables

Balance of paymentsweakening 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

Many Russian banks were relying excessively on foreign borrowing

Monetary-Exchange and Fiscal policyaiming to limit the impact of the crisis Monetary-exchange policy: –Initially supporting liquidity –Now supporting ruble, preserving reserves Fiscal policy: –Fiscal support to banks and enterprises

Outlook for Russia,

Fraternal twins: Russias two crises and

III. RUSSIAS FISCAL POLICY RESPONSEinitially supporting banks and enterprises Total fiscal support (% GDP) Total:6.7 –Financial sector3.3 –Real economy2.5 –Social protection0.2 –Regional transfers0.7 Source: World Bank staff estimates, Russian Economic Report No. 18.

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

Supporting the real economy––using direct support and easing the tax burden Total fiscal stimulus in (% GDP) Total 3.4 –enterprises:2.4 –households0.4 –Regions0.6

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

How does Russias fiscal stimulus compare with G-20 countries?

Social impactspreading fast

Projected amount of poor people before and after the crisis (in millions),

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

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

PROPOSED PACKAGE

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

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

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

Thank you!