RUSSIAN ECONOMIC
REPORT #18
Russia in the Global Storm
Refocusing policy on households
www.worldbank.org/ru
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. Russia’s storm
III. Policy response
IV. What more can be done?
I. The worst global crisis since WWII
• Deep, synchronized, global crisis with financial crisis
Industrial Production, annual % change
3-month moving average, seasonally adjusted
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
Developing Countries
High Income Countries
Sources: IMF, Datastream Thomson and World Bank
2009M1
2008M10
2008M7
2008M4
2008M1
2007M10
2007M7
2007M4
2007M1
2006M10
2006M7
2006M4
2006M1
2005M10
2005M7
2005M4
2005M1
Russia
Global Economic Outlook for 2009-10: Grim
•
Real GDP growth
•
•
•
World trade
•
•
•
-1.7% (2009)
+2.3% (2010) (highly uncertain)
-6.1% (2009)
+3.9% (2010) (highly uncertain)
Oil prices
•
•
USD 47.8 (2009)
USD 52.7 (2010)
[ Urals: $45 ]
[ Urals: $45 -$48]
Capital flows to developing countries drying out, oil prices to
remain low
Gross capital flows to emerging markets and Russia
billion US dollars
200
70
60
*Jan-2009
on
quarterly
bas is
150
50
40
100
30
20
50
10
Banks (left axis)
Bonds (left axis)
2009-Q1*
2008-Q4
2008-Q3
2008-Q2
2008-Q1
2007-Q4
2007-Q3
2007-Q2
-
2007-Q1
-
Equities (left axis)
Russia-total inflows (right axis)
Sources:
Dealogic and W orld Bank
World Bank oil price forecast
115
Nominal price of average crude (Brent, Dubai and WTI), simple
average, $/bbl
100
96.99
85
70
71.12
55
52.71
47.79
40
25
2007
2008
2009
Source: W orld Bank
2010
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
INTO THE STORM:
Stock market, financial sector liquidity crunch,
growth, industrial production collapse
Table 1.1: Main macroeconomic indicators, 2003-08
2006
2007
2008
IV Q 2008
Jan-09
Feb-09
GDP growth, %
7,7
8,1
5,6
1.1***
-8.8*
-7.3*
Industrial production growth, y-o-y, %
6,3
6,3
2,1
-6,1
-16,0
-13,2
Fixed capital investment growth, %, y-o-y
16,7
21,1
9,8
-2,3
-15,5
-14,1
Federal government balance, % GDP
Inflation (CPI), % change , e-o-p
7,4
9,0
5,5
11,9
4,0
13,3
4,0
13,3
15,0
2.4**
2,6
4.1**
Current account, billion USD
95,6
76,6
98,9
8,1
n/a
n/a
Unemployment, %
Memo: Oil prices, Urals (USD/barrel)
7,2
61,2
6,1
69,5
6,3
95,1
7,1
54,9
8,1
44,2
8,5
43,1
Reserves (including gold) billion USD, e-o-p
303,7
478,8
427,1
427,1
386,9
384,1
Source: Rosstat, CBR, Ministry of Finance, Bloomberg
* Preliminary estimate by ministry of economy
** Cumulative from end 2008
*** Preliminary estimates by the WB staff
Demand sources of Russia’s growth (in percent)
14.00
12.00
10.00
8.00
6.00
4.00
2.00
(2.00)
(4.00)
(6.00)
2007 Q3
2007 Q4
Consumption
2008 Q1
2008 Q2
Investment
2008 Q3
2008 Q4
Net Exports
2009 Q1*
Growth
Across-the-board slowdown, then deep
recession in ealry 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)
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 markets—adjusting rapidly
Table 1.3.Labor productivity, Disposable Income, Wages, and Unemployment
GDP growth, %, y-o-y
Total employment, million people
2006
7.7
68.8
2007
8.1
70.5
2008
5.6
71
Q4 2008
1.1**
70.6
09-Jan
-8.8*
69.6
09-Feb
-7.3*
69.2
Employment growth, %, y-o-y
0.8
2.4
0.6
-0.3
-0.4
-0.4
Labor productivity growth, %, y-o-y
6.8
5.6
5
1.4
n/a
n/a
Real disposable income growth, %, y-o-y
13.5
12.1
2.7
-5.8
-10.2
-4.7
Real wage growth, %, y-o-y
13.3
17.2
10.3
5
1.9
0.1
Average monthly wage, USD
392
532
694
668
544
524
Unemployment (%, ILO definition, e-o-p)
7.2
6.1
6.3
7.1
8.1
8.5
Source: Rosstat.
* - preliminary estimate of the Ministry of Economy
** - preliminary etimate by the WB staff
Employment changes in tradable and non-tradables
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
Many Russian banks were relying excessively on
foreign borrowing
Figure 2.2: Evolution of the loan-deposit ratio
130%
125%
120%
115%
110%
105%
100%
95%
2005
Source: CBR.
2006
2007
2008 (H1)
2008 (JanAug)
Monetary-Exchange and Fiscal policy—aiming 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, 2009-10
Table 1.7. Outlook for 2009-2010
World growth, %
Oil prices, Urals, USD/brrl
GDP growth, %
Federal government balance, %
Current account, USD bln.
Net capital outflows, USD bln.
Source: World Bank projections.
