## 1rusea2021001 ## Source details **Canonical URL:** [1rusea2021001](https://www.imf.org/-/media/files/publications/cr/2021/english/1rusea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1rusea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1rusea2021001.pdf.json) --- ### Pandemic status and public health measures - Daily infections as of January 28 (19,710) were about 30 percent below their end-December value. - Authorities announced restrictions could be gradually lifted in the coming weeks in light of the decline. - Mass vaccination of the population is ongoing; authorities have vowed to accelerate the pace. ### Economic outturns, activity, and outlook - Flash annual GDP: economy contracted by 3.1 percent last year, compared with staff’s -3.6 percent forecast. - Quarterly and high-frequency indicators: - Real GDP dropped 8.0 percent y/y in 2020Q2 (- 8.5 q/q SA). - GDP increased by 5.8 percent q/q SA in 2020Q3; 2020Q3 GDP stood 3.5 percent below 2019Q3. - Employment declined 2.2 percent in Q2 (seasonally adjusted). - Poverty rates increased to 13.5 percent in 2020Q2 from 12.7 percent in 2019Q2. - Only a quarter of the jobs lost during Q2 have returned; unemployment rate stood at 6.0 percent in November (August high-water mark 6.4 percent). - Projections and assumptions: - Economy projected to: contract by 3.6 percent in 2020; grow by 3 percent in 2021. - Forecast assumptions: COVID-19 vaccine widely available in 2021H2 in Russia and trading partners; oil and gas exports increase in line with OPEC+ agreement as of November 2020. ### Fiscal outturns and policy support - Preliminary 2020 federal fiscal deficit about 0.5 percent of GDP lower than projected in Staff Report, mostly due to stronger revenues such as VAT. - Fiscal support: about 3½ percent of GDP targeted at health, vulnerable households, unemployed, and firm support for SMEs and preventing large-scale layoffs; rises to 4½ percent if debt guarantees and capital injections included. - General government deficit: 4.6 percent of GDP in 2020 versus a surplus of almost 2 percent of GDP in 2019. - Reported fiscal measures (percent of GDP): - Spending measures: 2.4 - Healthcare: 0.6 - Non-healthcare: 1.8 - Income support: 0.8 - Firm support: 0.7 - Local governments: 0.3 - Revenue measures: 0.9 - Spending and revenue measures: 3.3 - Below-the-line measures: 1.0 - Measures to boost capital base: 0.5 - Guarantees for bank loans: 0.5 - Other: 0.1 - Public debt and financing: - Government debt projected to increase to 21 percent of GDP by end-2020, nearly 7½ percent of GDP higher than end-2019. - Gross financing needs: below 2 percent of GDP per year pre-crisis and projected at some 3 percent of GDP on average over 2020–25. - Recent issuance: €2 billion Eurobond in two tranches with yields of 1.125 percent (7-year) and 1.850 percent (12-year). - EMBIG spread for Russia about 165 bps in early January. ### Monetary and financial sector response - Bank of Russia (BoR) actions: - Policy rate cut by 200 bps to 4.25 percent (record low). - Increased liquidity support to banks and reduced interest rates on on-lending facilities for SMEs. - Released capital buffers and provided temporary regulatory forbearance on loan classification and provisioning. - Banking system metrics and resilience: - Capital adequacy ratio above 12 percent. - Liquid assets more than 130 percent of short-term liabilities. - NPLs about 9½ percent, adequately provisioned (above 90 percent). - Estimated capital available to cover potential loan-loss increases: 6.2 trillion rubles (5.6 percent of GDP). - Restructurings to date exceed a notional value of 6.5 trillion rubles. - Forbearance and supervisory guidance: - Forbearance allowed postponing provisioning until April 1, 2021 for corporate loans and July 1, 2021 for retail loans and SME loans. - Supervisors should track restructured loans closely; forbearance should not be extended when it expires as it obscures asset quality. ### Inflation and external sector - Inflation developments: - Headline inflation rose to 4.9 percent y/y in December from 2.3 percent y/y in February. - Core inflation 3.9 percent y/y in November (about 1½ percentage point rise since February). - Services inflation about 2.7 percent y/y, versus some 3¾ percent at end-2019. - Food price inflation increased from less than 2 percent y/y in February to more than 6 percent y/y. - Weekly data suggest inflation could increase to about 5¼ percent y/y in January from 4.9 percent in December. - External balances and capital flows: - Current account surplus through September declined to 1.7 percent of GDP from 3.2 percent of GDP in the corresponding period in 2019. - Private sector capital outflows about US$28 billion (1.6 percent of 2019 GDP) in H1 2020, triggering ruble depreciation by as much as 29 percent relative to end-2019. ### Oil and gas sector resilience and breakeven prices - Cash breakeven prices around $10–$15 per barrel (cash breakeven estimate varies across source excerpts). - Full-cost breakeven closer to $30–40 per barrel. - OPEC+ agreement (as of November 2020): tapering of production cuts from 7.7 mb/d to 5.8 mb/d starting January 1, 2021, with 5.8 mb/d adjustment scheduled to remain in place till 30 April 2022. - Additional oil sector facts: - Brent declined from US$66 per barrel (end-2019) to a low of US$19 per barrel on April 21; hovered around US$40– 45 per barrel since June. - Cash breakeven around $10 dollars per barrel owing to low operating costs, progressive taxes, and exchange rate effects (Annex text gives $10–$15 range). - Estimated lifting costs in 2020 around $3.4 per barrel. - Natural decline rates for many mature Russian fields around 10–25 percent per annum. - Reported capital expenditure plans possibly down by 30–40 percent in 2020. - Fiscal breakeven and buffers: - Russia’s pre-crisis fiscal breakeven oil price estimated around $40 per barrel. - Ministry of Finance stress test: one-year decline in Urals to $25 per barrel would reduce oil and gas revenues by 2.4 percent of GDP; three years at $25 would reach 7.6 percent of GDP revenue shortfall. - Foreign currency reserves "now at some 40 percent of GDP." ### Scarring, medium-term output, and potential growth - Real GDP in 2025 projected to be 2.5 percent below pre-crisis expectations. - Medium-term potential growth estimate reduced to 1.6 percent from 1.8 percent in the 2019 Article IV Staff Report. - Model and output-gap findings (Annex VII): - Staff’s forecasted