## cr18275

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### 1. Alternative Scenario: context, recent developments, and medium-term outlook
- Context: low growth rates underscore urgency of reforms
  - Convergence to advanced economy income levels has stalled; recent growth and prospects fall short of peers in Eastern Europe.
  - Structural constraints: large footprint of the state, high economic concentration, excessive regulation, governance and institutional weaknesses, inadequate infrastructure.
  - Fall in oil prices and 2014 sanctions raised uncertainty and dampened domestic and foreign private investment.
  - Authorities implemented a strong macroeconomic policy framework: a prudent fiscal rule, inflation targeting, and a flexible exchange rate.
- Recent developments and near-term outlook
  - Real activity increased by 1.5 percent in 2017.
  - Growth is expected to reach 1.7 percent in 2018.
  - One-off public investment projects supported growth in H1 2017; momentum slowed in H2 2017 due to the OPEC+ deal and weak manufacturing.
  - Headline CPI in May 2018: 2.4 percent; Core inflation in May 2018: 2.0 percent; End-2018 inflation projected at 3.5 percent.
  - External debt fell by 7 percent of GDP in 2017.
  - Reserves reached 264 percent of the ARA metric at end-2017 (247 percent a year earlier).
  - Staff assesses the external position in 2017 as moderately weaker than fundamentals and desirable policy settings.
  - New US sanctions in April 2018 resulted in a 5 percent real effective depreciation.
- Medium-term outlook and risks
  - Without structural reforms, growth expected to settle around 1.5 percent over the medium run.
  - Monetary policy expected to stabilize inflation around 4 percent by end-2019.
  - Risk factors: geopolitical tensions, retreat from cross-border integration (new US sanctions; new US tariffs on finished steel and aluminum), domestic risks from higher oil prices weakening reform resolve, incomplete banking sector cleanup, re-acceleration of credit growth (especially unsecured household credit).
  - Direct impact of new tariffs: about ½ percent of Russia’s exports; potential second-round price effects could affect a larger share of industry.
  - Spillovers from April 6 sanctions likely limited unless tensions escalate; main channel would be exchange rate depreciation affecting neighboring countries with thin FX reserves and dollarized systems.
  - Authorities estimate current account norm lower than staff (in range of 0 to 1 percent of GDP at the benchmark oil price under the fiscal rule).

### 2. Fiscal policy: consolidation, proposed spending, and staff advice
- Fiscal consolidation progress and targets
  - General government overall budget deficit: 3.6 percent of GDP in 2016 → 1.5 percent in 2017.
  - 2018–20 budget targets a zero primary balance by 2019 at the benchmark oil price.
  - Given actual oil prices substantially higher than the benchmark, a large primary surplus is likely as early as 2018.
- New government plans and financing options
  - Increase spending on infrastructure, health, and education by RUB 8 trillion over next six years (about 1.1 percent of GDP per annum, on average).
  - Financing options under discussion:
    - Raise revenues: increase main VAT rate from 18 to 20 percent; shift oil sector taxation from export duties to mineral extraction taxes (MET).
    - Re-prioritize spending, including savings from raising retirement age; government committed to increasing pensions in real terms.
    - Temporarily relax the fiscal rule.
- Staff advice
  - Cautioned against revisiting the fiscal rule shortly after implementation.
  - Russia has fiscal space due to low public debt and limited financing needs, but consolidation should continue to rebuild buffers.
  - Relaxing the rule could weaken credibility and be procyclical given a closing output gap, possibly requiring monetary tightening.
  - Current adjustment relies excessively on across-the-board spending freezes; quality of measures could be improved.
  - Further consolidation of 0.5–1.5 percent of GDP is needed over the medium term to reach a nonoil primary balance consistent with intergenerational equity.

### 3. Box 1 — Alternative Scenario: assumptions, macroeconomic impact, and projections
- Key assumptions
  - Public spending on health and education increases permanently in 2019 by about 0.6 percent of GDP annually, financed mostly by a higher main VAT rate and some expenditure savings from parametric pension reform.
  - Public infrastructure expenditure increases by about 0.5 percent of GDP over 2019–24, entirely financed by new public debt, requiring a temporary relaxation of the fiscal rule.
  - Potential GDP is assumed unchanged from the baseline (staff unable to estimate impact on potential GDP given lack of detail).
- Dynamics and transmission
  - Expansionary fiscal impulse pushes growth above potential in 2019–21 and opens a positive output gap.
  - Fiscal multiplier around unity initially, declines as wages and prices increase and monetary policy tightens.
  - Inflation accelerates substantially above the CBR’s 4 percent target due to higher VAT and demand pressures; monetary policy responds and inflation converges to target by 2025 as growth falls below potential.
  - Current account surplus slightly lower than baseline due to higher imports.
  - Overall fiscal balance deteriorates by about 0.5 percent of GDP over 2019–24; public debt increases just above 20 percent of GDP by 2025.
  - Authorities’ view: expect extra infrastructure investment and improved spending mix to have a positive impact on potential GDP; agreed staff assumption of no impact on potential GDP given scarcity of information.
- Scenario comparison (percent of GDP, unless otherwise indicated) — staff estimates and projections
  - Real GDP growth (%)
    - baseline: 2018 1.7; 2019 1.5; 2020 1.5; 2021 1.5; 2022 1.5; 2023 1.5; 2024 1.5; 2025 1.5
    - alternative: 2018 1.7; 2019 2.0; 2020 2.0; 2021 1.7; 2022 1.2; 2023 1.2; 2024 1.2; 2025 1.2
  - Output gap (%)
    - baseline: all years 0.0
    - alternative: 2018 0.0; 2019 0.5; 2020 1.0; 2021 1.2; 2022 0.9; 2023 0.6; 2024 0.3; 2025 0.0
  - Average CPI inflation (%)
    - baseline: 2018 2.9; 2019 4.0; 2020 4.0; 2021 4.0; 2022 4.0; 2023 4.0; 2024 4.0; 2025 4.0
    - alternative: 2018 2.9; 2019 5.8; 2020 5.0; 2021 5.0; 2022 4.8; 2023 4.6; 2024 4.3; 2025 4.0
  - Current account
    - baseline: 2018 6.1; 2019 5.7; 2020 4.9; 2021 4.7; 2022 4.5; 2023 4.1; 2024 4.0; 2025 4.1
    - alternative: 2018 6.1; 2019 5.6; 2020 4.8; 2021 4.5; 2022 4.4; 2023 4.0; 2024 3.9; 2025 4.1
  - Fiscal aggregates (percent of GDP)
    - General government revenue
      - baseline: 2018 36.2; 2019 35.3; 2020 34.8; 2021 34.5; 2022 34.3; 2023 34.1; 2024 34.0; 2025 33.9
      - alternative: 2018 36.2; 2019 35.8; 2020 35.3; 2021 34.9; 2022 34.8; 2023 34.6; 2024 34.5; 2025 34.4
    - General government expenditures
      - baseline: 2018 33.9; 2019 32.4; 2020 32.4; 2021 32.7; 2022 33.0; 2023 33.1; 2024 33.2; 2025 33.3
      - alternative: 2018 33.9; 2019 33.4; 2020 33.4; 2021 33.6; 2022 33.9; 2023 34.0; 2024 34.1; 2025 33.7
    - Net lending/borrowing (overall balance)
      - baseline: 2018 2.2; 2019 2.9; 2020 2.4; 2021 1.8; 2022 1.3; 2023 1.0; 2024 0.8; 2025 0.6
      - alternative: 2018 2.2; 2019 2.4; 2020 1.9; 2021 1.3; 2022 0.8; 2023 0.5; 2024 0.3; 2025 0.6
    - Public debt
      - baseline: 2018 16.1; 2019 15.6; 2020 15.5; 2021 15.6; 2022 15.8; 2023 16.0; 2024 16.2; 2025 16.4
      - alternative: 2018 16.1; 2019 16.0; 2020 16.4; 2021 17.2; 2022 18.0; 2023 18.9; 2024 19.8; 2025 20.3

### 4. Public investment, infrastructure, health, education, and social assistance
- Findings
  - Substantial infrastructure gaps, especially for roads but also for air transport and ports.
  - Public health expenditure is relatively low and should increase, but increases should go together with increasing the efficiency of such spending.
  - Pension indicators: current retirement ages 55/60 years for women/men; pension spending projected to increase; early retirement provisions are generous leading to an average effective retirement age substantially below the statutory one.
  - Social assistance expenditure is relatively high and appears thinly spread; social benefits could be better targeted to reduce poverty given constrained fiscal space.
  - Capital stock and infrastructure quality indicators incorporate World Economic Forum Global Competitiveness Index rankings (perception-based).
- Policy recommendations on public spending
  - Additional spending should be allocated within the confines of the fiscal rule.
  - Eliminate tax expenditures (around 2.8 percent of GDP) and reprioritize spending.
  - Parametric pension reform, including raising the statutory retirement age and limiting early retirement, remains critical for intergenerational equity.
  - Social benefits should be better targeted (means-testing) to reduce poverty while respecting constrained fiscal space.
- Authorities’ views
  - Re-affirmed strong support for the fiscal rule, particularly for maintaining the current benchmark oil price.
  - Discussing temporarily relaxing the requirement for a primary fiscal balance at the benchmark oil price to pay for needed infrastructure spending.
  - Believe additional debt-financed infrastructure spending of around 0.5 percent per year is unlikely to weaken credibility or result in overheating, as the multiplier is low.
  - Committed to a balanced package of tax reforms; precludes eliminating certain tax expenditures under VAT and PIT.
  - Committed to parametric pension reform and means-testing new social assistance while maintaining overall social spending to reduce poverty.
  - Plan to complete shift in oil sector taxation over the next six years, expected to be revenue-enhancing.

### 5. Monetary policy: recent actions and staff advice
- Recent actions
  - Since June 2017, the CBR cut its policy rate by a cumulative 200 bps, to 7.25 percent.
  - The CBR paused monetary easing in April and June 2018 following the April 6 round of US sanctions.
  - CBR estimates the neutral policy rate closer to the upper bound of the 6–7 percent range; policy stance moderately tight.
  - CBR decided not to make horizon-bound commitments; seeks to keep inflation close to 4 percent at all times.
  - In May 2018, CBR released its first information notice about its key rate decision-making process.
- Staff recommendations
  - Complete transition to a neutral policy stance, assuming current tight fiscal stance is sustained.
  - Maintain gradual and data-driven approach because inflation expectations are not yet firmly anchored and could drift up due to ruble depreciation, higher energy prices, strong growth in real wages, or possible fiscal changes.
  - Ensure inflation expectations do not move persistently below the target.
  - Refine communication strategy: reinforce that policy decisions target inflation forecasts rather than current inflation; elaborate acceptable deviations from the inflation target and over what time horizon.
- Authorities’ views
  - Agreed on pursuing gradual easing toward a neutral stance.
  - CBR argues equilibrium real interest rate has shifted up; neutral rate closer to upper bound of the 6–7 percent range.
  - CBR consistently refers to 4 percent inflation target; developed a regional communication program; does not see need to publish a path for projected interest rates now.

