## 2. Assessing the Impact of the Pension Reform and National Projects on Potential Output

## Source details

**Canonical URL:** [2. Assessing the Impact of the Pension Reform and National Projects on Potential Output](https://www.imf.org/-/media/files/publications/cr/2019/1rusea2019001.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2019/1rusea2019001.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2019/1rusea2019001.pdf.json)

---

### Context and recent macroeconomic developments
- Growth weakened after the 2000s boom; income convergence stalled at close to 60 percent of advanced countries’ average level.
- Key adverse factors:
  - The 2014 sanctions and fall in oil prices, and subsequent additional sanctions and geopolitical tensions.
  - Macroeconomic policy adjustment: tight monetary policy under inflation targeting with a free floating exchange rate; fiscal consolidation to correct the large non-oil structural deficit, later cemented in a new fiscal rule.
  - Long-standing structural constraints: large state footprint, excessive regulation, governance and institutional weaknesses, inadequate infrastructure, and demographic headwinds.
- Policy stance in 2019:
  - Fiscal stance estimated to be broadly neutral.
  - Monetary policy remains moderately tight but expected to shift towards neutral over the coming year.
- Authorities’ objectives under 13 national projects: raise GDP growth above the global average, halve poverty by 2025, and increase investment to 25 percent of GDP in the medium-term via emphasis on infrastructure, health, and education.

### Recent outcomes and near-term outlook
- Growth performance:
  - 2018: Output grew by 2.3 percent (outpacing staff’s projection of 1.7 percent and the CBR’s forecast of 1.5–2.0 percent).
  - 2019 forecast: GDP projected at 1.2 percent.
  - 2020 projection with planned national projects implementation: growth expected to accelerate to 1.9 percent.
- Inflation:
  - Inflation peaked in March 2019 at 5.3 percent and declined to 5.1 percent in May.
  - Projected to fall to 4.3 percent by December 2019, reach the target in early 2020, and subsequently temporarily fall below the target.
- Fiscal and external balances (selected):
  - Overall general government balance moved from a deficit to a surplus of 2.9 percent of GDP in 2018.
  - Fiscal surplus projected to fall to around 1.5 percent of GDP in 2019–20 as oil prices ease; the non-oil deficit remains broadly stable.
  - REER depreciated by around 7½ percent in 2018.
  - Current account registered a record surplus of 7 percent of GDP in 2018.
  - External debt fell by 5½ percent of GDP in 2018.
  - Non-residents’ holdings of ruble-denominated government debt: about 24 percent of the total stock in December 2018, recovered to 28 percent in April 2019.
  - International reserves increased to 284 percent of the ARA metric at end-2018.
- Risks:
  - Downside risks are significant, notably geopolitical risks related to potential additional US sanctions and intensified global trade tensions.
  - Domestic risk: accelerating retail credit growth could lead to a build-up of impaired assets.

### Assessing the impact of the pension reform and national projects — policy measures and magnitudes
- Planned fiscal and tax measures:
  - Over 2019–2024, federal spending is planned to be increased by 1.1 percent of GDP annually, nearly half of it for infrastructure.
  - VAT revenues would increase by about 0.5–0.6 percent of GDP annually to cover increases in current spending.
  - Net increase in public investment spending expected to raise demand and help mitigate structural bottlenecks over time.
- Pension reform specifics:
  - Parametric reform adopted in 2018 raises retirement ages to 65 for men and 60 for women by 2028.
  - Ministry of Economic Development estimate: reform will increase the labor force by around 2 million people (or about 3 percent) by 2024.

### Quantitative assessment methodology
- Production function (PF) approach based on a standard neoclassical growth model with inputs labor, physical capital, and total factor productivity (TFP).
- Employment assumption: increase from 72.5 million workers in 2018 to 74.0 million by 2024 (2 percent).
- Three PF specifications considered:
  - (i) Potential labor and capital from HP filter; two TFP cases (most fluctuations cyclical vs. almost no cyclical fluctuations).
  - (ii) Inputs adjusted by capacity utilization shares (HP-filtered).
  - (iii) Specification (ii) supplemented with forecasts of potential employment based on econometric estimates of the natural rate of unemployment.
- Multivariate filter approach used to estimate potential output trajectory 2001–2024, incorporating unemployment and inflation.

### Main quantitative results and projections
- Public infrastructure spending and increased labor supply due to pension reform could increase potential output growth by 0.1–0.5 percent a year over the next five years.
- Growth rate of potential GDP previously estimated at around 1.5 percent.
- Overall estimated acceleration in potential output growth to between 1.6 and 2.0 percent by 2024.
- Specification-specific ranges:
  - First PF specification: between 1.6 and 2.1 percent.
  - Second specification: between 1.6 and 1.7 percent.
  - Third specification: between 1.7 and 2.2 percent.

### Medium-term outlook and aggregate projections (selected)
- Absent deeper structural reforms, long-run growth projected to settle around 1.8 percent.
- Under broadly neutral fiscal policy and monetary policy easing from moderately tight to neutral, the output gap is projected to stay close to zero with growth in the 1.5–2.0 percent range.
- Selected macro projections (real GDP, annual percent change):
  - 2016: 0.3
  - 2017: 1.6
  - 2018: 2.3
  - 2019: 1.2
  - 2020: 1.9
  - 2021: 2.0
  - 2022: 2.0
  - 2023: 1.9
  - 2024: 1.8
- Inflation (consumer prices, period average, percent): 2.9 (2018); 4.9 (2019); 3.9 (2020); 4.0 (2021–2024).
- Fiscal balances (general government overall balance, percent of GDP): 2.9 (2018); 1.5 (2019); 1.3 (2020); 0.6 (2021); 0.0 (2022); -0.3 (2023); -0.6 (2024).

### Policy recommendations — aggregate and structural priorities
- Fiscal policy:
  - Maintain neutral fiscal stance while engineering a growth-friendly shift in the composition of taxes and spending and boosting the credibility of the fiscal rule.
  - Avoid further changes to the fiscal rule in coming years to firmly establish its credibility.
  - Additional fiscal consolidation of 1–2 percent of GDP will be needed eventually for intergenerational equity reasons.
  - Refrain from quasi-fiscal activities through the NWF and continue to invest NWF funds into high-quality foreign assets even after the liquid part reaches 7 percent of GDP.
- Monetary policy:
  - Continue easing toward a neutral stance given the revised inflation outlook.
  - NRIR estimates for late 2018 fall into the 1–3 percent range, with most estimates at about 2 percent; use NRIR jointly with other indicators when setting policy.
- Financial sector:
  - Strengthen supervision and regulation, address risks from fast-growing consumer credit, complete banking sector cleanup, and develop a strategy for returning rehabilitated banks to the private sector consistent with increasing competition.
  - Consider broadening macroprudential toolkit with borrower-based tools (LTV, DTI/PTI) if household credit growth remains fast.
- Structural reforms to accelerate potential output growth:
  - Strengthen competition, roll back state intervention where appropriate, and improve SOE efficiency.
  - Tackle infrastructure bottlenecks (roads and air transport highlighted), improve business climate, facilitate entry/exit of firms, and reform public procurement.
  - Consider a well-designed reduction in taxes on labor, financed by targeted expenditure savings or elimination of inefficient tax breaks, to incentivize labor supply and reduce informality.
- Social policy:
  - Fully implement pension reform; projected to reduce the pension fund’s deficit by 0.5–1.0 percent of GDP by 2024.
  - Improve targeting of social assistance (shift from universal to means-tested benefits where feasible) to reduce poverty more effectively given constrained fiscal space.
  - Increase health spending efficiency alongside higher allocations.

### National projects, financing, and governance (selected details)
- The 13 national projects broken into more than 70 federal projects; planned new federal spending over the next six years:
  - Infrastructure: about RUB 3.5 trillion (3 percent of annual GDP).
  - Health, education, and other current spending: about RUB 4.5 trillion (4 percent of GDP).
- Financing decomposition of RUB 25.7 trillion for National Projects:
  - 13.2 trillion from the federal budget (but only 8 trillion is new spending),
  - 5.0 trillion from regional budget and extra-budgetary funds,
  - 7.5 trillion from extra-budgetary sources.
- Infrastructure spending financed by a temporary relaxation of the fiscal rule by 0.5 percent of GDP for the next six years.
- Governance: each national project assigned a curator, a manager, and an administrator; detailed key performance indicators published; an online reporting system set up.
- Assessment note: “more specifics are needed on the structure of additional spending under the national projects, to fully assess its impact.”

### Fiscal rule, NWF, and medium-term consolidation
- Fiscal rule temporarily relaxed to target a primary deficit of 0.5 percent of GDP over 2019–2024 at the benchmark oil price of $40 (in real 2017 terms, adjusted for US inflation).
- If actual oil prices exceed the benchmark, fiscal authorities must purchase foreign exchange equal to the excess fiscal revenues and save it in the NWF.
- Flows into the NWF are held at the CBR as part of Russia’s international reserves until the NWF liquid assets target of 7 percent of GDP is met (expected in 2020).
- Recommendation: Avoid further changes to the rule and preserve credibility; continue investing NWF funds in high-quality foreign assets and avoid quasi-fiscal activity.

### Monetary policy, NRIR, and FX intervention considerations
- CBR policy actions:
  - CBR cut its key policy rate by 25 bps to 7.50 percent in June 2019 after raising it by 25 bps twice in 2018 H2.
  - VAT increase's impact on headline inflation in 2019:Q1 was around 0.5 percent (expected over 1 percent).
  - Staff recommends continued easing; some undershooting of inflation below the 4 percent target is expected in 2020.
- NRIR:
  - Staff NRIR estimates for late 2018 fall into the 1–3 percent range, with most estimates about 2 percent.
  - NRIR estimated to have decreased over the past 15 years due to lower potential growth, lower international rates, and country risk premia.
- FX intervention policy:
  - CBR could consider developing an explicit FX intervention policy to address disorderly market conditions, while avoiding attempts to influence the exchange rate away from fundamentals.

### Financial sector soundness, retail lending, and macroprudential response
- Retail lending and household debt:
  - Growth rates of unsecured consumer and mortgage lending each stood at about 24 percent in March.
  - Household debt in aggregate: 15.5 percent of GDP.
  - Share of unsecured consumer lending to households with PTI ratio above 50 percent increased to 37 percent at end-2018.
- Macroprudential responses:
  - CBR raised risk weights several times in 2018 and again in April 2019.
  - On June 11, the CBR announced it will establish surcharges to risk coefficients depending on both the effective interest rate (APR) and the PTI ratio since October 2019.
  - Staff recommendation: consider increasing risk weights for unsecured consumer loans based on DTI/PTI and introduce borrower-based tools (LTV and DTI/PTI) if fast household lending growth continues.
- Banking sector indicators and resolution:
  - NPLs remain high at (10.3 percent in March) but are adequately provisioned, per CBR data.
  - System-wide capital adequacy ratio stayed close to 12 percent.
  - A “bad bank” for core and non-core assets set up with a size (in book value) of around 2 percent of GDP; authorities hope for a recovery rate of about 40 percent through asset sales and other actions.
  - Staff recommendations: finalize increase of capital conservation buffer and SIB surcharge; strengthen legal framework for related party exposures; enable CBR professional judgment in supervision.

