World Bank lowers Russia's economic forecast as ruble falls

9th December 2014, Comments 0 comments

The World Bank announced a gloomier economic forecast for Russia on Tuesday as the ruble fell despite the central bank saying it had spent billions last week to prop it up.

Falling oil prices and sanctions over the crisis in Ukraine have taken a heavy toll on Russia's economy, and the World Bank on Tuesday predicted it would shrink by 0.7 percent in 2015.

It however warned that the contraction would be worse if oil prices were to keep sliding.

The bank had previously predicted zero growth for Russia for 2015. Its new forecast was in line with one from Russia's economic development ministry last week, which predicted a 0.8 percent contraction in 2015.

The World Bank said its latest forecast was based on the "most likely" scenario of crude prices averaging at $78 in 2015.

But if oil prices fell to $70, Russia's output would shrink by 1.5 percent and households would remain in "a crisis mode" for 2015 and 2016, it said.

"In the baseline scenario, investment is projected to contract for a third year in a row in 2015 because of continued uncertainty, restricted access to international financial markets by Russian companies and banks, and lower consumer demand," Birgit Hansl, the World Bank's lead economist for Russia, was quoted as saying.

The World Bank said that Russia would avoid recession in 2015 in a best case scenario if oil prices averaged $85.

On Tuesday, oil prices fell to fresh five-year lows, at around $65, battered by OPEC's decision last month to maintain its output levels despite a global supply glut.

Russia's economy has slowed in recent years, after GDP growth averaged eight percent during President Vladimir Putin's first two terms in office from 2000 to 2008. In 2013, growth was just 1.3 percent, attributed by economists to over-reliance on oil and gas revenues.

- Propping up ruble -

This year, falling growth has been exacerbated by the impact of Western sanctions on Russia over Ukraine and falling oil prices.

The ruble has fallen around 40 percent against the dollar and 32 percent against the euro since the beginning of the year, prompting price rises and reduced spending on non-essentials.

Russia's central bank said Tuesday that it had spent $4.5 billion last week to prop up the ruble, which has plunged over falling oil prices.

Putin last week urged the central bank and the government to take "tough coordinated actions" to stop speculation on the ruble.

Russia still has more than $400 billion in currency reserves. But that is 20 percent less than in the beginning of the year.

Despite the intervention, the ruble fell Tuesday, coming close to record lows set last week. It was worth 54.20 to the dollar and 67.35 to the euro at around 1530 GMT.

The central bank has raised interest rates by four percentage points since spring, to a current level of 9.5 percent, and the regulator could further raise rates at its next meeting on monetary policy on Thursday.

Consumption growth is expected to decline in 2015 for the first time since 2009 after "negligible expansion in 2014," Hansl of the World Bank said.

On Monday the Association of European Businesses announced surprisingly positive data on car sales for November, down just 1.1 percent year-on-year.

But analysts cautioned this was a short-term effect due to people rushing out to make large purchases before anticipated price hikes.

VTB Capital said in a research note Tuesday that "prevailing uncertainties over the ruble and macro trends" would remain.

"This momentum could be sustained through December, but sales are likely to plunge again as early as the first quarter of 2015 due to price hikes and the unfavourable base effect," VTB Capital said.

© 2014 AFP

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