real GDP decline in 2020 of 5½ percent relative to pre-crisis baseline. - Slightly more than 50 percent of the 5½ percent contraction attributed to negative supply shocks that depress potential GDP. - Lockdown supply shock estimated to have reduced potential GDP by nearly 2¾ percent in 2020. - Fiscal anti-crisis package estimated to have reduced the 2020 contraction by around 2¼ percentage points. - Output gap likely in the range of 2–3 percent negative in 2020 and likely as large or larger in 2021. - After 2021 rebound, potential growth assumed to settle at long-run value of 1.6 percent; output gap narrows to around ½ percent of GDP by 2025. ### Risks and scenarios - Downside risks: - Increase in infections requiring stricter containment measures. - Tight lockdowns in key trading partners slowing recovery. - Increasing geopolitical tensions. - Prolonged oil prices below $30–40 per barrel could threaten long-term viability of oil and gas sector. - Upside possibilities: - Successful vaccine rollout reducing pandemic persistence. - Post-pandemic confidence and pent-up demand generating stronger-than-projected recovery. ### Key policy recommendations and priorities - Fiscal policy: - Keep all unemployment benefits at their post-March levels until meaningful recovery in employment. - Government should be ready to extend and broaden access to support measures if needed. - Russia has substantial fiscal space to mount larger response if downside risks materialize. - Extend tax deferrals, ensure SME loan-to-grant conversion conditions are not too stringent (employment at or above 80–90 percent of pre-crisis level), and reassess return to fiscal rule’s 0.5 percent of GDP deficit limit in 2022 if warranted. - Transition to a profit-based tax regime for the oil and gas sector and phase out the “reverse excise”; replace the MET with the AIT once tax maneuver completed by 2024. - Remove inefficient tax expenditures (tax expenditures amounted to 4.2 percent of GDP in 2019, of which 1.6 percent of GDP benefit the oil and gas sector). - Better target social assistance; make new federal programs means-tested and reform older welfare programs. - Monetary policy: - Further loosening warranted in coming months to prevent inflation sliding under target over 2021. - Staff estimate that 50bps in rate cuts are necessary under the baseline to prevent inflation from sliding below target over 2021. - FX operations to address disorderly market conditions should be clearly separated from FX purchases under the fiscal rule. - Financial sector: - Supervisors should track the health of restructured loans closely; forbearance should not be extended when it expires. - BoR should continue to advise against dividend distributions in weaker banks and encourage full provisioning where affordable. - If provisioning brings banks under regulatory minimum, grant solvent banks additional time conditional on a credible plan and close supervisory follow-up. - Mortgage subsidy program should be terminated when it expires next year; expand BoR’s toolkit with borrower-based macroprudential measures if needed. - Structural reforms: - Use national projects to catalyze private activity and bolster potential growth, but avoid enlarging the state footprint. - Improve business climate, increase competition, address governance and corruption vulnerabilities. - Regulatory guillotine to cancel regulations failing cost-benefit tests, accompanied by public consultations and impact assessments. ### Non-financial corporate (NFC) sector and policy impact - NFC pre-crisis metrics: - Leverage ratio by end-2017: 55 percent. - Illiquid firms pre-crisis: roughly 7.4 percent; firms with negative equity pre-crisis: 14.5 percent. - Simulated crisis outcomes (without rolling over short-term liabilities): - Share of illiquid NFCs could increase to 34 percent (from 7.5 percent). - Corporate liquidity shortfalls ("liquidity gap") could be as large as 15.4 percent of GDP post-crisis. - Share of firms with negative equity increases from 15 percent to 19 percent; equity gap rises from 3.8 percent to 4.8 percent of GDP. - Policy measures’ mitigation: - Solvency-support measures could make up almost 80 percent of the increase in the corporate equity gap. - Rolling over bank loans could reduce share of illiquid firms by 9.4 percent and reduce liquidity gap by 7.4 percentage points of GDP. - Distributional outcome: - After policy measures and market funding: SMEs with liquidity gaps ~12.2 percent; SMEs with equity gaps ~16.2 percent. - Large corporates with liquidity needs 3.9 percent; with equity needs 6.9 percent. ### Financial sector contingency and reform recommendations - Contingency fiscal measures to consider: accelerating government payables including VAT refunds; extending filing deadlines; deferring tax liability; loss carry-back rules; accelerated depreciation or investment allowances. - Monetary considerations: additional policy rate cuts if demand weakens; caution if depreciation/inflationary shocks occur. - Crisis resolution: BoR should rely on resolution framework and Banking Sector Consolidated Fund to close non-viable banks or rescue those needing support. - FSAP priorities (selected): - Conduct asset quality reviews; enhance stress testing including consolidated and currency dimensions. - Improve macroprudential toolkit with borrower-based measures; strengthen AML/CFT implementation and supervision. - Progress on regulatory and supervisory reforms is in progress for several items; some recommendations deemed not relevant by authorities. *Source: 1rusea2021001 (excerpt).