Russia set to skirt Europe's budget crisis: World Bank

16th June 2010, Comments 0 comments

The World Bank on Wednesday cut its 2010 growth forecast for Russia but said the country's relatively healthy state coffers means Moscow should escape the budget woes besetting its European partners.

The Bank cut its forecast to 4.5 percent from 5-5.5 percent previously but said Russia's strong fiscal position dampened the risks from Europe's budget crisis.

Russia was hard hit by the global economic crisis, with the economy contracting 7.9 percent last year, but reserve funds built up in times of high oil prices have helped it avoid the problems currently engulfing EU states.

"Amid heightened global uncertainties, Russia is experiencing a bumpy recovery," the Bank said in its latest report on Russia, adding that growth would be slightly higher at 4.8 percent in 2011.

"Domestic demand is rising, but unemployment remains high, and credit and investment remain limited."

It said that Russia's links to the southern European countries worst hit by the debt crisis like Greece were limited and its fiscal position was far stronger.

"The debt crisis in Western Europe sharpens the downside risks to global recovery and oil prices.

"But the effects on Russia are likely to be blunted by its stronger fiscal and debt positions and by limited trade and financial links with the affected countries."

"Russia's fiscal and debt outlook is much less pressing than in other countries because both fiscal deficits and debt-to-GDP ratios are much lower," it added.

However the Bank said that Russia's continued dependence on hydrocarbon exports could make it vulnerable if the European budget crisis starts to severely erode the price of crude.

The Russian government has spent heavily to bring the economy out of recession and the World Bank said an increase in fiscal revenues due to higher oil prices is likely to be partly offset from additional social spending.

Russia built up two massive reserve funds -- The Reserve Fund and the National Wealth Fund -- during the period of high oil prices and their total contents were worth more than 200 billion dollars in 2008 when the crisis broke.

But with the government spending on the crisis, the Reserve Fund has been whittled back and will have only 15 billion dollars by the end of this year.

The combined worth of the two funds will be just over 100 billion dollars by the end of this year, the World Bank predicted.

"Therefore, the expected budget deficit in 2011 and 2012 will have to be mostly financed with domestic and external borrowing," it said.

The International Monetary Fund had the day earlier raised its 2010 forecast for Russia slightly to 4.25 percent but cautioned the recovery was still highly dependent on state help.

"With limited prospects for further increases in oil prices over the medium term, the strong growth in investment that powered the pre-crisis growth is unlikely to materialize again anytime soon," the IMF said in a statement.

"This suggests that Russia will emerge from the crisis with notably lower potential growth.

"While Russia's large reserves still provide safeguards, failure to tighten fiscal and monetary policies and reinvigorate banking and structural reforms would result in low medium-term growth."

© 2010 AFP

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