### Risks and recommended policy responses (RAM highlights)
- External risks with Relative Likelihood = High/Medium and Expected Impact = Medium:
  - Escalation of geopolitical tensions; recommended response: allow floating exchange rate to cushion shocks, FX intervention to counter disorderly markets, consider policy interest rate increase, use fiscal buffers within fiscal rule.
  - Rising protectionism and retreat from multilateralism; recommended response: supportive macro policies if affected, accelerate structural reforms to enhance diversification.
  - Weaker-than-expected global growth and large swings in energy prices; recommended response: allow exchange rate adjustment, use fiscal buffers within fiscal rule, advance structural reforms.
- Domestic risks:
  - Lack of structural reforms leading to decline in investment and TFP; recommended response: focus on structural and governance reforms and monitor implementation of 13 national projects.
  - Faster growth in consumer lending leading to build-up of impaired assets; recommended response: deploy macroprudential measures based on PTI/DTI and continue banking sector consolidation.

### Implementation status of past IMF recommendations — selected points
- Fiscal rule recommendation: Not implemented — the fiscal rule was temporarily relaxed by 0.5 percent of GDP over 2019–2024.
- Pension reform: Substantial progress — parametric reform approved in 2018; raises retirement age by 5 years over the next decade but did not reform early retirement.
- Oil sector taxation: Some progress — reform approved to eliminate export duties by 2024 and replace them with mineral extraction taxes; reform diluted by restoration of subsidies in the form of a “reverse excise.”
- Banking supervision and resolution: Some progress — enhanced inspections and resolution framework development; legal protection for supervisors and full implementation of some recommendations remain incomplete.

*Source: IMF staff chapter "2. Assessing the Impact of the Pension Reform and National Projects on Potential Output" and related excerpts from the provided PDF content unit 1rusea2019001.*

### 2. Assessing the Impact of the Pension Reform and National Projects on Potential Output

### 2. Assessing the Impact of the Pension Reform and National Projects on Potential Output

### Context and recent macroeconomic developments
- Russia’s growth weakened after the 2000s boom; income convergence stalled at close to 60 percent of advanced countries’ average level.
- Key adverse factors:
  - The 2014 sanctions and fall in oil prices, and subsequent additional sanctions and geopolitical tensions.
  - Macroeconomic policy adjustment: tight monetary policy under inflation targeting with a free floating exchange rate; fiscal consolidation to correct the large non-oil structural deficit, later cemented in a new fiscal rule.
  - Long-standing structural constraints: large state footprint, excessive regulation, governance and institutional weaknesses, inadequate infrastructure, and demographic headwinds.
- Policy stance in 2019:
  - Fiscal stance estimated to be broadly neutral.
  - Monetary policy remains moderately tight but expected to shift towards neutral over the coming year.
- Authorities’ objectives include raising GDP growth above the global average, halving poverty by 2025, and increasing investment to 25 percent of GDP in the medium-term via 13 national projects emphasizing infrastructure, health, and education.

### Recent outcomes and near-term outlook
- Growth performance:
  - 2018: Output grew by 2.3 percent (outpacing staff’s projection of 1.7 percent and the CBR’s forecast of 1.5–2.0 percent).
  - 2019 forecast: GDP projected at 1.2 percent, reflecting a weak first quarter estimate, lower oil prices, and the impact of the higher VAT rate on private consumption.
  - 2020 projection with planned national projects implementation: growth expected to accelerate to 1.9 percent.
- Inflation:
  - Inflation peaked in March 2019 at 5.3 percent and declined to 5.1 percent in May.
  - Projected to fall to 4.3 percent by December 2019, reach the target in early 2020, and subsequently temporarily fall below the target.
- Fiscal and external balances:
  - Overall general government balance moved from a deficit to a surplus of 2.9 percent of GDP in 2018.
  - Fiscal surplus projected to fall to around 1.5 percent of GDP in 2019–20 as oil prices ease; the non-oil deficit remains broadly stable.
  - REER depreciated by around 7½ percent in 2018.
  - Current account registered a record surplus of 7 percent of GDP in 2018.
  - External debt fell by 5½ percent of GDP in 2018.
  - Non-residents’ holdings of ruble-denominated government debt: about 24 percent of the total stock in December 2018 (from a peak of almost 35 percent in March 2018), recovered to 28 percent in April 2019.
  - International reserves increased to 284 percent of the ARA metric at end-2018.
- Risks:
  - Downside risks are significant, notably geopolitical risks related to potential additional US sanctions and the prospect of intensified global trade tensions.
  - Domestic risk: accelerating retail credit growth could lead to a build-up of impaired assets.

### Assessing the impact of the pension reform and national projects (Box 2)
- Policy measures and fiscal magnitudes:
  - Over 2019–2024, federal spending is planned to be increased by 1.1 percent of GDP annually, nearly half of it for infrastructure.
  - VAT revenues would increase by about 0.5–0.6 percent of GDP annually to cover increases in current spending.
  - Net increase in public investment spending expected to raise demand and help mitigate structural bottlenecks over time.
- Pension reform:
  - Parametric reform adopted in 2018 raises retirement ages to 65 for men and 60 for women by 2028.
  - Ministry of Economic Development estimate: reform will increase the labor force by around 2 million people (or about 3 percent) by 2024.
- Quantitative assessment methodology:
  - A production function (PF) approach based on a standard neoclassical growth model is used, with inputs labor, physical capital, and total factor productivity (TFP).
  - Employment assumed to increase from 72.5 million workers in 2018 to 74.0 million by 2024 (2 percent).
  - Three PF specifications considered:
    - (i) Potential labor and capital from HP filter; two TFP cases (most fluctuations cyclical vs. almost no cyclical fluctuations).
    - (ii) Inputs adjusted by capacity utilization shares (HP-filtered).
    - (iii) Specification (ii) supplemented with forecasts of potential employment based on econometric estimates of the natural rate of unemployment.
  - Multivariate filter approach used to estimate potential output trajectory 2001–2024, incorporating unemployment and inflation.
- Main quantitative results:
  - Public infrastructure spending and increased labor supply due to pension reform could increase potential output growth by 0.1–0.5 percent a year over the next five years.
  - Growth rate of potential GDP previously estimated at around 1.5 percent.
  - Overall estimated acceleration in potential output growth to between 1.6 and 2.0 percent by 2024.
  - Specification-specific ranges:
    - First PF specification: between 1.6 and 2.1 percent.
    - Second specification: between 1.6 and 1.7 percent.
    - Third specification: between 1.7 and 2.2 percent.

### Medium-term outlook and policy recommendations
- Medium-term projections:
  - Absent deeper structural reforms, long-run growth is projected to settle around 1.8 percent.
  - Under broadly neutral fiscal policy and monetary policy easing from moderately tight to neutral, the output gap is projected to stay close to zero with growth in the 1.5–2.0 percent range.
- Policy priorities and recommendations:
  - Maintain neutral fiscal stance while engineering a growth-friendly shift in the composition of taxes and spending and boosting the credibility of the fiscal rule.
  - Additional fiscal consolidation will be needed eventually for intergenerational equity reasons.
  - Monetary policy: continue easing toward a neutral stance given the revised inflation outlook.
  - Financial sector: strengthen supervision and regulation, and address risks from fast-growing credit to households.
  - Structural reforms required to accelerate potential output growth: strengthen competition, roll back state intervention where appropriate, and improve state-owned enterprise efficiency; tackle long-standing institutional and infrastructure bottlenecks.
- Authorities’ views:
  - Authorities broadly share staff’s views on growth outlook and risks.
  - Authorities consider the national projects will increase potential output growth but acknowledge quantification of their impact is ongoing.
  - Both the CBR and the Ministry of Finance view potential use of NWF resources to stimulate domestic demand as a domestic source of uncertainty.
  - Authorities agree the ruble is somewhat undervalued but emphasize uncertainty due to sanctions effects.

*Source: IMF staff chapter "2. Assessing the Impact of the Pension Reform and National Projects on Potential Output" from the provided PDF content.*

### 13.      The authorities have implemented significant changes to their fiscal framework in

### 13.      The authorities have implemented significant changes to their fiscal framework in

### Fiscal framework changes and revenue measures
- The government unveiled the 13 national projects, intended to accelerate growth and reduce poverty.
- To partially pay for these, they raised the main VAT rate from 18 to 20 percent starting in January 2019.
- The 10 percent reduced VAT rate for socially important goods was preserved, together with all other tax expenditures.
- The authorities approved an oil sector tax reform to gradually eliminate export duties on oil and gas by 2024 and replace them with mineral extraction taxes, intended to reduce implicit subsidies for domestic refining and consumption of fuel.

### National projects (Box 3) — scope, financing, and monitoring
- Objectives (from a May 2018 presidential decree): raising GDP growth above the global average, cutting poverty in half, and extending life expectancy.
- The 13 national projects envision a ramp-up of public spending on infrastructure, health, and education; further broken into more than 70 federal projects (example: the 13th project includes 11 federal projects related to transport and energy infrastructure).
- Planned new federal spending over the next six years:
  - Infrastructure: about RUB 3.5 trillion (3 percent of annual GDP).
  - Health, education, and other current spending: about RUB 4.5 trillion (4 percent of GDP).
- Financing decomposition of the 25.7 tn for National Projects:
  - 13.2 trillion from the federal budget (but only 8 trillion is new spending),
  - 5.0 trillion from regional budget and extra-budgetary funds,
  - 7.5 trillion from extra-budgetary sources.
- Infrastructure spending financed by a temporary relaxation of the fiscal rule by 0.5 percent of GDP for the next six years.
- Additional current spending mostly financed by the VAT increase from 18 to 20 percent.
- Governance: each national project assigned a curator, a manager, and an administrator; detailed key performance indicators published; an online reporting system set up.
- Assessment note: “more specifics are needed on the structure of additional spending under the national projects, to fully assess its impact.”

### Fiscal rule, NWF, and medium-term consolidation
- The fiscal rule was temporarily relaxed to target a primary deficit of 0.5 percent of GDP (previously zero) over 2019–2024 at the benchmark oil price of $40 (in real 2017 terms, adjusted for US inflation).
- If actual oil prices exceed the benchmark, fiscal authorities are required to purchase foreign exchange equal to the excess fiscal revenues and save it in the NWF.
- Flows into the NWF are held at the CBR as part of Russia’s international reserves, at least until the target for NWF liquid assets, of 7 percent of GDP, is met (expected in 2020).
- Recommendation: Further changes to the rule should be avoided, in order to firmly establish its credibility.
- Fiscal space: Russia has some fiscal space, due to the low level of public debt and limited financing needs.
- Long-run scenario analysis suggests further fiscal consolidation of 1–2 percent of GDP would eventually be needed to reach a nonoil primary balance consistent with sharing equitably Russia’s finite resource wealth with future generations.
- Recommendation: Authorities should refrain from quasi-fiscal activities through the NWF and should continue to invest NWF funds into high-quality foreign assets even after the liquid part of the fund reaches the 7 percent of GDP target, to safeguard resources for future generations, avoid procyclicality, and insulate the domestic economy from oil price volatility.

