The World Bank predicts Russia a crisis worse than the 1998 default

The World Bank warns that Russia will emerge from the current crisis more slowly than from the 1998 crisis, and recovery will be deeper and longer due to weak global demand, tight financial conditions and low oil prices. The report also gives alarming forecasts for unemployment, poverty, inflation and GDP decline, though experts note the country still has ways to finance the deficit and low external debt.

Russia will emerge from the current crisis more slowly than from the 1998 crisis. This is stated in a report published on Monday by the World Bank (WB). The Bank’s experts believe that the current crisis will be deeper in terms of the slowdown in economic growth and longer-lasting compared with the 1998 crisis.
More prolonged and gradual rates of recovery in the Russian economy will be determined by low global demand and difficult international financial conditions, combined with a prolonged period of low oil prices.
The Bank notes that the 1998 economic crisis in Russia was a classic fiscal and currency crisis, which unfolded as a currency crisis, a default on debt obligations, a deep devaluation, and a sharp economic recovery driven by exports from an extremely low base amid generally favorable external economic conditions. But overall, it was a crisis of the public sector.
Meanwhile, the economic shocks of 2008, which began as a private-sector crisis, were triggered by excessive borrowing under conditions of a deep triple shock (a deterioration in the terms of trade, capital outflows, and tighter external borrowing conditions), while the financial position in the public sector was extremely stable.
The Bank believes that unemployment in Russia will rise to 12% this year, compared with 6.3% in 2008, and the poverty rate will reach 15.5%, which is 2.8 percentage points above the pre-crisis level. Inflation in the Russian Federation will be 11-13%. The main factors contributing to rising inflation will be higher import prices and a significant easing of fiscal policy.
According to the WB forecast, the Russian economy will fall by 4.5% in 2009, and in 2010 GDP growth will be zero, the World Bank’s chief economist for Russia, Zeljko Bogetic, told journalists on Monday. “We expect a huge decline in domestic demand and a worsening of the overall economic and social situation,” he said. According to the WB, the Russian federal budget deficit in 2010 may amount to 6% of GDP, but the government will be able to finance such a deficit from the Reserve Fund.
Commenting on the possibility of Russia entering the external borrowing market before the Reserve Fund is exhausted, Zeljko Bogetic said that such a decision should be made depending on many factors, including how the situation will develop in 2010.
“Russia has no major borrowing constraints, since external debt is very low,” the World Bank representative noted. In addition, Russia remains a solvent country, with sufficient oil and gas revenues even under current conditions, he believes.
As for the development of the crisis in the global economy, Zeljko Bogetic noted that the world economy will decline by 1.7% in 2009, and global trade volumes by 6.1%, while in 2010 global GDP may grow by 2.3%.