### 6. Macro-financial policies, banking sector developments, and resolution
- Banking sector performance and risks
  - Failures of three large private banks in H2 2017 weakened overall performance.
  - Aggregate profits declined for the first time since 2015, mainly due to additional provisioning for NPLs by banks under resolution.
  - NPLs increased from 9.7 percent in March 2017 to 10.7 percent in March 2018.
  - Aggregate capital adequacy dipped below 13 percent in late 2017, recovered to 13 percent in March 2018; regulatory minimum 8 percent.
  - CBR closed another 62 credit institutions in 2017 (compared to 110 in 2016), total credit institutions 561 at end-2017, down from 923 at end-2013.
  - CBR implemented temporary regulatory forbearance for loans to borrowers affected by new US sanctions until end-2018.
- Credit growth (selected)
  - Overall private sector credit grew by about 11 percent in April 2018 in nominal terms (8.5 percent in real terms).
  - Retail lending growth: about 17 percent y-o-y since mid-2016.
  - Consumer lending (excluding real estate and car loans): about 14 percent.
  - Mortgage lending: around 18 percent.
  - Corporate lending: 9 percent y-o-y, adjusted for exchange rate valuation effects.
  - SME lending is still declining.
- Resolution costs and bad bank plan
  - CBR rescued several private banks using the new resolution framework providing equity capital injections via the Banking Sector Consolidation Fund (BCF).
  - Resolution costs estimated at over 2 percent of GDP, including CBR backstop funding for deposit insurance payouts and liquidity and capital injections.
  - Distressed asset fund (“bad bank”) to be established using a subsidiary of one of the large rescued banks.
  - Bad assets of large failed private banks estimated at 2.1 trillion rubles (around $34 billion or 2.1 percent of GDP).
  - “Bad bank” expected to become operational in the second half of 2018; would be privately managed, potentially by an equity fund.
- Supervisory and macroprudential measures
  - Risk Analysis Service initiated elements of an Asset Quality Review (AQR).
  - New regulation effective January 2017 limits related-party exposures at 20 percent of banks’ total regulatory capital.
  - Draft federal law on communication protocols between auditors and the CBR passed first reading in State Duma in December 2017.
  - Calculation of payment-to-income ratios mandatory in January 2019.
  - CBR continues to develop and refine stress-testing methodologies, including macroprudential stress-testing.

### 7. Bank supervision, regulation, and recommendations
- Findings on supervision and regulation
  - Risk Analysis Service welcome but needs to complete evaluations and align with best international practices.
  - Legal framework for related party exposures and external auditors could be strengthened further.
  - Supervision could be enhanced by enabling CBR to exercise professional judgment as part of explicit early intervention; strengthening ex post communication on resolution decisions; ensuring credible strategy for returning rehabilitated banks to private hands.
  - Stress-testing capacity could benefit from improved internal cooperation between Banking Supervision and Financial Stability Departments.
  - Improve AML/CFT effectiveness, including PEPs and beneficial ownership transparency.
- Structural recommendations for the banking sector
  - Target governance and risk management improvements in SOBs.
  - Reduce concentration and level the playing field between private and state-owned banks.
  - Gradually reduce the state’s footprint in the banking sector with careful sequencing and credible privatization stewards.
  - Recognize substantial heterogeneity in performance, efficiency, and competitive behavior among banks.

### 8. State footprint, competition, and structural reform priorities
- Staff estimates and observations
  - State’s share in economy around 30–35 percent; increased in banking and oil and gas industries in recent years.
  - Russian state accounts for close to 40 percent of formal sector activity and for 50 percent of formal sector employment.
  - Staff estimates suggest state accounted for about one-third of Russia’s VA in 2016; in last five years state share in VA increased significantly in energy and banking, but only slightly overall (from 31 to 33 percent of GDP); state accounted for about 38 percent of formal sector VA.
  - Out of about 32,500 SOEs, around 500 represent more than 85 percent of revenues.
- Issues and policy recommendations
  - Most SOE procurement occurs through non-competitive methods; supplier concentration is high.
  - Medium-term objective: reduce state’s footprint with careful sequencing to avoid increasing concentration via privatization.
    - First gear: enhance competition, promote market entry, level playing field in public procurement.
    - Develop clear exit strategy for sectors lacking economic rationale for state ownership, including banking—strategy should be competition-enhancing.
    - Tackle institutional and governance issues, reduce excessive regulations and customs procedures.
  - Short-term priorities: feasible measures with high productivity impact; proposed boost to investment in physical and human capital should be deficit-neutral.
  - Persist with efforts to strengthen competitiveness, promote trade integration, and diversify exports to accelerate TFP growth.
  - Continue implementing the fiscal rule, which "has weakened the impact of oil prices on the real exchange rate" and should help facilitate export diversification.

### 9. Staff appraisal: macro outlook, fiscal and monetary guidance, and financial sector reform
- Macroeconomic outlook and structural impediments
  - Despite ongoing recovery, medium-term outlook remains weak; projected growth rates imply Russia would lag peers in Eastern Europe and not catch up with per capita incomes in advanced economies.
  - Contributing factors: insufficient infrastructure; large state footprint; governance and institutional weaknesses increasing concentration and stifling dynamism; slow global integration; geopolitical uncertainty.
  - External position in 2017 moderately weaker than suggested by fundamentals and desirable policy settings.
- Fiscal policy guidance
  - Fiscal rule shields economy from oil price fluctuations and should facilitate diversification; staff recommend resisting revision of the fiscal rule.
  - Fiscal consolidation should continue to rebuild buffers; quality of measures could be improved.
  - Further consolidation of 0.5–1.5 percent of GDP needed over medium term to reach a nonoil primary balance consistent with intergenerational equity.
  - Encourage growth-friendly, deficit-neutral shift from social security contributions to consumption taxes.
  - Consider re-prioritizing spending, strengthening tax compliance, reducing tax expenditures under VAT and PIT to finance priorities.
  - Social assistance should be better targeted; parametric pension reform could help offset demographic trends and provide fiscal space.
- Monetary policy guidance
  - With headline inflation below 4 percent and low underlying pressures despite closing output gap, further monetary easing appears appropriate.
  - CBR should maintain gradual, data-driven approach; continue refining communication strategy to strengthen credibility and reduce inertia in inflation expectations.
- Financial sector reforms and supervision
  - Renew efforts to close gaps in bank supervision and regulation, complete banking sector cleanup, intensify supervision of related-party lending, swiftly complete independent asset quality evaluations aligned with best practices, enable CBR to exercise professional judgment, and develop credible strategy for returning rehabilitated banks to private hands.

### 10. Selected macroeconomic and financial statistics (highlights)
- Real GDP (annual percent change, selected): -2.5 (2015), -0.2 (2016), 1.5 (2017), 1.7 (2018), 1.5 (2019–2023).
- Unemployment rate: 5.6 (2015), 5.5 (2016), 5.2 (2017), 5.5 (2018–2023).
- Consumer prices (period average): 15.5 (2015), 7.1 (2016), 3.7 (2017), 2.9 (2018), 4.0 (2019–2023).
- Current account (percent of GDP): 4.9 (2015), 1.9 (2016), 2.2 (2017), 6.1 (2018), 5.7 (2019), 4.9 (2020), 4.7 (2021), 4.5 (2022), 4.1 (2023).
- Gross international reserves (GIR, billions USD): 368.4 (2015), 377.7 (2016), 432.7 (2017), 498.3 (2018), 559.8 (2019), 613.3 (2020), 660.7 (2021), 701.3 (2022), 738.5 (2023).
- General government revenue (percent of GDP): 31.8 (2015), 32.7 (2016), 33.3 (2017), 36.2 (2018).
- General government expenditures (percent of GDP): 35.1 (2015), 36.4 (2016), 34.8 (2017), 33.9 (2018).
- Net lending/borrowing (overall balance, percent of GDP): -3.4 (2015), -3.6 (2016), -1.5 (2017), 2.2 (2018).
- Public debt (percent of GDP, baseline projections): 11.6 (2016), 16.1 (2017), 15.5 (2018), 16.1 (2019), 15.5 (2020).
- Banking sector indicators (selected): NPLs to total loans: 6.7 (2014), 8.3 (2015), 9.4 (2016), 10.0 (2017). Capital to risk-weighted assets: 12.5 (2014), 12.7 (2015), 13.1 (2016), 12.1 (2017).
- Bad assets of failed private banks estimated at 2.1 trillion rubles (around $34 billion or 2.1 percent of GDP).

### 11. Annex highlights — implementation of past IMF and FSAP recommendations; data and surveillance
- Fiscal rule implementation and fiscal policy
  - New fiscal rule expected to fully come into force in 2019; requires a zero primary balance at benchmark oil price of $40 per barrel.
  - Further consolidation and quality improvements needed; parametric pension reform under discussion.
  - VAT increase from 18 to 20 percent and shift in oil taxation to MET over 2019–24 noted in legislative actions.
  - Budget Code amended to establish temporary infrastructure fund financed by relaxing the fiscal rule by 0.5 percent of GDP on average over 2019–24.
- FSAP recommendations (implementation status, selected)
  - AQR: CBR initiated some elements via Risk Analysis Service; more effort needed to complete evaluations and align with best practices.
  - Stress-testing: in progress; first macroprudential stress testing of financial sector undertaken in 2017.
  - Related-party lending limit: implemented (20 percent of bank equity capital effective January 1, 2017).
  - Legal and resolution framework: new resolution mechanism introduced; further legal and operational changes needed to fully implement FSB Key Attributes and effective P&A transactions.
  - Liquidity management: FX repo framework and ELA facility implemented in 2017; T-bill program not re-established.
- Data and statistics
  - Data provision broadly adequate for surveillance; scope for improvements in national accounts, seasonally adjusted GDP, monetary statistics in SRF format, and further enhancements to external sector statistics.
  - Russia is an SDDS subscriber since 2005; plans to revamp SDDS National Summary Data Page to disseminate data in SDMX.
  - Selected data reporting frequencies and latest observations provided (e.g., GDP/GNP 2017:Q4; External Current Account Balance 2018:Q1).

*International Monetary Fund staff summary of "1. Alternative Scenario" from the Russian Federation report.*

### 1. Alternative Scenario ____________________________________________________________________________ 9

### 1. Alternative Scenario

### Context: low growth rates underscore the urgency of reforms
- Russia’s convergence to advanced economy income levels has stalled; recent growth and prospects fall short of peers in Eastern Europe.
- Structural constraints include: a large footprint of the state, high economic concentration, excessive regulation, governance and institutional weaknesses, and inadequate infrastructure.
- The fall in oil prices and the 2014 sanctions raised uncertainty and dampened domestic and foreign private investment.
- The authorities implemented a strong macroeconomic policy framework: a prudent fiscal rule, inflation targeting, and a flexible exchange rate.

### Recent economic developments and near-term outlook
- Recovery from the 2015–16 recession supported by policy response and higher oil prices.
- Output:
  - Real activity increased by 1.5 percent in 2017.
  - Growth is expected to reach 1.7 percent in 2018.
- One-off public investment projects supported growth in H1 2017 (2018 World Cup, Power of Siberia pipeline); momentum slowed in H2 2017 due to the OPEC+ deal and weak manufacturing.
- Inflation:
  - Headline CPI in May 2018: 2.4 percent.
  - Core inflation in May 2018: 2.0 percent.
  - End-2018 inflation projected at 3.5 percent.
- External sector and buffers:
  - External debt fell by 7 percent of GDP in 2017.
  - Reserves reached 264 percent of the ARA metric at end-2017 (247 percent a year earlier).
  - Staff assesses the external position in 2017 to have been moderately weaker than fundamentals and desirable policy settings.
  - New US sanctions in April 2018 resulted in a 5 percent real effective depreciation.