### Taxation, tax expenditures, and labour taxation
- The authorities’ annual budget document estimates tax expenditures at around 2.5 percent of GDP.
- The survey omits tax expenditures under the personal income tax, notably various deductions and exemptions.
- Direct taxes remain quite high, including social contributions of 30 percent for most workers.
- Policy suggestion: A shift from direct to indirect taxes (for example, lower social contributions financed by VAT base broadening) could help incentivize labor supply and reduce informality.
- Distributional consideration: VAT base broadening might lower the purchasing power of vulnerable groups, such as retirees; the government has committed to increasing pensions by 40 percent over the next six years, significantly above projected cumulative inflation.

### Oil sector taxation and fuel subsidies
- Repeated revisions to oil sector tax reform over the past 12 months have complicated oil sector taxation.
- Original reform intent: replace oil export duties with a mineral extraction tax to create a level playing field between domestic and export markets.
- Undermining factor: restoration of subsidies to domestic refining and consumption in the form of a “reverse excise,” conditional on company/remoteness/modernization plan/sanctions targeting.
- The reverse excise contains a “damping component” which compensates oil companies for a portion of the difference between domestic and international fuel prices to incentivize stable domestic consumer prices.
- The reverse excise has been revised several times, producing a complex mechanism for subsidizing domestic refining and consumption.
- Recommendation: Any further revisions to oil sector taxation should be revenue-neutral. A schedule should be set for phasing out the reverse excise (including the damping component) to simplify oil taxation and eliminate domestic fuel subsidies, while heeding the impact of rising fuel prices on vulnerable groups.

### Social spending, pensions, and targeting
- Additional spending on health, education, and particularly infrastructure is welcomed; infrastructure should target the most binding constraints (notably roads and air transport).
- Health spending increases should be accompanied by efforts to increase efficiency.
- Pension reform is welcome and should be fully implemented; it is projected to reduce the pension fund’s deficit by 0.5–1.0 percent of GDP by 2024.
- Early retirement provisions remain overly generous and in need of reform (under current system, up to 30 percent of workers in the formal sector are estimated to be eligible for early retirement).
- Expenditure on social assistance is relatively high and appears to be too broadly and thinly spread.
  - According to recent estimates, 65 percent of the Russian population currently get some form of social assistance.
  - While 10 percent of social assistance is targeted, only a quarter of this goes to the around 15 percent of the population living in poverty.
  - Total spending on social assistance is more than enough to eradicate poverty, but in practice it reduces the incidence of poverty only by a third.
- Recommendation: Given constrained fiscal space, social assistance could be better targeted toward reducing poverty, for example by shifting from universal to means-tested benefits.
- The recent reform to unemployment benefits (more generous but curtailed duration for most workers) is welcome.

### Authorities’ views (fiscal)
- Authorities reaffirm strong support for the fiscal rule in its current form.
- Discussions ongoing about investment rules for the NWF once its liquid portion exceeds 7 percent of GDP; authorities agree rules should avoid strengthening the link between the price of oil and the exchange rate.
- Authorities are strengthening their framework for assessing tax expenditures and beginning to analyze the efficiency of tax expenditures.
- On oil sector taxation, authorities acknowledged reverse excise has added complexity but claim subsidies for domestic consumption and refining have been significantly reduced compared to the previous regime.
- Authorities noted they are implementing a comprehensive strategy to reduce informality and consider current social contribution rates a reasonable compromise.
- Authorities cautious about revisiting early retirement eligibility due to concerns about employability of older workers.
- Authorities committed to means-testing any new social benefits.

### Monetary policy: easing should continue
- The CBR cut its key policy rate by 25 bps to 7.50 percent in June after raising it by 25 bps twice in 2018 H2 (September and December).
- In December, the CBR justified the rate increase as a pre-emptive move to contain second-round effects of the VAT rate increase.
- The VAT increase's impact on headline inflation in 2019:Q1 was around 0.5 percent, compared to an expected increase over 1 percent.
- In this context, the CBR cut its key policy rate and lowered its end-of-year annual inflation forecast for 2019 from 4.7–5.2 percent to 4.2–4.7 percent, allowing the possibility of further key policy rate reductions and a transition to neutral monetary policy during 2020.
- Staff revised down its inflation forecast based on observed outcomes, expected stability in domestic fuel and food prices.
- Recommendation: As inflation outturns remain broadly in line with or below staff’s forecast, the CBR should continue to ease monetary policy. Some undershooting of inflation below the 4 percent target is expected in 2020.

### Natural real interest rate (NRIR) and policy stance
- Staff NRIR estimates for late 2018 fall into the 1–3 percent range, with most estimates at about 2 percent (the lower bound of the CBR’s 2–3 percent range).
- The NRIR is estimated to have decreased over the past 15 years, driven by lower potential growth rates, lower international rates, and country risk premia.
- Comparing actual real policy rates to NRIR estimates suggests monetary policy was relatively accommodative during 2005–08, while in more recent years policy has been moderately tight.
- Uncertainty around NRIR estimates complicates policy; NRIR should be considered jointly with other indicators when setting policy.
- Recommendation: The CBR should continue refining its policy framework and communications strategy, adopt a more symmetrical approach to deviations from the 4 percent inflation target over time, and communicate policy decisions to reflect the CBR’s view of the economic and inflation outlook.

### FX intervention policy consideration
- The CBR could consider developing an explicit FX intervention policy to address disorderly market conditions; past episodes (e.g., September 2018) suggest such policy could mitigate abrupt exchange rate movements.
- Caution: any FX intervention policy must credibly avoid attempting to influence the exchange rate away from fundamentals.

### Financial sector: banking sector performance and NPLs
- Banking sector: aggregate returns on assets and equity increased in 2018, mainly driven by the largest banks.
- System-wide capital adequacy ratio stayed close to 12 percent.
- NPLs remain high at (10.3 percent in March) but are adequately provisioned, according to CBR data.
- The CBR continued banking sector cleanup: total number of credit institutions reduced to 469 as of May 1, from over 900 in 2013.
- A “bad bank” for core and non-core assets has been set up to deal with impaired assets of banks in open resolution, with a size (in book value) of around 2 percent of GDP.
- Authorities hope for a recovery rate of about 40 percent through actions including asset sales to the market.
- Staff recommendation: have a strategy for returning rehabilitated banks to the private sector consistent with increasing competition among banks; CBR should assess the viability of NPLs and ensure banks have incentives to write them off.

*Source: IMF staff report excerpt.*

### 26.      Rapid retail lending growth has spurred a regulatory response, but more may be

### Rapid retail lending growth has spurred a regulatory response, but more may be needed.

### Retail lending growth, household debt, and risks
- Growth rates of unsecured consumer and mortgage lending each stood at about 24 percent in March.
- Household debt in aggregate: 15.5 percent of GDP.
- Share of unsecured consumer lending to households with a payment-to-income (PTI) ratio above 50 percent increased to 37 percent at end-2018.
- Distribution note: unsecured consumer loans by PTI show concentrations in higher PTI intervals as of 2018 Q1–Q4 (figure referenced).

### Regulatory and macroprudential responses
- The CBR raised risk weights several times in 2018, and again in April 2019.
- Staff recommendation: CBR should consider increasing risk weights for unsecured consumer loans based on debt-to-income or payment-to-income ratios.
- Policy action: On June 11, the CBR announced it will establish surcharges to risk coefficients depending on both the effective interest rate (APR) and the PTI ratio since October 2019.
- New requirements: a matrix of risk weights where the higher the PTI and the APR, the higher the risk weight.
- Further staff advice: If fast growth in lending to households continues, consider broadening the macroprudential toolkit by introducing borrower-based tools (based on loan-to -value (LTV) and debt-to -income (DTI)/PTI ratios), which are often more effective in constraining credit growth than sectoral capital requirements.

### Corporate and SME credit and macro-financial context
- Credit to corporate and SME sectors: modest growth rates (below 6 percent, year-on-year, as of end-2018 and below 4 percent, year-on-year, in the last quarter of 2018, respectively).
- Increased profitability in tradable and non-tradable sectors and lower FX risks for corporates have contributed to reduce macro-financial risks.

### Supervisory and regulatory framework developments and gaps
- 2018 measures the CBR implemented or adopted:
  - Capital adequacy requirements can be augmented with risk-based buffers.
  - CBR sets the Basel III net stable funding ratio for systemically-important banks (SIBs).
  - Formal criteria adopted to guide bank resolution decisions.
  - 149 banks with capital less than RUB 1 billion were switched to a restricted basic license (simplified regulation; prohibited from most overseas operations).
- Recommendations and outstanding issues:
  - Strengthen legal framework for related party exposures and the draft law upgrading framework for banks’ external auditors.
  - In the ongoing asset quality review (AQR), scope to further improve identification of risks in consumer lending and to account for corporate borrowers’ business environments.
  - Final increase of the capital conservation buffer and capital surcharge for SIBs should be implemented as scheduled so banks achieve fully-loaded levels by January 2020.
  - Enhance supervision by enabling the CBR to exercise professional judgement as part of an explicit early intervention mechanism.
  - Supervision/legal reforms need legal protection for supervisors; State Duma currently reluctant to grant.

### Instant payment system (IPS)
- The CBR launched a new instant payment system (IPS) in January 2019.
- Design: built using best international experience (BIS CPMI, Australia’s NPP and ECB’s TIPS).
- Function: enable instant customer-to-customer interbank transfers 24/7/365.
- Tariffs for banks: between 0.5 and 3 rubles per payment depending upon the volume with a grace period in 2019.
- CBR intention: foster competition in this market segment.
- Staff recommendation: clearer delineation of oversight versus operational responsibilities for payment systems in the CBR’s organizational structure; apply oversight standards consistently to comparable payment and settlement systems, including those operated by the CBR.

### AML/CFT progress and vulnerabilities
- Progress since 2016 FSAP (AML/CFT Technical Note) and in preparation for FATF/MONEYVAL/EAG mutual evaluation:
  - Finalization of the National Risk Assessment (NRA).
  - Public summary of NRA highlights main money laundering threats: i) fraud and misappropriation of budgets and taxes; ii) corruption and bribery; iii) financial sector fraud; and iv) drug trafficking.
- Remaining actions:
  - Continue to take appropriate mitigating measures to address identified risks.
  - FATF/MONEYVAL/EAG mutual evaluation report scheduled for adoption by FATF in October 2019; will provide a roadmap for future improvements.
- Beneficial ownership:
  - Authorities require all Russian legal entities to have beneficial ownership information available.
  - Recommendation: consider requiring legal entities to feed this information into a domestic beneficial ownership registry.
- External factors:
  - Possible negative impact of sanctions on the risk appetite of foreign financial institutions to do business with Russian counterparts is a concern; authorities should monitor and mitigate.
  - Bilateral foreign sanctions and extraterritorial impacts potentially increase risk exposure of foreign institutions and pressure correspondent banking relationships.
  - Ongoing investigations in third countries related to past money laundering schemes may similarly affect correspondent relationships.

