World Bank: Russia's Economy Loses Momentum, Needs Structural Reform

By Andrey Ostroukh and Lukas I. Alpert

MOSCOW--Russia needs to implement structural reforms as its economy is losing momentum and is underperforming its emerging-market peers, the World Bank said Tuesday.

Russia's economic growth has already dropped to half the level seen in the decade up to the 2008 global financial crisis, while industrial output declined this year for the first time since 2009. Given the lack of investment in the economy, such a trend is expected to continue over the medium term, the World Bank said in its Russian Economic Report, published twice a year.

"The weak external environment, high inflation, flat oil prices and sluggish domestic demand are set to postpone a pickup in growth towards the second half of 2013," the World Bank said.

"By 2014, growth in Russia is set to be lower again than in Brazil, South Korea and Turkey," it said.

The World Bank expects the Russian economy to slow further to 3.3% in 2013 from 3.4% in 2012, remaining far below an ambitious target of an annual 5% set by President Vladimir Putin. The economy ministry expects Russia's economy to expand by 3.6% this year.

In the absence of large investments and new discoveries, Russia's commodities-dependant economy will struggle to expand as further increases in oil prices are unlikely, capacity utilization is approaching pre-crisis peaks and unemployment remains at a record low, the World Bank said.

"Today's moderate growth reflects Russia's moderate potential growth rate, as indicated by low unemployment and high capacity utilization, along with a weak external environment," it said.

The World Bank said falling oil prices--which it forecast at $102 a barrel in 2013 and 2014, down from $105 in 2012-- would further slow the Russian economy. Around 50% of federal government revenue comes from oil.

"We see a slight downgrade for the oil price, which will weigh on Russia," Kaspar Richter, the World Bank's chief Russia economist, said at a press conference Tuesday.

To revive and modernize its economy, Russia has to manage macroeconomic policies to ensure economic stability, sticking to prudent spending plans, focusing on low inflation and strengthening banking supervision, particularly in consumer lending, the World Bank said in its report.

To lift its growth potential, Russia needs to reduce "the state's footprint on the economy" and improve the investment climate, while strengthening governance through more transparency, better regulations and more effective control of corruption, the bank said.

James Marson contributed to this item.

Write to Andrey Ostroukh at andrey.ostroukh@dowjones.com and Lukas I. Alpert at lukas.alpert@dowjones.com

Corrections & Amplifications

This item was corrected at 1041 GMT because it misspelled the name of the World Bank's chief economist for Russia in the ninth paragraph. His name is Kaspar Richter, not Caspar Richter.

  (END) Dow Jones Newswires
  02-26-130453ET
  Copyright (c) 2013 Dow Jones & Company, Inc.