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Russia gov’t must ward off social crisis-World Bank

The Russian economy will contract by 4.5% in 2009 and the state needs to spend up to 1% of GDP to save some 4 million people from poverty and stave off social unrest, the World Bank said.

In its Russian Economic Report, the World Bank said the government should boost unemployment subsidies by 70%, increase child subsidies by 220% and raise pensions by 20% 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 Lead Economist on Russia, Zeljko Bogetic, told a news conference.

Economists and political scientists are on alert for any signs the economic crisis is raising risks to Russia's political 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% 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.

During Russia's last recession a decade ago, the economy contracted 5.3% and the ruble lost two thirds of its value.

A poll published last week by the independent Levada Centre showed that 26% of Russians would be willing to take part in mass social 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% of GDP on infrastructure and supporting small and medium enterprises.

The Russian government approved a revised 2009 budget this month with a deficit of 8% of GDP but the World Bank said the energy exporter could sustain a 9% deficit due to its accumulated fiscal reserves.

The new US administration 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 that consumer prices would rise 11%-13% 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 “favorable for the gold and forex reserves' preservation” and that the ruble 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

“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. (Reuters)