### Authorities’ views on financial sector issues
- Authorities’ assessment:
  - Health of the financial system has improved over the past year.
  - General quality of asset portfolio stabilized, especially in the corporate sector, per AQRs.
  - Further work needed to expand review coverage of the consumer lending portfolio.
  - Intention to disinvest rescued banks, but uncertainty whether market/private capital readiness exists and concern about dominance by a single private shareholder.
  - Authorities agree CBR needs legal protection to exercise professional judgement for enhanced supervision.
- Macroprudential stance:
  - Authorities consider measures already implemented as pre-emptive to mitigate potential financial stability risks.
  - They would explore implementing risk weights based on DTI.
  - Currently, they state they do not have legal scope to implement borrower-based macroprudential measures (LTV and PTI).

### Structural reforms to lift potential growth
- Rationale: decline of Russia’s per capita income relative to EU new member states underscores importance of structural reforms; many past growth drivers are non-replicable (2003–08 factors).
- Long-standing weaknesses: inadequate infrastructure, large footprint of the state, lack of competition, excessive regulations, weak protection of property rights, corruption vulnerabilities, adverse demographic trends.
- Steps taken by authorities:
  - Gradual extension of pension ages adopted in 2018.
  - Government plans to boost public spending on human and physical capital via 13 national projects.
  - Pilots for lower and simpler taxation of the self-employed in four regions in 2019.
  - National projects and business climate plan (January 2019) to increase non-energy exports, trade integration within the Eurasian Economic Union, facilitate trade, selectively reduce import duties, and expedite customs through digitalization and risk-based approaches.
- Reform priorities (near term, high productivity impact and feasible):
  - Enhance competition by facilitating entry/exit of firms (e.g., reform bankruptcy framework).
  - Strengthen competition authority’s enforcement powers.
  - Reform public procurement rules to ensure open and competitive tendering.
  - Consider a well-designed reduction in taxes on labor, financed by targeted expenditure savings or elimination of inefficient tax breaks, to incentivize labor supply and reduce informality.
- Trade and FDI recommendations:
  - Persist with efforts to strengthen competitiveness and promote trade integration by reducing barriers to trade and FDI.
  - Address structural rigidities identified in 2017 Article IV Selected Issues Papers (e.g., business regulation and undiversified export basket).
  - Steadfast implementation of the revised fiscal rule to weaken impact of oil prices on exchange rate and support the non-oil economy.
  - Reduce high localization requirements (noted as the third highest among G20 countries) which may keep Russia outside global supply chains.

### Governance, corruption vulnerabilities, and fiscal transparency
- Governance weaknesses discussed: AML/CFT, fiscal governance, and SOE oversight.
- Fiscal transparency:
  - Cross-country evidence: fiscal transparency correlated with better outcomes (efficiency of public investment and revenue collection, lower borrowing costs, improved corruption perceptions).
  - Russia has made significant progress since volunteering for an IMF Fiscal Transparency Evaluation (FTE) in 2014, but further improvements remain.
  - Specific fiscal transparency gaps: reporting government’s obligations under PPPs, reducing share of classified expenditure in the budget, strengthening SOE governance.
- Recommendations on SOEs and fiscal reporting:
  - Start producing a summary document on the financial performance of the SOE sector.
  - Require all SOEs to publish audited financial statements.
  - MoF initiated review program of the value for money of government tax expenditures to inform the 2020 Budget.
  - Work to strengthen financial oversight of SOEs underway with statistics on consolidated public corporations sector expected in the early 2020s.
  - Government plans to extend time horizon for longer-term economic and fiscal forecasts beyond current 17-year horizon and include more detailed fiscal risk analysis.

*Source: IMF staff report chapter titled "Rapid retail lending growth has spurred a regulatory response, but more may be needed."*

### 44.      Improving Russia’s moderate growth prospects will depend on domestic policies

### 44.      Improving Russia’s moderate growth prospects will depend on domestic policies

### Growth outlook and overarching policy message
- External impetus to growth is expected to be limited due to sanctions, global political and trade uncertainty and lower oil prices.
- A credible macroeconomic framework has been established since 2014 in the form of inflation targeting, exchange rate flexibility and the fiscal rule.
- Stronger medium-term growth requires an acceleration of structural reforms to improve the working of the economy.

### Fiscal stance and sovereign wealth management
- The neutral stance of fiscal policy in 2019 implied by the fiscal rule is appropriate.
- Further changes to the rule should be avoided in coming years to firmly establish its credibility.
- Additional consolidation of 1–   2 percent of GDP is estimated to be needed in the long term to share equitably Russia’s natural resource wealth with future generations.
- The authorities should refrain from quasi-fiscal activities through the NWF and should continue to invest NWF funds into high-quality foreign assets to safeguard resources, avoid procyclicality, and shield the economy from oil price fluctuations.

### Tax and spending policy priorities
- The authorities’ plans for a growth-friendly shift in taxes and spending are welcome but could be extended, within the confines of the fiscal rule.
- Planned spending increases in public infrastructure, health and education under the national projects are welcome if well-targeted and efficiently implemented.
- Oil sector taxation should be simplified, including phasing out subsidies for domestic consumption while ensuring protection for vulnerable groups.
- Improved revenue collection and removal of inefficient tax breaks could finance a reduction in social contributions, helping address informality.
- Early retirement provisions remain overly generous despite recent pension reform.
- Within the current social assistance budget, greater emphasis on means-tested rather than universal benefits would help to reduce poverty.

### Financial sector soundness and banking reform
- Cleanup of the banking sector needs to be completed.
- Continue strengthening bank supervision and regulation, including:
  - reducing lending concentration and related-party loans;
  - strengthening asset quality review;
  - fully implementing Basel III regulatory standards as scheduled.
- Additional measures to curb unsecured consumer lending may be needed if current measures prove insufficient.
- Develop a strategy for returning rehabilitated banks to private hands consistent with increasing competition among banks.

### Monetary policy and inflation outlook
- The monetary policy stance is estimated to be moderately tight; with reduced inflationary pressures, continued easing appears appropriate.
- The VAT increase has had a lower-than-expected impact on headline inflation.
- Recent appreciation of the ruble and stability of domestic fuel prices reduce inflationary pressures.
- A forecast that incorporates these developments is consistent with inflation reaching the 4 percent target in early 2020, under a declining path for the central bank’s policy rate.

### Structural reforms to raise potential growth
- The potential to raise growth depends on the ambition of reforms to strengthen competition and reduce the role of the state.
- Public infrastructure spending quantified under the National Projects, combined with the labor supply impact of pension reform, is projected to lift potential growth by 0.1–0.5 percentage points, depending on the effectiveness of implementation.
- Other National Project initiatives include targeting demographics, labor productivity and employment support, SMEs and entrepreneurship support, enhancing international cooperation, and increasing non-commodity exports.
- To achieve significant growth dividends, reforms should address:
  - lack of competition and the large footprint of the state in the economy and intrusiveness into business activity;
  - facilitating entry and exit of firms;
  - strengthening SOE governance;
  - fully implementing plans for improving the business climate;
  - encouraging competition within and across regions, including in public procurement.

### Fiscal transparency and public reporting
- Since the 2014 Fiscal Transparency Evaluation, progress includes estimates of the value of natural resources, detailed reporting on the cost of tax expenditures, publishing longer-term fiscal projections and a comprehensive report on fiscal risks, and adopting a program-based budget classification.
- Further progress is needed to:
  - report the government’s obligations under PPPs;
  - reduce the share of classified expenditure in the budget;
  - strengthen the governance and enhance the financial reporting of SOEs.

*International Monetary Fund*

### 51.      Public and external debt are assessed to be sustainable. The external position in 2018 was

### 1rusea2019001 - 51. Public and external debt are assessed to be sustainable. The external position in 2018 was

### IMF assessment and surveillance
- Public and external debt are assessed to be sustainable.
- The external position in 2018 was moderately stronger than fundamentals and desirable policy settings.
- The next Article IV consultation should be held on the standard 12-month cycle.

### Macroeconomic outlook and growth
- Real GDP (annual percent change):
  - 2016: 0.3
  - 2017: 1.6
  - 2018: 2.3
  - 2019: 1.2
  - 2020: 1.9
  - 2021: 2.0
  - 2022: 2.0
  - 2023: 1.9
  - 2024: 1.8
- Real domestic demand (annual percent change): -1.1 (2016); 3.8 (2017); 1.5 (2018); 1.1 (2019); 1.9 (2020); 2.4 (2021); 2.5 (2022); 2.3 (2023); 2.1 (2024)
- Unemployment rate (percent): 5.5 (2016); 5.2 (2017); 4.8 (2018); 4.8 (2019); 4.8 (2020); 4.7 (2021); 4.7 (2022); 4.7 (2023); 4.8 (2024)
- Output gap (percent of potential GDP): -1.5 (2016); -0.8 (2017); 0.2 (2018); -0.1 (2019); -0.1 (2020); 0.1 (2021); 0.2 (2022); 0.2 (2023); 0.1 (2024)
- Real per capita GDP (2014=100): 97.7 (2016); 99.2 (2017); 101.5 (2018); 102.8 (2019); 104.8 (2020); 107.0 (2021); 109.4 (2022); 111.7 (2023); 114.0 (2024)

### Inflation and monetary policy
- Consumer prices (period average, percent): 7.1 (2016); 3.7 (2017); 2.9 (2018); 4.9 (2019); 3.9 (2020); 4.0 (2021); 4.0 (2022); 4.0 (2023); 4.0 (2024)
- Consumer prices (end of period, percent): 5.4 (2016); 2.5 (2017); 4.3 (2018); 4.3 (2019); 3.9 (2020); 4.0 (2021); 4.0 (2022); 4.0 (2023); 4.0 (2024)
- Core CPI (period average, percent): 7.5 (2016); 3.5 (2017); 2.5 (2018); 4.3 (2019); 3.8 (2020); 3.9 (2021); 4.0 (2022); 4.0 (2023); 4.0 (2024)
- CBR policy action noted: cut key policy rate by 25 bps in June 2019 after an increase of 50 bps in 2018 H2 (textual narrative).

