World Bank, sees growth, warns Russia on oil dependence

30th March 2011, Comments 0 comments

The Word Bank forecast Wednesday 4.4 percent growth for Russia this year but also warned about the risks of inflation and the economy's over-reliance on oil and gas exports.

The World Bank slightly downgraded Russia's growth forecast from the 4.5 percent it issued in November in its last country report.

It urged the government not to be complacent and -- with oil prices high -- follow through on the deep-rooted structural reforms it had been promoting for much of the past decade.

"With strengthened growth in its largest trading partner, Western Europe, and oil prices on the rise, Russia is expected to grow by 4.4 percent in 2011, followed by 4.0 percent growth in 2012," the World Bank report said.

But it cautioned the figures depended on steady gains in consumer consumption and an easing in the long-term credit market.

It added the country remained particularly vulnerable to volatile energy prices driven by unpredictable world events.

Russia recorded 4.0 percent growth in 2010 after a 7.9-percent contraction in 2009 that came on the heels of the global financial and economic crisis and the subsequent implosion of world demand for the country's oil and gas exports.

Government officials now admit that the pace of a sustained recovery depends on an improved business climate and the development of private industries that comprise President Dmitry Medvedev's long-flagged modernisation campaign.

Medvedev chaired yet another modernisation meeting on Wednesday in which he promised to set up a $2 billion joint investment fund with private equity firms that would later be expanded to $10 billion and attract even greater cash flows.

"We need (to develop) the trust and interest of both domestic and foreign investors," Medvedev said in televised remarks.

But analysts said the fund was unlikely to drive Russian growth in the short term amid growing political pressure for the state to ratchet up spending ahead of December's parliamentary and next year's presidential polls.

The World Bank cautioned that such outlays would force the government to miss its 2011 annual inflation target of six to seven percent.

The rapid money supply growth "during the first eight months of 2010 has proved to be excessive and has led to a buildup of inflationary pressures," the report said.

The World Bank noted an 8.8-percent jump in year-on-year prices in Russia in December 2010 -- up dramatically from a 5.5-percent rate in July.

The way Russia's increased oil and gas are spent is the subject of almost weekly government infighting and debates.

Russia's liberal Finance Minister Alexei Kudrin has long promoted caution and warned earlier this month that most of the cash would be put aside in a special reserve to help fight inflation.

The figures involved could account for up to a quarter of Russia's annual budget -- economists estimate that a $10 jump in the price of oil adds about 650 billion rubles ($23 billion) to state coffers.

Russia's current budget is based on an estimate of $75 per barrel and an accompanying budget deficit of 3.6 percent of gross domestic product but current benchmark oil prices are around $100 per barrel.

The World Bank stressed that any extra spending should focus exclusively on economic investment programmes.

© 2011 AFP

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