World Bank slashes growth forecast for Russia to 0.3%

24 September 2014

The World Bank today slashed its forecast for Russia's economy over the next two years, saying growth would stagnate amid a lack of structural reforms and Western sanctions over Russia's role in the Ukraine conflict.

In its biannual report, the World Bank cut its forecast for Russian economic growth to 0.3 per cent in 2015 and 0.4 per cent in 2016 under its baseline scenario. This is sharply down from its earlier estimate of 1.5 per cent and 2.2 per cent for the two years; and well below the government's estimates.

Even if Western sanctions are repealed soon, the economy would only inch upward, while an increase in geopolitical tensions would bring a small recession, the global lender said.

Even under the most optimistic scenario, which envisages a full resolution of the geopolitical tensions and an end of all sanctions by the end of 2014, the World Bank sees only 0.9 per cent growth in 2015, increasing to 1.3 per cent in 2016.

"The economy is on the threshold of recession and will remain there for a while," said Birgit Hansl, the bank's lead economist on Russia and the main author of the report.

Russia's economic growth slowed to near zero in the first half of the year amid declining consumer activity, waning investment and the several rounds of the Western sanctions in response to Russia's policy toward Ukraine.

Russia's government has lowered its forecasts, but still sees 1.2 per cent growth in 2015 and 2.3 per cent in 2016.

This month, the European Bank for Reconstruction and Development too gave a downbeat view of the economic prospects for Ukraine and Russia.

The World Bank's baseline scenario suggests that even though the government will be able to preserve macroeconomic stability even if the sanctions continue, growth will be minimal.

The bank based its outlook on the continuation of Russia's economic policy, which since the beginning of the geopolitical tensions "has been dominated by measures to maintain macroeconomic stability and safeguard the economy from the impact of these tensions."

The base scenario also assumes that fiscal policy remains prudent and the central bank sticks to its promise to fully float the ruble next year.

However, the World Bank expects no substantial structural reforms to take place, which it says are badly needed.

Under the pessimistic scenario of an increasing intensity of geopolitical tensions, the bank saw the economy slipping into a protracted low-level recession.

If the government lifts caps on budgetary spending in an attempt to kick-start the economy, it would lead to higher inflation, ruble depreciation and further deterioration of the investment climate, the bank said.

The bank reiterated its usual suggestions for Russia to grow its economy: keep the macroeconomic stability, make the policy environment predictable and ensure a positive shift in business and consumer confidence.

But whether this happens remains to be seen.


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