The World Bank slashes its forecast on economic contraction in Russia

The World Bank Global Economic Prospects has been released today. It contains a downgraded forecast for economic contraction rates in Russia in 2015.

According to the foregoing research, Russia is expected to face a contraction of -2.9% compared to 2014, which is 4 times the value predicted in the previous version of forecast made by the International Bank for Reconstruction and Development (IBRD) in December last year (as a reminder, the World Bank expected then Russia's economy to see a contraction of -0.7%).

It is not often that the World Bank makes such a drastic revision of its forecast, the last time such a revision was made during the crisis 2008–2009. Such a drastic downgrade of the forecast on economic contraction for Russia can be regarded in different ways. On the one hand, this may have an adverse impact on agents' expectations, which would only exacerbate the economic situation. On the other hand, such a revision shouldn't come as a surprise, because it is backed by solid reasons such as the steady fall of global crude oil prices (Brent crude price has dropped to 45,47 dollars a barrel to date, according to Bloomberg) whose dynamics has a strong impact on the economic development in the Russian Federation; the slowdown in economic growth (and even a stagnation is possible) in the Eurozone; as well as the extremely unfavorable geopolitical situation due to the crisis in Ukraine, and hence economic sanctions against Russia will not be lifted.
In fact, as repeatedly noted above and as Herman Gref, CEO of Sberbank, noted in his speech at the Gaidar Forum 2015 in Moscow, the structural slowdown of economic growth and a following recession in Russia were preconditioned prior to the crisis in Ukraine which along with the worsening terms of trade just aggravated the existing internal problems.

In his speech at the Forum Prime Minister Dmitry Medvedev noted that "we should learn to live amid low energy prices". One could hardly disagree with this, however, the phrase needs to be rephrased to read, "it is long time ago that we should have started to learn to live amid low oil prices".

Today, amid low energy prices the federal government will have to cut budget spending (by 10% for all budget items, except the protected ones, as Finance Minister Anton Siluanov noted today at the Gaidar Forum ). Additionally, a drastic turnaround in the economic policy requires structural reforms aimed at enhancing the quality of institutions (to ensure that property rights are protected, the law enforcement system is transparent, etc.). Furthermore, structural reforms are vital even if oil prices rebound to 60–70 dollars a barrel, Mr. Gref noted.

Otherwise we may face an economic stagnation for many years to come.

Maria Kazakova, Ph.D. in Economics, Deputy Head of Gaidar Institute's International Center for Budget Sustainability Study