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On July 27, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with the Russian Federation. [1] Background In the wake of the global financial crisis, the Russian economy has been hit hard by dual shocks—a collapse in oil prices and a sudden reversal of capital flows. Fixed investment plummeted, significantly weakening the nexus of high growth in investment, productivity, and real wages that had powered consumption and the economic boom prior to the crisis. Against this background, real GDP contracted sharply in the first quarter, while labor market conditions eased considerably, dampening growth in real wages. As the output gap widens, inflation pressures are easing. Following an initial sharp depreciation, a recent modest increase in oil prices and renewed capital inflows have provided some support to the ruble, which remains broadly in equilibrium. The banking system is under increasing strain, and private sector credit is contracting. As the macroeconomic situation has deteriorated, the level of overdue loans has more than doubled since January, despite regulatory forbearance. Moreover, in an environment of high uncertainty, banks have exhibited a strong preference for liquidity. Since monetary policy was abruptly tightened in January, the stock of credit has been falling, for the first time since end-2004. The authorities’ response to the crisis has been swift and substantial, driven by concerns that weaknesses in the banking and corporate sectors could lead to a full-fledged crisis. In particular, the authorities’ pre-crisis focus on exchange-rate stability had encouraged substantial foreign-currency borrowing, encouraging unsustainably high rates of credit growth. Combined with supervisory shortcomings, this had left Russian banks and corporates particularly vulnerable to a reversal of inflows. As a result, policy interventions at first focused on maintaining external and financial sector stability by providing significant liquidity at low interest rates while keeping the exchange rate stable to offset the abrupt loss of foreign financing. However, as reserve losses mounted and capital outflows surged, the ruble was devalued and monetary policy tightened. More recently, as exchange rate stabilized and oil prices started to tick up, monetary policy has been gradually eased. In April 2009, as the economy continued to contract, the government passed a large supplementary budget to support flagging domestic demand. The budget includes large discretionary increases in defense and security spending; along with a package of anti-crisis measures aimed at stimulating economic activity by reducing taxes, extending support to strategic sectors, and enhancing social assistance. As a result, the non-oil deficit of the general government is expected to widen by 5½ percent of GDP in 2009—reaching 13¾ percent of GDP. The deficit will be monetized by drawing down the Oil Reserve Fund, except for domestic borrowing of up to 1 percent of GDP. Despite the substantial fiscal stimulus, recovery will be slow in coming with important downside risks weighing on economic outlook. Going forward, the external environment is likely to remain challenging, as the subdued outlook for global growth implies only a gradual recovery in commodity prices. Moreover, global deleveraging by financial institutions suggests that capital inflows to emerging economies, including Russia, are unlikely to return to their pre-crisis levels any time soon. Against this backdrop, real GDP is expected to contract by 6½ percent in 2009, after expanding at an annual rate of 7—8 percent before the crisis. With the banking system expected to remain under strain, credit growth would turn negative and impede a robust rebound. As a result, the economy is projected to recover only slowly over the course of 2010, with inflation gradually falling. The current account surplus would decline in 2009 before improving modestly in 2010, reflecting a gradual recovery of oil prices. Taking into account the planned large-scale monetization of the fiscal deficit, capital outflows are expected to remain relatively high at $68 billion. Executive Board Assessment Russia has been hit hard by dual shocks—a collapse in oil prices and a sudden reversal of capital flows. Executive Directors commended the authorities for a swift and substantial policy response to these developments, but noted that macroeconomic management has proved challenging with worsening external circumstances, and economic activity is projected to decline sharply in 2009. Despite some recent tentative signs that the economy may have reached a turning point, it is expected to recover only gradually in 2010. The near-term outlook hinges critically on a sustained rebound in the global economy and commodity prices as well as on the pursuit of appropriate domestic policies going forward. Directors noted that Russia’s pre-crisis policies have had important implications for the scope and effectiveness of the authorities’ response to the adverse external environment. On the one hand, Russia’s prudent policy of taxing and saving its oil wealth during the good years has created room for a large fiscal stimulus. On the other hand, the pre-crisis policy of controlled ruble appreciation—combined with the lack of long-term domestic funding—contributed to excessive foreign currency borrowing as high oil prices helped inflate investor appetite for Russian assets, and left Russian banks and corporates vulnerable to a reversal of inflows. Against this background, Directors saw stabilization of the banking sector as the immediate, but a complex, challenge facing Russian policymakers. Sizable liquidity injections and heavy interventions slowed the pace of ruble depreciation early in the crisis and likely prevented corporate bankruptcies and reduced strains on banks. The ensuing reserve losses, however, forced the authorities to allow a large depreciation of the ruble and to significantly tighten monetary policy. Directors noted that the tighter monetary conditions have exacerbated pressures in the banking sector, with banks’ loan portfolios now deteriorating at a notably faster pace. Directors encouraged the authorities to take a more proactive and concerted approach to tackling the problems in the banking sector. They considered that regulatory forbearance has made it difficult to assess accurately the state of asset quality and credit risks. Directors therefore stressed that policy actions should include mandatory, bottom-up stress tests of the larger banks, embedded in a holistic analysis of the banking sectors’ risk profile. They also recommended a roadmap laying out the likely supervisory responses in the event that a bank’s capital deteriorates, and a strengthening of the supervisory authority of the Central Bank of Russia (CBR). On fiscal policy, most Directors questioned the size and reversibility of the stimulus currently underway. Directors expressed concern that the large stimulus may become entrenched, leading to a renewed bout of excessive real appreciation and lower competitiveness, once the economy recovers. They recommended scaling back the fiscal stimulus and reorienting its composition toward measures that are self-reversing. With declining inflation, most Directors saw merit in continuing the more recent easing of monetary policy. However, they advised that the reduction in interest rates should proceed cautiously, taking into account the potential impact on the ruble and the intention to transition to an inflation targeting regime. Directors highlighted the risk that the forthcoming liquidity injections from the monetized fiscal deficit, combined with lower interest rates, might induce a shift into foreign exchange, putting excessive downward pressure on the exchange rate. In light of Russia’s still-substantial international reserves, Directors agreed that the CBR should stand ready to support the ruble in the event that unexpected developments unsettle exchange rate expectations. While noting the increased exchange rate flexibility since the beginning of the year, Directors observed that the interventions should be only temporary and that the exchange rate should ultimately reflect Russia’s underlying fundamentals. A number of Directors stressed that greater exchange rate flexibility would help limit speculative capital flows and signal a credible commitment to price stability. Directors welcomed the authorities’ intention to reinvigorate structural reforms in the health and education sectors. However, they regretted the delays in implementing other reforms critical to improving Russia’s investment climate and promoting economic diversification. A few Directors were concerned that the process for WTO accession appears to be losing momentum. Looking forward, Directors emphasized that—once the current crisis subsides—policy priorities should be geared toward medium- and long-term objectives. These would include refocusing fiscal policy on the non-oil deficit and anchoring it on a target that is sustainable from a long-term perspective; reorienting monetary policy toward controlling inflation, supported by a flexible exchange rate; and reinvigorating structural reforms. Table 1. Russian Federation: Selected Macroeconomic Indicators, 2006–10
Sources: Russian authorities; and IMF staff estimates.
[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. More news |
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