Mr. Prime Minister, Mr. Deputy Prime Minister, Mr. Kostin, Senior officials of the Government, of the Central Bank, Distinguished guests.

It is a privilege to speak before you today. I am returning to Russia after fifteen years. Working in Russia as an economist during the challenging early 1990s was a defining moment of my career. Now I am back with many good memories — and it is good to see that during that period, Russia has made immense progress towards prosperity.

Good economic policies—not only high oil prices—have helped Russia build this prosperity. The building blocks were many: sound fiscal management, declining inflation, repayment of the external debt, the establishment of oil stabilization funds, and the implementation of budgetary reforms. These policies laid the foundations for stable and high growth rates of 7 percent, and Russia has become the twelfth largest economy with the third highest international reserves in the world. And more importantly, tens of millions of Russians have been lifted out of poverty.

Then in September 2008, the global economy went into cardiac arrest. Credit, real estate, and consumer bubbles burst in country after country. Banks stopped lending – even to each other. The total capitalization of world stock markets was almost divided by two in 2008, a loss of nearly $30 trillion dollars —more than twice the GDP of the United States destroyed within months. The financial crisis quickly became an economic crisis as global output and trade sharply declined. As a result, job losses have mounted all over the world: from December 2007 to July 2009, unemployment rates have increased by at least 50% in the UK and Japan; and have doubled in the US, Spain and Ireland.

In Russia, the global financial crisis was transmitted through sharp reversals in capital flows and a collapse in world oil prices. Our analysis indicates that the Russian economy could shrink, by as much as 8 percent in 2009. The number of poor people in Russia is likely to increase, instead of the decline 0.8 million that was predicted last year. Such was the severity of the impact of this global crisis.

G-20 countries have helped to stabilize the world economy. To counter the intense financial crisis and colossal collapse of global demand, we have witnessed an aggressive and coordinated global loosening of monetary and fiscal policies. This has helped to avoid a major depression, and we are now seeing signs of recovery. Credit conditions have improved, industrial production has turned around, and commodity prices appear to have bottomed out.

Russia’s policymakers contributed to the global policy response. The Russian government has acted swiftly. It eased monetary policy. Over time, it made exchange rate policy more flexible. And it put in place a sizeable fiscal package of support for financial sector recapitalization and for the real economy. A large-scale regional labor market support program was implemented. Thanks to these measures, Russia has avoided a currency crash and a potential financial panic. It now appears that the worst part of the crisis in Russia may now be over.

But we are not yet out of trouble. The rebuilding of inventories and the impact of fiscal stimulus––the short term factors behind the nascent recovery––may soon slow down. As the impact of the substantial stimulus package dissipates, the private sector will need to take over as the engine of economic recovery and growth. Although the recovery appears fragile, with significant risks in the short-term, the outlook for the medium to longer term also poses challenges. The growth rates prior to the crisis were fueled by global liquidity and rising commodity and asset prices. The post-crisis world is likely to be much different than before – both more competitive and constrained. Adjusting to this world will be a challenge for all countries, including Russia.

The good news is that the strategic priorities that Russia has developed will lay the foundation for future growth. In January of 2006, when Prime Minister Putin was President of the Russian Federation, he articulated a clear vision, saying that “We need to move from the simple extraction of natural resources to reorient the economy toward an innovative way of development.” In December of last year, President Medvedev reiterated that “Our task is to emerge from this crisis a more diversified and innovative economy.” A modern, diversified, and innovative Russia is a realistic objective. India is exporting billions of dollars of knowledge services to the US alone. Such potential clearly exists in this highly educated country.

We already see interest growing at the regional level. For example, Tatarstan is already engaged with the World Bank in developing world class universities, based on their rich academic tradition. It is easy to picture that Russia’s cities will be the place where economic diversification will happen. Skilled and productive people and entrepreneurs seeking new markets and better products will drive this process. And innovative enterprises that compete successfully in world markets will be the engine that will propel Russia towards a vibrant and creative economy.

Turning this strong and diversified growth potential into reality will depend on two policy pillars. Namely establishing a favorable investment climate and maintaining a sound macro and fiscal framework.

More needs to be done to create the necessary incentives for private investors. According to recent World Bank surveys of Russian enterprises, the following barriers are particularly critical: tax rates, access to finance, education of the workforce, corruption, and getting licenses and permits. The World Bank and the Russian Government are actively engaged in addressing the issue through the identification and design of fast- track reforms in Moscow and other Russian cities. But much works remains to be done.

The second pillar required for increasing private investment is to maintain sound macro and fiscal policies. The challenge will be to meet this key macro objective with rising pressures on public sector spending. Not only for required investments in infrastructure, but also current expenditures on the social sector. Russia’s demographic trends mean that public expenditures on pensions, health and education are likely to increase by 3 or 4 percent of GDP, under any long-term economic scenario. On the revenue side, tax es must be carefully designed to ensure that they do not inhibit entrepreneurship and job creation. And a comprehensive set of policies will need to be developed to ensure the efficiency of social expenditures. For example, by better targeting social assistance to the most needy.

But let me broaden the lens.

The prosperity of Russia is also key to the Region and to the World. The World Bank also sees Russia as a partner in development–– regionally and globally. Russia is a regional engine of growth. It is the largest market in the Commonwealth of Independent States, accounting for over three quarters of the combined GDP of the Commonwealth. And it is the second largest destination country for migrants, who earn more than $25 billion every year to send to their families back home. Prosperity in Russia has the potential to lift millions of people out of poverty throughout the CIS, and we hope to become a partner in accomplishing this goal.

At the global level, Russia has the potential to help solve the most pressing challenges of our time. As the third highest emitter of greenhouse gases—but with nearly a quarter of the world's undisturbed ecosystems—Russia’s efforts at energy efficiency have the potential for huge global impact. Finally, Russia is becoming a major player in the field of development assistance. We are proud that Russia is partnering with us in assisting the poorest countries through its increasing contributions to the World Bank’s International Development Association (IDA), our fund for the world’s poorest countries. Russia is also contributing generously to our joint programs in quality of education, malaria control, financial literacy, and social protection in Africa and around the world. We are pleased to support Russia's initiative to convene a conference of emerging donors in February 2010.

Mr. Prime Minister, Mr. Deputy Prime Minister, Mr. Kostin, senior officials, and distinguished guests. As in many other countries, the challenges for Russia in adjusting to the post-crisis world are significant. Given the obstacles that Russia has overcome since I last worked in Russia fifteen years ago, I am confident that Russia will be able to diversify its economy and prosper in the post-crisis world.