World Bank Slashes Forecast for Russian Economy

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The World Bank on Wednesday 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.

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In its biannual report, the World Bank cut its forecast for Russian economic growth to 0.3% in 2015 and 0.4% in 2016 under its baseline scenario from 1.5% and 2.2%, respectively--well below the government's estimates.

Even if Western sanctions are quickly repealed, the economy would only inch upward, while an increase in geopolitical tensions would bring a small recession, the bank said.

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

"The economy is at 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% growth in 2015 and 2.3% in 2016.

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

Michal Rutkowski, the bank's director in Russia, told reporters that its forecast was more pessimistic than the government's as it expected a slower pickup in investment and much lower consumption in the coming years.

"The policy uncertainty about the economic course the country will take that is casting the longest shadow on Russia's medium-term prospects," the bank said in the report.

The World Bank's baseline scenario suggests that even though the government will be able to preserve the macroeconomic stability despite the persistence of the sanctions, 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 said 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.

Although the bank doesn't expect any limitation of Russia's oil trade, access to the international capital market would become increasingly restricted for the country's companies and banks, further increasing borrowing costs and hampering investment activities.

Under this scenario the World Bank expects the economy to contract 0.9% next year and by a further 0.4% in 2016.

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.

"Economic recovery in 2015 and afterward would depend on solid private investment growth and a lift in consumer sentiments," the bank said.

The bank expects downward pressure to continue on the ruble, which has already lost 16% in the past 12 months.