Statement by the IMF Mission to the Russian Federation

Press Release No. 08/225
September 26, 2008

An International Monetary Fund (IMF) mission, headed by Poul Thomsen, visited the Russian Federation September 22-25 to hold discussions with the country's authorities on the recent turmoil in international and Russian financial markets. Discussions focused on the implications for Russia's macroeconomic outlook, financial sector stability, and on the best policy response to this turmoil. The mission held discussions with Russian senior officials, including with Finance Minister Alexei Kudrin and Central Bank Governor Sergei Ignatiev, and with representatives of a large number of financial institutions. At the conclusion of the mission, Mr. Thomsen made the following statement yesterday in Moscow:

"The less favorable external environment and the downturn in Russian financial markets will cause some weakening in GDP growth, but Russia is well positioned to avoid a sharp and lasting reduction in growth, provided the policy response is appropriate and timely. In this regard, some slowdown is warranted in as much as the economy has been overheating, with GDP growth running well above potential and inflation increasing rapidly until recently. We have reduced our forecast for Russia's GDP growth to 7.1 percent in 2008 and to 6-6½ percent in 2009.

"Our projection reflects that the Russian economy is relatively well cushioned against adverse shocks. This owes much to the sound fiscal policy in recent years: (i) the policy of saving most of the oil revenue windfall in the stabilization fund means that about 85 percent of the revenue loss as oil prices decline will be absorbed by the stabilization fund. This will significantly limit the negative impact on the economy; and (ii) the resulting decline in the fiscal surplus will not lead to an unsustainable position as the federal budget will still be balanced at an oil price of about US$60 per barrel in 2009, despite spending increases in recent years. There are other important buffers: the external current account will record a surplus of around 3 percent of GDP next year, despite much lower oil prices; and foreign reserves are very large.

"A well-considered, comprehensive and timely policy response will be key to preventing a sharper and more sustained negative impact on growth and employment. While automatic fiscal stabilizers, in particular through reduced savings in the stabilization fund, should be allowed to work, discretionary fiscal relaxation should be avoided. At this stage, the expected weakening in GDP growth is not so large as to justify such a fiscal stimulus. Indeed, a discretionary relaxation—be it by increasing spending or cutting taxes—could further weaken investor confidence by raising concern about medium-term fiscal sustainability. We would also advise against government intervention in the equity market, as this could distort and delay market adjustment, thereby increasing volatility.

"At this juncture, the policy response should focus on maintaining liquidity in the banking system. The mission believes that the measures taken by the Central Bank of Russia (CBR) and the Ministry of Finance in this regard have been appropriate and timely. While the fragmentation of the interbank market poses a challenge, the authorities have struck a good balance between targeting the liquidity support on large and systemically important banks, while providing direct support of all banks through the easing of reserve requirements. Large capital outflows through the banking system would be a signal that this liquidity support is becoming excessive. But even if such outflows are avoided, capital is likely to continue to flow out of Russia on a net basis in the coming months as the carry-trade that had been fuelled by expectations of ruble appreciation continues to unwind and as banks and enterprises will likely find it difficult to fully roll-over external liabilities. Reflecting this, we expect a notable slowdown in credit growth—from levels that were clearly excessive—during the remainder of 2008 and into 2009. In this regard, the mission would warn against resisting this slowdown by investing the National Wealth Fund domestically. More generally, once confidence returns banks should again be able to mobilize sufficient market based funding—domestically and externally—and we would caution against putting in place permanent sources of official long-term financing of the banking system as this could undermine monetary policy when conditions in financial markets normalize. Policy measures should focus on preserving confidence in the banking system.

"The CBR has acted decisively and timely to the problems that have arisen in a few banks so far. While problems in additional banks can not be ruled out, we see no systemic risks. A recent update of the Financial Sector Assessment Program (FSAP) by financial sector experts found that the crisis-resolution framework has improved significantly since the 2004 turmoil and that it is now broadly appropriate. Moreover, the comprehensive deposit insurance scheme that has been put in place will help prevent adverse spillovers to the banking system as a whole if individual banks fail. Overall, the mission is confident that the CBR has the tools and determination to preserve the stability of Russia's financial system by intervening in weak banks in a timely manner."



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