* ### 1. The number of new infections continues to trend down. Daily infections as ### 1. The number of new infections continues to trend down. Daily infections as ### Pandemic status and public health measures - Daily infections as of January 28 (19,710) were about 30 percent below their end-December value. - Authorities have announced that restrictions could be gradually lifted in the coming weeks in light of the decline. - Mass vaccination of the population is ongoing; authorities have vowed to accelerate the pace. ### Economic outturns, activity, and outlook - Flash annual GDP indicates that the economy contracted by 3.1 percent last year, compared with staff’s -3.6 percent forecast. - Quarterly breakdown is not yet available; strong industrial production data for December, particularly in manufacturing, suggests the economy might not have contracted in the fourth quarter. - The flash release points to upside risks to the 2021 growth forecast, but staff see tangible risk from rising infections globally and tight lockdowns in key trading partners that may slow recovery before mass vaccinations take hold. - Real GDP dropped 8.0 percent y/y in 2020Q2 (- 8.5 q/q SA) at the peak of the lockdowns. - GDP increased by 5.8 percent q/q SA in the third quarter; third quarter GDP stood 3.5 percent below its level in 2019Q3. - Employment declined 2.2 percent in Q2 on a seasonally adjusted basis. - Poverty rates increased to 13.5 percent in 2020Q2 from 12.7 percent in 2019Q2. - Only a quarter of the jobs lost during the second quarter have returned; the unemployment rate stood at 6.0 percent in November, marginally below the August high-water mark of 6.4 percent. ### Fiscal outturns and policy support - Preliminary data indicate the 2020 fiscal deficit at the federal level was some 0.5 percent of GDP lower than projected in the Staff Report, mostly on account of stronger revenues such as VAT. - About 3½ percent of GDP in fiscal support was targeted at the health sector, vulnerable households and the unemployed, and firm support mainly focused on supporting SMEs and preventing large-scale layoffs. - This rises to 4½ percent if debt guarantees and capital injections are included. - Crisis-related spending combined with weaker revenues will push the general government deficit to 4.6 percent of GDP in 2020 compared to a surplus of almost 2 percent of GDP last year. - Fiscal support measures (as reported): - Spending measures: 2.4 (percent of GDP) - Healthcare: 0.6 - Non-healthcare: 1.8 - Income support: 0.8 - Firm support: 0.7 - Local governments: 0.3 - Revenue measures: 0.9 (Includes the cut in social security contributions for SMEs, tax credits, reimbursements of taxes and the postponement of social security and tax payments.) - Spending and revenue measures: 3.3 - Below-the-line measures: 1.0 - Measures to boost capital base: 0.5 - Guarantees for bank loans: 0.5 - Other: 0.1 ### Monetary and financial sector response - The Bank of Russia cut its policy rate by 200 bps to 4.25 percent (a record low). - The BoR increased liquidity support to banks and reduced interest rates on on-lending facilities for SMEs. - Support to the financial sector included releasing capital buffers and temporary regulatory forbearance on loan classification and provisioning. - Sector activity codes (OKVED) were used to identify firms eligible for assistance; this allowed quick delivery and limited fraud but led to some mistargeting where firms with outdated OKVED codes or in sectors not deemed affected did not receive support. - Banks entered the crisis with significant buffers; crisis-related losses do not appear to pose significant risks to system-wide bank capitalization. - Supervisors should track the health of restructured loans closely; forbearance should not be extended when it expires as it undermines transparency. ### Inflation and external sector - Weekly data suggest inflation remains high on a sequential basis; inflation could increase to about 5¼ percent y/y in January from 4.9 percent in December. - Preliminary January data indicate inflation is relatively broad-based. - Headline inflation rose to 4.9 percent y/y in December from 2.3 percent y/y in February. - Food price inflation increased from less than 2 percent y/y in February to more than 6 percent y/y. - Core inflation has risen by about 1½ percentage point since February to 3.9 percent y/y in November. - Services inflation remains weak at about 2.7 percent y/y, versus some 3¾ percent at end-2019. - Declining oil prices and volumes weakened the current account: the current account surplus through September declined to 1.7 percent of GDP, from 3.2 percent of GDP during the corresponding period in 2019. - A spike in global risk aversion and falling oil prices triggered about US$28 billion (1.6 percent of 2019 GDP) in private sector capital outflows during the first half of the year, prompting a depreciation of the ruble/US$ exchange rate by as much as 29 percent relative to its end-2019 level. ### Key policy recommendations and priorities - Fiscal Policy: - All unemployment benefits should be kept at their post-March levels until there has been a meaningful recovery in employment. - The government should stand ready to extend and broaden access to support measures if needed. - Russia has substantial fiscal space to mount an even larger response were downside risks to materialize. - Monetary Policy: - Further loosening of the monetary stance is warranted in the coming months to prevent inflation from sliding under target over 2021. - FX operations to address disorderly market conditions if and when they arise should be clearly separated from FX purchases under the fiscal rule. - Financial Sector: - Supervisors should track the health of restructured loans closely. - Forbearance should not be extended when it expires. - The acceleration of house prices warrants careful monitoring and a reassessment of recent measures to stimulate mortgage lending. - Structural Reforms: - The national projects present an opportunity to bolster potential growth; they should be used to catalyze stronger private activity and not contribute to enlarging the already large footprint of the state on the economy. *Staff Report for the 2020 Article IV Consultation, Russian Federation (January 19, 2021; February 2, 2021).* ### 11. The economy is expected to have ### 11. The economy is expected to have ### Outlook and short-term projections - The economy is expected to have contracted in 2020Q4 as restrictions to contain the pandemic were reintroduced. - Activity is expected to remain subdued at best at least through the first quarter of 2021 due to reintroduction of containment measures coinciding with a sharp rise in cases. - Industrial production and PMI indicators suggest the recovery may be stalling or becoming more erratic. - The impact in 2020Q4 is expected to be less severe than in 2020Q2 because restrictions have been less intense and more targeted, and firms and individuals have had time to adapt. - All in all, the economy is projected to: - contract by 3.6 percent in 2020, - grow by 3 percent in 2021. - Forecast assumptions: - A COVID-19 vaccine becomes widely available in 2021H2 in Russia and its trading partners, allowing for a rebound in domestic demand and exports. - Oil and gas exports will increase in line with the OPEC+ agreement as