### Medium-term outlook and risks
- Without structural reforms, growth expected to settle around 1.5 percent over the medium run.
- Monetary policy expected to stabilize inflation around 4 percent by end-2019.
- Risk factors:
  - Diminished risk from persistently lower oil prices.
  - Increased risks from geopolitical tensions and retreat from cross-border integration (new US sanctions; new US tariffs on finished steel and aluminum).
  - Direct impact of new tariffs: about ½ percent of Russia’s exports; potential second-round price effects could affect a larger share of industry.
  - Domestic risks: higher oil prices could weaken reform resolve; incomplete banking sector cleanup and re-acceleration of credit growth—especially unsecured household credit—could build non-performing assets.
- Spillovers from April 6 sanctions likely limited unless geopolitical tensions escalate further; main channel would be exchange rate depreciation affecting neighboring countries with thin FX reserves and dollarized systems.
- Authorities’ views: broadly shared staff’s assessment on cyclical position, growth outlook, and risks; estimate current account norm lower than staff (in range of 0 to 1 percent of GDP at the benchmark oil price under the fiscal rule).

### Policy discussions: priorities to seize the reform opening
- Main policy priorities discussed:
  - Persist with fiscal consolidation, while engineering growth-friendly shifts in taxes and spending.
  - Continue monetary policy easing toward a neutral stance and refine central bank communication.
  - Further strengthen supervision, improve bank resolution framework, and lower the state’s footprint and concentration in the financial sector.
  - Restart structural reforms to address long-standing weaknesses and strengthen competitiveness.

### Fiscal policy: engineering growth-friendly shifts while persisting with consolidation
- Fiscal consolidation progress:
  - General government overall budget deficit: 3.6 percent of GDP in 2016 → 1.5 percent in 2017.
  - 2018–20 budget targets a zero primary balance by 2019 at the benchmark oil price.
  - Given actual oil prices substantially higher than the benchmark, a large primary surplus is likely as early as 2018.
- New government plans:
  - Increase spending on infrastructure, health, and education by RUB 8 trillion over next six years (about 1.1 percent of GDP per annum, on average).
  - Financing options under discussion:
    - Raise revenues: increase main VAT rate from 18 to 20 percent; shift oil sector taxation from export duties to mineral extraction taxes (MET).
    - Re-prioritize spending, including savings from raising retirement age; but government committed to increasing pensions in real terms.
    - Temporarily relax the fiscal rule.
  - Box 1 presents a hypothetical alternative scenario where the fiscal rule is temporarily relaxed and additional spending is financed by a mix of revenue, expenditure measures, and new public debt.
- Staff advice:
  - Cautioned against revisiting the fiscal rule shortly after implementation.
  - Russia has fiscal space due to low public debt and limited financing needs, but consolidation should continue to rebuild buffers.
  - Relaxing the rule could weaken credibility and be procyclical given a closing output gap, possibly requiring monetary tightening.
  - Current adjustment relies excessively on across-the-board spending freezes; quality of measures could be improved.
  - Further consolidation of 0.5–1.5 percent of GDP is needed over the medium term to reach a nonoil primary balance consistent with intergenerational equity.

### Box 1 — Alternative Scenario: assumptions and macroeconomic impact
- Assumptions:
  - Public spending on health and education increases permanently in 2019 by about 0.6 percent of GDP annually, financed mostly by a higher main VAT rate and some expenditure savings from parametric pension reform.
  - Public infrastructure expenditure increases by about 0.5 percent of GDP over 2019–24, entirely financed by new public debt, requiring a temporary relaxation of the fiscal rule.
  - Potential GDP is assumed unchanged from the baseline (staff unable to estimate impact on potential GDP given lack of detail).
- Dynamics and transmission:
  - Expansionary fiscal impulse pushes growth above potential in 2019–21 and opens a positive output gap.
  - Fiscal multiplier around unity initially, declines as wages and prices increase and monetary policy tightens.
  - Inflation accelerates substantially above the CBR’s 4 percent target due to higher VAT and demand pressures; monetary policy responds to demand pressures, with inflation converging to target by 2025 as growth falls below potential.
  - Current account surplus slightly lower than baseline due to higher imports.
  - Overall fiscal balance deteriorates by about 0.5 percent of GDP over 2019–24; public debt increases just above 20 percent of GDP by 2025.
- Authorities’ view:
  - Expect extra infrastructure investment and improved spending mix to have a positive impact on potential GDP.
  - Agreed staff assumption of no impact on potential GDP is understandable given scarcity of information.
  - Noted the CBR’s track record suggests a substantial inflation or output gap is unlikely to persist for an extended period.

- Scenario comparison (percent of GDP, unless otherwise indicated) — staff estimates and projections:
  - Real GDP growth (%)
    - baseline: 2018 1.7; 2019 1.5; 2020 1.5; 2021 1.5; 2022 1.5; 2023 1.5; 2024 1.5; 2025 1.5
    - alternative: 2018 1.7; 2019 2.0; 2020 2.0; 2021 1.7; 2022 1.2; 2023 1.2; 2024 1.2; 2025 1.2
  - Output gap (%)
    - baseline: all years 0.0
    - alternative: 2018 0.0; 2019 0.5; 2020 1.0; 2021 1.2; 2022 0.9; 2023 0.6; 2024 0.3; 2025 0.0
  - Average CPI inflation (%)
    - baseline: 2018 2.9; 2019 4.0; 2020 4.0; 2021 4.0; 2022 4.0; 2023 4.0; 2024 4.0; 2025 4.0
    - alternative: 2018 2.9; 2019 5.8; 2020 5.0; 2021 5.0; 2022 4.8; 2023 4.6; 2024 4.3; 2025 4.0
  - Current account
    - baseline: 2018 6.1; 2019 5.7; 2020 4.9; 2021 4.7; 2022 4.5; 2023 4.1; 2024 4.0; 2025 4.1
    - alternative: 2018 6.1; 2019 5.6; 2020 4.8; 2021 4.5; 2022 4.4; 2023 4.0; 2024 3.9; 2025 4.1
- Fiscal aggregates (percent of GDP)
  - General government revenue
    - baseline: 2018 36.2; 2019 35.3; 2020 34.8; 2021 34.5; 2022 34.3; 2023 34.1; 2024 34.0; 2025 33.9
    - alternative: 2018 36.2; 2019 35.8; 2020 35.3; 2021 34.9; 2022 34.8; 2023 34.6; 2024 34.5; 2025 34.4
  - General government expenditures
    - baseline: 2018 33.9; 2019 32.4; 2020 32.4; 2021 32.7; 2022 33.0; 2023 33.1; 2024 33.2; 2025 33.3
    - alternative: 2018 33.9; 2019 33.4; 2020 33.4; 2021 33.6; 2022 33.9; 2023 34.0; 2024 34.1; 2025 33.7
  - Net lending/borrowing (overall balance)
    - baseline: 2018 2.2; 2019 2.9; 2020 2.4; 2021 1.8; 2022 1.3; 2023 1.0; 2024 0.8; 2025 0.6
    - alternative: 2018 2.2; 2019 2.4; 2020 1.9; 2021 1.3; 2022 0.8; 2023 0.5; 2024 0.3; 2025 0.6
  - Public debt
    - baseline: 2018 16.1; 2019 15.6; 2020 15.5; 2021 15.6; 2022 15.8; 2023 16.0; 2024 16.2; 2025 16.4
    - alternative: 2018 16.1; 2019 16.0; 2020 16.4; 2021 17.2; 2022 18.0; 2023 18.9; 2024 19.8; 2025 20.3

*International Monetary Fund staff summary of "1. Alternative Scenario" from the Russian Federation report.*

### 15.      Staff agreed that higher spending on physical and human capital is desirable to lift

### 15.      Staff agreed that higher spending on physical and human capital is desirable to lift productivity (text charts below)

### Public investment, infrastructure, health, education, and social assistance — findings
- Russia faces substantial infrastructure gaps, especially for roads but also for air transport and ports.
- Public health expenditure is relatively low and should increase, but increases should go together with increasing the efficiency of such spending.
- Pension indicators:
  - Current retirement ages: 55/60 years for women/men.
  - Pension spending is projected to increase significantly.
  - Early retirement provisions are generous, leading to an average effective retirement age substantially below the statutory one.
- Social assistance expenditure is relatively high and appears to be thinly spread; social benefits could be better targeted to reduce poverty given constrained fiscal space.
- Capital stock and infrastructure quality indicators incorporate World Economic Forum Global Competitiveness Index rankings (perception-based; interpret with caution).
- Health system indicators and metrics shown for Russia versus CESEE, EMs, and OECD (charts referenced in source).

### Policy recommendations on public spending
- Additional spending should be allocated within the confines of the fiscal rule.
- Authorities could focus on eliminating tax expenditures (around 2.8 percent of GDP) as well as reprioritizing spending.
- Parametric pension reform, including raising the statutory retirement age and limiting early retirement, remains critical for intergenerational equity.
- Social benefits should be better targeted (means-testing) to reduce poverty while respecting constrained fiscal space.

*Italic note from source: The authorities’ survey excludes additional tax expenditures under PIT, including various deductions and exemptions.*

*Italic note from source: For further details, see Eich, Soto, and Gust (2012).*

### Authorities’ views on fiscal policy and social spending
- Authorities re-affirmed strong support for the fiscal rule, particularly for maintaining the current benchmark oil price.
- They are discussing temporarily relaxing the requirement for a primary fiscal balance at the benchmark oil price, to pay for needed infrastructure spending.
- Authorities believe additional debt-financed spending on infrastructure of around 0.5 percent per year is unlikely to weaken the credibility of the fiscal framework or result in overheating, as the multiplier is low.
- On tax changes, authorities emphasized the need for a balanced package of tax reforms, which precludes eliminating certain tax expenditures under VAT and PIT.
- Authorities are committed to implementing parametric pension reform and to means-testing any new social assistance programs, although they will maintain the overall level of social spending in order to reduce poverty.
- Authorities plan to complete the shift in oil sector taxation over the next six years, which they expect to be revenue-enhancing.

### Monetary policy: recent actions and staff advice
- Recent actions:
  - Since June 2017, the CBR has cut its policy rate by a cumulative 200 bps, to 7.25 percent.
  - The CBR paused its monetary easing in April and June 2018 following the April 6 round of US sanctions.
  - The CBR estimates the neutral policy rate to be closer to the upper bound of the 6–7 percent range, and therefore the policy stance to be moderately tight.
  - The CBR decided not to make any horizon-bound commitments for now, but instead seek to keep inflation close to 4 percent at all times.
  - In May 2018, the CBR released its first information notice about its key rate decision-making process.
- Staff recommendations:
  - Complete the transition to a neutral policy stance, assuming the current tight fiscal stance is sustained.
  - Maintain a gradual and data-driven approach because inflation expectations are not yet firmly anchored and could drift up due to ruble depreciation, higher energy prices, strong growth in real wages, or possible fiscal changes.
  - Ensure inflation expectations do not move persistently below the target.
  - Refine communication strategy: reinforce that policy decisions target inflation forecasts rather than current inflation; elaborate acceptable deviations from the inflation target and over what time horizon.