### Fiscal outlook and sustainability
- General government net lending/borrowing (overall balance, percent of GDP): -3.7 (2016); -1.5 (2017); 2.9 (2018); 1.5 (2019); 1.3 (2020); 0.6 (2021); 0.0 (2022); -0.3 (2023); -0.6 (2024)
- General government revenue (percent of GDP): 32.8 (2016); 33.3 (2017); 35.5 (2018); 34.7 (2019); 34.3 (2020); 33.6 (2021); 33.2 (2022); 33.0 (2023); 32.9 (2024)
- General government expenditures (percent of GDP): 36.4 (2016); 34.7 (2017); 32.6 (2018); 33.3 (2019); 33.3 (2020); 33.0 (2021); 33.0 (2022); 33.3 (2023); 33.5 (2024)
- Primary balance (percent of GDP): -3.2 (2016); -1.0 (2017); 3.4 (2018); 1.9 (2019); 1.8 (2020); 1.5 (2021); 1.0 (2022); 0.7 (2023); 0.5 (2024)
- Non-oil balance (percent of GDP): -9.8 (2016); -8.7 (2017); -7.0 (2018); -6.9 (2019); -6.7 (2020); -6.8 (2021); -7.1 (2022); -7.3 (2023); -7.4 (2024)
- Non-oil primary structural balance (percent of GDP): -8.9 (2016); -7.7 (2017); -6.6 (2018); -6.4 (2019); -6.1 (2020); -6.0 (2021); -6.2 (2022); -6.3 (2023); -6.3 (2024)
- Memorandum: General government debt (percent of GDP): 16.1 (2016); 15.5 (2017); 14.6 (2018); 15.8 (2019); 16.3 (2020); 17.1 (2021); 18.1 (2022); 19.2 (2023); 20.5 (2024)
- Narrative findings:
  - The authorities have completed an ambitious fiscal consolidation, relying on both expenditure and revenue measures.
  - Further fiscal consolidation is needed to bring the non-oil deficit to a level consistent with intergenerational equity.
  - A gradual rebuilding of fiscal buffers is projected.
  - Full implementation of the pension reform would help mitigate the decline in the labor force (textual observation).

### External sector and reserves
- Current account (billions of U.S. dollars): 24.5 (2016); 33.2 (2017); 113.8 (2018); 106.5 (2019); 97.5 (2020); 90.6 (2021); 75.1 (2022); 69.2 (2023); 64.2 (2024)
- Current account (percent of GDP): 1.9 (2016); 2.1 (2017); 6.9 (2018); 6.3 (2019); 5.6 (2020); 5.1 (2021); 4.1 (2022); 3.7 (2023); 3.3 (2024)
- Exports, f.o.b. (billions of U.S. dollars): 281.7 (2016); 353.5 (2017); 443.1 (2018); 447.7 (2019); 451.0 (2020); 452.3 (2021); 456.7 (2022); 466.1 (2023); 478.7 (2024)
  - Of which energy exports (billions of U.S. dollars): 151.1 (2016); 190.3 (2017); 256.3 (2018); 244.4 (2019); 242.4 (2020); 232.8 (2021); 227.0 (2022); 226.2 (2023); 228.3 (2024)
  - Oil exports (billions of U.S. dollars): 119.9 (2016); 151.6 (2017); 207.2 (2018); 197.2 (2019); 196.2 (2020); 189.1 (2021); 184.0 (2022); 183.1 (2023); 184.8 (2024)
  - Gas exports (billions of U.S. dollars): 31.2 (2016); 38.7 (2017); 49.1 (2018); 47.3 (2019); 46.2 (2020); 43.7 (2021); 43.0 (2022); 43.1 (2023); 43.5 (2024)
- Imports, f.o.b. (billions of U.S. dollars): -191.5 (2016); -238.1 (2017); -248.6 (2018); -255.7 (2019); -264.5 (2020); -275.1 (2021); -287.5 (2022); -300.8 (2023); -315.6 (2024)
- Gross international reserves (Billions of U.S. dollars): 377.7 (2016); 432.7 (2017); 468.5 (2018); 517.5 (2019); 551.5 (2020); 582.5 (2021); 608.5 (2022); 629.5 (2023); 645.5 (2024)
- Months of imports of goods and non-factor services (GNFS): 17.0 (2016); 15.9 (2017); 16.4 (2018); 17.6 (2019); 18.1 (2020); 18.4 (2021); 18.4 (2022); 18.2 (2023); 17.8 (2024)
- Total external debt (billions of U.S. dollars): 511.8 (2016); 518.1 (2017); 454.0 (2018); 456.3 (2019); 465.0 (2020); 480.2 (2021); 500.2 (2022); 517.3 (2023); 538.9 (2024)
- Total external debt (percent of GDP): 39.9 (2016); 32.8 (2017); 27.4 (2018); 27.2 (2019); 26.8 (2020); 27.0 (2021); 27.4 (2022); 27.3 (2023); 27.5 (2024)
- Net private capital flows (percent of exports of GNFS): -4.2 (2016); -6.4 (2017); -13.4 (2018); -8.8 (2019); -11.4 (2020); -11.5 (2021); -9.6 (2022); -8.7 (2023); -9.2 (2024)
- Narrative findings:
  - The current account surplus reached a record high in 2018, driven almost entirely by the trade balance.
  - The non-energy current account has stagnated.
  - Net private capital outflows continued, while foreign holdings of sovereign debt declined but appear to have bottomed out.

### External financing and balance of payments projections
- Balance of payments:
  - Trade balance (billions of U.S. dollars): 90.2 (2016); 115.4 (2017); 194.5 (2018); 192.0 (2019); 186.5 (2020); 177.2 (2021); 169.3 (2022); 165.3 (2023); 163.1 (2024)
  - Services (billions of U.S. dollars): -24.0 (2016); -31.2 (2017); -29.9 (2018); -31.7 (2019); -34.3 (2020); -37.7 (2021); -41.3 (2022); -44.8 (2023); -48.4 (2024)
  - Income (billions of U.S. dollars): -35.5 (2016); -42.1 (2017); -41.4 (2018); -39.2 (2019); -42.6 (2020); -38.3 (2021); -44.2 (2022); -44.3 (2023); -45.1 (2024)
  - Capital and financial account (billions of U.S. dollars): -10.8 (2016); -13.1 (2017); -78.2 (2018); -57.5 (2019); -63.5 (2020); -59.6 (2021); -49.1 (2022); -48.2 (2023); -48.2 (2024)
  - Overall balance (billions of U.S. dollars): 8.2 (2016); 22.6 (2017); 38.2 (2018); 49.0 (2019); 34.0 (2020); 31.0 (2021); 26.0 (2022); 21.0 (2023); 16.0 (2024)
- External financing requirements and sources (Table 3 highlights projections for 2018–24 including gross financing requirements, current account, debt amortization, and sources such as FDI, foreign investment in Russia, new borrowing and debt rollover; specific table entries preserved in main tables above).

### Banking sector and financial soundness
- Financial soundness indicators (selected):
  - NPLs to total loans (percent): 6.0 (2013); 6.7 (2014); 8.3 (2015); 9.4 (2016); 10.0 (2017); 10.1 (2018); 10.4 (2019 Q1)
  - Capital to risk-weighted assets (percent): 13.5 (2013); 12.5 (2014); 12.7 (2015); 13.1 (2016); 12.1 (2017); 12.2 (2018); 12.2 (2019 Q1)
  - Tier 1 capital to risk-weighted assets (percent): 9.1 (2013); 9.0 (2014); 8.5 (2015); 9.2 (2016); 8.5 (2017); 8.9 (2018); 9.6 (2019 Q1)
  - Return on assets (percent): 1.9 (2013); 0.9 (2014); 0.3 (2015); 1.2 (2016); 1.0 (2017); 1.5 (2018); 1.8 (2019 Q1)
  - Return on equity (percent): 15.2 (2013); 7.9 (2014); 2.3 (2015); 10.3 (2016); 8.3 (2017); 13.8 (2018); 15.9 (2019 Q1)
- Narrative findings:
  - Retail credit growth accelerated while corporate credit increased slowly.
  - NPLs remained around the same level over the last year.
  - Bank profitability is recovering, especially for large banks.
  - Aggregate capital ratios have remained stable; the CBR continues cleanup of the banking system.
  - The corporate sector reduced external debt in recent years; banks’ external borrowing declined in 2018.

### Key commodity and price indicators
- Brent oil price (U.S. dollars per barrel): 44.0 (2016); 54.4 (2017); 71.1 (2018); 68.4 (2019); 66.9 (2020); 63.4 (2021); 61.2 (2022); 60.1 (2023); 59.9 (2024)
- Urals crude oil spot price (U.S. dollars per barrel): 41.9 (2016); 53.0 (2017); 69.6 (2018); 66.9 (2019); 65.4 (2020); 61.9 (2021); 59.7 (2022); 58.7 (2023); 58.4 (2024)

### Policy implications and projected adjustments (textual conclusions in source)
- Further fiscal consolidation is needed to reduce the non-oil deficit toward intergenerational equity benchmarks.
- A gradual rebuilding of fiscal buffers is projected and recommended.
- Full implementation of pension reform would help mitigate expected declines in the labor force.
- Monetary policy eased in mid-2019 following a moderation in inflation and decline in short-term pro-inflationary risks (CBR cut key rate by 25 bps in June 2019 after prior tightening in 2018 H2).

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

### Annex I. Risk Assessment Matrix (RAM)

### Annex I. Risk Assessment Matrix (RAM)

### External Risks
- Escalation of geopolitical tensions
  - Relative Likelihood: High
  - Expected Impact if Materialized: Medium
  - Overall Level of Concern: (presented under External Risks)
  - Recommended Policy Response:
    - "The floating exchange rate should play a key role in cushioning the shock. Disorderly market conditions could be countered with foreign exchange intervention. An increase in policy interest rates could also be considered. Fiscal policy could use existing buffers within the framework of the fiscal rule."

- Rising protectionism and retreat from multilateralism
  - Relative Likelihood: High
  - Expected Impact if Materialized: Medium
  - Recommended Policy Response:
    - "If the country is affected by the imposition of tariffs, macroeconomic policies should be supportive in order to weather the initial impact through the trade channel. Structural reforms should be accelerated to enhance diversification and increase trade links. They should be accompanied by support for multilateral efforts to promote global trade and strengthen the multilateral trading system."

- Weaker-than-expected global growth
  - Relative Likelihood: Medium/High
  - Expected Impact if Materialized: Medium
  - Recommended Policy Response:
    - "A decline in oil prices would be the main spillover channel. In that context, the exchange rate should be allowed to adjust. Disorderly market conditions could be countered with foreign exchange intervention. Fiscal policy could use existing buffers within the framework of the fiscal rule."

- Large swings in energy prices
  - Relative Likelihood: Medium
  - Expected Impact if Materialized: Medium
  - Recommended Policy Response:
    - "The floating exchange rate should be the main shock absorber. Fiscal policy could use existing buffers within the framework of the fiscal rule. Structural reforms should be advanced to promote diversification."

