The Dawn of a New Economic Era?

Russia Economic Report April 2015 | Edition No. 33

•A steep drop in oil prices, geopolitical tensions with sanctions shocked an economy already impacted by lingering structural problems.

•The economy was successfully stabilized. The shocks hit the economy late in the year. Growth was 0.6 percent.

•Weaker Ruble and trade restrictions revived manufacturing activity.

Russia’s economy experienced two

shocks in 2014, but avoided a recession

Growth prospects for 2015-2016 are

negative

•The full effects of the two shocks will become evident in 2015 and likely push the Russian economy into recession.

•The World Bank baseline scenario projects a contraction of 3.8 percent in 2015 and a contraction of 0.3 percent in 2016.

•Two alternative scenarios with a lower- and upper-bound oil price.

The impact of sanctions is likely to

linger for a long time

•The World Bank baseline outlook sees the poverty rate increasing from 10.8 percent in 2013 to 14.2 percent in 2015 and in 2016.

•This would be the first significant increase since the 1998-1999 crisis due to declining income and consumption and high inflation.

1

2

Achievements in shared prosperity are

under threat

•New realities will have the potential to alter the structure of the economy and the ways Russia integrates with the rest of the world.

•Strategic policies needed to balance old and new risks to the economy: (1) manage adjustment to the lower oil price and sanctions; (2) lessen structural growth constraints.

4

Main messages

3

Russia Economic Report No. 33

1. Recent Economic Developments

2. Outlook and Risks

3. The Economic Impact of Sanctions

Recent Economic Developments:A Year of Economic Turmoil

The Tale of Two Shocks: Oil Prices and Impact of Economic Sanctions

Oil Prices and Ruble Exchange Rate in 201430

35

40

45

50

55

60

65

7040

50

60

70

80

90

100

110

120

Oil price Rub/USD (right hand axis)

→ High Inflation and Declining Real Wages Dampen Consumption

Russia’s CPI inflation by components and Real wage growth, percent, y-o-y

0

2

4

6

8

10

12

14

16

18

2011 2012 2013 2014 2015

Food Non-Food Services CPI

-10

-5

0

5

10

15

2009 2010 2011 2012 2013 2014

Nonmarket Nontradables

Tradables Total

Russia’s Economy Avoided A RecessionGrowth composition, percent, y-o-y

-15

-5

5

15

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Consumption Gross Fixed Capital FormationChange in inventories ExportImport Stat errorGDP growth

→ Monetary Tightening and High External Borrowing Cost Extinguish Investment

Central Banks Key Policy Rate (percent) and Russia’s CDS spreads (bps) for 5 year bonds

140

240

340

440

540

640

4

6

8

10

12

14

16

18

→ Tradable Sector Becomes Main Growth Engine

Contribution to GDP Growth By Sector, y-o-y, percent of GDP

0.0-2.7

1.3 1.80.5 0.3 0.4

5.0

-3.6

2.8 2.2

2.9

1.00.3

0.2

-0.4

0.0-0.2

0.1

0.0 -0.1

-7.0

-5.0

-3.0

-1.0

1.0

3.0

5.0

2008 2009 2010 2011 2012 2013 2014

Tradable Non-tradable Public sector

World Bank Outlook for Russia:A Protracted Recession

Global Growth Moderately Rising

Global real GDP growth, percent, y-o-y

2009 2010 2011 2012 2013 2014e 2015f 2016f 2017f

World -1.8 4.3 3.1 2.4 2.5 2.6 2.9 3.2 3.2

High income -3.5 3.0 1.9 1.4 1.4 1.7 2.1 2.4 2.2

Developing countries 3.0 7.8 6.3 4.7 5.0 4.5 4.5 5.1 5.3

Euro area -4.5 2.0 1.7 -0.7 -0.4 0.9 1.4 1.7 1.6

Russia -7.8 4.5 4.3 3.4 1.3 0.6 -3.8 -0.3 2.2

Russia’s Outlook Depends on Oil Prices

Growth in Global Oil Demand

(4.00)

(3.00)

(2.00)

(1.00)

-

1.00

2.00

3.00

4.00

2007Q1 2008Q3 2010Q1 2011Q3 2013Q1 2014Q3

mb/d, year over year growth

OECD

China

Non-OECD, ex China

Russia’s Growth Outlook is NegativeGDP growth, percent, y-o-y

-4.6

-1.0

3.4

1.3

0.6

-3.8

-0.3

-2.9

0.1

-5

-4

-3

-2

-1

0

1

2

3

2012 2013 2014 2015 2016

Lower-bound scenario Baseline scenario Upper-bound scenario

Real GDP Levels Fall Below 2012

Real GDP, percent, 2012=100

97.2

96.2

100.0

101.3

101.9

98.0

97.7

99.0 99.1

95

96

97

98

99

100

101

102

2011 2012 2013 2014 2015

Lower-bound scenario Baseline scenario Upper-bound scenario

Shared Prosperity Achievements At RiskPoverty and Shared Prosperity

15.2

13.313.0

12.5

12.7

10.7

14.2

14.2

10.8

11.2

14.8

15.7

12.7

12.6

0.410

0.412

0.414

0.416

0.418

0.420

0.422

0.424

10

11

12

13

14

15

16

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Poverty rate, % Baseline scenario

Lower-bound scenario Upper-bound scenario

Gini (rhs)

Is the Middle Class Still Growing?Share of the Population with Per Capita Income in US$ ppp / day

0

50

100

more than 50 USD/day 25-50 USD/day10-25 USD/day 5-10 USD/dayless than 5 USD/day more than 10 USD/day

Gross capital formation, percent of GDP, and Total factor productivity growth

0

5

10

15

20

25

30

35

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Russia

BRICS Average (excluding Russia)

EU11 Average

Resource Rich* Average

-15

-10

-5

0

5

10

15

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

Percent

Total Factor Productivity

Capital

Labor

GDP Growth

Russia’s Investment and Productivity Challenge

How Will Russia Manage the Adjustment to Lower Oil Prices and Sanctions?