### Authorities’ views on monetary policy and communication
- Authorities agreed on the need to pursue a gradual easing of monetary policy towards a neutral stance.
- The CBR argued that monetary policy normalization in advanced economies and country-specific factors have shifted the equilibrium real interest rate up, consistent with the neutral policy rate inching closer to the upper bound of the 6–7 percent range.
- The CBR consistently refers to their 4 percent inflation target; has developed a regional communication program; does not see a need to publish a path for projected interest rates now.

### Macro-financial policies and banking sector developments
- Banking sector performance:
  - Failures of three large private banks in H2 2017 weakened overall performance.
  - Aggregate profits declined for the first time since 2015, mainly due to additional provisioning for NPLs by banks under resolution.
  - NPLs increased from 9.7 percent in March 2017 to 10.7 percent in March 2018.
  - Aggregate capital adequacy dipped below 13 percent in late 2017, but recovered to 13 percent in March 2018, against a regulatory minimum of 8 percent.
  - The CBR closed another 62 credit institutions in 2017 (compared to 110 in 2016), bringing total credit institutions to 561 at end-2017, down from 923 at end-2013.
  - The CBR implemented temporary regulatory forbearance for loans to borrowers affected by the new US sanctions until end-2018.
- Credit growth:
  - Overall private sector credit grew by about 11 percent in April 2018 in nominal terms (8.5 percent in real terms).
  - Retail lending growth: about 17 percent y-o-y since mid-2016.
  - Consumer lending (excluding real estate and car loans): about 14 percent.
  - Mortgage lending: around 18 percent.
  - Corporate lending: 9 percent y-o-y, adjusted for exchange rate valuation effects.
  - SME lending is still declining.
- Macro-financial risks and adjustment:
  - Profitability of tradable and non-tradable sectors has picked up on the back of strengthening activity and higher oil prices, despite some declines in H2 2017.
  - Overdue corporate loans in rubles and FX have not shown a clear downward trend recently due to increases in bad debts in banks undergoing open resolution.
  - FX risks for banks and corporates remain low as short-term liabilities are sufficiently covered by liquid external assets.
  - Deleveraging over the past two years has strengthened balance sheets; domestic and external borrowing has been relatively stable.

### Resolution costs, bad bank plan, and supervisory measures
- Resolution and costs:
  - The CBR rescued several private banks using the new resolution framework providing equity capital injections via the Banking Sector Consolidation Fund (BCF).
  - As a result of takeovers, the CBR has become owner of several former private banks.
  - Financial stability has been maintained but at a significant cost to the authorities (estimated at over 2 percent of GDP), including CBR backstop funding for deposit insurance payouts and liquidity and capital injections.
- Bad bank strategy:
  - A distressed asset fund (“bad bank”) will be established using a subsidiary of one of the large rescued banks.
  - Bad assets of the large failed private banks are estimated at 2.1 trillion rubles (around $34 billion or 2.1 percent of GDP).
  - The “bad bank” would be privately managed, potentially by an equity fund.
  - The “bad bank” is expected to become operational in the second half of 2018.
- Supervisory and macroprudential measures:
  - Risk Analysis Service initiated some elements of an Asset Quality Review (AQR).
  - New regulation (effective January 2017) limits related-party exposures at 20 percent of banks’ total regulatory capital.
  - Draft federal law prescribing communication protocols between auditors and the CBR passed first reading in the State Duma in December 2017.
  - The CBR continues measures to improve the AML/CFT framework.
  - A new federal law authorized the CBR to increase risk weights for certain asset types to mitigate threats to financial stability.
  - Calculation of payment-to-income ratios will become mandatory in January 2019.
  - The CBR continues to develop and refine stress-testing methodologies, including macroprudential stress-testing.

### State-owned banks (SOBs) and competitive/efficiency assessment
- Structure and performance:
  - SOBs dominate Russia’s banking system, with the three largest ones accounting for 54 percent of the system’s assets in 2017.
  - State-owned banks have healthier balance sheets than privately owned banks, but are less profitable (except for Sberbank).
  - Structural analysis (Panzar and Rosse, 1987 approach) finds foreign-owned banks behave more competitively than either private or state-owned banks.
  - Data Envelopment Analysis suggests Russian banks are far from the efficiency frontier compared to peers with similar bank-dominated systems, showing no signs of convergence.
  - Private banks appear closer to the efficiency frontier than most SOBs, even as SOBs benefit from cheaper funding and having most large SOEs as clients.

_Italic source attribution: Selected content from cr18275 - 15.      Staff agreed that higher spending on physical and human capital is desirable to lift, cr18275.pdf, International Monetary Fund._

### 29.      Staff argued that additional efforts are needed to strengthen bank supervision and

### cr18275 - 29.      Staff argued that additional efforts are needed to strengthen bank supervision and

### Bank supervision and regulation: findings
- The establishment of the Risk Analysis Service, a special CBR unit responsible for independent asset quality evaluations, is welcome, but "more efforts are needed to swiftly complete the evaluations and to also ensure their alignment with best international practices."
- The legal framework for related party exposures and the draft law upgrading the framework for banks’ external auditors "could be strengthened further."
- Supervision could be enhanced by:
  - Enabling the CBR to exercise professional judgment as part of an explicit early intervention mechanism.
  - Strengthening ex post communication of the rationale behind bank resolution decisions.
  - Ensuring a credible strategy for returning rehabilitated banks to private hands consistent with increasing competition and improving the allocation of capital.
- The CBR’s stress-testing capacity could substantially benefit from improved internal cooperation by ensuring that the Banking Supervision and Financial Stability Departments have seamless access to all supervisory/macroprudential reporting and modeling.
- Improving further the effectiveness of the AML/CFT system— including in relation to politically exposed persons and the transparency and availability of beneficial ownership information of legal persons—will support efforts to address financial crimes related to tax evasion and corruption.

### Banking sector structure, governance, and performance
- Staff suggested the structure and governance of the banking system should evolve toward greater efficiency, more competition, and better governance.
- Specific recommendations:
  - Target improvements in governance and risk management practices of state-owned banks (SOBs).
  - Reduce concentration in the sector and level the playing field between private and state-owned banks, which currently enjoy lower funding costs due to cheap government deposits and implicit government guarantees.
  - Gradually reduce the significant footprint of the state in the banking sector to help increase competition and efficiency; recognition that finding responsible stewards for privatization (including reputable foreign investors with long-term interests) will be difficult in the current environment and possible only in the long term.
- Performance heterogeneity noted: staff and authorities recognized "substantial heterogeneity in performance, efficiency, and competitive behavior among both public and private banks."

### Authorities’ views and actions
- Authorities argued they have made substantial progress with the cleanup of the banking sector and with implementation of structural reforms in the sector; health of the banking sector and financial supervision have improved "compared to 6–12 months ago."
- The Risk Analysis Service has made a "major positive contribution."
- Authorities believe regulatory improvements have enabled further deepening of financial markets and that special programs to develop financial technology will increase competition.
- Authorities agreed that to enhance supervision the CBR needs to be able to exercise professional judgment, which "requires legal immunity for supervisors" that the State Duma is currently reluctant to grant.
- Authorities are working on changes to the legal constraints on purchase and assumption (P&A) transactions.
- Cleanup timeline: "The authorities believe that the cleanup of the banking sector will be completed within three years."
- Divestment plan for rescued banks: merge those banks and sell the merged bank in a public offering to multiple small investors.
- Extension of open resolution under the BCF to a non-systemic private bank was done to continue a resolution process started under the old DIA resolution scheme.

### Structural reforms and the state’s footprint in the economy
- Staff highlights stalled convergence to advanced economy income levels and urgency of structural reforms due to long-standing weaknesses: inadequate infrastructure, excessive regulation, governance and institutional weaknesses, and adverse demographic trends.
- Staff estimates regarding the state’s size and footprint:
  - "The state’s share in the economy is around 30–35 percent, and that it has increased in the banking and oil and gas industries in recent years."
  - "The Russian state accounts for close to 40 percent of formal sector activity and for 50 percent of formal sector employment."
  - "Staff estimates suggest that the state accounted for about one-third of Russia’s VA in 2016."
  - "In the last five years, the state’s share in VA increased significantly in energy and banking, but only slightly overall (from 31 to 33 percent of GDP)."
  - "However, the state accounted for about 38 percent of formal sector VA."
- Competitive and procurement concerns:
  - Most SOE procurement occurs through non-competitive methods and supplier concentration is high.
  - Law allows SME quotas to be used by subsidiaries of larger firms and allows unconstrained use of price advantages for domestic suppliers—provisions that limit market access, efficiency, and value chain development.
  - SOEs appear to underperform relative to non-state firms in many activities; cumulative distribution of gross returns on assets for SOEs is often to the left of that for non-state entities.
- State’s footprint implications:
  - The large public sector contributes to concentration in several sectors and may bias allocation of savings toward large players.
  - Public procurement (by government and SOEs) may play a role in reduced competition.
- Scope of SOEs and potential efficiency gains:
  - Out of about 32,500 SOEs, around 500 represent more than 85 percent of revenues, suggesting large potential for consolidation and efficiency gains through better management of state property.

### Policy recommendations and reform priorities
- Medium-term objective: reduce the state’s footprint over the medium term with careful sequencing (outright privatization could increase concentration).
  - First gear efforts at enhancing competition (promote market entry) and leveling the playing field in public procurement (reduce supplier concentration and facilitate SME development).
  - Develop a clear exit strategy for sectors where there is no economic rationale for state ownership, including banking—strategy should be competition-enhancing.
  - Tackle institutional and governance issues, including excessive regulations and customs procedures that complicate trade integration.
- Short-term priorities: focus on feasible measures with high productivity impact.
  - Proposed boost to investment in physical and human capital should be undertaken in a deficit-neutral manner.
  - A parametric pension reform under discussion could raise the statutory retirement age, ease pressures on the budget, and help temporarily offset negative demographic trends; in the short term could dampen pressures in the labor market.
  - Planned shift in the taxation of the oil sector could reduce distortions and implicit fuel subsidies.
  - A broader fiscal maneuver from direct to indirect taxation could incentivize labor supply, reduce informality, and attract new investment.
- To accelerate TFP growth: persist with efforts to strengthen competitiveness, promote trade integration, and diversify exports by reducing barriers to trade and FDI.
- Continue steadfast implementation of the new fiscal rule, which "has weakened the impact of oil prices on the real exchange rate" and should help facilitate export diversification.

*Source: IMF staff report excerpt (cr18275).*

### 38.      In addition, there is a range of measures to address long-standing weaknesses in

### cr18275 - 38.      In addition, there is a range of measures to address long-standing weaknesses in

### Measures to address governance and productivity constraints
- Strengthen transparency, accountability, and governance standards in the SOE sector, in line with the recommendations of the 2014 Fiscal Transparency Evaluation (FTE).
- In the financial sector, strengthen supervision and limit connected lending to ensure credit flows to the more productive projects.
- Reduce informality to increase the returns on training and R&D spending.
- Authorities consider stricter key performance indicators for SOEs and question whether a multiplicity of SOE objectives contributes to below-par performance.
- Authorities are committed to creating a more transparent, standardized, and competitive market environment, including by leveling the field in public procurement.

