Statement at the Conclusion of the 2011 Article IV Consultation Mission to RussiaPress Release No. 11/232
June 14, 2011
A team from the International Monetary Fund, headed by Mr. Juha Kӓhkӧnen, visited Moscow during June 2-14 to hold discussions for the 2011 Article IV consultation.1 The team met with Deputy Prime Minister Alexei Kudrin, Bank of Russia Governor Sergei Ignatiev, other senior officials, and representatives from the private sector, academia, and think tanks. At the conclusion of the visit, Mr. Kӓhkӧnen issued the following statement:
The key economic challenge facing Russia is to leverage the ongoing commodity boom to put growth on a sustained higher trajectory. This requires breaking with the procyclical policies of the past and reorienting policies in all key areas. Growth is projected at 4.8 percent in 2011 and 4.5 percent in 2012. Unless policies are strengthened, growth is likely to taper off to less than 4 percent in the medium term. Russia would remain vulnerable to external shocks, and drops in the oil price could trigger another recession and reduce medium-term growth further. In contrast, growth-enhancing reforms could lift medium-term growth to 6 percent or more. The 2020 strategy being formulated provides an opportunity to put in place reforms to support stronger growth.
A credible, ambitious, and growth-friendly fiscal consolidation—anchored in a sound framework—would reduce fiscal vulnerabilities. The 2011-13 budget would leave the nonoil deficit high, at 10½ percent of GDP, in 2013. Reducing fiscal vulnerabilities requires a larger and faster fiscal adjustment. The authorities’ long-term nonoil deficit target of 4.7 percent of GDP, suspended during the crisis, is consistent with fiscal sustainability and equitable intergenerational use of the oil wealth. Concrete plans—grounded in growth-friendly measures, including a reversal of the payroll tax increase, reductions in subsidies and tax exemptions, and better targeting of social transfers—should be laid out to reach this target by 2015. Durable adjustment will also require fundamental reforms, including to pensions, social protection, and healthcare. Front-loading the consolidation would enhance the credibility of adjustment, and help to rebuild earlier the oil funds. Moreover, a stronger fiscal framework would improve the effectiveness of fiscal policy. Key actions in this regard would include refraining from supplementary budgets to avoid procyclical increases in spending; creating an independent fiscal agency tasked with conducting impartial and transparent fiscal analysis and assessment of fiscal policy implementation; and improving public procurement to increase the efficiency of government spending. The planned comprehensive accounting of tax exemptions is welcome, since it would help in prioritizing the use of budget resources and increase transparency.
A more decisive monetary tightening—underpinned by a flexible exchange rate, an improved monetary framework, and better communication—would help to bring down and anchor inflation. Without further tightening, inflation will remain well outside the Bank of Russia’s target range of 6-7 percent for 2011. Continued policy tightening—through further rate increases and withdrawal of excess liquidity—will therefore be needed this year. This would also help to reduce inflation to 6 percent by 2012 and to 3-5 percent over the medium term. The tightening should be supported by a consistent communication policy, the transparency of which could be increased by publishing information on inflation expectations and medium-term inflation forecasts. Further improvements to the monetary framework would enhance the effectiveness of the policy tightening. These would include a continued narrowing of the policy interest rate corridor, streamlining the set of policy instruments, draining excess bank liquidity, and creating a binding policy interest rate at the center of the corridor. Ongoing steps by the Central Bank of Russia toward greater exchange-rate flexibility are welcome, as they create room for monetary policy to focus more squarely on inflation and also provide a shock absorber if capital inflows were to resume.
A stronger financial sector would underpin faster growth. In the banking sector, key improvements would include greater supervisory authority for the Bank of Russia, including legislation on connected lending and consolidated supervision; greater discretion to use “professional judgment” in applying laws and regulations to individual banks; and putting in place a clearer and more coherent framework for prompt remedial action. In the nonbank sector, the recent merger of securities and insurance supervision offers an opportunity for improved supervision, provided that the new agency is given adequate powers and resources. Given the concentration in the financial sector, effective systemic risk monitoring is imperative, and the establishment of a working group under the Presidential Council and a new department at the Bank of Russia in charge of macroprudential analysis is welcome.
Better governance and a more welcoming business environment would help to attract productive investment and facilitate economic diversification. Adverse demographic trends suggest that investment and productivity gains will have to be the primary engines of long-term growth. Accordingly, the recently-announced 10-point plan to improve the investment climate should be implemented expeditiously. The creation of a private equity fund could encourage foreign investment by reducing operational uncertainties, but its political independence should be ensured and contingent liabilities contained. Broader governance reforms are needed, including strengthening of property rights and the rule of law, and reform of the judiciary system and civil service. Accession to the World Trade Organization would also improve the business climate through increased predictability of the government’s trade policies. Decisive implementation of the planned privatization—including in the banking sector—should help to curtail state dominance, improve competition, and reduce moral hazard.
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with its member countries, 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. In September 2010, the IMF made stability assessments under the Financial Sector Assessment Program (FSAP) a mandatory part of IMF surveillance every five years for 25 jurisdictions with systemically important financial sectors, including Russia. Accordingly, in parallel with the 2011 Article IV consultation, Russia is also undergoing an FSAP update; see press statement of the FSAP mission that visited Russia in April (http://www.imf.org/external/np/sec/pr/2011/pr11132.htm) and summary of its key findings and recommendations (http://www.imf.org/external/np/ms/2011/041211.htm).