* Russian economy to contract 4.5 pct in 2009
* Russia must spend more to save 4 mln people from poverty
* World Bank says social situation has worsened rapidly
(Adds Dvorkovich, Khristenko quotes)
By Gleb Bryanski and Toni Vorobyova
MOSCOW, March 30 (Reuters) - Russia must step up spending to save 4 million people from poverty and stave off social unrest as the economy will contract by a sharper than expected 4.5 percent this year, the World Bank said on Monday.
The World Bank said in its Russian Economic Report that the government should boost unemployment subsidies by 70 percent, increase child subsidies by 220 percent and raise pensions by 20 percent for a third of the poorest pensioners.
“The social situation has worsened so rapidly and so unexpectedly that it is important to shift the focus of the anti-crisis policy to the population,” the World Bank’s chief economist on Russia, Zeljko Bogetic, told a news conference.
Investors are watching for any signs that the worst economic crisis in at least a decade could increase social tensions or undermine stability.
Vladimir Putin’s popularity over 10 years in power as president and now prime minister has been bolstered by booming commodities prices which helped raise the living standards of even some of the poorest Russians.
The forecast contraction in gross domestic product (GDP) is much sharper than the 2.2 percent expected by the Russian government, due to the World Bank’s markedly more pessimistic view on the global economy.
“There are risks to the downside both on the global level and in Russia,” Bogetic said.
The Kremlin’s top economic aide Arkady Dvorkovich declined to comment on the World Bank’s report as he had not yet seen it.
“It is clear that there will be a slowdown this year, but our actions...will help minimise the effects of the crisis and limit the economic contraction,” he told reporters.
During Russia’s last recession a decade ago, the economy contracted 5.3 percent and the rouble lost two thirds of its value. This time it is in a stronger position thanks to nearly $400 billion of gold and forex reserves.
By spending 1 percent of GDP on child benefits, unemployment benefits and pensions over the next 12 months Russia could save over 4 million people from poverty, the World Bank estimates.
A poll by the independent Levada Centre this month showed 26 percent of Russians would be willing to take part in mass protests about rising prices and falling living standards.
“Since there is a threat of a significant social pressure it would have been clever to pay attention and assign funds for social protection,” Bogetic said, adding that aid to the poor may also boost domestic consumer demand.
“They will not buy expensive imported goods,” he said. He said the government could also spend another 0.5 percent of GDP on infrastructure and supporting small and medium enterprises.
In a sign of falling living standards, Industry Minister Viktor Khristenko said car sales could fall by more than 60 percent this year, much sharper than expected [ID:nNL0400001].
The Russian government approved a revised 2009 budget this month with a deficit of 8 percent of GDP but the World Bank said the energy exporter could sustain a 9 percent deficit due to its accumulated fiscal reserves.
The new U.S. administration has called on major economies to use government spending to jumpstart growth but Russian Finance Minister Alexei Kudrin has said a higher deficit would be inflationary.
“We do not regard inflation as a significant problem in the Russian economy in 2009,” Bogetic said, forecasting consumer prices would rise 11-13 percent this year.
The World Bank expects the global recession to end next year, with the Russian economy posting zero growth in 2010.
Bogetic said the current more flexible exchange rate policy was “favourable for the gold and forex reserves’ preservation” and that the rouble has found a stable level after several weeks of managed devaluation, which ended in January.
“The exchange rate has reached a stable level which corresponds to the current oil prices,” he said.
The World Bank’s forecasts are based on the price for Russia’s Urals oil blend at $45 per barrel in 2009 URL-E — broadly in line with the $41 level assumed in the budget.
It sees capital outflows of $170 billion this year — in contrast to the Russian central bank which has revised its view to around $79 billion from $90 billion [ID:nLU250494].
“Our estimates are based primarily on our view about scheduled repayments of banking and corporate sector (debt) of around $130 billion and a significant slowdown of foreign direct investments,” Bogetic said.
Editing by Ruth Pitchford and Chris Pizzey