- Sharp tightening of global financial conditions
  - Relative Likelihood: Low/Medium
  - Expected Impact if Materialized: Low
  - Recommended Policy Response:
    - "Enhance resilience and confidence in the financial system by strengthening core institutions and policy frameworks. Improve the investment climate. Tighten monetary policy if balance of payment pressures emerge, while allowing the exchange rate to adjust, providing liquidity, and intervening only to counter disorderly market conditions."

### Domestic Risks
- Lack of structural reforms leading to decline in investment and TFP
  - Relative Likelihood: Medium/High
  - Expected Impact if Materialized: Medium
  - Recommended Policy Response:
    - "Focus on structural and governance reforms to improve the investment climate. Avoid distortive measures and increase trade openness. Monitor closely (through KPIs and other metrics) the implementation of the 13 national projects and other planned structural reforms."

- Faster growth in consumer lending leading to build-up of impaired assets
  - Relative Likelihood: Medium
  - Expected Impact if Materialized: Medium
  - Recommended Policy Response:
    - "Deploy additional macroprudential measures related to payment-to-income and/or debt-to -income ratios to mitigate financial stability risks. Continue the consolidation process in the banking sector, including through resolution of banks that are not compliant with regulatory and supervisory norms."

---

### Annex II. Implementation of Past IMF Recommendations — Key Points
- Fiscal Policy
  - Recommendation: Refrain from revising the fiscal rule; over the medium term implement further fiscal consolidation to reach a nonoil primary balance consistent with intergenerational equity.
    - Implementation Status: "Not implemented. The fiscal rule was temporarily relaxed by 0.5 percent of GDP over 2019–2024, in order to accommodate higher infrastructure spending."
  - Recommendation: Reform oil sector taxation; shift from direct to indirect taxation; eliminate inefficient tax expenditures.
    - Implementation Status: "Some progress. The authorities approved an oil sector tax reform, which will gradually eliminate export duties by 2024 and replace them with mineral extraction taxes. However, the reform was diluted by restoring subsidies to domestic refining and consumption in the form of a “reverse excise” which has made oil sector taxation more complex. The main VAT rate was raised from 18 to 20 percent in January 2019. Tax expenditures have been preserved."
  - Recommendation: Implement parametric pension reform (raise statutory retirement age, limit early retirement).
    - Implementation Status: "Substantial progress. A parametric pension reform was approved in 2018. It will raise the retirement age by 5 years over the next decade, but did not reform early retirement."
  - Recommendation: Improve quality of spending mix; increase spending on physical and human capital; improve targeting of social assistance.
    - Implementation Status: "Some progress. The authorities intend to spend an additional 7 percent of GDP over 2019–2024 on investment in physical and human capital under the national projects. They have formulated a plan to improve the efficiency of public spending over the next six years. The authorities have also reformed unemployment insurance, by increasing benefits and reducing their duration for most workers."

- Monetary and Financial Sector Policy
  - Recommendation: Refine further the CBR’s communication strategy.
    - Implementation Status: "Some progress. CBR’s communications are reinforcing the message that policy decisions are targeting inflation forecasts rather than current inflation."
  - Recommendation: Strengthen bank supervision and regulation; complete independent asset quality evaluations; bolster legal framework on related party exposures and external auditors; enable CBR professional judgment; improve ex post communication on bank resolution decisions.
    - Implementation Status: "Some progress. The CBR continues its efforts to improve bank supervision and regulation. All banks have been subjected to enhanced on-site inspections. The authorities report that related party lending has declined. Lack of legal protection for the exercise of professional judgement continues to limit the enforcement of regulations on related party lending."
  - Recommendation: Nudge banking system toward more competition and better governance; reduce concentration; develop strategy for returning SOBs to private hands.
    - Implementation Status: "Some progress. The CBR has made progress with banks under open resolution and aims to eventually return them to the private sector. A “bad bank” has been set up that will deal with the non-performing and non-core assets of these banks. Its assets have been classified by type of industry, and industry-specific strategies to deal with these have been developed. However, the CBR still needs to spell out a strategy for returning banks under open resolution to the private sector and reduce the footprint of the state. No major advances have been made to level the playing field between private and state-owned banks."

- Structural Policies
  - Recommendation: Reduce the state’s footprint over the medium term; enhance competition; level the playing field in public procurement; improve efficiency.
    - Implementation Status: "Some progress. In line with the National Plan for Promoting Competition for 2018–20, a draft law banning the creation of state and municipal unitary enterprises in competitive markets is currently under consideration in the State Duma. The authorities have also drafted and published a bill prohibiting state-owned banks from buying their private competitors."
  - Recommendation: Tackle institutional and governance issues, including excessive regulation.
    - Implementation Status: "Some progress. In January 2019, the government introduced a comprehensive plan to improve the business climate. It aims to ease access to utility networks, expedite construction approvals, digitalize the registration of real estate, simplify SME access to government procurement and funding, ease business registration, improve corporate governance, and reduce administrative pressures on business. This includes the so-called “regulatory guillotine” initiative— a comprehensive review of all existing rules and regulations for businesses, and automatic cancelation of those that do not meet a cost-benefit test. The State Duma is also considering a draft law to reform and expand the so-called “special investment contract” framework, which guarantees a stable regulatory environment to investors for a fixed period of time."
  - Recommendation: Persist with efforts to strengthen competitiveness, promote trade integration, and diversify exports.
    - Implementation Status: "Some progress. One of the authorities’ announced 13 national projects focuses on increasing non-energy exports, particularly of machinery, agriculture, and services. It also targets further trade integration within the Eurasian Economic Union. The authorities’ plan to improve the business climate (outlined above) aims to promote exports and expedite customs procedures through digitalization."
  - Recommendation: Strengthen transparency, accountability, and governance standards in the SOE sector.
    - Implementation Status: "Some progress. The government is exploring the possibility of introducing real-time remote access by tax authorities to the tax and financial statements of SOEs, in exchange for exemptions from on-site tax inspections. In May 2019, the State Duma passed a bill which enables the Audit Chamber to audit the subsidiaries of of government companies and government corporations."
  - Recommendation: Reduce informality.
    - Implementation Status: "Some progress. In 2019, the authorities launched pilots for lower and simpler taxation of the self-employed in 4 regions. By mid-2019, real-time online registration will be required for all retail sales."

---

### Annex III. Debt Sustainability Analysis — Key Assumptions and Projections
- Figure 2 — Baseline scenario (selected underlying assumptions for 2019–2024 as presented)
  - Real GDP growth: 1.2 1.9 2.0 2.0 1.9 1.8
  - Inflation: 4.3 3.9 4.0 4.0 4.0 4.0
  - Primary Balance: 1.9 1.8 1.5 1.0 0.7 0.5
  - Effective interest rate: 7.6 7.6 7.9 8.1 8.1 8.2
- Figure 2 — Historical scenario (selected)
  - Real GDP growth: 1.2 1.0 1.0 1.0 1.0 1.0
  - Inflation: 4.3 3.9 4.0 4.0 4.0 4.0
  - Primary Balance: 1.9 -1.2 -1.2 -1.2 -1.2 -1.2
  - Effective interest rate: 7.6 7.6 6.5 5.7 5.1 4.8
- Figure 2 — Constant Primary Balance Scenario (selected)
  - Real GDP growth: 1.2 1.9 2.0 2.0 1.9 1.8
  - Inflation: 4.3 3.9 4.0 4.0 4.0 4.0
  - Primary Balance: 1.9 1.9 1.9 1.9 1.9 1.9
  - Effective interest rate: 7.6 7.6 7.9 8.1 8.2 8.3

- Table 1 — Baseline: External debt (concatenated series as presented)
  - "Baseline: External debt29.138.039.932.827.428.027.627.527.527.327.32.2"

- Table 1 — Selected items and projections (as presented)
  - Change in external debt: "-2.78.91.9-7.1-5.40.6-0.3-0.10.0-0.20.0"
  - Identified external debt-creating flows (4+8+9): "3.111.4-0.2-9.1-7.1-4.5-3.8-2.9-2.4-1.8-1.3"
  - Current account deficit, excluding interest payments: "-4.2-6.7-3.5-3.0-7.9-6.7-6.2-5.7-5.2-4.6-4.1"
  - Deficit in balance of goods and services: "-6.5-8.1-5.2-5.3-9.9-8.0-7.6-7.0-6.6-6.0-5.7"
  - Exports: "27.328.825.926.130.730.130.530.730.930.931.3"
  - Imports: "20.820.720.720.720.822.122.923.724.324.925.5"
  - Net non-debt creating capital inflows (negative): "2.31.5-0.70.51.41.51.72.02.02.02.0"
  - Automatic debt dynamics: "1/5.016.64.0-6.6-0.50.70.70.70.70.80.8"
  - Contribution from nominal interest rate: "1.41.71.60.91.01.11.21.31.31.31.3"
  - Contribution from real GDP growth: "-0.21.0-0.1-0.5-0.7-0.3-0.5-0.5-0.5-0.5-0.5"
  - Residual, incl. change in gross foreign assets (2-3): "-5.8-2.52.02.01.65.13.52.82.51.51.3"
  - External debt-to-exports ratio (in percent): "106.6131.9154.0126.089.393.090.689.689.088.487.2"
  - Gross external financing need (in billions of US dollars): "145.760.159.056.10.25.515.319.726.633.737.7"
  - Gross external financing need (in percent of GDP): "7.14.44.63.60.010-Year10-Year0.30.91.11.51.81.9"
  - Scenario with key variables at their historical averages: "28.028.728.929.028.227.31.7"

- Key macroeconomic assumptions underlying baseline (selected series as presented)
  - Real GDP growth (in percent): "0.7-2.30.31.62.31.03.81.21.92.02.01.91.8"
  - GDP deflator in US dollars (change in percent): "-10.8-32.2-6.221.12.7-0.117.7-2.81.31.72.02.32.4"
  - Nominal external interest rate (in percent): "4.03.84.02.73.34.10.73.94.54.74.84.8"
  - Growth of exports (US dollar terms, in percent): "-5.0-30.1-15.423.723.72.423.9-3.54.54.54.84.15.7"
  - Growth of imports (US dollar terms, in percent): "-8.7-34.3-5.622.95.31.922.64.66.97.46.76.97.0"
  - Current account balance, excluding interest payments: "4.26.73.53.07.94.91.76.76.25.75.24.64.1"
  - Net non-debt creating capital inflows: "-2.3-1.50.7-0.5-1.4-0.80.9-1.5-1.7-2.0-2.0-2.0-2.0"

- Figure 3 — Bound tests and scenario notes (summary)
  - Interest-rate shock, CA shock, Growth shock, Combined shock, and Real depreciation shock are presented with scenario labels and baseline comparisons.
  - Notes: "Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown. Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. One-time real depreciation of 30 percent occurs in 2010."

