Lev FreinkmanJuly 7, 2009

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OutlineDepth of Russia’s crisis in comparative

perspectiveGuessing about the current stage of the

crisisMedium term prospects for RussiaRegional ImplicationsSome lessons from the global experience

Sources: WB Russian Economic Report, 19; IET

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Global forecast for 2009-10 remains pessimistic

• Real GDP growth• -2,9% (2009)• +2,0% (2010)• This is lower than in the March forecast

• Global Trade • -9,7% (2009)• +3,8% (2010)

• Oil prices • USD 55,53 (2009 ) (Urals: $50 )• USD 62,95 (2010 ) (Urals: $55 -$60)

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Scale of industrial decline

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Industrial Production, Decline in January 2009 relative to July 2008, %

Some signs of stabilization

IMPROVEMENTS:•Capital inflows to developing countries•Commodity prices•Stock markets

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Russia: sharp contractionAffected by: decline in commodity prices,

deterioration in access to finance, and compression in global demand

2006 2007 2008 Q1-2009 Jan-Apr Jan- May 09 09

GDP growth, % 7.7 8.1 5.6 -9.8 -9.8 -10.1*Industrial production % 6.3 6.3 2.1 -14.3 -14.9 -15.4 Fixed investment, %, 16.7 21.1 9.8 -15.6 -15.8 -17.7 Federal gov bal, % GDP 7.4 5.5 4.0 -0.6 -3.3 -3.1 Inflation (CPI), % change 9.0 11.9 13.3 5.4 6.2 6.8 Current account, bn USD 95.6 76.6 98.9 11.1 n/a n/a Unemployment, % (ILO) 7.2 6.1 6.4 9.4 9.6 9.7 Oil prices, Urals 61.2 69.5 95.1 44.1 45.5 47.8 Reserves, bn USD 303.7 478.8 427.1 383.9 383.9 404.2

* - preliminary estimate7

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No sign of recovery, broad contraction

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But much stronger BOP than most people expected

Balance of payments (USD billions), 2006-2009 2006 2007 Q1-08 Q4-08 2008 Q1-09

Current Account Balance 94.7 77.0 38.0 8.6 102.3 11.1

Trade Balance 139.3 130.9 49.9 24.7 179.7 21.7

Capital & Financial Account 3.3 85.7 -25.7 -136.9 138.8 -29.9

Errors and Omissions 9.5 -13.8 -5.8 -2.8 -8.9 -12.3

Change in Reserves 107.5 148.9 6.4 -131.1 -45.3 -31.1

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Stock market follows oil price developments

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WB projections for Russia, 2009-10

2009 2010 World growth, % -2.9 2.0 Oil prices, World average, USD/bbl 56 63 GDP growth, % -7.9 2.5 Federal government balance, % -7.2 -6.0 Current account, USD bln. 32 36 Capital account, USD bln. -60 -30

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Russian experts are even more pessimistic than this

“The crisis affects Russia much more heavily than the majority of other countries of comparable size. Even the word “catastrophe” could already applied with difficulty to what now occurs in the Russian industry.” [A.N. Illarionov]

GDP decline of 9% in 2009 is a common expectation

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My own humble assessment

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I am somewhat more optimistic than thisRussia will come out of the crisis relatively

stronger compare to its neighbors in ECAPerceptions among Russian industrialists are

more “positive” than this -7-9% forecastSeveral factors will help Russian economy to

perform better in H2, 2009Russia is too much dependent upon world

market to get through on its own. Downside risks are huge.

Nobody knows

Factors of Russian StrengthFiscal reserves, massive program of fiscal

stimulus(4% of GDP), heavily underutilized so far

Effect of devaluationContraction in late 2009 was partially driven

by panic, not just by fundamentals, over-shooting

Small financial sectorFlexible labor markets makes adjustment in

the real sector much easier15

Alternative survey estimates: Changes in industrial output

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IET’s Survey ResultsMonthly surveys of about 1000 industrial

enterprises since 1992. Proved track record of stat accuracy

Drastic slowed down in the rate of industrial decline

Still a declineExpectations are positive. On average

enterprise managers do not expect further decline in industrial output and demand

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While employment is expected to decline

Employment plans of industrial plans remains quite negative

This may have implications for remittances

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Comparative importance of factors that hamper growth

(Frequency of mentioning, %)

   Jan 2009 Base Domestic demand 67 26 Q3, 07

Export demand 36 11 Q4, 07

Shortage of working capital 46 34 Q1, 07

Arrears 39 10 Q4, 07

Pressures from imports 11 32 Q3, 08

Labor shortages 16 49 Q2, 08Источник. ИЭПП

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Risks for RussiaA possibility of banking crisis in Q3, 2009Crisis could be too short. It may be over

before its lessons are learned. Inadequate government policies:

Readiness to spend too much in non-systemic and non-transparent ways

Instincts for nationalizationWeakness for lobbyism by large

businessInability to implement its own decisions

in due time 20

Quick erosion of devaluation effect

Real Ex Rate Index, 100 = January 2002

Almost half of the gains were lost since March

Ruble already reached its strength of late 2007

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Slow budget executionThe rate of

budget spending is slow

30% of annual budget after 5 months

26% for national economy spending

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Monthly federal budget spending, trln rbl

Impact on Russia’s neighbors in the CIS

Russia’s is 8th largest economy in the world. Major export market, etc.

In Jan.-April 09 imports from the CIS - only 51% of 2008 level, loss of $5.5 bln in export proceeds

Exports to Russia are unlikely to recover in 2009, even for countries that went through competitive devaluation.

I would expect that 2009 exports to Russia would remain at the 60% of 2008

The effect on remittances in 2009 could be similar because it reflects a decline in both construction and employment in Russia, up to 35% in US$ terms

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Russian imports from the CIS, Jan-April, mln US$

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Remittances from Russia to the CIS: decline in both total value and

average size of transfers

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Lessons from the financial crisesLessons from World Bank Research on Financial Crises (WPS

4779, Nov. 2008)Countries with competitive elections did not face less or more

frequent crises, but they deal with them in a more efficient way They react to a crisis in more timely mannerSuffer from a smaller decline in outputSpent less money on anti-crisis programsLess prone to spend public money under anti-crisis programs

to bailout large owners and creditors

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