Statement by the IMF Mission to the Russian FederationPress Release No. 09/193
June 1, 2009
An International Monetary Fund (IMF) mission, headed by Poul Thomsen, visited Russia May 21-June 1, 2009 to hold discussions for the annual Article IV Consultation. The discussions focused on the effects of the global economic crisis on the Russian economy, and on the authorities’ policy response. The mission met with First Deputy Prime Minister Shuvalov, Deputy Prime Minister and Finance Minister Kudrin, Central Bank of Russia (CBR) Governor Ignatiev, other senior officials, and representatives of financial institutions, corporations and think tanks. At the conclusion of the visit, Mr. Thomsen made the following statement:
“The global economy is undergoing its worst recession since the 1930s. Global activity is declining, world trade and commodity prices have collapsed, and capital flows to emerging markets have plummeted. The global economy is expected to contract by 1¼ percent in 2009, before recovering gradually in 2010. Moreover, commodity prices are likely to recover only slowly, while global deleveraging by financial institutions is likely to curtail capital inflows to emerging economies. Against this backdrop, Russia’s economic outlook is challenging. Russia has been hit both by lower oil prices and a turnaround in capital flows. In spite of a swift and substantive policy response, Russia’s real GDP is projected to turn from positive growth of 5½ percent in 2008 to a decline of 6½ percent in 2009, and to remain stagnant in 2010.
“The swing in growth is much larger in Russia than in its G-20 peers. This susceptibility to the global business cycle and to the attendant collapse in commodity prices reflects, to some extent, longstanding policy weaknesses. While the oil stabilization fund mechanism—the prudent policy of taxing and saving much of Russia’s oil price windfall—is appropriately absorbing most of the oil price shock transmitted through the external current account, the reversal in capital flows has led to painful adjustments and exposed policy weaknesses. In particular, the pre-crisis policy of controlled ruble appreciation, alongside regulatory and supervisory shortcomings, encouraged excessive foreign currency borrowing at a time when high oil prices increased investor appetite for Russian financial assets. The result was an oil price-related surge in capital inflows and an associated credit boom that left Russia highly vulnerable to shocks through the capital account.
“On the banking side, a comprehensive plan to address the bad assets and associated capital shortfalls is urgently needed. The CBR does not yet have a full picture of the situation in the banking system, and plans for how to ensure that banks are adequately capitalized still need to be formalized. Without a more comprehensive assessment and determined policy, there is a risk that banks will struggle to adjust balance sheets for a prolonged period, with credit and counterparty concerns stifling credit expansion and exacerbating banks’ preference for liquidity. Accordingy, the mission recommends to: (i) conduct detailed reviews and mandatory stress tests of large and medium-sized banks to obtain better estimates of their viability and capital needs; this exercise would enable banks to plan early to increase capital from private sources and the authorities to consider necessary actions, including recapitalization by public funds; (ii) develop regulatory guidance regarding the supervisory actions that the CBR will implement as banks’ capital deteriorates and the level of problem loans increases; and (iii) avoid the imposition of lending and interest rate targets that would risk causing further balance sheet deterioration. The mission has also recommended steps to enhance bank supervision and resolution.
“While Russia’s prudent fiscal management during the oil boom has created room for a fiscal expansion, the composition of the fiscal stimulus could be improved given the need to balance short-term cyclical considerations with medium-term fiscal concerns. The planned shift in Russia’s fiscal position in 2009 may prove hard to reverse when the economy recovers, and risks leaving a spending and tax structure that cannot be sustained without causing overheating and excessively rapid real appreciation over time. Accordingly, the discretionary fiscal stimulus should be curtailed in 2009, by limiting the deterioration in the balance of the general government to a still very sizable 7-8 percent of GDP, compared to the more than 10 percent of GDP currently planned. A better targeted, yet smaller, stimulus could have a similar impact on economic activity, while avoiding a permanent change in the tax and expenditure structure of the budget. Looking ahead, if a smaller discretionary stimulus is implemented in 2009, there would be scope to maintain the fiscal stimulus in 2010 if the growth outlook weakens further.
“The ongoing easing of monetary policy is appropriate in light of the inflation outlook, but the CBR will need to strike a cautious balance between domestic and external stability. The use of the Reserve Fund to cover the government’s financing needs will entail a substantial liquidity injection in 2009, and the CBR will need to manage bank liquidity carefully to avoid undue pressures on the ruble. Given Russia’s large international reserve cushion, there is scope to intervene and sell reserves in the event of abrupt and dramatic shifts in exchange rate expectations and reversal of capital inflows, but the CBR should let the exchange rate move in response to changes in medium-term fundamentals. The increased exchange rate flexibility is welcome and will be critical in reducing entrenched inflation.
“The mission is concerned that support for WTO accession is losing momentum. As the scope for catch-up gains in productivity diminish, long-term growth will become increasingly dependent on boosting investment, including by improving Russia’s investment climate. In this regard, the mission is concerned that the drive to gain accession to the WTO appears to be losing momentum—enhancing competition and reducing rent seeking through early WTO membership remain key to a strengthening of the investment climate. More generally, while many reforms aimed at improving the investment climate and bolstering institutions—including civil service, administrative, and judicial reforms—are technically well advanced, implementation appears to have stalled. The urgency of advancing reforms is heightened by adverse demographic factors, which are leading to a contraction in the labor supply.”