Several months ago, during a raging debate on the consequences of the world economic crisis for Russia, a commentator whom I’ll call BFC excoriated me for my pessimism. He pointedly asked if things were so bad, why were reputable organizations, such as the World Bank, making much sunnier (though hardly great) forecasts for the 2009-2010 Russian economy.
All good things come to those that wait, B. The World Bank has released its Russian Economic Report 18. (Links to report and a powerpoint presentation are to the right on the linked page. You can read the entire report, but its main results are summarized in the ppt presentation.)
It’s full of I-told-you-so material for SWP. Key sentences:
With a much worse global financial outlook and oil prices in the USD 45 a barrel range, Russia’s economy is likely to contract by 4.5 percent in 2009, with further downside risks. This represents a major downward adjustment from our forecast in November 2008, which saw growth at 3 percent, based on growth of the world economy and oil prices around USD 75 a barrel. (Emphasis added.)
In other words, the WB was unduly optimistic last year, when the debate was raging here on SWP.
The report makes frightening reading (not that there is a single economy out there for which 2009-2010 looks good). I would direct attention to a chart on p. 12 of the World Bank report, in Box 2.1, which plots growth rate deceleration (vertical axis) against fiscal stimulus (horizontal axis). Look at the point way down at the bottom. The one labeled “Russia.” It means that the WB forecasts that the growth rate for Russia will decelerate more than for any other G-20 economy. I repeat. The growth rate for Russia will decelerate more than for any other G-20 economy. In other words, by one measure, the WB validates my assertion, contested so vigorously by BFC and a couple of others, that the world crisis would hit Russia harder than the US and most other industrialized economies.
This measure is related to one I’ve mentioned in a couple of recent posts, namely the growth gap: the difference between growth potential and actual performance. The combination of the facts that (a) Russia was growing fairly rapidly 2006-1H 2008, and (b) has contracted more than other G-20 economies, means that (c) the growth gap in Russia is very large indeed. This is reflected in the rapid deceleration in Russian growth.
Another particularly interesting and revealing chart is Figure 1.1. Compare the performance of Russia not so much to the developed economies, but its developing peers. Note how much Russia has underperformed these nations in the crisis.
The rest of the report is chock full of interesting details. I’ll call out a couple. First, investment in Russia (never high when compared to other rapidly growing economies, e.g., the “Asian Tigers”) has plummeted, down in the fourth quarter by 1.1 percent, down in the first two months of the year by almost 15 percent.T This bodes ill for long term growth. Second, consumption has also declined after dramatic growth in previous years. Third, construction is down 18 percent. Fourth, unemployment forecast to be 12 percent. Fifth, disposable income down sharply. I could go on.
The adjectives in the report are also quite illuminating. Phrases like “rapidly decelerating” and “collapsing domestic demand” are sprinkled throughout.
The report pays special emphasis to how the crisis has seriously eroded the laudable progress made against poverty in the last several years. The poverty, unemployment, disposable income, and consumption numbers all point to potential sources of popular discontent.
Furthermore, the report repeatedly emphasizes that Russia’s policymakers face serious constraints that severely limit their choices. Sound familiar?
And if you think the World Bank is gloomy, it is a starry-eyed optimist compared to the OECD. The OECD’s report on the Russian economy forecasts a 5.6 percent decline of GDP in 2009, as compared to the World Bank forecast of -4.5 percent. The OECD report notes that the Russian recovery is highly dependent on exogenous factors, especially the price of oil (another point BFC disputed vigorously).
So, BFC, you asked for it . . . you got it.
It should be noted that big organizations like WB, IMF, and OECD are frequently lagging indicators. Prudence, and the fact that they are political bodies, dictate that they be very cautious in their assessments. In contrast, mere bloggers can be more aggressive and opinionated.
Oh, I have to mention just one other thing before closing this post. It speaks volumes: “Russia Seeks to Carve Out Role in Crisis-Hit World Economy“:
“I think in general they see this crisis as a way to show the world that they have some answers and they’ve moved on,” said Tim Ash, head of CEEMEA research at RBS in London.
“It is a great opportunity for them to re-jig the global financial architecture and put themselves in a central place.”
Arguably Russia’s closest allies are the other BRIC nations, emerging market powerhouses Brazil, China and India. All have sizeable foreign currency reserves and are vulnerable to the global slowdown as they rely on exports.
This month the BRICs released their first communique at a G20 finance ministers’ meeting and joined the Financial Stability Forum, signaling a growing world role.
The communique reflected some of Russia’s campaigns, calling for “major reserve issuing economies…to ensure that the macroeconomic policy is more balanced” and for a reshuffle of country representation at the International Monetary Fund (IMF).
Russia followed that up with its own proposals for Thursday’s meeting of G20 leaders. Its suggestion to replace the dollar with a new international reserve currency quickly found support from China and sparked international debate.
Now, the first quote is the view of a certain Mr. Tim Ash, but if it is at all a reflection of Russian official thinking–and there is independent information that would tend to support that view–then they are delusional. They have answers? They have a Plan to Save the World?
As the World Bank and OECD note, they have huge problems at home, and limited policy tools to deal with them. They have more than enough on their hands at home even to think about saving the world. Their reserves, shrunken as they are, are doubtfully sufficient to address their own pressing issues, let alone provide a meaningful prop to the world economy. Their policy ideas are primarily aimed at weakening the US, rather than contributing to a meaningful improvement in the world financial system. (When I read their proposals, or hear Lavrov or Medvedev speak of them, I am reminded of the punchline of the old joke about the Russian given a wish by a genie: “I wish that my neighbor’s cow dies.”)
The entire world is hurting economically. I stand by my previous forecast that due to the very structure of its economy and institutions, Russia is hurting, and continue to hurt, worse than most others. The World Bank and OECD are coming around to that view.