World Bank cuts Russian growth forecast, sees GDP decline in 'shock' scenario

The World Bank is expecting 2014 inflation to be between 5.5 percent and 6 percent in Russia, exceeding Central Bank's target of 5 percent.

The World Bank forecasts that Russian GDP will contract 1.8 percent in 2014 under its scenario for a severe shock to the economy resulting from the Crimea crisis, the bank said in its 31-page Russian Economic Report, subtitled: "Confidence crisis exposes economic weakness."

If the "shock" scenario does not materialize, but Russia fails to alter economic policy to stimulate growth in investment activity, GDP growth will slow to 1.1 percent in 2014, down from already low GDP growth of 1.3 percent in 2013.

As recently as December the World Bank had forecast that the Russian economy would expand 2.2 percent in 2014.

The World Bank developed two alternative scenarios for Russia's 2014-2015 growth outlook in response to the higher-risk environment since political uncertainties around the Crimean crisis in early March 2014 led to increased market volatility. Both scenarios forecast slowing growth.

The low-risk scenario projects growth to slow to 1.1 percent in 2014, slightly picking up to 1.3 percent in 2015, it says.

Under the high-risk, "shock" scenario, GDP will contract 1.8 percent in 2014, recovering to 2.1 percent growth in 2015, in part due to the lower comparison basis.

"Confidence weakness continues to weigh down on domestic demand suggesting, first, that consumption growth is likely to slow and stabilize at a lower level than in previous years. Second, our growth outlook projects that at the margin, the rate of growth will be increasingly dependent on the recovery in investment demand. Third, in the short-term, growth will be impacted by the geopolitical tension that started with the Crimean crisis and depend on how it will be resolved," the report says.

The World Bank's low-risk scenario assumes a limited and short-lived impact of the Crimea crisis. "The crisis could be contained in a peaceful fashion with some political tension remaining in 2014. In that case, the economic impact is expected to be limited with no trade restrictions introduced trough sanctions. The main transmission channels of this contained crisis would be through the capital account and impacts on market confidence."

"In 2015, political tension could subside following an orderly resolution of the geopolitical tension around the Russia-Ukraine affairs and accommodation with the West. Access to international capital and financial market would be restored and confidence would improve."

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