it stood in November 2020. ### Scarring and medium-term output - The COVID-19 pandemic is likely to leave economic scars. - Real GDP in 2025 is projected to be 2.5 percent below what was expected pre-crisis due to less capital accumulation and lower labor productivity. - The medium-term estimate of potential growth has been reduced to 1.6 percent from 1.8 percent in the 2019 Article IV Staff Report, reflecting delays to national projects aimed at boosting productivity. - Contributing factors to relatively smaller scarring compared with other G20 countries and past Russian crises: - Corporate sector entered the crisis in a stronger position. - Policy support measures buffered firms’ liquidity and solvency (Annex IV). ### Oil and gas sector resilience and breakeven prices - Cash breakeven prices in Russia are around $10 dollars per barrel owing to low operating costs, progressive taxes, and exchange rate effects. - Full-cost breakeven price is closer to $30–40 per barrel, implying: - Production will recover quickly once OPEC+ production cuts are tapered even if oil prices remain low, but - A prolonged period of oil prices below $30–40 per barrel could threaten long-term viability of the oil and gas sector. - Note on OPEC+ agreement as it stood in November 2020: - Tapering of production cuts by participating countries from 7.7 mb/d to 5.8 mb/d, starting on January 1, 2021. - The 5.8 mb/d adjustment was scheduled at that time to remain in place till 30 April 2022. ### Risks and scenarios - Short-term downside risks dominate; medium-term risks are more balanced. - Downside risks: - Increase in infections could necessitate stricter containment measures, disrupting supply, weakening demand, and triggering layoffs. - Increasing geopolitical tensions. - Upside possibilities: - Development and successful rollout of effective vaccines reducing the risk of a protracted pandemic. - Post-pandemic confidence effects and pent-up demand could lead to a stronger-than-projected recovery. ### Authorities’ views (summary) - Authorities broadly shared staff’s assessment of the outlook and risks; differences in growth forecasts are within the range of uncertainty. - They agree rapid increase in infections will slow the recovery but expect the impact to be less than in the spring. - Authorities believe relatively strong corporate balance sheets and significant policy response should limit longer-term scarring. - The BoR’s analysis suggests the external position is broadly in line with fundamentals. ### Policy discussions: mitigating the crisis and strengthening the recovery - General guidance: - With the virus not yet under control, the government should stand ready to provide further fiscal support if needed. - The policy rate should be reduced further in the coming months to prevent inflation from sliding under target over 2021. - Regulatory forbearance should not be extended when it expires as it obscures true bank asset quality. - Continue past recommendations: improve the business climate, increase competition, address governance. - National projects can bolster potential growth but should not expand the state footprint. A. Fiscal policy: support the economy and strengthen the fiscal framework - 2021–23 Budget envisages significant fiscal consolidation; authorities willing to reassess if the economy weakens. - Specific recommendations and observations: - Extend tax deferrals further if the economy remains weak. - Ensure conditions for converting subsidized SME loans into grants (employment at or above 80–90 percent of pre-crisis level) are not too stringent given renewed stress. - Broaden sectors receiving support if stricter lockdowns are instituted or stress spreads. - Allow the 2021 deficit to close as warranted by the economic situation and reassess the envisaged return to the fiscal rule’s 0.5 percent of GDP deficit limit in 2022. - Retain higher unemployment benefits provided after March until there is a meaningful recovery in employment; authorities recently announced continuation of the maximum unemployment benefit for another three months. - Return lower unemployment benefits to post-March levels eventually; pre-crisis benefits were very low by international standards (27 percent of previous income compared to an OECD average of 47 percent). - Fiscal space and financing: - Government debt projected to increase to 21 percent of GDP by end-2020, nearly 7½ percent of GDP higher than at end-2019. - Gross financing needs remain low: below 2 percent of GDP per year pre-crisis and projected at some 3 percent of GDP on average over 2020–25. - Recent issuance: €2 billion Eurobond in two tranches with yields of 1.125 percent for the 7-year tranche and 1.850 percent for the 12-year tranche. - EMBIG spread for Russia about 165 bps in early January. - Staff conclude Russia has substantial fiscal space, fiscal rule limits notwithstanding. - Tax policy recommendations: - Transition to a profit-based tax regime for the oil and gas sector and phase out subsidies to domestic oil refineries (“reverse excise”). - The “reverse excise” subsidy is negligible at current oil prices (0.25 percent of GDP per year over the next 3 years) but could increase in the future; any adverse effects on vulnerable households from removing the subsidy should be offset by increased targeted transfers. - Replace the MET with the AIT once the tax maneuver is completed by 2024 to provide incentives for investment and reduce the carbon footprint. - Other fiscal reforms: - Remove inefficient tax expenditures (tax expenditures amounted to 4.2 percent of GDP in 2019, of which 1.6 percent of GDP benefit the oil and gas sector). - Better target social assistance spending; new federal programs are means-tested and reforms to target older welfare programs are supported. B. Monetary policy: easing should continue - Monetary context and outlook: - Deposit and lending rates down by around 150 bps since the start of the year. - Real policy rate at some -0.6 percent; neutral real rate estimated by authorities at 1–2 percent. - IMF staff expect inflation to fall to 3½ percent by end-2021 absent further policy easing, despite recent run-up keeping inflation above the 4-percent target in the short term. - Staff analysis and projections: - Model estimates suggest at least ½ of the contraction in 2020 relative to the pre-crisis baseline can be attributed to a decline in potential output, implying a negative output gap of 2–3 percent. - Output gap expected