*Source: IMF staff.*

### Annex IV. FSAP Key Recommendations

### Annex IV. FSAP Key Recommendations

### Banking Stability
- Conduct an asset quality review (AQR) to ensure adequate bank capitalization (CBR).  
  - Timing: ST/MT*  
  - Progress: In progress. Collateral registry is being prepared to ensure the timeliness and completeness of the valuation of assets and collateral. The CBR considers that the quality of the portfolio of the corporate sector has stabilized. However, regarding consumer lending, further work is needed to complete the identification of risk from this segment. The CBR is publishing stress-test results but not AQRs.
- Enhance stress testing practices, including on a consolidated basis and by currency (CBR).  
  - Timing: ST/MT  
  - Progress: In progress. CBR continues upgrading its stress-testing methodology: extended supervisory boundaries of entities, updated the methodology for assessing credit, market and interest rate risks. Also, a draft regulation, which lays out the stress-testing requirements for the internal procedures of assessing capital adequacy (ICAAP) is being finalized. In 2017, the CBR undertook its first macroprudential stress testing of the financial sector.

### Liquidity Management
- Review FX repo framework and formalize lender of last resort (CBR).  
  - Timing: ST  
  - Progress: Done. The FX repo framework takes account of banks’ access to FX funding from the interbank market. The CBR implemented an ELA facility in 2017. Procedures and criteria for liquidity provision under this facility set by the CBR are different from monetary policy instruments.
- Re-establish T-bill program.  
  - Timing: ST  
  - Progress: Not done. T-bill operations are a part of the budget policy.

### Financial Sector Oversight and Regulation
- 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 acquisition of large stakes in non-bank institutions. The draft law has been communicated to the Ministry of Finance. Provisions regulating CBR’s prior approval for individuals and legal entities to acquire over 10 percent of shares in non-bank institutions is codified in Federal No. 281-FZ of July 29, 2017, which became effective January 1, 2018.
- Issue specific requirements for management of banks’ country and transfer risks (CBR).  
  - Timing: ST  
  - Progress: In progress. A single regulatory act is being developed with requirements for managing country and transfer risks.
- Upgrade framework for relations with and use of banks’ external auditors (CBR).  
  - Timing: ST  
  - Progress: In progress. A draft law allows the CBR to regulate and supervise audit activities has been prepared. However, no new developments have been observed.
- Strengthen further the legal framework applicable to related parties (CBR).  
  - Timing: ST  
  - Progress: In progress. Effective from January 2017, the definition of related parties has been broadened and a limit set on such exposure at 20 percent of a bank’s equity capital. A new draft Law that requires credit institutions to deal with related parties on an arm’s length basis has been communicated to the Ministry of Finance.
- Upgrade framework for prudential oversight of banks’ operational risk (CBR).  
  - Timing: ST  
  - Progress: In progress. A pilot project to conduct a comprehensive analysis of the quality of the operational risk management systems of credit institutions under the existing regulatory framework has been completed. A separate methodology has been developed to assess the efficiency of the system of ensuring business continuity and/or restoration in credit institutions. A draft regulation on the requirements for the operational risk management system in a credit institution and a banking group has been prepared.
- Bring securities and insurance regulation and supervision into line with international standards (CBR).  
  - Timing: MT  
  - Progress: In progress. With respect to IOSCO principles, a total of 112 recommendations were received, of which as of April 1, 2019: 22 were fully implemented; 58 are in progress, of which 19 were implemented substantially (34 regulatory legal acts were adopted, 5 regulatory legal acts were submitted to the State Duma for discussion, 5 reports were published for public consultations, 55 inspections of securities market participants were conducted). Based on a self-evaluation, the Principles of IAAS No. 4 and No. 5 has been completed: 4 out of 6 recommendations of the 2015–16 FSAP have been partially implemented, 1 has been fully implemented, 1 has not been implemented.
- Ensure the effective implementation of the AML/CFT framework (CBR, MoF monitoring).  
  - Timing: ST  
  - Progress: In progress. The CBR participated in the AML/CFT National Risk Assessment (NRA) and conducted a comprehensive sectoral AML/CFT risk assessment in the supervised sectors taking into account regional specificities. On December 2018, the CBR issued guidelines for handling certain category of clients. The NRA is used also for the FATF/MONEYVAL/EAG comprehensive AML/CFT mutual evaluation. A public summary highlights: (i) fraud and misappropriation of budgets and taxes, (ii) corruption and bribery, (iii) financial sector fraud, and (iv) drug trafficking as the main money laundering threats.

### Macroprudential Policy
- Adopt legal changes to provide a comprehensive policy toolkit (CBR, MoF).  
  - Timing: ST/MT  
  - Progress: In progress. A Federal Law authorizes the CBR to increase risk weights by its Board decisions for certain types of assets. A CBR ordinance from August 2018 determines the method of applying risk premiums for capital adequacy purposes. Also, since October, a single methodology for the calculation of the payment-to-income ratio will be used.

### Crisis Management and Resolution
- Review the framework for the use of public funds to finance the DIA for resolution purposes to be provided by the federal government. If necessary to use CBR funds, the federal government should provide an indemnity (CBR, MoF).  
  - Timing: MT  
  - Progress: Not done. At present, budget funds cannot be used to finance bank resolution.
- Establish a funding mechanism for 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.
- 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) an effective resolution tool (CBR, MoF).  
  - Timing: ST  
  - Progress: In progress. The authorities have introduced a new resolution mechanism (Banking Sector Consolidation Fund). However, there is no provision as yet for asset transfer at market prices to an acquiring institution as part of a P&A transaction.

### Banking Sector Development
- Promote legal reforms to increase state-owned commercial banks (SOB’s) Board effectiveness (MoF, CBR).  
  - Timing: MT  
  - Progress: In progress. A Federal Law was adopted in July 2018 (On Amendments to the federal Law on Joint-Stock Companies), which aims at strengthening the role of the board of directors and ensuring the creation of an effective risk management and internal control system, and internal audit in public companies.
- Continue gradual privatization of SOBs (MoF, CBR) as conditions permit.  
  - Timing: MT  
  - Progress: Not done. Market conditions do not seem favorable at this time. There was an attempt to sell one bank, which was rescued using the new resolution framework, in March 2019.

* “ST–short term” is within one year; “MT–medium term” is one to three years.

*Italic: Annex IV. FSAP Key Recommendations, Russian Federation (IMF).*

### 5.      GDP stagnated after the dual shock of sanctions and lower oil prices in 2014, with

### 5.      GDP stagnated after the dual shock of sanctions and lower oil prices in 2014, with

### Growth performance 2014–18
- Growth averaged only 0.5 percent over 2014–18.
- Russia has been growing about 2 percent a year slower than expected at the time of the October 2013 WEO.
- Gross external outflows averaged 2 percent of GDP per year in 2014–18 (a reversal from nearly 6 percentage points of GDP of inflows in 2003–08).
- Domestic demand growth fell into negative territory; both consumption and investment fell in real terms during the period.
- Oil prices averaged 33 percent lower than expected over 2014–18 (based on October 2013 WEO projections).

### Drivers of the slowdown
- External shocks and policy responses:
  - Sanctions constrained access of Russian corporates and banks to international financial markets, forcing deleveraging and increasing country risk premia.
  - Exchange rate depreciation occurred alongside restrictive macro policies.
  - Monetary policy is estimated to have been moderately tight throughout the period as the CBR sought to establish confidence in the inflation targeting framework under difficult external circumstances.
  - Fiscal policy needed to tighten from the large non-oil deficits developed up to 2014, reflected in a negative fiscal impulse.
- Trade and demand composition:
  - Large depreciation of the real exchange rate helped growth by boosting nonoil exports and reducing imports amid weak domestic demand.
  - Oil volumes continued to grow only slowly, contributing very little to overall growth.
- Productivity and factor accumulation:
  - Labor and capital accumulation continued to make positive contributions to output but at slower rates than earlier periods.
  - Overall productivity declined, reflecting weakened dynamism in goods-producing sectors and changes in employment composition.
- Quantitative attribution from model-based analysis:
  - Counterfactual analysis based on both the GIMF and G20 models suggests unfavorable external conditions, including sanctions and the decline in global oil price, explain around 0.8 percentage points of the shortfall relative to October 2013 WEO projections.
  - A further 0.3 percentage points of the shortfall is attributed to responses to these shocks from the financial sector and macroeconomic policies.
  - Remaining differences could result from structural problems in the domestic economy or forecasting errors.

### Comparison with peers (NMS and G20 EMs)
- Historical and structural contrasts:
  - Russia shares a legacy of socialism with the EU new member states (NMS) but is more comparable in size and openness to other G20 emerging market economies (G20 EMs).
  - Russia is an oil exporter; the NMS and most G20 EMs are oil importers.
  - Russia’s external trade is linked to the dollar; the NMS are focused on the euro.
- Performance patterns:
  - Russia outpaced both NMS and other G20 EMs in the boom and remained above the NMS in the aftermath of the GFC.
  - During 2010–13 Russia grew more strongly than NMS, helped by high oil prices and fiscal expansion; NMS embarked on fiscal consolidation.
  - From 2014, macro trends diverged: Russia’s growth virtually stagnated; other G20 EMs grew much faster roughly following expectations; the NMS surprised somewhat on the upside.
- Factors explaining divergence:
  - Oil price decline: larger drag on Russia relative to NMS and most G20 EMs.
  - Linkages with Western Europe: sanctions reduced Russia’s financial and trade ties with advanced Europe, while NMS strengthened integration in value chains and benefited from EU structural and cohesion funds.
  - Structural and institutional reform: Russia improved macro frameworks but made less progress on structural reform, with a somewhat larger state footprint, notably in the financial sector; NMS continued institutional convergence with EU standards.
  - Fiscal stance: NMS completed fiscal consolidation by 2014; Russia reversed an expansionary stance after 2014, undertaking significant fiscal tightening; G20 EMs on average did not make large fiscal shifts.
  - Spreads and capital flows: up to 2013 Russian bond spreads comoved with NMS; since 2014 Russia’s spreads have been significantly higher and more volatile while NMS spreads declined; capital flows fell in Russia and rose in the NMS.

### Conclusions and outlook
- Russia can grow faster, but it is unlikely to recapture mid-2000s growth momentum: almost all factors driving the boom years have reversed.
- Some factors may ease in coming years, including the tightness of macro policies; the tight policy stance is expected to ease from 2019 on, with monetary policy moving to a neutral stance and little further change in the non-oil structural primary fiscal balance, following the fiscal rule.
- Strong macroeconomic frameworks should help restore confidence, reduce real interest rates, and limit real exchange rate reactions to oil prices, subject to risk of further external shocks.
- With strong structural and institutional reforms, medium-term growth could increase, but the combination of transformation, ramping up of oil production and prices, loose macro policies, and massive global liquidity that drove past high growth is unlikely to be repeated.

