World Bank says Russia crisis to send poverty to highest in decade

By Alexander Winning

MOSCOW (Reuters) - Russian poverty rates will return to 2007 levels this year as the economy continues to contract and inflation reduces people's purchasing power, the World Bank said on Wednesday.

The international lender's comments add to the view that it is ordinary Russians who have borne the brunt of the country's economic crisis, as the blow for many firms has been cushioned by the weaker rouble and state aid.

The number of poor people in Russia will rise to more than 20 million out of a population of over 140 million, the World Bank said, the largest increase in poverty since the 1998-99 crisis that included a sovereign debt default.

Birgit Hansl, lead Russia economist for the World Bank, said the government would find it difficult to combat rising poverty because of a sharp fall in budget revenues stemming from the oil price collapse. Global prices for oil, Russia's main export, have fallen to under $40 per barrel from over $115 in June 2014, while the economy has also been hit by Western sanctions imposed over Moscow's role in the Ukraine crisis.

"It's clear the fiscal space is very small to continue with social expenditure increases," Hansl told a news conference.

Among ways to help ease poverty, she said social expenditure could be better targeted, including by means testing.

Mikhail Matytsin, a World Bank poverty economist, said the crisis had also driven a dramatic shift in consumption patterns.

The World Bank sees private consumption falling by 3 percent in 2016 in Russia after a decline of over 9 percent in 2015, a far sharper slump than during the 2008-09 global financial crisis.

"This is a new adjustment to the (economic) shock," Matytsin said, saying households had cut back most on durable goods such as cars and domestic appliances.

The World Bank now sees private consumption recovering only very modestly and stabilising at growth levels of around 2 percent from 2018. Before the latest economic downturn, private consumption in Russia had been rising at around 6 percent each year, Hansl said.

In its latest Russia economic report, the World Bank downgraded its growth forecasts to a contraction in gross domestic product of 1.9 percent this year and tepid growth of 1.1 percent in 2017.

It previously saw a contraction of 0.7 percent in 2016 and growth of 1.3 percent in 2017. It said its weaker forecasts reflected its new assumption that the oil price would average $37 a barrel in 2016, rather than the $49 forecast previously.

The World Bank said serious structural reforms, which it has long said are needed to ensure sustainable economic growth in Russia, were not likely before the 2018 presidential election.

(Editing by Jason Bush and Catherine Evans)