to widen next year as lifting restrictions triggers a rebound in potential GDP that outpaces the recovery in demand, putting downward pressure on prices. - Policy recommendation: - Staff estimate that 50bps in rate cuts are necessary under the baseline to prevent inflation from sliding below target over 2021 and to preserve room to respond to future shocks. - Suggest addressing any realized depreciation/inflationary shocks if and when they happen via a range of policy tools, including policy rate hikes. - FX operations: - BoR’s March-April 2020 FX operations to smooth disorderly market conditions were appropriate. - Under a flexible exchange rate, FX operations should be limited to addressing excess volatility and not attempt to influence the level of the exchange rate. - To increase transparency, the BoR should keep FX operations aimed at addressing disorderly market conditions clearly separate from regular monthly FX purchases/sales under the fiscal rule. Authorities’ views on monetary policy - The BoR favors a wait-and-see approach, seeing inflation at 3½ to 4 percent at end-2021 as consistent with the inflation target. - BoR places significant weight on rising household inflation expectations and rapid credit growth, and believes FX operations should be used only in exceptional circumstances. *International Monetary Fund, Russian Federation: selected IMF staff analysis and policy recommendations from the source content.* ### 28. The financial sector entered the crisis from a position of strength. Bank profitability ### 1rusea2021001 - 28. The financial sector entered the crisis from a position of strength. Bank profitability ### Financial sector position at crisis onset - Bank profitability increased with both the return on assets and the return on equity reaching all-time highs at end-2019. - Banking system capital and liquidity: - Capital adequacy ratio above 12 percent. - Liquid assets at more than 130 percent of short-term liabilities. - Asset quality and provisioning: - NPLs remain high at some 9½ percent but are adequately provisioned (above 90 percent). - Deleveraging and de-dollarization since 2014 reduced external liabilities and vulnerability to exchange rate movements. - Banking sector consolidation and asset resolution: - Number of credit institutions down to 412 at end-October from over 900 in 2013. - A bank for non-core assets (BNA) handling some 500 billion rubles in impaired assets has a recovery rate of around 40 percent. - The BoR intends to divest rehabilitated banks once market conditions permit. ### Capital buffers, regulatory measures, and available loss-absorption capacity - BoR guidance and adjustments: - BoR encouraged banks to cover losses out of accumulated capital buffers, including the 2.5 percent capital conservation buffer and 1 percent capital surcharge for systemically-important banks. - BoR reduced risk weight add-ons on pre-crisis mortgages to zero (risk weight add-ons remain in place for new mortgages). - Estimated capital available to cover potential increase in loan losses (excluding new accumulation of profits): 6.2 trillion rubles (5.6 percent of GDP). - Regulatory forbearance provided by BoR: - For loan provisioning and asset valuation: - Forbearance on loan provisioning allows banks to delay reclassifying restructured loans and postpone provisioning until April 1, 2021 for corporate loans and July 1, 2021 for retail loans and loans to SMEs. - Forbearance on asset valuation allowed banks to use pre-crisis exchange rates until September 30, 2020 and pre-crisis bond and equity prices until December 31, 2020. - Only a few banks have taken advantage of the forbearance on exchange rates. ### Loan restructurings and stress-testing - Restructuring scale and loss absorption: - Restructurings to date exceed a notional value of 6.5 trillion rubles. - Given capital buffers, banks should be in a strong position to weather plausible loan losses on these restructured loans. - Loss absorption capacity is uneven: most large banks likely can absorb losses through profit generation alone; some smaller banks could struggle. - BoR stress tests suggest the banking sector has enough buffers in the aggregate to withstand a significantly worse scenario than currently projected. - Policy guidance: - BoR should continue to advise against dividend distributions in weaker banks. - Supervisors should track performance of restructured loans closely while forbearance remains in place. ### Risks of extending regulatory forbearance - Forbearance on loan classification and provisioning: - Obscures the underlying strength of banks’ balance sheets and should not be extended. - Delaying provisioning delays recognition of loan losses but does not improve actual balance-sheet strength or ability to extend credit. - Supervisors should track needed (instead of actual) provisions to gauge true capital needs. - BoR should continue encouraging banks that can afford to fully provision for loan losses to do so now rather than wait until forbearance expires. - An extended timeframe to restore capital may be considered when banks are fundamentally sound and the decline in regulatory capital ratios is expected to be temporary. ### Mortgage and housing market monitoring - Recent developments: - Mortgage lending and house prices have accelerated in recent months, albeit from a low base. - Reduction in risk weight add-ons on existing mortgages freed up capital to absorb crisis losses; high add-ons for new loans ensure correct pricing of new mortgage risk. - Policy recommendations: - No evidence suggests a mortgage subsidy program is needed; it should be terminated when it expires next year. - If the mortgage subsidy program is extended the BoR may need to further increase risk weight add-ons on new mortgages. - Staff welcomes legislative efforts to expand the BoR’s toolkit with borrower-based macroprudential measures. ### AML/CFT regime - Progress and remaining work: - Russia has made significant progress; the 2019 AML/CFT mutual evaluation report recognized an in-depth understanding of risks and established policies and laws. - Authorities adopted an Interagency Action plan (August 2020) and a tailored BoR roadmap (October 2020) to implement recommendations. - Remaining priorities include better compliance with the preventive regime, enhanced AML/CFT supervision, and prioritizing investigation and prosecution of complex ML cases. ### Authorities’ views (selected) - BoR assessment: - Agreed