### Authorities’ views and planned initiatives
- The May 2018 presidential decree aims to raise GDP growth above the global average.
- Authorities argue that ramping up infrastructure, health, and education spending is key for boosting potential growth.
- Additional infrastructure expenditure is estimated at about 3.5 percent of GDP spread over six years and could improve productivity if project selection targets the right sectors.
- Authorities are committed to implementing a pension reform and agreed on the need to increase the retirement age, although key parameters are still under discussion.
- Authorities welcomed the analysis on the state’s footprint and acknowledged that the relatively large state contributes to economic concentration; they noted high concentration even in sectors where the state’s presence is low.
- Authorities are doubtful whether stricter criteria to fill SME quotas in state procurement would be an effective way to increase competition, but are open to analyzing international experience.
- Authorities acknowledged the need to reduce the state’s footprint, particularly in the banking sector, and stressed the importance of correct sequencing of reforms to avoid privatization leading to more concentration.

### Staff appraisal — macroeconomic outlook and structural impediments
- Despite the ongoing recovery, the medium-term outlook remains weak; with projected growth rates, Russia would lag behind peers in Eastern Europe and not catch up with per capita incomes in advanced economies.
- Contributing factors: insufficient infrastructure; a large footprint of the state; governance and institutional weaknesses increasing economic concentration and stifling dynamism; slow integration in the global economy; uncertainty from geopolitical tensions negatively affecting private investment.
- The external position in 2017 was moderately weaker than suggested by medium-term fundamentals and desirable policy settings.
- The authorities have established a strong macroeconomic policy framework, including a prudent fiscal rule, inflation targeting, and a flexible exchange rate.
- To accelerate potential growth, the focus must shift to structural reforms to boost productivity and the supply of labor and capital.

### Fiscal policy guidance
- The fiscal rule shields the economy from fluctuations in oil prices and should facilitate economic diversification; it has anchored fiscal policy by providing a credible fiscal path.
- Staff recommend resisting revision of the fiscal rule because doing so would be procyclical and could weaken macroeconomic credibility.
- Fiscal consolidation should continue in line with the rule to rebuild fiscal buffers; the pace of adjustment over 2018–20 is appropriate, but its quality could be improved.
- Further consolidation of 0.5–1.5 percent of GDP is needed over the medium term to reach a nonoil primary balance consistent with sharing equitably Russia’s natural resources with future generations.
- Staff encourage a growth-friendly, deficit-neutral shift from social security contributions to consumption taxes to incentivize labor supply, reduce labor informality, and attract new investment.
- Authorities could consider re-prioritizing spending, strengthening tax compliance, and reducing tax expenditures under VAT and PIT to finance priorities (health, education, infrastructure).
- Social assistance is high but too thinly spread; better targeting is needed to meaningfully reduce poverty.
- Long-delayed parametric pension reform could help offset negative demographic trends temporarily and provide additional fiscal space.

### Monetary policy guidance
- With headline inflation below the 4 percent target and low underlying inflationary pressures despite a closing output gap, further monetary easing appears appropriate.
- The CBR should maintain a gradual and data-driven approach, as inflation expectations are not yet firmly anchored and external and fiscal risks have increased.
- The central bank should continue to refine its communication strategy to strengthen its credibility and reduce inertia in the formation of inflation expectations.

### Financial sector reforms and supervision
- Recent failure of several large banks created a non-negligible quasi-fiscal burden and revealed shortcomings: excessive risk concentration and lending to connected parties rather than to the most competitive firms.
- Recommendations:
  - Renew efforts to close gaps in bank supervision and regulation, and in the provision of accurate financial statements.
  - Complete the cleanup of the banking sector.
  - Intensify supervision of risks, with a focus on related-party lending.
  - Swiftly complete independent asset quality evaluations and ensure alignment with best international practices; establishment of a special division within the CBR for this purpose is welcome.
  - Enable the CBR to exercise professional judgment and strengthen ex post communication of the rationale behind bank resolution decisions.
  - Develop a credible strategy for returning rehabilitated banks to private hands consistent with increasing competition and improving capital allocation.

### Competition, state footprint, and privatization sequencing
- Boosting growth requires stronger competition in domestic markets, a leaner state, and a more vibrant private sector.
- The state’s footprint is estimated at around a third of the economy and needs to be reduced, particularly in banking and other sectors with limited rationale for public ownership.
- Sequencing is critical: first strengthen institutional architecture to avoid further concentration of economic power after privatization.
- Enhance competition by facilitating entry/exit and use state purchases to promote market contestability and SME development.
- Strengthen transparency, accountability, and governance standards in the corporate sector, particularly for SOEs, to raise efficiency in the use of state resources.
- Persisting with efforts to strengthen competitiveness, promote trade integration, and diversify exports could accelerate productivity growth.

*Source: cr18275 - 38.      In addition, there is a range of measures to address long-standing weaknesses in*

### 48.      The next Article IV consultation should be held on the standard 12-month cycle.

### 48. The next Article IV consultation should be held on the standard 12-month cycle.

### Real sector developments and labor market
- Cyclical recovery is driven by higher domestic demand, with some leakage into higher imports.
- High-frequency indicators point to the fragility of the recovery’s momentum.
- Wages are growing and the headline unemployment rate is falling.
- Broader measures of labor market slack are also declining, in part reflecting structural features related to population aging and a shrinking labor supply.
- Key time-series and projections (selected):
  - Real GDP (annual percent change, projections): -2.5 (2015), -0.2 (2016), 1.5 (2017), 1.7 (2018), 1.5 (2019–2023).
  - Real domestic demand (annual percent change): -8.9 (2015), -1.9 (2016), 3.7 (2017), 1.8 (2018), 1.3 (2019–2023).
  - Unemployment rate: 5.6 (2015), 5.5 (2016), 5.2 (2017), 5.5 (2018–2023).
  - Real GDP by expenditure (2017 Q1–Q4, percent Y/Y growth): final consumption, households, government, gross capital formation, gross fixed capital formation, exports, imports (charts and series shown in source).

*Sources: Rosstat; and IMF Staff calculations.*

### Inflation and monetary policy
- Recovery of oil prices since February 2016 led to a ruble rebound, which supported disinflation together with tight monetary policy and a better-than-expected harvest.
- Inflation expectations have continued to fall.
- The CBR cut its key rate by 200 bps since June 2017.
- Consensus forecast shows inflation reaching the CBR’s target in 2019.
- Market expectations for further policy rate cuts were put on hold following a new round of US sanctions.
- Key series and indicators:
  - Consumer prices (period average): 15.5 (2015), 7.1 (2016), 3.7 (2017), 2.9 (2018), 4.0 (2019–2023).
  - Consumer prices (end of period): 12.9 (2015), 5.4 (2016), 2.5 (2017), 3.5 (2018), 4.0 (2019–2023).
  - Core CPI (period average): 16.3 (2015), 7.5 (2016), 3.5 (2017), 2.9 (2018), 3.7 (2019–2023).
  - Policy and interbank rates (percent): series include interbank rate, O/N lending rate, REPO rate, O/N deposit rate (charts and values shown in source).
  - CBR one-year-ahead inflation expectations (percent): series from CBR Survey and actual inflation (charted in source).

*Sources: Central Bank of Russia; Public Opinion Foundation Survey; Russia Economic Barometer; Bloomberg Financial Market L.P.; and IMF staff calculations.*

### External sector
- Trade is rebounding together with economic activity; current account is on the rise.
- Trade balance supports improvement in the headline current account, while the non-energy current account balance has stagnated.
- Net private capital outflows have stabilized, supported by record high inflows into sovereign debt.
- Key figures (billions of U.S. dollars unless otherwise indicated):
  - Total merchandise exports, f.o.b: 341.4 (2015), 281.8 (2016), 353.0 (2017), 435.7 (2018), 442.0 (2019), 447.2 (2020), 456.1 (2021), 467.6 (2022), 476.1 (2023).
  - Total merchandise imports, f.o.b: -193.0 (2015), -191.6 (2016), -238.0 (2017), -256.1 (2018), -263.9 (2019), -270.7 (2020), -278.2 (2021), -285.6 (2022), -295.3 (2023).
  - External current account: 67.7 (2015), 24.4 (2016), 35.2 (2017), 99.6 (2018), 96.9 (2019), 84.7 (2020), 82.2 (2021), 81.3 (2022), 76.8 (2023).
  - Current account (percent of GDP): 4.9 (2015), 1.9 (2016), 2.2 (2017), 6.1 (2018), 5.7 (2019), 4.9 (2020), 4.7 (2021), 4.5 (2022), 4.1 (2023).
  - Gross international reserves (GIR, billions USD): 368.4 (2015), 377.7 (2016), 432.7 (2017), 498.3 (2018), 559.8 (2019), 613.3 (2020), 660.7 (2021), 701.3 (2022), 738.5 (2023).
  - Months of imports: 15.7 (2015), 17.0 (2016), 15.9 (2017), 17.0 (2018), 18.5 (2019), 19.8 (2020), 20.7 (2021), 21.5 (2022), 21.8 (2023).

*Sources: Rosstat; and IMF staff calculations; Central Bank of Russia; IMF staff estimates (where indicated).*

### Fiscal policy and public finances
- Oil prices and related fiscal revenues have stabilized at lower levels.
- Authorities are undertaking an ambitious fiscal consolidation, which has mostly relied on the expenditure side of the budget.
- Gross government debt remains low, due in part to use of the Reserve Fund to partially finance deficits in 2015–17.
- Further fiscal consolidation could bring the non-oil deficit closer to a level consistent with intergenerational equity and gradually rebuild fiscal buffers.
- Key fiscal indicators (percent of GDP):
  - General government revenue: 31.8 (2015), 32.7 (2016), 33.3 (2017), 36.2 (2018), 35.3 (2019), 34.8 (2020), 34.5 (2021), 34.3 (2022), 34.1 (2023).
  - General government expenditures: 35.1 (2015), 36.4 (2016), 34.8 (2017), 33.9 (2018), 32.4 (2019), 32.4 (2020), 32.7 (2021), 33.0 (2022), 33.1 (2023).
  - Net lending/borrowing (overall balance): -3.4 (2015), -3.6 (2016), -1.5 (2017), 2.2 (2018), 2.9 (2019), 2.4 (2020), 1.8 (2021), 1.3 (2022), 1.0 (2023).
  - Non-oil balance: -11.3 (2015), -9.7 (2016), -8.7 (2017), -8.4 (2018), -6.8 (2019), -6.5 (2020), -6.6 (2021), -6.7 (2022), -6.6 (2023).
  - Federal government net lending/borrowing: -2.3 (2015), -3.4 (2016), -1.4 (2017), 2.4 (2018), 3.0 (2019), 2.5 (2020), 1.9 (2021), 1.4 (2022), 1.1 (2023).
  - Oil revenue (general government, percent of GDP): 7.9 (2015), 6.1 (2016), 7.3 (2017), 10.6 (2018), 9.7 (2019), 8.9 (2020), 8.4 (2021), 8.0 (2022), 7.6 (2023).
  - General government debt (percent of GDP): 16.3 (2015), 16.1 (2016), 15.5 (2017), 16.1 (2018), 15.6 (2019), 15.5 (2020), 15.8 (2021), 16.0 (2022), projection shows similar.

