Public Information Notice: IMF Concludes Post-Program Monitoring Discussion on the Russian Federation

July 18, 2001

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On May 29, 2001, the Executive Board of the International Monetary Fund (IMF) concluded a Post-Program Monitoring discussion on the Russian Federation based on information available through that date.1


A 17-month Stand-By Arrangement with Russia expired on December 27, 2000. Russia's outstanding obligations to the Fund at end-April 2001 amounted to SDR 8.5 billion (US$10.8 billion), which amounts to 143.7 percent of Russia's quota.

Economic performance in 2000 was very strong. Output grew by 7½ percent, inflation was brought down to 20 percent, and official reserves increased sharply to 5½ months of import cover. Developments were dominated by the strength of the balance of payments. High international energy prices swelled an already large current account surplus to more than 18 percent of GDP, permitting a large build-up of official reserves despite continued high levels of private capital outflows. Sterilized intervention by the Central Bank of Russia (CBR), assisted by a large fiscal surplus and a strong recovery in the demand for money, moderated the ensuing pressure for a sharp real appreciation of the exchange rate. A relaxation of the stance of both monetary and fiscal policies in the second half of the year heightened inflationary pressures and contributed to a sharp increase in capital outflows, while the growth momentum slowed during the year as the real exchange rate appreciated.

Developments in early 2001 point to a slowdown in growth and some uptick in inflation. Even after regularizing payments to Paris Club creditors, the budget has run a strong surplus that has enabled monetary aggregates to be kept under control despite a further increase in official reserves. The economy has not, to date, been significantly affected by uncertainties in global financial markets with the spread on Russia's Eurobonds declining during the year and a strong increase in Russia's stock market index.

Structural reforms were conducted in the context of the comprehensive structural reform agenda adopted by the government in July 2000. Reforms in the fiscal area were the main achievements in 2000, with the adoption of important tax legislation (i.e., passage of four of the five main chapters of Part II of the Tax Code), and further strengthening of the Treasury. The nonpayments situation improved significantly in 2000, with the share of barter in industrial sales nearly halved to about 20 percent by end-2000, and cash collections at some key infrastructure monopolies doubling in the course of the year. While much of the improvement was related to the strengthened financial conditions in the economy, the reduction in barter and nonpayments also reflected supporting policy measures, including the continued absence of offset operations by the federal government and stricter financial discipline in the economy. On the other hand, reforms lagged in other key areas such as the banking system and restructuring of the power and gas sectors.

Executive Board Assessment

Executive Directors welcomed the completion of the first Post-Program Monitoring discussion on Russia and agreed with the thrust of the staff appraisal. They observed that Russia's macroeconomic performance in 2000 had been impressive, driven by a combination of a favorable external environment—the large real depreciation of the ruble in 1998 and the recent sharp increase in international energy prices—as well as the generally prudent stance of fiscal and monetary policies. While welcoming important structural reforms, particularly the tax reform, they felt that the authorities had not taken sufficient advantage of the positive conditions to advance the structural reform agenda. Directors also noted that the recent slowdown of growth and an uptick in inflation pointed to the need to be vigilant and to adjust the policy stance as necessary to preserve recent macroeconomic gains.

Directors agreed that the authorities' macroeconomic program for 2001 appropriately aims at supporting growth, continuing the disinflation process, and building up external reserves. They also expressed their support for the government's broader structural reform program, noting that it addresses weaknesses in key macroeconomic areas—namely, fiscal and banking reform, the elimination of nonpayments/barter, and the promotion of good governance and transparency in public policy making. Directors noted that, while many of these measures had been part of Fund- and World Bank-supported programs in the past, their inclusion now in the government's own program, and its publication, signal stronger ownership and the likelihood of timely implementation.

Directors considered that the main challenge to short-run economic policy is to manage the strong balance of payments so that it does not weaken growth prospects or ignite inflationary pressures. They stressed that the authorities face the difficult task of creating appropriately tight domestic liquidity conditions to prevent an acceleration of inflation, while seeking to smooth the real appreciation of the ruble so as not to threaten economic growth. To achieve this, the CBR would need to undertake large sterilization operations, and the authorities should ensure that the CBR has an adequate income position as well as a range of instruments for this purpose. In view of the rise in inflation and the need to generate domestic financial saving, many Directors were of the view that the CBR should tighten monetary policy. Some Directors, however, were concerned that raising interest rates could worsen the domestic liquidity management problem. In general, Directors cautioned that a greater contribution from fiscal policy will be needed to contain inflation and ease the burden on monetary policy. This would be all the more important if the balance of payments turns out to be stronger than anticipated. Directors also stressed the importance of better coordination between the CBR and the Finance Ministry in the area of debt management. They noted further that both accelerated trade liberalization and accelerated debt repayments would help Russia deal with the difficult policy trade-offs caused by the very strong current account and the accumulation of foreign exchange reserves.