with staff that the financial sector is resilient and shared concerns about extending regulatory forbearance. - See no evidence loan losses will pose a problem for larger well-capitalized banks; smaller banks’ long tail is stronger after sector cleanup. - Defended forbearance as needed to encourage loan restructurings and avoid procyclical contraction in lending but are considering not extending it. ### Contingency policies should downside risks materialize - Fiscal policy options (examples to consider): - Accelerating government payables, including VAT refunds. - Extending filing deadlines. - Deferring tax liability. - Loss-carry back rules. - Accelerated depreciation provisions or investment allowances. - Monetary policy considerations: - Additional cuts to the policy rate if demand weakens and creates deflationary pressures. - Further loosening may be counterproductive if increased global risk aversion or a sharp drop in oil prices trigger exchange rate depreciations with medium-run implications for inflation. - BoR should use FX operations in case of disorderly market conditions, separated from regular FX purchases/sales under the fiscal rule. - Financial sector policies: - Public data and BoR stress tests suggest solvency concerns are limited for larger banks; smaller banks with less capital could struggle. - If necessary, BoR should rely on its resolution framework and the Banking Sector Consolidated Fund to close fundamentally non-viable banks or rescue those that need rescuing. ### Structural reforms to strengthen the recovery - Growth context and priorities: - Pre-crisis growth averaged 1½ percent, low for Russia’s per capita GDP. - Key reforms remain reducing the footprint of the state, improving the business climate, increasing competition, and addressing governance and corruption vulnerabilities. - Regulatory guillotine: - Ongoing review of existing rules by forty government agencies; cancelation of regulations that do not meet a cost-benefit test is welcome. - Need for public consultations, regulatory impact assessments, and ex-post reviews to ensure replacement regulations are fit for purpose. - Regulatory guillotine should not substitute for measures to increase competition and reduce barriers to entry. - National projects: - 13 national projects envisage ramped-up public spending on infrastructure, health, and education. - Final deadline pushed from 2024 to 2030. - Projects could boost potential growth if procurement is fair and transparent and if deeper structural reforms to improve business climate and governance are implemented. ### Staff appraisal — key conclusions and recommendations - Near-term outlook: - Economy expected to return to growth toward the middle of 2021, with risks tilted to the downside. - Second wave expected to have less impact; availability of an effective vaccine reduces risk of a protracted pandemic. - Fiscal policy: - Should stand ready to provide further support if needed; extend or broaden access to existing measures if the economy weakens. - Consider keeping all unemployment benefits at their post-March level while crisis persists. - Tax and social policy: - Push ahead with growth-friendly tax reforms and plans to improve targeting of social assistance. - Transition to a profit tax for the oil and gas sector is welcome; start phasing out the “reverse excise” mindful of impacts on vulnerable groups. - Eliminate inefficient or inequality-increasing tax expenditures; ensure other social assistance programs are means-tested. - Monetary policy: - Further monetary loosening warranted as weak domestic demand likely to push inflation below target in 2021. - BoR should continue FX operations in disorderly markets, clearly separated from fiscal-rule FX operations. - Bank forbearance and provisioning: - Forbearance on loan classification and provisioning obscures true asset quality and should not be extended. - Supervisors should track restructured loans closely; banks that can fully provision should do so without delay. - Banks entered the crisis with significant capital buffers; crisis-related losses do not appear to pose significant system-wide capitalization risks. - If needed provisioning brings a bank’s capital ratio under regulatory minimum, grant solvent banks additional time to restore capital conditional on a credible plan and close supervisory follow-up. - Housing market: - Cancel mortgage subsidy program when it expires next year given no evidence of misaligned prices. - Expand BoR’s macroprudential toolkit with borrower-based measures. - Structural reform imperative: - Increasing potential growth requires far-reaching structural reforms beyond national projects to reduce state footprint, improve business climate, increase competition, and address governance shortcomings. *Source: 1rusea2021001 (excerpt).* ### 49. It is proposed that the next Article IV consultation with Russia be held on the ### 1rusea2021001 - 49. It is proposed that the next Article IV consultation with Russia be held on the ### Evolution of the COVID-19 Pandemic - Reported daily new COVID-19 cases and deaths (7-day moving averages) tracked against the 5th and 95th percentiles for 213 countries and territories; Russian Federation trajectories shown for Feb-20 to Dec-20. - Excess deaths between March-November 2020 indicate the actual death toll is "significantly higher." - Lockdown stringency (Oxford Stringency Index) for Germany, United Kingdom, United States, Russia illustrated for Feb-20 to Dec-20; Russia's restrictions during the second wave are "thus far less stringent than in other countries." - Mobility (Yandex Self-Isolation Index) in cities with population over 1 million and Moscow: "Mobility had declined less during the second wave, but things are changing." - Sources: Human Mortality Database; Rosstat; WHO; Yandex; and IMF staff calculations. ### Market Developments, 2020 - Exchange rate and oil price: Brent (US$/b) and Ruble per US$ series plotted Jan-19 to Jan-21; ruble "reached its lowest point in mid-March, and is still not far above this level." - Non-residents reduced their debt and equity holdings between mid-March and April; Non-Resident Portfolio Flows shown in Millions of US$. - Equity prices: MICEX average showed a 30 percent decline in mid-March with a "significant recovery" thereafter. - Sovereign debt spreads (EMBIG) increased by 200 bps but returned to or below early-2019 levels. - 5-year CDS increased by more than 200 bps and then declined