AFP - The World Bank on Tuesday revised down its growth forecast for Russia, predicting a steeper contraction in gross domestic product of 8.7 percent in 2009 and very weak recovery for the economy in 2010.

In its latest Russia report, the Bank predicted only a modest turnaround to GDP growth of 3.2 percent in 2010, amid signs of a global recovery driven by developing powerhouses China, India and Brazil.

"In 2010, we predict growth of 3.2 percent," said Sergei Ulatov, an economist with the World Bank in Moscow and one of the authors of the report.

"This may seem overly optimistic, but it is partly a statistical phenomenon by which the very low base in 2009 allows Russia this level of growth, despite the fact that we see a very weak recovery during all four quarters of 2010.

"In our previous report, we predicted a fall in GDP of 7.9 percent, now we predict a fall of 8.7 percent based on a review of the data for the first two quarters, which was lower than expected," he added.

The forecast is slightly more pessimistic than official predictions with President Dmitry Medvedev forecasting that GDP would shrink 7.5 percent this year.

The European Bank for Reconstruction and Development (EBRD) also downgraded its Russia forecast Tuesday, predicting a contraction of 8.5 percent in 2009 and sluggish growth of 3.1 percent in 2010.

Russia has seen its economy shrink by about 10 percent for the first nine months of this year, according to official figures.

But the World Bank and the EBRD said Russia's greatest challenge remains an urgent need to restructure its economy to lessen its dependence on raw export commodities in the face of future financial shocks.

The Bank said the outlook was uncertain because a large part of Russia's non-exporting sectors, which are not dependent on foreign markets, continued "to suffer from depressed consumer demand and limited credit availability."

But the Bank increased its two-year price forecast for crude oil, a major driver of Russia's export led-economy which currently outranks Saudi Arabia as the world's top oil producer.

"The downside risks associated with high volatility of oil prices and global demand will, however, remain," it said.

High oil prices could also undercut the government's will to implement reforms, Ulatov warned. "It is a risky tendency not only for Russia's economy, but also because the budget needs to be diversified from dependence on oil," he said.

Despite the improvement in oil prices, the Bank predicted the government will have to severely cut spending by 2010 once it has exhausted its huge reserve fund and may be forced to borrow to cover its deficit.

The expected modest recovery during the second half of 2009 is unlikely to have significant impact on unemployment and real incomes while it might take three years for the poverty rate to decline to pre-crisis levels, it said.

The World Bank warned that Russia's real GDP will likely return to pre-crisis levels only in late 2012.

It said Russia's pre-crisis decade of prosperity -- which saw growth of 7.7 percent in 2006 and 8.1 percent in 2007 -- was built on high oil prices, surging capital inflows and access to low-cost financing coupled with strong economic management.

In the post-crisis world, Russia must needs implement fiscal adjustment and diversify its economy in the context of sluggish global growth, low capital flows, and more limited access to foreign financing, the World Bank said.

Economists say Russia has been helped by the recovery in oil prices from last year's lows but warn too little has been done to diversify the economy and say the country remains vulnerable to fluctuations in the price of crude.

"The recovery is without question very weak. But more than anything it shows our doubts over what will be done in the future... what reforms the government will implement," said Ulatov.