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Analysis & Opinion
25.12.08 Crisis, But Not As We Know It
By Sergei Balashov

The World Bank’s latest report offered a detailed look into the nature of the Russian economic crisis, yet provided few concrete answers as to when we should expect a recovery. Those predictions that have been made are facing more and more challenges as the situation and the moods in the market head south.

“This is not the Great Depression,” the World Bank’s lead economist for Russia Zeljko Bogetic reflected on the thought that had crossed the minds of many analysts and businesspeople at the presentation of the WB’s Russian Economic Report. It offered a detailed explanation why it wasn’t 1998 either. Yet, the question that is still in the air is what exactly it is, and how long it is going to last.

The point The World Bank was trying to get across was a bit different, and didn’t aim at giving an exact prediction. “We got the message out to make sure that in times of uncertainty people at least can understand what’s going on,” said Klaus Rohland, World Bank Director and Resident Representative in Russia.

As to what’s going on, the picture looks pretty grim. The impact on Russia’s economy has also so far appeared to be worse than expected despite the large-scale anti-crisis measures implemented by the government.

The World Bank confirmed in its report that Russia is heavily dependent on the global economy, breaking this dependence into two fundamental parts. The tightening of credit markets along with the fall of commodity prices, which once made Russia a “safe haven” for investment amid the sub-prime mortgage collapse, are dragging down the economy. The latter has to do with the negative projections for global economic growth. As these are worsening by the day, institutions like the WB have to alter their forecasts on a weekly basis with no visible end in sight.
“There is a general across the board slowdown of the Russian economy, and this slowdown is accelerating in the third quarter,” said Bogetic.

At the same time, the World Bank didn’t shy away from offering some light at the end of the tunnel, however bleak and blurry.

Any forecast can only be made based on certain assumptions, as nobody is sure which way the main economic factors impacting Russia will head next year. The WB puts oil prices at $74.5 per barrel, which is substantially higher than the current prices, but corresponds with a level that experts argue would make oil production cost efficient. Assuming 0.93 percent global growth and the impact of the policy responses of the Russian government, the WB said the GDP growth would be at 3 percent in 2009, compared to pre-crisis predictions of 6.5 percent. Both unemployment and inflation will rise unsubstantially, while the fiscal surpluses are expected to decrease next year.
It was also noted that Russia headed into the financial crisis in much better shape than ten years ago, when it had to default on its internal debts. This time Russia has a stronger financial system with low levels of debt and fiscal and external account surpluses. Its vast reserves are also playing a big part in fending off the economic troubles. With all financial measures considered, the CBR losses should amount to no more than an additional $100 billion.

“This is a growth recession, not an outlook recession yet. We do expect recovery towards the end of 2009,” said Bogetic. The recovery schedule is closely tied to the rebound of the global and the U.S. economy, which has recently been looking more and more uncertain. Bloomberg reported on Tuesday that the U.S. housing market was close to the bottom with prices falling at a pace “reminiscent of the Great Depression.” The median resale price went down by 13 percent while purchases were down 7.6 percent, the sharpest decline in 20 years. Asian markets went down yesterday amid low forecasts for the coming year. Japan gained a little despite the government’s statements that the economy would be deteriorating.

The Daily Telegraph reported on Tuesday that the UK economy is expected to shrink by 2.5 percent in 2009. This followed a report from Britain’s Office for National Statistics announcing 0.6 percent decline in the third quarter of 2008, compared to an expected 0.5. In the scale of just a quarter, it seems to be a significant shift to the worse and seems to confirm the trend set out in the crisis forecasts and predictions that have so far been rendered.

It falls in line with the IMF’s global GDP growth expectations for 2009, which were lowered to 2.2 percent from 3 percent in November, complicating the recovery outlook for the next year. Managing director of the International Monetary Fund Dominique Strauss-Kahn said the January forecast could be even worse than that in November, reported BBC.

The moods in the Western markets resonated with Russian businesses. The TRUST investment bank has just released a report setting out its expectations for small and medium sized businesses, marking the biggest plunge ever recorded. Its updated index shows a plunge in entrepreneurs’ expectations to 102, after staying at 130 as recently as August. TRUST noted that business owners and entrepreneurs generally preserved a positive attitude even while dealing with tightening credit market and declining revenues.

“The fall of the index reflects how the mood of the Russian entrepreneurs corresponds with the current economic situation,” said Nadia Cherkasova, the bank’s managing director for development of small and medium sized businesses, in a statement released by TRUST.

Now, as it becomes clear that the crisis will rather be prolonged than come to a halt quickly, there is less and less optimism in the market.

“We like to think about different scenarios with a lack of certainty; the global economy [should be allowed to recover] in a gradual fashion. It won’t be a V-type recovery as many people and the stock markets would like to see, it’s going to be a long U-shaped recovery,” said Bogetic. “How long it’s going to take is anyone’s guess,” he added.
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