2009
-1.7
45
-4.5
-7.4
31
170
2010
2.3
45
0.0
-6.0
16
90
Fraternal twins: Russia’s two crises 1997-98 and 2008-09
Box figure 1. Quarterly growth rate (year-on-year) in percentage, 1997–99 vs 2007–09
21
15
1999 Q4
1999 Q3
16
11
10
5
2007 Q4
2008 Q1
1999 Q2
2008 Q2
6
1997 Q4
2008 Q3
0
1998 Q2
1999 Q1
1998 Q1
2008 Q4
1
-5
2009 Q3
1998 Q4
2009 Q1
1998 Q3
-4
-10
2009 Q4
2009 Q2
-9
-15
2008-2009* (Left Axis)
Box figure 2. Quarterly growth of investment in
percentage, 1997–99 vs 2007–09
55
45
1998-1999 (Right Axis)
Box figure 3. Quarterly growth of net exports in
percentage, 1997–99 vs 2007–09
35
300
25
250
15
200
5
150
-5
100
-15
50
300
1998 Q4
250
1999 Q4
35
25
1999 Q3
2007 Q4
200
1999 Q1
1998 Q3
150
2008 Q1
15
1997 Q4
5
1999 Q2
2008 Q2
1998 Q1
1998 Q2
1998 Q3
1999 Q1
2008 Q3
2008 Q4
100
1999 Q2
1999 Q3
1998 Q2
-5
1998 Q4
0
2009 Q4
2009 Q1
-15
-25
2009 Q3
2009 Q2
1997 Q4 1998 Q1
2008 Q3
2007 Q4
-35
-50
2008 Q4
50
2009 Q3
2009 Q1
0
2009 Q2
-50
2008 Q1
2008 Q2
-25
-45
2008-2009* (Left Axis)
1998-1999 (Right Axis)
-100
-100
2008-2009* (Left Axis)
1998-1999 (Right Axis)
III. RUSSIA’S FISCAL POLICY RESPONSE—initially
supporting banks and enterprises
• Total fiscal support 2008-09 (% GDP)
–
–
–
–
Total:
Financial sector
Real economy
Social protection
Regional transfers
6.7
3.3
2.5
0.2
0.7
Source: World Bank staff estimates, Russian Economic Report No. 18.
Support to the financial system
• Total support to fin sector 2008-09 (% GDP)
• Total
– Subordinated loans:
– Recapitalization
3.3
2.3
1.0
Supporting the real economy––using direct support
and easing the tax burden
• Total “fiscal stimulus” in 2008-09 (% GDP)
• Total
– enterprises:
– households
– Regions
3.4
2.4
0.4
0.6
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 Russia’s fiscal stimulus compare with G-20
countries?
Box Figure 1. Estimated size of fiscal stimulus Box Figure 2. Estimated size of fiscal stimulus and
measures in G-20 countries
growth deceleration in G-20 countries
Turkey
Italy
Brazil
India
Argentina
France
Mexico
United Kingdom
Indonesia
Japan
Canada
Russia
South Africa
Germany
Australia
Spain
Korea
United States
China
Saudi Arabia
0.0%
Average annual growth deceleration in percentage
points (2008-2010)
0.00%
2008 2009 2010
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0% 10.0%
0.00%
-0.50%
Italy
0.50% Indonesia 1.00%
Canada
Mexico
France Japan
Brazil
-1.00% Turkey
1.50% United States
2.00%
Korea
2.50%
AustraliaSouth Africa
Germany
India
United Kingdom
Spain
-1.50%
China
-2.00%
Argentina
-2.50%
Russia
-3.00%
Average annual size of fiscal stimulus as a percentage of GDP (2008-2010)
Source: Data for non-Russia G-20 countries, IMF (based on packages announced through late February). The figures do not include (i)
below-the-line operations, (ii) measures that were already planned for, (iii) banking-sector support measures. Estimates of planned
expenditures for 2010 are not available for Russia, Argentina, India, Mexico, and South Africa.
Social impact—spreading fast
Figure 2.2 Projected loss of employment in Russia in 2009
0
2
0
100
Loss in employment, % change (top bar)
4
6
8
10
12
14
16
Manufacturing
Construction
Retail
Agriculture
Other
200 300 400 500 600 700 800
Loss in employment, thosands (bottom bar)
900 1000
Projected amount of poor people before and after the
crisis (in millions), 2008-09
25.00
20.00
15.00
10.00
5.00
0.00
2008
2009
ADDITIONAL number of poor after the crisis
Projected number of poor before the crisis
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
Figure 2.6. Impact on poverty reduction for a given increase in program budget
16.00%
15.50%
poverty Rate
15.00%
14.50%
14.00%
13.50%
13.00%
12.50%
12.00%
0%
100%
200%
300%
400%
500%
% increase in benefit
Child allowances
Pensions (lowest 30%)
Unemployment benefits
Source: World Bank staff estimates.
PROPOSED PACKAGE
. A potential social protection stimulus package of 1 percent of GDP, implemented in a period from
April 2009 to March, 2010 could help move 4.1 million people out of poverty compared with a noprogram scenario
Cost of the program as a Reduction in poverty Reduction in poverty
share of GDP (%)
rate (% points)
(million people)
Child allowance
0.28
0.80
1.13
Low-end pensions
0.59
1.80
2.54
Unemployment benefits
0.14
0.30
0.42
Total
1.0%
2.90
4.09
Source: World Bank estimates.
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!