to near pre-crisis levels. - Long-term yields are now below pre-crisis levels. - Sources: Bloomberg Financial L.P.; EFPR Global; Haver Analytics; and IMF staff calculations. ### Real Sector Developments, 2014–21 - Real GDP annual growth: 2017 1.8; 2018 2.5; 2019 1.3; 2020 -3.6; 2021 3.0; projections through 2026 (Table 1 and Table 2). - Economy poised for a sharp contraction in 2020 followed by a modest recovery in 2021, leaving output "well below its pre-crisis trend." - Contributions to Real GDP Growth: imports, exports, investment, consumption series across 2014–2021. - Quarterly contributions (2018Q3–2020Q3): contraction in 2020Q2 led by a sharp decline in domestic demand, notably consumption and services. - Consumer indicators: consumer confidence and real disposable income series (Jan-18 to Jul-20) show real disposable income y/y % and consumer confidence SA % balance declining; retail trade volume and PMI series indicate after rebounding in June and July high-frequency indicators suggest the economy is slowing. - Table 1 (Selected macro indicators, 2017–26) key entries: - Real GDP (annual percent change): 2017 1.8; 2018 2.5; 2019 1.3; 2020 -3.6; 2021 3.0; 2022 3.9; 2023 2.1; 2024 1.8; 2025 1.8; 2026 1.8. - Real domestic demand: 2017 4.1; 2018 2.2; 2019 3.0; 2020 -5.8; 2021 5.1; 2022 3.8; 2023 2.1; 2024 2.1; 2025 1.9; 2026 1.8. - Unemployment rate: 2017 5.2; 2018 4.8; 2019 4.6; 2020 5.8; 2021 5.5; 2022 5.0; 2023 4.9; 2024 4.8; 2025 4.8; 2026 4.7. - Output gap (percent of potential GDP): 2017 -0.9; 2018 -0.1; 2019 -0.2; 2020 -2.8; 2021 -3.0; 2022 -1.4; 2023 -0.9; 2024 -0.7; 2025 -0.5; 2026 -0.3. ### Inflation and Monetary Policy, 2016–20 - Oil price and exchange rate shocks: "The drastic decline in oil prices contributed to a depreciation of the ruble." - Inflation components: supply disruptions and high food prices temporarily boosted inflation; contributions to headline inflation by food, non-food, services shown monthly. - One-year-ahead inflation expectations increased; CBR (Bank of Russia) cut its key rate by 200 bps since Jan 2020. - Policy and interbank rates: interbank and policy rates series Jan-2016 to Jan-2021; market expectations for further policy rate cuts are on hold. - Yield curves for 1 year, 5 year, 10 year shown; long-term interest rates at or below pre-crisis levels. - Expectations of future policy rates plotted as basis points (3-mon. futures minus 3-mon. MOSPrime). ### External Sector Developments, 2008–20 - Trade balance and energy exports: trade balance declined sharply through September 2020 as energy exports fell due to plunging oil prices and OPEC+ restrictions. - Current account remained in surplus though it declined, reflecting a sharp drop in services imports. - Official reserves: "official reserves provide ample buffers against shocks." - Net private capital outflows resumed in 2020H1 but stabilized at lower levels than in 2014/15; non-resident inflows into sovereign debt levelled off. - Table 3 (Balance of Payments, selected entries, 2017–26, Billions of U.S. dollars): - Current account: 2017 32.2; 2018 115.7; 2019 64.8; 2020 29.0; 2021 44.2; 2022 37.4; 2023 37.4; 2024 32.2; 2025 29.2; 2026 29.4. - Trade balance: 2017 114.6; 2018 195.1; 2019 165.3; 2020 89.3; 2021 121.5; 2022 120.0; 2023 122.8; 2024 118.1; 2025 114.8; 2026 114.0. - Exports of goods: 2017 352.9; 2018 443.9; 2019 419.9; 2020 320.4; 2021 374.1; 2022 383.0; 2023 395.0; 2024 401.6; 2025 409.0; 2026 418.5. - Gross reserves (billions of U.S. dollars, memorandum): 2017 432.7; 2018 468.5; 2019 554.4; 2020 583.4; 2021 593.5; 2022 603.8; 2023 611.8; 2024 617.8; 2025 621.8; 2026 624.0. - Brent oil price (U.S. dollars per barrel, memorandum): 2017 54.4; 2018 71.1; 2019 64.0; 2020 42.3; 2021 51.1; 2022 50.2; 2023 49.7; 2024 49.5; 2025 49.4; 2026 49.5. ### Fiscal Policy, 2020–26 - Fiscal balance: deterioration began in May 2020 and projected to have "deteriorated sharply in 2020." - Drivers: increase in expenditures and a decline in non-oil revenues; decline in oil revenues was compensated with resources from the National Welfare Fund (NWF), which will "gradually recover in line with the recovery of oil prices." - Public debt: will increase in 2020 and "gradually decline in the medium-term if the announced consolidation is followed." - Table 4 (Fiscal Operations, percent of GDP, selected entries, 2017–26): - General government revenue: 2017 33.4; 2018 35.5; 2019 35.8; 2020 34.6; 2021 34.4; 2022 34.1; 2023 34.0; 2024 34.1; 2025 33.9; 2026 33.6. - General government expenditure: 2017 34.8; 2018 32.6; 2019 33.9; 2020 39.2; 2021 36.7; 2022 35.3; 2023 35.0; 2024 35.1; 2025 34.7; 2026 34.4. - Net lending/borrowing (overall balance): 2017 -1.5; 2018 2.9; 2019 1.9; 2020 -4.6; 2021 -2.3; 2022 -1.2; 2023 -1.0; 2024 -1.0; 2025 -0.8; 2026 -0.8. - Non-oil primary balance: 2017 -8.4; 2018 -6.6; 2019 -6.0; 2020 -10.3; 2021 -8.4; 2022 -7.1; 2023 -7.0; 2024 -7.0; 2025 -6.6; 2026 -6.5. - National Welfare Fund (percent of GDP, projection): series shown 2005–2026 in chart; NWF used to offset oil revenue declines. ### Banking Sector Developments, 2008–20Q3 - Credit growth: retail credit growth has slowed while corporate and mortgage lending accelerated; Credit to the economy (y/y percent change, FX adjusted) plotted Jan-12 to Jan-20. - NPLs: Non-Performing Loans remain close to pre-crisis levels (NPLs percent series). - Profitability: bank profitability declined since the pandemic onset but "remains high... especially for large banks." Profit for the Current Year shown in Billions of Russian rubles for 2019Q1–2020Q2 by bank asset size deciles. - Capital ratios: aggregate capital ratios remained stable; capital adequacy (percent) series shown. - Number of credit institutions with a banking license: monthly change and total series Jan-12 to Jan-20. ### Macro-Financial Developments, 2008–20Q3 - Corporate profitability: profitability of tradable and non-tradable sectors declined since end-2019; corporate profit levels plotted as percent of GDP. - Overdue loans: stock of overdue loans in rubles continues to decline; overdue loans in FX increased in 2020, particularly in manufacturing. - Real estate: share of real estate in total corporate lending increased since end-2016. - External debt: corporate sector increased external debt since early 2019 while banks' external borrowing continued to decline. Gross short-term external debt by sector (Billions of USD) provided. - Residency breakdown of banks' debt: external