Assure technology and innovation transfer, e.g. technology that can

support exploration of less accessible oil and gas fields.

Counterbalance restricted access to external finance, e.g. effectively invest

natural resource revenues.

Boost investor and consumer confidence, e.g. careful management of financial sector risks and fiscal buffers.

Special Focus NoteThe Economic Impact of Sanctions

The Economic Impact of Sanctions on Russia

Stock market prices and trends and Exchange rate dynamics, Euro-Dollar basket

10

30

50

70

90

110

1200

1300

1400

1500

1600

1700

1800

1900

Trade volume, bln Rub (right axis) MICEX index

35

40

45

50

55

60

65

70

75

80

The Economic Impact of Sanctions on RussiaBond Issuance in US$ billion and Russia Corporate Emerging Market Bond Index for Russia

220

240

260

280

300

320

0

5

10

15

20

25

H1 2013 H1 2014 H2 2013 H2 2014

The Economic Impact of Sanctions on RussiaRussia’s Food and Beverage Imports by Country: Q3, 2013 and 2014 (US$ billion)

and Russia’s Cereal Imports by Country: Q3, 2013 and 2014 (US$ billion)

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

Q3/2013 Q3/2014

0

0.05

0.1

0.15

0.2

0.25

Q3/2013 Q3/2014

Thank you!

For more information about the World Bank and its activities in the Russian Federation, please visit:

http://www.worldbank.org/en/country/russia

If you would like to be access our Russia Economic Reports, please visit:

www.worldbank.org/eca/rer

For questions and comments relating to this publication, please contact bhansl@worldbank.org.

EXTRA SLIDES

Baseline Scenario Projections

Main economic indicators

2012 2013 2014 2015 2016

Oil price (US$ per barrel, WB average) 105.0 104.0 97.6 53.2 56.9

GDP growth, percent 3.4 1.3 0.6 -3.8 -0.3

Consumption growth, percent 6.4 3.9 1.5 -5.3 -1.9

Gross capital formation growth, percent 3.0 -6.6 -5.7 -15.3 1.1

General government balance, percent of GDP 0.4 -1.3 -1.2 -3.6 -3.1

Current account (US$ billions) 71.3 34.1 56.7 73.7 62.9

percent of GDP 3.6 1.6 3.0 6.0 4.4

Capital and financial account (US$ billions) -32.3 -56.2 -143.2 -122.1 -60.0

percent of GDP -1.6 -3.0 -7.7 -10.0 -4.2

CPI inflation (average) 5.1 6.8 7.7 16.5 8.0

Upper-bound Oil Price Scenario

Main economic indicators

2012 2013 2014 2015 2016

Oil price (US$ per barrel, WB average) 105.0 104.0 97.6 65.5 68.7

GDP growth, percent 3.4 1.3 0.6 -2.9 0.1

Consumption growth, percent 7.0 3.5 0.9 -3.0 -0.6

Gross capital formation growth, percent 1.5 -5.6 -8.2 -10.8 1.8

General government balance, percent of GDP 0.4 -1.3 -1.2 -2.8 -2.1

Current account (US$ billions) 71.3 34.1 56.7 61.7 54.0

percent of GDP 3.6 1.6 3.0 4.5 3.5

Capital and financial account (US$ billions) -32.3 -62.2 -143.2 -105.5 -48.6

percent of GDP -1.6 -3.0 -7.6 -7.7 -3.1

CPI inflation (average) 5.1 6.8 7.7 14.0 7.0

Lower-bound Oil Price Scenario

Main economic indicators

2012 2013 2014 2015 2016

Oil price (US$ per barrel, WB average) 105.0 104.0 97.6 45.0 50.0

GDP growth, percent 3.4 1.3 0.6 -4.6 -1.0

Consumption growth, percent 6.4 3.9 1.5 -6.6 -2.7

Gross capital formation growth, percent 3.0 -6.6 -5.7 -17.1 -0.4

General government balance, percent of GDP 0.4 -1.3 -1.2 -4.5 -2.6

Current account (US$ billions) 71.3 34.1 56.7 83.1 79.7

percent of GDP 3.6 1.6 3.0 7.1 5.8

Capital and financial account (US$ billions) -32.3 -62.2 -143.2 -130.2 -79.7

percent of GDP -1.6 -3.0 -7.6 -11.1 -5.8

CPI inflation (average) 5.1 6.8 7.7 17.5 9.0

Russia’s Diverging Growth PerformanceQuarterly GDP growth, percent, y-o-y

-12

-8

-4

0

4

8

12

OECD Oil-exporters RussiaOECD EU EmergingOther Emerging