April 1, 2015 / 11:02 AM / 2 years ago

World Bank sees protracted recession in Russia

A vendor (R) sells vegetables at a food market, which operates once a week on Saturday, in the Russian southern city of Stavropol March 14, 2015.Eduard Korniyenko

MOSCOW (Reuters) - Russia faces a protracted recession as the impact of Western sanctions lingers and oil prices stay low, the World Bank said in a report published on Wednesday.

In its baseline scenario, the bank expected Russia's gross domestic product to contract by 3.8 percent in 2015 and a further 0.3 percent in 2016, describing medium-term growth prospects as dim.

The World Bank's lead economist for Russia, Birgit Hansl, said "adjustment to the new oil price reality and the sanctions environment" was a key policy challenge.

"If we look more into the medium term, the main challenge for Russia is the continued dearth in investment," she said, presenting the report.

The bank's latest forecasts are more pessimistic than those made in December, when it expected the economy to shrink by 0.7 percent this year and grow by 0.3 percent in 2016.

The new baseline forecasts assume that the oil price will recover only marginally over the next two years, averaging $53 per barrel in 2015 and $57 per barrel in 2016, reflecting ample global supplies and moderate demand.

Under a more optimistic scenario, with oil averaging $65.5 per barrel in 2015 and $68.7 per barrel in 2016, the economy would contract by 2.9 percent this year and grow by only 0.1 percent in 2016, the World Bank said.

Its latest forecasts assume that sanctions imposed against Russia because of its role in the Ukraine conflict would stay in place in 2015 and 2016.

The sanctions could have damaging long-term consequences that may last even after the sanctions are lifted, the bank said, citing the case of South Africa where sanctions imposed in the 1980s caused a major slump in investment.

In Russia's case, sanctions were likely to exacerbate an existing investment shortage.

"Low investment demand hints at the deeper structural problems of the Russian economy and has already initiated a new era of potentially small growth," the report said.

The bank also warned that a projected 3.8 percent budget deficit this year could "severely deplete" the budget's Reserve Fund, currently equal to around 4.7 percent of GDP.

Hansl said, however: "One could argue that it is prudent to use fiscal buffers at these times as a counter-cyclical measure."

The Bank also foresaw a $122 billion capital and financial account deficit this year, reflecting continuing heavy capital outflows, only partially covered by a $74 billion current account surplus.

Reporting by Alexander Winning, writing by Jason Bush, editing by Elizabeth Piper

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