*Sources: Russian authorities; and IMF staff calculations and estimates.*

### Banking sector and financial soundness
- Retail and corporate credit growth are recovering; NPLs for the household sector are falling.
- Banks’ profitability is recovering despite a decline in the last two quarters.
- Three large private banks were taken over by the new Banking Sector Consolidation Fund, and capital ratios dipped slightly towards end-2017 while CBR continues cleaning up the banking system.
- Macro-financial developments:
  - Retail, corporate and SME lending (Y-o-y percent change, FX adjusted) series show recovery since 2016.
  - Overdue loans and NPLs (percent of total loans): households, corporate, and NPLs series shown (charts).
  - Capital adequacy (percent): capital to risk-weighted assets: 12.5 (2014), 12.7 (2015), 13.1 (2016), 12.1 (2017). Tier 1 capital to risk-weighted assets: 9.0 (2014), 8.5 (2015), 9.2 (2016), 8.5 (2017).
  - NPLs to total loans: 6.7 (2014), 8.3 (2015), 9.4 (2016), 10.0 (2017).
  - Loan loss provisions to total loans: 6.5 (2014), 7.8 (2015), 8.5 (2016), 9.3 (2017).
  - Return on assets: 0.9 (2014), 0.3 (2015), 1.2 (2016), 1.0 (2017).
  - Return on equity: 7.9 (2014), 2.3 (2015), 10.3 (2016), 8.3 (2017).
  - Distribution of loans by sector and geographical distribution of interbank exposures shown in Table 7.

*Sources: Central Bank of Russia; and IMF staff calculations.*

### External financing, reserves, and financing gap
- External financing projections and gross international reserves are shown to remain large relative to short-term debt and import coverage.
- Table 3 summary (billions of U.S. dollars):
  - Gross financing requirements (2018–2023): 6 (2018), 6 (2019), -8 (2020), -8 (2021), -10 (2022), -13 (2023).
  - Current account balance (2018–2023): 100 (2018), 97 (2019), 85 (2020), 82 (2021), 81 (2022), 77 (2023).
  - Debt amortization (2018–2023): -94 (2018), -91 (2019), -93 (2020), -90 (2021), -91 (2022), -90 (2023).
  - Sources of financing (2018–2023): Capital account balance (net) 0; Foreign direct investment (net) -18 (2018), -18 (2019), -22 (2020), -27 (2021), -29 (2022), -30 (2023); RUS investment abroad -48 (2018) ... -78 (2023); Foreign investment in RUS 31 (2018) ... 48 (2023); New borrowing and debt rollover 85 (2018) ... 104 (2023).
  - GIR change (2018–2023): 66 (2018), 62 (2019), 53 (2020), 47 (2021), 41 (2022), 37 (2023).
  - Financing gap: 0 for 2018–2023.

*Sources: Central Bank of Russia; and IMF staff estimates.*

### Debt, sustainability, and stress tests
- Public sector debt indicators and debt sustainability analysis (DSA) — baseline scenario:
  - Nominal gross public debt (percent of GDP): 11.6 (2016), 16.1 (2017), 15.5 (2018), 16.1 (2019), 15.5 (2020), 15.5 (2021), 15.8 (2022), 16.0 (2023).
  - Effective interest rate (percent): 6.8 (2016), 7.2 (2017), 7.3 (2018), 7.1 (2019), 6.9 (2020), 6.8 (2021), 7.0 (2022), 7.1 (2023).
  - Primary balance (percent of GDP): 0.1 (2016), 3.2 (2017), 1.0 (2018), -2.8 (2019), -3.4 (2020), -2.7 (2021), -2.1 (2022), -1.5 (2023).
  - Change in gross public sector debt (percent of GDP): 0.7 (2016), -0.3 (2017), -0.5 (2018), 0.6 (2019), -0.5 (2020), -0.1 (2021), 0.1 (2022), 0.2 (2023), cumulative 0.5.
- Alternative scenarios and stress tests:
  - Historical scenario, constant primary balance scenario, and multiple shock tests (interest rate, current account, growth, real depreciation, combined shocks) are presented with charted outcomes for public gross financing needs, gross nominal public debt composition by maturity and by currency, and external debt sustainability bound tests.
  - External debt (percent of GDP) baseline: 31.7 (2013), 29.1 (2014), 37.9 (2015), 39.8 (2016), 32.9 (2017), 32.9 (2018), 32.3 (2019), 33.8 (2020), 34.9 (2021), 36.1 (2022), 36.8 (2023).
  - Debt-stabilizing non-interest current account: -0.8 (table note).

*Sources: IMF staff estimates; Central Bank of Russia; country desk data (as cited in tables).*

### Medium-term framework and projections (selected)
- Macroeconomic framework:
  - GDP growth at constant prices (percent): -2.5 (2015), -0.2 (2016), 1.5 (2017), 1.7 (2018), 1.5 (2019–2023).
  - Consumer prices (end of period): 12.9 (2015), 5.4 (2016), 2.5 (2017), 3.5 (2018), 4.0 (2019–2023).
  - External current account balance (percent of GDP): 4.9 (2015), 1.9 (2016), 2.2 (2017), 6.1 (2018), 5.7 (2019), 4.9 (2020), 4.7 (2021), 4.5 (2022), 4.1 (2023).
- Memorandum and projections:
  - Gross reserves (end of period, billions USD): 368.4 (2015), 377.7 (2016), 432.7 (2017), 498.3 (2018), 559.8 (2019), 613.3 (2020), 660.7 (2021), 701.3 (2022), 738.5 (2023).
  - Trade balance (percent of GDP): 10.8 (2015), 7.0 (2016), 7.3 (2017), 10.9 (2018), 10.5 (2019), 10.2 (2020), 10.1 (2021), 10.1 (2022), 9.7 (2023).
  - Brent oil price (U.S. dollars per barrel): 52.4 (2015), 44.0 (2016), 54.4 (2017), 73.3 (2018), 72.5 (2019), 68.7 (2020), 66.0 (2021), 64.1 (2022), 62.8 (2023).

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

*Italic: Source: IMF staff summary of the Russian Federation Article IV staff report (as provided in the supplied content).*

### Annex I. Implementation of Past IMF Recommendations

### Annex I. Implementation of Past IMF Recommendations

### Fiscal Policy: implementation status and key measures
- Recommendation: Implement a well-designed fiscal rule to anchor consolidation efforts, re-build buffers, and contain Dutch Disease.
  - Implementation status: Substantial progress.
  - Details: The new fiscal rule is expected to fully come into force in 2019, and requires a zero primary balance at the conservative benchmark oil price of $40 per barrel.
  - Staff note: The design could have been improved by incorporating oil futures prices, increasing the fiscal target to ensure intergenerational equity, and adding an expenditure target.
- Recommendation: Improve the quality of fiscal adjustment measures. Implement parametric pension reform, including raising the statutory retirement age. Improve the balance between current and capital spending.
  - Implementation status: Some progress.
  - Details: Fiscal consolidation continues to rely on across-the-board spending freezes. Parametric pension reform is currently under discussion. The authorities have proposed an additional cumulative 3.5 percent of GDP in infrastructure spending over the next six years.
- Recommendation: Rebalance from direct to indirect taxes, to reduce informality.
  - Implementation status: In progress.
  - Details: Various ideas for tax reforms are under discussion, including raising the main VAT rate from 18 to 20 percent.
- Recommendation: Ensure that the fiscal federalism framework incentivizes regional revenue mobilization and private sector development.
  - Implementation status: Some progress.
  - Details: A tourism tax was piloted in May 2018 in two regions. Regions have been given the right to grant profit tax preferences for new investment in 2018.

### Monetary Policy: implementation and communication
- Recommendation: Continue easing monetary policy gradually, given risks to the inflation outlook.
  - Implementation status: Implemented.
  - Details: The CBR has reduced its main policy rate gradually, by a total of 200 basis points since June 2017, down to 7.25 percent.
- Recommendation: Improve the central bank’s communication strategy, by shifting to a time horizon beyond end-2017 and by elaborating what departures from the inflation target are acceptable and over what horizon.
  - Implementation status: Substantial progress.
  - Details: The 4 percent inflation target is now seen as applying to an indefinite period of time (as opposed to end-2017). The inflation target is now around or near 4 percent (as opposed to the previous target of exactly 4 percent). The CBR decided against an explicit band.
  - Staff recommendation: The communication strategy would benefit from elaborating what deviations from the inflation target are acceptable and over what time horizon.

### Financial Sector Policy: reforms and gaps
- Recommendation: Tighten further the limit on related party lending.
  - Implementation status: Implemented.
  - Details: The definition of related parties has been broadened and the limit on individual exposures was set at 20 percent of a bank’s equity capital.
- Recommendation: Improve the bank resolution framework, to make it consistent with international standards. Replace CBR funding with federal government funds. Provide explicitly for statutory bail-ins. Remove impediments to purchase & assumption transactions. Accelerate the introduction of explicit early bank intervention procedures.
  - Implementation status: Partly implemented.
  - Details:
    - A new resolution mechanism provides for equity capital injections (instead of CBR loans), as well as limited bail-in.
    - A new mechanism to finance the costs of banking resolution has been identified, but it does not explicitly provide for the use of public funds.
    - Some impediments to purchase & assumption transactions remain; these should eventually start separating the good and bad assets of problem banks and transferring the latter at market (rather than book) values.
    - Authorities need to introduce additional resolution powers and safeguards recommended by international standards (e.g., well-defined early intervention procedures).
- Recommendation: Strengthen the AML/CFT framework, including through measures related to politically exposed persons and entity transparency.
  - Implementation status: In progress.
  - Details: Authorities continue enhancing the AML/CFT framework and are at an early stage of strengthening the measures related to politically exposed persons and entity transparency.

### Structural Policies: reform agenda and investment
- Recommendations: Expand Russia’s preferential access to large markets; improve customs procedures; increase labor market flexibility; strengthen property rights and governance; continue commitments from the May 2016 London anti-corruption summit; refocus state intervention to areas with positive spillovers; invest in innovation and infrastructure.
  - Implementation status: In progress.
  - Details:
    - The Ministry of Economic Development has prepared a comprehensive plan including measures to attract FDI, promote special economic zones, reduce the state’s footprint in the economy, and improve governance.
    - The cleanup of the banking system is well-advanced, but more needs to be done.
    - The authorities have proposed an additional cumulative 3.5 percent of GDP in spending on infrastructure over the next six years.

### External position — key statistics and assessment
- Net international investment position (NIIP) at end-2017: 18 percent GDP (marginally higher than in 2016 and up from 10 percent in 2013).
- Gross assets: 88 percent of GDP.
- Liabilities: 70 percent of GDP (split evenly between equity and debt).
- Total external debt at end-2017: 34 percent of GDP (a 6 percentage point reduction from the year before).
- Assessment: Projected current account surpluses suggest Russia will continue to maintain a positive IIP. Official external assets have been increasing rapidly since the introduction of the new fiscal rule. Recent external deleveraging by the private sector reduces risks further.
- Overall assessment excerpt: The external position in 2017 was moderately weaker than suggested by fundamentals and desirable policy settings. Since then, worsening geopolitical tensions have weakened the exchange rate. While this has not altered the overall assessment, the correction likely brought the REER closer to fundamentals.

