World Bank Sees Grim Year Ahead

The World Bank on Tuesday unveiled a grim picture of Russia's economic outlook, slashing the country's 2009 growth forecast by more than half and saying the ruble's slide would likely be allowed to continue.

The report, which also estimates 2008 capital outflows at $50 billion, lends further credence to already rampant predictions that a devaluation is on the way. The Central Bank last week said it would allow the ruble to trade in a wider band against the dollar and euro, effectively letting it drop 1 percent.

"The Russian economy is very dependent on the price of oil, and the ruble is also very dependent on that," Zhelko Bogetich, the World Bank's chief economist for Russia, told reporters. "Now we see the actual depreciation of the ruble, and we think it will actually continue."

Bogetich, who led the compilation of the report, said Russia's economic position had greatly improved since 1998 but that the country was still heavily dependent on oil and gas revenues.

Oil prices have fallen by more than half from their highs this summer as the economic downturn eats into global consumption.

Additionally, a drop in trade and a sharp reversal in capital flows — which were poised for a big net gain before the war in Georgia in August — were also contributing to the currency's decline, Bogetich said.

"It's important to realize that Russia is still a commodity-based economy," said Klaus Rohland, the bank's country director for Russia. "The medium-term challenge and strategy of Russia would be to … move to a diversification of the economy."

Citing sources in the government, Russian Newsweek reported Monday that the government had already decided on a "soft devaluation" of the ruble and that it would tolerate a drop to 30 rubles per dollar by the end of the year. By May 1, the report said, the rate could fall to 35 rubles.

And while government officials have yet to suggest anything so specific, many have been softening their positions regarding the exchange rate. Federation Council Speaker Sergei Mironov said Tuesday that Russians had nothing to fear from a ruble that falls "gently, not sharply," Itar-Tass reported.

President Dmitry Medvedev, however, appears to be holding out hope that the ruble may find broader use as a regional reserve currency. He told a meeting of the Security Council and the State Council, a group of governors, on Tuesday that Russia should encourage the use of the ruble as the "only and major" currency for such transactions with members of the Commonwealth of Independent States.

The report also cut its estimate for real GDP growth next year to 3 percent from the current 6.5 percent, while it said economic expansion in 2008 would slip to 6 percent from its earlier outlook of 6.8 percent.

"Most of the impact is concentrated in the last quarter of this year, when economic activity is expected to slow to about 2 percent," the report said.

Earlier this month, the International Monetary Fund cut its outlook for Russia's 2009 growth to 3.5 percent. Finance Minister Alexei Kudrin said at the time that the IMF prediction was roughly in line with his expectations for next year.

The World Bank also said inflation during the rest of 2008 would remain largely unchanged at 13.5 percent — above the government's goal of 11.8 percent but below recent estimates from officials of around 14 percent.

"This reflects opposing factors of slowing economy, credit crunch, reversal of capital inflows and additional liquidity and public expenditures, which are likely to rise further," the report said. "In 2009, reducing inflation below 12 percent will be difficult."

Unemployment, meanwhile, is expected to increase to 5.9 percent, from an average this year of 5.3 percent, by the end of 2008. The lost jobs will be in labor-intensive industries, such as construction, as well as the financial industry.

In general, the World Bank praised the Central Bank's actions since September to support liquidity and restore confidence in the banking sector as "swift, appropriate and proportionate to the problem at hand." An estimated $15 billion was pumped into the economy in September and October.

An upside to the crisis could be a much-needed restructuring of the banking sector, which Bogetich called the "Achilles' heel of Russia's economy."

The loan-deposit ratio increased from about 105 percent to more than 125 percent in early 2008, which is high but still lower than in other CIS countries.

"Banks who relied excessively on external borrowing as a mode of funding will need to revisit their business model," the report said.

The economists also wrote that Russia could earn an additional $84 billion to $112 billion in export revenues annually if it were to become more energy efficient.

"The lower energy efficiency of Russia affects its competitiveness and its economy to a great extent," Bogetich said, noting that reform required government intervention.