### Annex VII — The Natural Interest Rate in the Russian Federation: key points
- Framework and estimation:
  - Uses a version of the Laubach and Williams (2003) model as proposed by Pescatori and Turunen (2015).
  - Model includes a backward-looking IS curve, a Phillips curve linking inflation to output gap and imported inflation, and an equation linking NRIR to trend output growth and other determinants.
  - Determinants of NRIR (r_t^*) are trend growth (g_t) and an exogenous process (z_t): r_t^* = c g_t + z_t.
  - Two specifications for z_t:
    - Specification 1: z_t depends on a news index of economic policy uncertainty (p_t), country risk (c_t measured by EMBI), the US 10-year real sovereign yield (e_t), and autoregressive terms.
    - Specification 2: replaces the economic policy uncertainty index with the real effective exchange rate (REER).
  - Estimated using quarterly data 2003:Q1–2018:Q3; observed real interest rate constructed from CBR nominal policy rate and Consensus Economics 1-year ahead headline inflation expectations.
- Results:
  - NRIR estimates fall into the 1–3 percent range, with most estimates around 2 percent (at the lower bound of the CBR range 2–3 percent).
  - Estimated long-term growth rates at end sample broadly fall in a range of 1–1.5 percent.
  - Specification 1 performs better, largely due to the explanatory power of the Economic Policy Uncertainty Index.
  - General trend: NRIR shows a broadly declining trend driven by declining long-term growth; NRIR decreases through 2010 then moves sideways with increased volatility, especially since the dual shock at end-2014.
  - Decomposition: declines in the US long-term interest rate partially offset by increases in country risk (EMBI); in recent years, decreases in global interest rates and reductions in country risk were more than offset by increases in economic policy uncertainty.
  - In Specification 2, REER contribution to NRIR is small, possibly due to correlation with US rate and EMBI.
- Policy implications:
  - The direction of some factors affecting NRIR in emerging markets can differ from reserve currency countries (e.g., country risk premium pushes NRIR up in Russia).
  - Large uncertainty around NRIR estimates creates challenges for policy implementation; noisy NRIR estimates imply they should be considered jointly with other indicators such as deviations of inflation from target.

*Source: IMF staff report content unit 1rusea2019001 (chapter/section 5 and Annex VII).*

### References

### References

### Bibliographic References
- Dmitry Kreptsev, Alexey Porshakov, Sergey Seleznev, Andrey Sinyakov (2016) The equilibrium interest rate: a measurement for Russia. Bank of Russia, Economic Research Working Papers No. 13, July 2016.
- IMF (2017), “G-20 Report on Strong Growth, Sustainable, and Balanced growth,” October.
- Laubach, Thomas, and John C. Williams, 2003. "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1063–1070, November.
- Pescatori, Andrea and Jarkko Turunen, 2015. "Lower for Longer; Neutral Rates in the United States," IMF Working Papers 15/135, International Monetary Fund.

### Natural Real Interest Rate (Figure 1)
- Figure title: Russian Federation: Natural Real Interest Rate Estimations
- Specifications depicted:
  - Specification 1: US interest rate, EMBI, Policy Uncertainty
  - Specification 2: US interest rate, EMBI, REER
- Displayed elements (as labeled in the figure):
  - Median; 1st & 9th deciles; Natural Real Interest Rate (Percent)
  - Natural Real Interest Rate: Components (Percent, trend growth and additional determinants; Percent, trend growth and other determinants)
  - Decomposition of Z (Percent) with components labeled z_shock, z_polunc, z_us rate, z_embi, z_reer
  - Interest Rate Gap (Percent, real interest rate minus r*)
- Source: IMF staff calculations.

### Fund Relations — Key Figures (As of May 31, 2019)
- Membership Status: Joined June 1, 1992; Article VIII.
- General Resources Account (SDR Million and Percent Quota):
  - Quota 12,903.70
  - Fund holdings of currency 10,521.01
  - Reserve Position 2,382.72
  - Percent Quota: 336.92 100.00 81.53 18.47
- SDR Department (SDR Million and Percent Allocation):
  - Net cumulative allocation 5,671.80 100.00
  - Holdings 4,842.61 85.38
- Outstanding Purchases and Loans: None
- Latest Financial Arrangements (table entries reproduced as text):
  - Stand-by: Approval Date 07/28/99; Expiration Date 12/27/00; Amount Approved (SDR million) 3,300.00; Amount Drawn (SDR million) 471.43
  - EFF: Approval Date 03/26/96; Expiration Date 03/26/99; Amount Approved (SDR million) 13,206.57; Amount Drawn (SDR million) 5,779.71
  - of which SRF: Approval Date 07/20/98; Expiration Date 03/26/99; Amount Approved (SDR million) 3,992.47; Amount Drawn (SDR million) 675.02
  - Stand-by: Approval Date 04/11/95; Expiration Date 03/26/96; Amount Approved (SDR million) 4,313.10; Amount Drawn (SDR million) 4,313.10
- Projected Obligations to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - Forthcoming 2019 2020 2021 2022 2023
  - Principal: 4.66 9.30 9.29 9.29 9.29
  - Charges/Interest: (same line as Principal in table formatting) Total 4.66 9.30 9.29 9.29 9.29

### Exchange Arrangements and FX Policy
- De jure and de facto exchange rate arrangement: free floating.
- Central Bank of Russia (CBR) may intervene in the domestic foreign exchange market in the event of threats to financial stability.
- Effective February 1, 2017, the Ministry of Finance (MOF) implemented a mechanism for foreign exchange purchases and sales:
  - Purpose: enhance stability and predictability of local economic conditions and reduce impact of global energy price volatility on Russia’s economy and public finances.
  - Rule: As long as the actual Urals price exceeds US$40 per barrel, in real terms, the MOF will be purchasing foreign exchange in the amount of additional oil and gas revenues.
  - If actual prices drop below US$40 per barrel, MOF will be selling foreign exchange in the amount of the resulting shortfall in oil and gas revenues.
  - Operations: size announced at the start of every month; purchases evenly distributed within the month.
  - Characterization: preannounced, predictable, involves small daily amounts, and is not triggered by an exchange rate level.
- Russia 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.
- Article IV Consultation cycle: standard 12-month; last consultation concluded on September 7, 2018.

### FSAP, Fiscal Transparency, and Resident Representation
- FSAP participation:
  - Participated in FSAP during 2016; FSSA report discussed by the Board in July 2016.
  - FSAP financial stability assessment took place during April 2011; FSSA report discussed by the Board in September 2011.
  - FSAP update took place in fall 2007; FSSA report discussed by the Board in August 2008.
- IMF’s Fiscal Transparency Evaluation (FTE): undertaken in October 2013 and published in May 2014.
- Resident Representative: Mr. Gabriel Di Bella, Resident Representative since July 15, 2015.

### Statistical Issues — Assessment of Data Adequacy for Surveillance (As of May 31, 2019)
- General: Data provision is broadly adequate for surveillance; scope for further data improvements exists in the context of emerging data demands for assessing external vulnerabilities.
- National Accounts:
  - Data broadly adequate, but concerns 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 revised but compiled according to the 1993 SNA.
  - Main changes: improvements in estimation of imputed rental services of owner-occupied dwellings and use of market value of assets to estimate consumption of fixed capital.
  - Real GDP data rebased to 2016 prices, published from 1995:Q1.
  - CBR compiles quarterly sectoral financial accounts and financial balance sheets; data available on agency’s website 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.
  - Aggregate price indices compiled for each good and service item for all regions and the Russian Federation as a whole.
  - Population weights (rather than expenditure shares) applied to individual regional indices, possibly biasing CPI downwards if price increases are higher in regions with higher per capita expenditures.
  - Detailed PPI weights available only on the Russian-language version of the Rosstat website.
  - Recommendations noted: 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, other changes in volume of assets and liabilities, and outlays by functions of government (COFOG).
  - 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:
  - Following remote technical assistance from STA, in January 2019 Russia started reporting monetary data using the standardized report form (SRFs).
  - Data reported monthly for central bank and other depository corporations, quarterly for other financial corporations.
  - Reported data broadly consistent with MFSMCG methodology.
- External Sector Statistics:
  - Balance of payments data broadly adequate; significant improvements have been made.
  - CBR published gross capital flow data for the private sector.
  - Since 2012, BOP compiled according to BPM6; historical revisions back to 1994:Q1 for BOP and to 2004:Q1 for IIP.
  - Supplementary data (currency breakdown and derivatives) covering 2015:Q4 to 2018:Q3 published.
  - CBR adjusts 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 FSIs and 9 of the 13 encouraged FSIs for deposit takers on a quarterly basis.
  - After 2016, FSIs on earnings and profitability reported quarterly instead of annually.
  - 2 FSIs for households and 3 FSIs for real estate markets reported quarterly.
  - Data posted on 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.

### Russian Federation: Table of Common Indicators Required for Surveillance (As of May 31, 2019) — Selected entries
- Exchange Rates: Date of latest observation May 2019; Date received 5/31/2019; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation April 2019; Date received 5/20/2019; Frequency M M M.
- Reserve/Base Money: Date of latest observation May 2019; Date received 5/31/2019; Frequency W W W; Data Quality – Methodological soundness and Accuracy and reliability: O, O, LO, LO and O, O, O, O, O (as listed).
- Broad Money: April 2019; 5/31/2019; M M M; Data Quality entries: O,O,LO,LO and O,O,O,O,O.
- Central Bank Balance Sheet: March 2019; 5/06/2019; M M M; Data Quality entries: O,O,LO,LO and O,O,O,O,O.
- Consolidated Balance Sheet of the Banking System: April 2019; 5/31/2019; M M M; Data Quality entries: O,O,LO,LO and O,O,O,O,O.
- Interest Rates: May 2019; 5/31/2019; W W W; Data Quality entries: O,O,LO,LO and O,O,O,O,O.
- Consumer Price Index: April 2019; 5/15/2019; M M M.
- Revenue, Expenditure, Balance and Composition of Financing – General Government: April 2019; 5/22/2019; M M M; Data Quality – Methodological soundness: O, LO, LNO, O; Accuracy and reliability: O, O, O, O, O.
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: April 2019; 5/22/2019; M M M; Data Quality – Methodological soundness: LO, LNO, LO, O; Accuracy and reliability: O, O, LO, O, NA.
- Stocks of Central Government and Central Government-Guaranteed Debt: April 2019; 5/22/2019; M M M.
- External Current Account Balance: 2019:Q1; 4/09/2019; Q Q Q.
- Exports and Imports of Goods and Services: 2019:Q1; 4/09/2019; Q Q Q; Data Quality: O, O, O,LO and LO, O, O, O, O.
- GDP/GNP: 2018:Q4; 4/02/2019; Q Q Q.
- Gross External Debt: 2019:Q1; 4/26/2019; Q Q Q; Data Quality: O, O, O, O and O, O,LO, O, LO.
- International Investment Position: 2018:Q4; 4/02/2019; Q Q Q.

*Source: 1rusea2019001 - References (IMF staff calculations and staff report informational annex, June 25, 2019).*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2019/1rusea2019001.pdf_