### Current Account (CA) — background, model outputs, and recommendations
- Historical CA balances:
  - 2015 CA: 5 percent of GDP.
  - 2016 CA: 1.9 percent of GDP.
  - 2017 CA: 2.3 percent of GDP (despite a further deterioration of 0.2 percent of GDP in the non-energy CAB).
- EBA model outputs and gaps:
  - EBA CA model norm for 2017: 3.7 percent of GDP.
  - Cyclically adjusted CA surplus for 2017: 3.3 of GDP.
  - CA gap (EBA vs actual): –½ percent of GDP (per model comparison).
  - Staff assessment of 2017 CA gap: –1¼ percent, with a confidence interval between –2½ and 0 percent.
- Staff diagnosis and recommendation:
  - The fiscal gap accounts for most of the CA gap.
  - Medium-term policy should tighten fiscal policy while raising infrastructure and health spending to rebuild buffers and save more of the oil wealth for future generations.
  - The new fiscal rule provides a reasonable mechanism to achieve this goal.

### Real Exchange Rate (REER) — background and assessment
- REER movements:
  - Between mid-2014 and February 2016: REER depreciated by over 35 percent.
  - 2017: REER appreciated by 16 percent (correction of overshooting).
  - Since mid-2017: REER broadly stable at a level some 15 percent below the pre-crisis level.
  - By April 2018: REER depreciated by 8.5 percent relative to the 2017 average, in part due to new US sanctions in April.
- Assessment: Both EBA Level and Index REER models indicate a small undervaluation of around 5 percent. Staff assess that the 2017 REER was between 0 and 10 percent above its equilibrium level, in line with the staff-assessed CA gap.

### Capital and financial accounts: flows and buffers
- Background: Net private capital outflows continued in 2017, though at a significantly slower pace than in 2014–15. Private sector external deleveraging continued due to limited access to international capital markets.
- Assessment: Russia is exposed to risks of accelerated capital outflows because of geopolitical uncertainties, but the floating exchange rate regime and large international reserves provide substantial buffers.

### FX intervention and reserves adequacy
- International reserves:
  - At end-March 2018: US$457 billion.
  - At end-2016: U$378 billion.
- Drivers: Valuation effects and Ministry of Finance FX purchases in line with the new fiscal rule.
- Reserve adequacy metrics:
  - International reserves at end-2017 were equivalent to 264 percent of the Fund’s reserve adequacy metric.
  - Adequacy range: 100–150 percent.
  - Additional commodity buffer appropriate: $58 million.
  - Ratio of reserves to the buffer-augmented metric: 195 percent.
- Policy guidance: Large FX interventions should be limited to episodes of market distress.

### Technical background notes (selected)
- Russia’s foreign assets are mostly in foreign currency (over 93 percent as of end-2017); liabilities are predominantly in rubles (64 percent). About three-quarters of external debt is denominated in foreign currency.
- The 19 percent increase in dollar GDP in 2017 (on account of rebounding oil prices and ruble appreciation) explains most of the reduction in assets- and liabilities-to-GDP ratios.
- “Disguised” capital outflows include pre-payments on import contracts where the goods are not delivered, repeated large transfers abroad that deviate from standard remittances behavior, or securities transactions at inflated prices. The CBR includes estimates of “disguised” capital outflows in the financial account but not in the foreign asset position of the reported NIIP.
- The change in the EBA CA gap vis-à-vis the 2017 Article IV is due primarily to revisions in the EBA methodology. The 2017 CA norm for Russia is 2½ percentage points of GDP lower than under the previous methodology.
- The commodity buffer is computed in line with Annex III of the Guidance Note on Reserve Adequacy.

*International Monetary Fund — Annex I. Implementation of Past IMF Recommendations*

### Annex IV. Implementation of FSAP Recommendations

### Annex IV. Implementation of FSAP Recommendations

### Banking Stability
- Recommendation: Conduct an asset quality review (AQR) to ensure adequate bank capitalization (CBR).
  - Timing: ST/MT
  - Progress: Not done. The CBR initiated some elements of an AQR for the banking system with the recently established Risk Analysis Service unit, but more efforts are needed to swiftly complete the evaluations and to also ensure their alignment with best international practices on AQRs.
- Recommendation: Enhance stress-testing practices, including on a consolidated basis and by currency (CBR).
  - Timing: ST/MT
  - Progress: In progress. CBR continues upgrading its methodologies to develop bank-specific and bank-group-specific behavioral models on a consolidated basis. In 2017, the CBR undertook its first macroprudential stress testing of the financial sector.

### Liquidity Management
- Recommendation: Review the FX repo framework, and formalize the lender-of-last-resort function (CBR).
  - Timing: ST
  - Progress: Done. The FX repo framework takes into account banks’ access to FX funding from the interbank market. The CBR implemented an ELA facility in 2017.
- Recommendation: Re-establish a T-bill program.
  - Timing: ST
  - Progress: Not done. T-bill operations are a part of budget policy.

### Financial Sector Oversight and Regulation
- Recommendation: Require prior approval for banks’ domestic investments in nonbank institutions (CBR).
  - Timing: ST
  - Progress: In progress. A draft law requires banks to coordinate with the CBR on the acquisition of large stakes in non-bank institutions. The draft law has passed public discussion and is at the stage of inter-agency examination. Provisions regulating CBR’s prior approval for individuals and legal entities to acquire over 10 percent of shares in non-bank institutions are codified in Federal No. 281-FZ of July 29, 2017, which became effective on January 1, 2018.
- Recommendation: Issue specific requirements for management of banks’ country and transfer risks (CBR).
  - Timing: ST
  - Progress: In progress. Under review.
- Recommendation: Upgrade framework for relations with and use of banks’ external auditors (CBR).
  - Timing: ST
  - Progress: In progress. A draft federal law that would allow the CBR to regulate and supervise audit activities passed a first reading in the State Duma last December and a second reading in June 2018.
- Recommendation: Strengthen further the legal framework applicable to related parties (CBR).
  - Timing: ST
  - Progress: In progress. A new regulatory limit that caps bank’s loans to related-parties at 20 percent of their total regulatory capital became effective on January 1, 2017. A new draft law that requires credit institutions to deal with related parties on an arm’s length basis has passed public discussion and is at the stage of inter-agency examination.
- Recommendation: Upgrade the framework for prudential oversight of banks’ operational risk (CBR).
  - Timing: ST
  - Progress: In progress.
- Recommendation: Bring regulation and supervision for securities and insurance markets in line with international standards (CBR).
  - Timing: MT
  - Progress: In progress. CBR has approved a roadmap to harmonize the Russian legislation with both the IOSCO Objectives and Principles of Securities Regulation and the IAIS Insurance Core Principles.
- Recommendation: Ensure the effective implementation of the AML/CFT framework (CBR, MoF monitoring).
  - Timing: ST
  - Progress: In progress.

### Macroprudential Policy
- Recommendation: Adopt legal changes to provide a comprehensive policy toolkit (CBR, MoF).
  - Timing: ST/MT
  - Progress: In progress. A federal law that became effective in March authorizes the CBR’s governing board to increase risk weights for certain types of assets. The calculation of the PTI ratio will be mandatory from January 1, 2019.

### Crisis Management and Resolution
- Recommendation: Review the framework for the use of public funds to allow the federal government to finance the DIA’s resolution activities. If CBR funds are used, the federal government should provide an indemnity (CBR, MoF).
  - Timing: MT
  - Progress: Not done. The authorities do not intend at this point to implement this recommendation and budget funds are not used to finance bank resolution.
- Recommendation: Establish a mechanism for the recovery of the costs of providing temporary public financing through levies on the financial industry (CBR, MoF).
  - Timing: MT
  - Progress: Not done. The resolution mechanism does not envisage levies on banks other than the premia already collected by the DIA.
- Recommendation: Introduce the full range of resolution powers and safeguards recommended by the FSB Key Attributes, including by implementing legal and operational changes needed to make purchase and assumption (P&A) transactions an effective resolution tool (CBR, MoF).
  - Timing: ST
  - Progress: In progress. The authorities have introduced a new resolution mechanism. However, there is no provision yet for asset transfers at market prices to an acquiring institution as part of a P&A transaction.

### Banking Sector Development
- Recommendation: Promote legal reforms to increase the effectiveness of the boards of state-owned commercial banks (SOBs) (MoF, CBR).
  - Timing: MT
  - Progress: In progress. The CBR is engaged in drafting a bill that provides for audit committees as well as an enhanced role of the boards of directors at public joint stock companies. The bill has passed a second reading in parliament.
- Recommendation: Continue the gradual privatization of SOBs as conditions permit (MoF, CBR).
  - Timing: MT
  - Progress: Not done. Market conditions do not seem favorable at this time.

### Fund Relations and Financial Data
- Membership Status: Joined June 1, 1992; Article VIII.
- General Resources Account (SDR Million):
  - Quota: 12,903.70
  - Fund holdings of currency: 11,497.24
  - Reserve Position: 1406.49
  - Lending to the Fund: 470.55
  - Percent: 100.00 (Quota), 89.10 (Fund holdings of currency), 10.90 (Reserve Position)
- SDR Department (SDR Million):
  - Net cumulative allocation: 5,671.80 (100.00 percent allocation)
  - Holdings: 4,830.55 (85.14 percent)
- Outstanding Purchases and Loans: None
- Latest Financial Arrangements (Type, Approval Date, Expiration Date, Amount Approved (SDR million), Amount Drawn (SDR million)):
  - Stand-by: 07/28/99 — 12/27/00 — 3,300.00 — 471.43
  - EFF: 03/26/96 — 03/26/99 — 13,206.57 — 5,779.71
    - Of which SRF: 07/20/98 — 03/26/99 — 3,992.47 — 675.02
  - Stand-by: 04/11/95 — 03/26/96 — 4,313.10 — 4,313.10
- Projected Obligations to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - 2018 Principal/Charges/Interest Total: 3.97
  - 2019 Principal/Charges/Interest Total: 8.00
  - 2020 Principal/Charges/Interest Total: 8.01
  - 2021 Principal/Charges/Interest Total: 8.00
  - 2022 Principal/Charges/Interest Total: 8.00

### Exchange Arrangements
- The de jure and de facto exchange rate arrangement is free floating. Under this arrangement, the exchange rate of the ruble is determined by market factors. The CBR may intervene in the domestic foreign exchange market in the event of threats to financial stability.
- Effective February 1, 2017, the MOF implemented a new mechanism for foreign exchange purchases and sales:
  - As long as the actual Urals price exceeds US$40 per barrel, MOF will be purchasing foreign exchange in the amount of additional oil and gas revenues.
  - If the actual prices drop below this level, MOF will be selling foreign exchange in the amount of the resulting shortfall in oil and gas revenues.
  - The size of these operations will be announced at the start of every month and purchases will be evenly distributed within the month.
  - The foreign exchange purchase program is preannounced, predictable, involves small daily amounts, and is not triggered by an exchange rate level.
- The Russian Federation accepted the obligations of Article VIII, Sections 2, 3, and 4 of the IMF Articles of Agreement with effect from June 1, 1996, and maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions.

