Streetwise Professor

March 31, 2009

The World Bank Comes Around

Filed under: Economics,Energy,Financial crisis,Politics,Russia — The Professor @ 2:10 pm

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.

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  1. I skimmed through it (I’ll read it properly when I have more time). I’ll throw out Problem #1 for now – they posit Urals prices of 45$ for 2009 and 2010. It is already trading around this figure what with light crude at 50$ and it seems very unlikely not to keep on rising.

    Comment by Sublime Oblivion — March 31, 2009 @ 8:49 pm

  2. Very unlikely not to keep on rising? Are you demented? It can only keep on rising if American demand is going to surge. Thanks for all the compelling evidence showing how/when/why that’s going to happen. But I guess we’re just supposed to trust your brilliant insights about the oil market — how odd that you’re not a billionaire by now! Mind linking to the page where you predicted oil would fall by 2/3 in 2008? Dog ate that page? What a pity!

    More important, at least you could do SWP the courtesy of READING his post, you ape, before “commenting” on it (if so your drivel can be called). His point is not that the World Bank is RIGHT, but that they have SPOKEN in a highly negative manner about Russia. Your neo-Soviet attempt to spin that fact is completely hilarious.

    In my view, the World Bank is in fact probably vastly UNDERestimating Russia’s problems. It’s a conservative institution, and it can’t possibly have all the real facts about the Russian economy because the KGB spy who rules the country lies like he breathes.

    In short, with “friends” like you Russia needs no enemies.

    Comment by La Russophobe — April 1, 2009 @ 10:20 pm

  3. I can only comment on what I know and that does not include accurate predictions of the future oil price. What I can plainly see is that Russia has social problems not helped by a complete lack of meritocracy, social justice, democracy which are I agree hard to capture in any economic predicitions. So I agree with the point “In my view, the World Bank is in fact probably vastly UNDERestimating Russia’s problems” above.

    Comment by AlanE — April 2, 2009 @ 2:57 am

  4. “The [Russian] PMI has now signaled contraction for eight successive months, a longer sequence than that registered during the 1998 financial crisis. Moreover, the average PMI reading for the current period of decline (42.0) indicates a sharper downturn than that seen a decade earlier (where the PMI averaged 46.3).”

    Comment by La Russophobe — April 2, 2009 @ 8:31 am

  5. Sounds familiar as we did discuss this a few months ago. I can’t find the thread, but we were discussing Aslund’s predictions that the Russian GDP would fall in the negative numbers this year, perhaps as low as -8 or so. He was quite prescient. I remember having a discussion with another commentator to La Russophobe’s site arguing that Russia’s GDP would fall into negative numbers next year. The other person kept saying that it could not happen because the World Bank and the IMF were reporting that Russia would have 6% percent GDP growth this year. The facts are now showing who was right 😉

    Comment by Michel — April 2, 2009 @ 12:30 pm

  6. […] bookmarks tagged laudable The World Bank Comes Around saved by 5 others     ktetis bookmarked on 04/02/09 | […]

    Pingback by Pages tagged "laudable" — April 2, 2009 @ 12:51 pm

  7. @La Loserdope,

    1. The fall in oil prices was pretty directly linked to the credit crisis, which few foresaw would explode so dramatically. Did you predict it?

    2. Re-oil demand, that is simply false. In the last few years it is China that accounted for the lion’s share of marginal global demand for oil. The US has been relatively flat in recent years, and oil consumption didn’t drop much during this downturn because the price fell so much.

    3. I didn’t make a longer comment or one strictly related to SWP’s post because I had not yet read the cited report in detail, and as such it would have been pointless of me to waste mine and readers’ time with it.

    4. A PMI of 42 is low, but the typical Eurozone figure as well as the US and Japan are in the early to mid 30’s, which I believe indicate more rapid industrial contractions there.

    Comment by Sublime Oblivion — April 2, 2009 @ 1:52 pm

  8. Da Russophile, a number of people foresaw the housing collapse. There was even a blog dedicated to it: that discussed the coming real estate collapse from 2005 to 2008.

    Comment by Michel — April 2, 2009 @ 3:47 pm

  9. For those of you who read Russian, this is an interesting piece: Even Russian experts are saying that the latest World Bank and OECD projections are too optimistic. An excerpt: “По мнению Центра развития и Центра анализа экономической политики ГУ-ВШЭ, 4,5% падения от Всемирного банка и 5,6% от ОЭСР – это лучшее, что нас может ждать.”

    Comment by Michel — April 2, 2009 @ 4:32 pm

  10. Erm Michel, did they also predict that the housing collapse will lead to a general global and industrial crisis? And that it would tank oil prices?

    Some Russian experts would beg to disagree:

    Например, если Минфин прогнозирует снижение доходов федерального бюджета в 2009 году примерно на 30%, то эксперты ИНП ожидают снижения лишь на 17,5%. Уже в текущем, 2009 году экономисты института считают возможным рост ВВП на 3,7%, тогда как Минэкономразвития прогнозирует спад на 2,2%.

    So experts say many things. (Though I agree 3.7% is too optimistic. I for one am looking at about 0% to -2%).

    Comment by Sublime Oblivion — April 2, 2009 @ 4:58 pm

  11. “Russian experts.” Ha ha. That’s a good one, tell me another. One of the world’s great oxymorons, from one of the world’s great morons. From where would such expertise have come? Education in the USSR?

    What a pathetic joke. When one wonders why Russians don’t live to see age 60, work for $4/hour and lose 1 million from their population every year, the answer is simple: “Friends” like “Sublime Oblivion” helping it right into the abyss.

    Comment by La Russophobe — April 2, 2009 @ 5:39 pm

  12. So, Da Russophile, are you willing to commit yourself to 0 to -2% growth? I would say at least -6 to -8%. Let’s see in January who was closer to the truth 🙂 SWP, what is your prediction?

    Comment by Michel — April 2, 2009 @ 6:02 pm

  13. So if Russia declines by less than 4% I win, and if by more than 4% you win? OK.

    Comment by Sublime Oblivion — April 2, 2009 @ 6:37 pm

  14. Договорились!

    Comment by Michel — April 2, 2009 @ 7:02 pm

  15. This from The Moscow Times:

    “Deputy Economic Development Minister Andrei Klepach said Thursday that Russia’s economy shrank by 7 percent in the first quarter, Itar-Tass reported, marking a staggering downturn after eight years of oil-fueled growth.

    “These figures are worse than we expected,” Klepach said at a conference in Kiev, Ukraine. He was citing preliminary figures.

    Klepach also said net capital outflows reached $33 billion in the first quarter, with record outflows of $130 billion last year.

    Government officials are sticking to their view that the economy will shrink by 2.2 percent in 2009, and they expect a recovery in the final quarter.”


    Comment by Michel — April 3, 2009 @ 2:31 pm

  16. Договорились

    The main issue I think is whether it will be more of an L shaped or more of a U/V shaped recession. WB/OECD thinks the former (as do you presumably), Economy Ministry and I think the latter.

    Comment by Sublime Oblivion — April 3, 2009 @ 5:37 pm

  17. Of I think the “former” as I don’t believe in fairy tales 😉

    Comment by Michel — April 4, 2009 @ 9:15 am

  18. We’ll see.

    Comment by Sublime Oblivion — April 5, 2009 @ 1:26 am

  19. […] now I expect it be about 1% to -2%, and certainly not less than -4% (on the latter point, a made a symbolic bet on this in late March with commentator “Michel” at […]

    Pingback by Decoupling from the Unwinding | Sublime Oblivion — April 5, 2009 @ 4:28 pm

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