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Here is Why the World Bank's Growth Forecast for Russia is Wrong

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This post first appeared on Russia Insider

The World Bank today announced that it expected Russian 2014 GDP to come in-line with current government forecasts of 0.5%. Their base scenario also predicts 0.3% growth in 2015 and 0.4% in 2016 which deviates from the recently upgraded forecasts by the Russian Economic Ministry of 1.3% and 2% for 2015 and 2016 respectively. 

The World Bank's main thesis is that retail sales, which have been the driver of Russian growth over the past 15 years, are "moderating to a new and lower growth trajectory in an environment of subdued consumer sentiments". They believe that growing household debt and high inflation expectations will undermine demand for the next two years.

<figcaption>World Bank (Typically Late to the Game) Sees Stagnation</figcaption>
World Bank (Typically Late to the Game) Sees Stagnation

As I wrote earlier, the Russian economy bottomed in June this year. It had been in a slowdown that had started in early 2013 as the Ruble started to depreciate aggressively. But this is what the World Bank and many analysts miss. While they correctly target the Ruble as being the cause of the most recent downturn they fail to take into account the very important chronology. It has very little to do with sanctions and the broader Ukrainian situation as the following graph will show.

Image icon ruble-euro.png
The Ruble Fell Before Ukraine, Not After

Let's take February (before Crimea) as an example. In 2014, the Euro/Ruble exchange rate averaged 48.2 against the prior year's 40.34, in other words a depreciation of 19.4% this has fed through over-time into consumer prices and eroded the real component in any growth calculation. 

The exchange rate in August was 48.12 against a prior 43.98, in other words a depreciation of 9.4%; already inflation dynamics have improved greatly from Q1, and this has started to show in the Producer Price Index which fell from 9% to 5.4% in August. 

If the Ruble stays on its current trajectory it will be around 48.5 by February (it will be far higher if the oil market improves), then it will be down a mere 0.6%. As a consequence, dis-inflationary pressures will increase the real component of economic data as the nominal component is fairly sticky.

In short, real wages will increase allowing for faster retails sales growth.

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