Russia is recovering well from the financial crisis thanks to strong oil, but high commodity prices pose risks to inflation and fiscal stability, and a poor investment climate puts a drag on growth, the World Bank said.
The government must resist the temptation to go on a pre-election spending splurge, while the central bank should press on with increasing rouble flexibility even if it means allowing sizeable currency appreciation, it said on Wednesday.
The World Bank cut its forecast for 2011 gross domestic product growth to 4.4 percent from 4.5 percent in November's report, and forecast a slowdown to 4.0 percent in 2012. Downside risks are associated with the economy's dependence on highly volatile oil prices, which could at any time retreat from current lofty levels above $100 a barrel.
The current level of oil prices also poses upside risks to 2011 inflation, which the World Bank sees at 8-9 percent compared with the government's forecast of 6-7 percent.
Zeljko Bogetic, the World Bank's lead economist for Russia, told a conference in Moscow that an "oil curse", where export prices reduce the fiscal deficit but the non-oil deficit remains high, may again affect Russia. He said that authorities need to take advantage of current strong prices to prop up the budget.
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