### FSAP Participation and Other Assessments
- FSAP Participation: Russia participated in the Financial Sector Assessment Program during 2016, and the FSSA report was discussed by the Board in July 2016 at the time of the 2016 Article IV discussion.
- Historical FSAP activity: An FSAP financial stability assessment took place during April 2011, and the FSSA report was discussed by the Board in September 2011. An FSAP update took place in the fall of 2007, and the FSSA report was discussed by the Board in August 2008.
- IMF’s Fiscal Transparency Evaluation (FTE): Undertaken in October 2013 and published in May 2014; it assessed the Russian government’s fiscal reporting, forecasting, and risk management practices against the IMF’s revised Fiscal Transparency Code.
- Article IV Consultation: Russia is on the standard 12-month consultation cycle. The last consultation was concluded on June 29, 2017.
- Resident Representative: Mr. Gabriel Di Bella, Resident Representative since July 15, 2015.

### World Bank Group Relations (IBRD)
- The Russian Federation joined the World Bank (IBRD and IDA) in 1992.
- The Bank has provided financing for 70 projects in different sectors totaling slightly over US$10.5 billion in IBRD loans.
- IBRD’s current portfolio of projects amounts to US$536 million in the areas of financial literacy, statistics, municipal infrastructure, cultural heritage preservation, hydro-meteorology and forestry.
- The undisbursed balance is US$113 million as of May 2018.
- All Bank financing in the portfolio is in the form of investment project financing.
- The Bank also has a program of Advisory Services and Analytics (ASA), including reimbursable advisory services (RASs). The ASA program is organized around the priorities identified in the Systematic Country Diagnostic (SCD) for the Russian Federation.

_Annex IV. Implementation of FSAP Recommendations — Staff Report for the 2018 Article IV Consultation — Informational Annex_

### 1. Growth and Competitiveness (e.g., labor markets and informality, investment climate, export

### 1. Growth and Competitiveness (e.g., labor markets and informality, investment climate, export promotion and digital economy)

### Multilateral development partner activities and financing
- World Bank: In FY18, along with two regular Russia Economic Reports, the World Bank planned to finalize work on the Russian labor market and informality, digital economy, and green finance.
- International Finance Corporation (IFC):
  - Russia became an IFC member in 1993.
  - Since then, IFC’s long-term investments in Russia totaled US$10 billion, of which US$3.5 billion were mobilized from partners, across 263 projects.
  - As of April 2018, IFC’s committed investment portfolio in Russia stood at US$446.6 million of which US$417.4 million was disbursed.
  - Note: Previously IFC reported the total volume of investments, including short-term and long-term. Due to changes in accounting of short-term instruments, they are no longer included in the total investment volume.
- Multilateral Investment Guarantee Agency (MIGA):
  - MIGA’s gross exposure in Russia was US$329 million as of April 2018.
  - MIGA is involved in two projects in the finance and manufacturing sectors.
  - In dollar terms, MIGA’s exposure is concentrated in Russia’s financial sector (some 85 percent of MIGA’s gross exposure), supporting the investment of a French financial institution in its Russian subsidiary.
  - MIGA’s exposure in the manufacturing sector supports the investment of a company located in the greater Moscow area.

### Policy developments affecting growth and competitiveness (supplementary information as of August 31, 2018)
- External environment and risks:
  - Turbulence in emerging markets and heightened geopolitical tensions increased downside risks in the short term.
  - The ruble depreciated over the summer by 5-10 percent.
  - Long-term interest rates on domestic public debt increased by 100-150 bps.
- Recent output developments:
  - GDP growth accelerated to 1.8 percent (yoy) in Q2 of 2018 from 1.3 percent in Q1, according to Rosstat’s flash estimate. First quarter GDP is likely to be revised upward.
- Fiscal and tax measures (legislative actions over the summer):
  - State Duma approved increase in the main VAT rate from 18 to 20 percent, effective in 2019.
  - Legislation passed to shift oil sector taxation from export duties to mineral extraction taxes over 2019-24.
  - Budget Code amended to establish a temporary infrastructure fund financed by relaxing the fiscal rule by 0.5 percent of GDP on average over a period of six years (2019-24).
  - A bill proposing parametric pension reform (raising statutory retirement age from 55/60 to 63/65 years for women/men by an average of 6 months every year) passed its first reading; second and third readings expected in the fall.
  - Authorities’ fiscal package to be finalized in the fall for the 2019-21 budget.
- Monetary policy and financial sector measures:
  - The Central Bank of Russia (CBR) kept its key policy rate unchanged at its July 27 policy meeting.
  - Headline CPI inflation accelerated to 2.5 percent in July (yoy).
  - CBR considers the shift to a neutral monetary policy stance is now highly likely to be completed in 2019 instead of 2018.
  - Effective July 1, the CBR increased risk ratios for FX loans, including real estate loans.
  - Effective August 1, the CBR raised mandatory reserve requirements on FX liabilities by 1 percentage point.
  - Due to rapid growth in unsecured consumer lending (17.0 percent in June, yoy), higher risk weights will be applied to such loans issued after September 1.

### Implications for growth and competitiveness
- Revenue measures (VAT increase and oil tax changes) are expected to generate additional revenues to finance increased spending on education and health.
- Fiscal relaxation (temporary infrastructure fund financed by 0.5 percent of GDP on average over 2019-24) could support infrastructure investment but interacts with monetary policy stance given inflation and inflation expectations.
- Financial-sector regulatory tightening (risk ratios, reserve requirements, higher risk weights for consumer lending) aims to contain vulnerability from currency and credit growth.

### Human capital, poverty, and shared prosperity (planned work)
- The World Bank planned work on Human Capital, Poverty and Shared Prosperity themes, including education quality and equity, skills, integrative health, social protection, and spatial equity (noted alongside FY18 planning).

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### Statistical issues and data adequacy for surveillance (As of June 20, 2018)
- General assessment:
  - Data provision is broadly adequate for surveillance, but scope exists for further data improvements given emerging data demands for assessing external vulnerabilities.
- National Accounts:
  - Data are broadly adequate for surveillance; concerns exist about reliability and consistency of quarterly GDP estimates and seasonally adjusted headline GDP.
  - In April 2016, Rosstat released GDP estimates compiled according to the 2008 SNA.
  - Data for 2011 to 2013 were revised but are compiled according to the 1993 SNA.
  - Main changes in revised series: improvements in estimation of imputed rental services of owner-occupied dwellings and use of the market value of assets to estimate consumption of fixed capital.
  - Real GDP data are rebased to 2016 prices and published from 1995Q1.
  - Central Bank of Russia compiles quarterly sectoral financial accounts and financial balance sheets; however, data are available on the agency’s website only up to the fourth quarter of 2017.
- Price statistics:
  - Monthly CPI and PPI compiled using the Two-Stage (Modified) Laspeyres (2000=100) cover all regions.
  - Weights reflect expenditures in the 12 months ending in the most recent September.
  - Population weights, rather than expenditure shares, are applied to individual regional indices, possibly biasing the CPI downwards if price increases are higher in regions with higher per capita expenditures.
  - Detailed weights for PPI are available only on the Russian-language version of Rosstat website.
  - Further efforts recommended: improve treatment of seasonal items in the core inflation index; implement a new household budget survey (under consideration).
- Government Finance Statistics:
  - Authorities compile comprehensive general government accounts based on GFSM 2014 on an annual basis, including statement of sources and uses of cash, accrual-based government operations, complete balance sheet (including non-financial assets), holding gains and losses, and outlays by functions (COFOG).
  - A monthly statement of sources and uses of cash based on GFSM 2014 is compiled for whole general government.
  - Authorities recently started reporting quarterly accrual-based general government operation statement and a financial balance sheet.
- Monetary and Financial Statistics:
  - Analysis of balance sheet effects hindered by lack of comparable data on currency and maturity breakdown of banking-sector assets and liabilities.
  - Adoption of detailed reporting using Standardized Report Forms (SRFs) recommended (STA mission 2007; ROSC mission 2010) to provide comprehensive currency and instrument breakdowns for central bank, other depository corporations, and other financial corporations.
  - Since March 2011, the Banking System Survey (equivalent to Depository Corporations/Broad Money Survey) includes a breakdown by national and foreign currency.
  - Publication of similar breakdowns in SRF format for central bank and other depository corporations would be useful.
  - STA has made recommendations to improve monetary data to conform to SRF format; authorities are yet to follow up.
- External sector statistics:
  - Balance of payments data are broadly adequate for surveillance and have seen significant improvements.
  - CBR has recently published gross capital flow data for the private sector.
  - Since 2012, BOP compiled according to BPM6; historical data revised (going back to 1994Q1 for BOP, and to 2001Q1 for IIP).
  - CBR makes adjustments to merchandise import data to account for “shuttle trade,” smuggling, and undervaluation.
  - Statistical techniques used to estimate transactions and positions of foreign-owned enterprises with production sharing agreements; techniques continuously improved.
  - Improvements in coverage and quality of direct investment surveys; CBR participating in CDIS and CPIS.
- Financial sector surveillance:
  - Russia reports all 12 core financial soundness indicators (FSIs) and 9 of the 13 encouraged FSIs for deposit takers on a quarterly basis.
  - After 2016, FSIs on earnings and profitability are reported quarterly instead of annually.
  - Also, 2 FSIs for households and 3 FSIs for real estate markets are reported quarterly.
  - Data are reported for posting on the IMF’s FSI website with a lag of more than one quarter.

### Data standards and quality
- Russia is an SDDS subscriber since 2005.
- Russia plans to revamp the SDDS National Summary Data Page to disseminate data also in machine-readable format (SDMX).
- Data ROSC was published in 2011.

### Selected latest observations and reporting frequencies (Table of Common Indicators Required for Surveillance, as of June 20, 2018)
- Exchange Rates: May 2018; Date received 06/15/2018; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: May 2018; Date received 06/15/2018; Frequency M M M.
- Reserve/Base Money: April 2018; Date received 5/31/2018; Frequency D W W.
- Broad Money: April 2018; Date received 5/31/2018; Frequency D M M.
- Central Bank Balance Sheet: May 2018; Date received 6/14/2018; Frequency M M M.
- Consolidated Balance Sheet of the Banking System: April 2018; Date received 5/31/2018; Frequency M M M.
- Interest Rates: May 2018; Date received 5/31/2018; Frequency M M M.
- Consumer Price Index: April 2018; Date received 5/04/2018; Frequency M M M.
- Revenue, Expenditure, Balance and Composition of Financing – General Government: March 2018; Date received 5/09/2018; Frequency M M M.
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: March 2018; Date received 5/09/2018; Frequency M M M.
- Stocks of Central Government and Central Government-Guaranteed Debt: April 2018; Date received 5/22/2018; Frequency M M M.
- External Current Account Balance: 2018:Q1; Date received 4/10/2018; Frequency Q Q Q.
- Exports and Imports of Goods and Services: 2018:Q1; Date received 4/10/2018; Frequency Q Q Q.
- GDP/GNP: 2017:Q4; Date received 4/02/2018; Frequency Q Q Q.
- Gross External Debt: 2018:Q1; Date received 4/26/2018; Frequency Q Q Q.
- International Investment Position: 2017:Q4; Date received 04/03/2018; Frequency Q Q Q.

*Source: Russian Federation — IMF staff report and supplementary information (documents and tables as of June 20, 2018 and August 31, 2018).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18275.pdf_