Looking ahead, Directors welcomed the government's far-reaching structural reform program aimed at improving the business and investment climate. They urged the authorities to implement resolutely their program, as it would strengthen incentives for investment—both foreign and domestic—and reduce capital flight, thereby fostering growth and lowering vulnerability to external shocks. A few Directors commented on the probably negative impact of exchange restrictions on foreign investment in Russia and urged the authorities to review the capital control structure.

Directors stressed that improved governance and transparency would contribute to building public support for the government's reform program. In this regard, they strongly welcomed the government's commitment to further improving governance and transparency, including strengthening steps against money laundering and the publication of economic and financial policies for 2001 and the outline of the medium-term strategy. They also welcomed the authorities' intentions to publish the Report on the Observance of Standards and Codes modules on fiscal policies, monetary and financial policies, and data dissemination, as well as to provide reserve and foreign currency liquidity information to the Fund according to the Special Data Dissemination Standard template.

Directors commended the authorities on the significant improvements to the tax system introduced through the reform of Part II of the Tax Code initiated in 2000. However, they were concerned that revenue losses from the ongoing tax reforms could become too large, and emphasized the importance of maintaining Russia's hard-won fiscal sustainability in the face of the uncertain costs of the structural reform program and the revenue implications of possible future cyclical downturns. Directors welcomed the plans by the authorities to establish an oil stabilization fund and encouraged them to consider carefully its design and its connections to overall fiscal policy. They noted that such a fund could provide resources for structural reforms or debt servicing, while maintaining full financial transparency and accountability.

Directors commented that financial sector reform is essential for the expansion of private sector activity. They urged the authorities to build upon the strategy paper developed by the CBR and to design a forward-looking strategy that would increase the role of private banks—including foreign banks—enhance competition, and move to international accounting standards. Directors urged the authorities not to be sidetracked in this process, but to set an appropriately ambitious timetable and to adhere to it. They welcomed the recent approval by the Duma of a package of measures to strengthen the legislative framework for dealing with bankrupt financial institutions. Directors emphasized that the success of the strategy would depend upon the authorities' ability to overcome strong-vested interests opposed to these reforms.

Directors welcomed the continuing decline in barter transactions and stressed that the authorities need to continue their efforts to strengthen payments discipline in the economy to ensure that the recent decline in barter/nonpayments is not reversed in the event of a cyclical downturn or worsening of the terms of trade. They stressed the importance of continued close monitoring of progress relative to cash collection targets and the implementation of new measures in case of slippages.

Directors considered it appropriate for the Fund to monitor the authorities' program in the context of Post-Program Monitoring procedures. Noting that Russia will face large external debt payments in 2003, they urged the authorities to implement their program resolutely to ensure a continuation of the healthy recent macroeconomic performance, to minimize risks associated with volatile energy prices, and to establish a strong record of policy implementation. The latter will be particularly helpful in the event of any possible future need for Fund financial support.

A number of Directors encouraged the authorities to consider publishing the Post-Program Monitoring staff report.

Russian Federation: Macroeconomic Indicators, 1998-2001

  1998 1999 2000 2001

  (Annual percentage changes)
Production and prices        
     Real GDP -4.9 3.5 7.7 4.0
     Change in consumer prices        
     Period average (on previous period) 27.7 85.7 20.8 17.6
     Within period 84.5 36.6 20.1 14.0
     Change in GDP deflator 12.4 65.1 40.0 17.8
  (In percent of GDP)
Public sector        
     Enlarged government balance -8.0 -3.3 3.0 1.0
     Federal government        
     Overall balance (commitment basis) -5.9 -4.4 1.0 0.8
     Primary balance (commitment basis) -1.3 1.8 5.3 3.9
     Revenue 11.0 13.2 16.2 15.6
     Expenditure (commitment basis) 16.9 17.6 15.2 14.9
     Interest 4.5 6.2 4.3 3.1
     Noninterest 12.3 11.4 10.9 11.7
  (In billions of U.S. dollars unless otherwise indicated)
External sector        
     Total exports, fob 74.9 75.8 105.2 105.0
     Total imports, fob 58.0 39.6 44.2 52.4
     External current account (deficit -) -1.6 22.9 45.3 35.6
     Gross reserves coverage
       (months of imports of GNFS)
1.8 2.8 5.5 6.0
Memorandum items:        
     Nominal GDP (billions of rubles) 2,696 4,607 6,947 8,500
     Exchange rate
       (rubles per U.S. dollar, period average)
9.7 24.6 28.1 ...

Sources: Russian authorities; and IMF staff estimates and projections.

1 Post-Program Monitoring provides for more frequent consultations between the Fund and members whose arrangement has expired but that continue to have Fund credit outstanding, with a particular focus on policies that have a bearing on external viability. There is a presumption that members whose credit outstanding exceeds 100 percent of quota would engage in Post-Program Monitoring.


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