borrowing, local markets, local banks series. ### Key Macroeconomic and Financial Indicators (selected exact figures) - Real GDP (Table 1 projections): 2020 -3.6; 2021 3.0; 2022 3.9; 2023 2.1; 2024 1.8; 2025 1.8; 2026 1.8. - Consumer prices (period average): 2020 3.4; 2021 4.3; 2022 3.6; 2023 3.8; 2024 4.0; 2025 4.0; 2026 4.0. - Gross international reserves (Table 1): 2019 554.4 (billions of U.S. dollars); 2020 583.4; 2021 593.5; 2022 603.8; 2023 611.8; 2024 617.8; 2025 621.8; 2026 624.0. - General government overall balance (percent of GDP, Table 1): 2019 1.9; 2020 -4.6; 2021 -2.3; 2022 -1.2; 2023 -1.0; 2024 -1.0; 2025 -0.8; 2026 -0.8. - General government debt (percent of GDP, Table 4 memorandum): 2017 14.3; 2018 13.6; 2019 13.8; 2020 21.0; 2021 20.7; 2022 20.2; 2023 19.9; 2024 19.7; 2025 19.1; 2026 18.0. - Banking sector FSI highlights (Table 6): - Capital to risk-weighted assets: 2014 12.5; 2015 12.7; 2016 13.1; 2017 12.1; 2018 12.2; 2019 12.3; Q3-2020 12.8. - NPLs to total loans: 2014 6.7; 2015 8.3; 2016 9.4; 2017 10.0; 2018 10.1; 2019 9.3; Q3-2020 9.6. - Return on equity: 2014 7.9; 2015 2.3; 2016 10.3; 2017 8.3; 2018 13.8; 2019 19.7; Q3-2020 16.8. *Source: Russian authorities; Bank of Russia; Human Mortality Database; Rosstat; WHO; Yandex; Bloomberg Financial L.P.; EFPR Global; Haver Analytics; and IMF staff calculations and estimates.* ### Annex I. Oil Sector Resilience ### Annex I. Oil Sector Resilience ### Oil price shock and demand collapse - Brent crude price decline: from US$66 per barrel at end-2019 to a low of US$19 per barrel on April 21; hovered around US$40– 45 dollars per barrel since June. - IEA estimate: global oil demand in April 2020 was down nearly 29 percent compared to its pre-crisis level and is expected to be at least 6½ percent lower for the year. - Partial recovery drivers: OPEC+ production cut agreement and a modest recovery in oil demand as containment restrictions eased. ### Russian crude production and OPEC+ cuts - Historical sensitivity: Russia’s crude oil production historically largely unaffected by price movements (examples: production up 2 percent in 2015 when prices fell nearly 40 percent; production up 0.5 percent from mid-2017 to mid-2018 when prices rose nearly 60 percent). - OPEC+ impact: crude oil production in Russia fell to 8.8 million barrels per day in May, 18 percent below the output level in April, bringing production to levels last seen in 2004. - Production outlook: production cuts gradually eased from August onwards, with production not expected to return to baseline until April 2022. ### Break-even prices and cost structure - Estimated cash breakeven price for Russian oil companies: around $10–$15 per barrel. - Comparative break-evens: U.S. shale companies around $40–$50 per barrel; Saudi Aramco reported production costs just under $10 per barrel. - Full-cost breakeven (including reservoir management and new wells): closer to $30–40 per barrel. - Saudi Arabia and Iraq full-cost benchmarks: around $13 per barrel and around $12 per barrel respectively. ### Factors that keep Russian breakeven low - Operating expenses: - Analyst estimate of lifting costs in 2020: around $3.4 per barrel. - Saudi Aramco reported lifting costs: $2.80 per barrel. - Tax regime: - Progressive tax system with the first $15 per barrel effectively tax free. - Estimated tax burden on a typical Russian oil and gas company: as low as 19 percent of total revenue if the oil price is $20 per barrel, rising to 49 percent once the oil price reaches $50–$60 per barrel. - Changes in the tax burden estimated to absorb more than 80 percent of the overall change in oil prices. - Exchange rate effects: - The ruble-dollar exchange rate is highly correlated with movements in the oil price (correlation close to 0.9 between January 2010 till August 2020 on monthly data). - About 80 percent of operating expenses are denominated in rubles, so measured in U.S. dollars costs tend to be high when oil prices are high and low when oil prices are low. ### Investment, decline rates, and medium-term production risks - Natural decline rates: - Many mature Russian fields: estimated natural decline rate around 10–25 percent per annum. - Saudi Aramco reported natural decline rate on its assets: 8 percent. - Observed decline lower due to reservoir management techniques, but maintaining pre-crisis output requires significant investment in reservoir management and new wells. - Reported capital expenditure impact: some analysts estimate a 30–40 percent drop in capital expenditure plans in 2020. - Implication: a sustained period of below $40 per barrel oil could have significant consequences for the longer-term outlook of the oil and gas sector in Russia. ### Fiscal resilience and government vulnerability - Russia’s pre-crisis fiscal breakeven oil price: estimated to be around $40 per barrel. - Comparative fiscal breakevens: Saudi Arabia around $80 per barrel; Iraq around $60 per barrel; United Arab Emirates around $70 per barrel. - Fiscal position: - Russia’s overall fiscal balance was 1.9 percent of GDP in 2019 compared to a deficit of 4.5 percent of GDP in Saudi Arabia. - Ministry of Finance 2020 budget stress tests: a one-year decline in the Urals oil price to $25 per barrel would reduce oil and gas revenues by 2.4 percent of GDP; if oil prices remained at this level for 3 years, the revenue shortfall would reach 7.6 percent of GDP. - Buffers: Russia’s foreign currency reserves noted as "now at some 40 percent of GDP", suggesting the government is well-placed to weather a prolonged period of low oil prices. ### Tax regime reform and policy implications - Current primary tax: mineral extraction tax (MET), a volume-based royalty tax. - Drawbacks: inability to deduct costs, distortion of investment, weakened incentives to adopt new technologies, frequent changes to the MET formula, ad-hoc tax breaks, complicated and unpredictable system. - Consequence: analysts attribute Russia’s recovery ratio (share of known resources being extracted) below 30 percent; contrast with Norway where more than 50 percent of oilfield reserves would normally be recovered. - Additional Income Tax (AIT): - Profit tax introduced in 2019 to reshape the tax regime. - Current application: AIT currently only applies to 5 percent of upstream output. - Ministry of Finance expectation: take up of the AIT will increase significantly in 2021 as tax breaks that disqualify fields from participating are cancelled. - Potential benefits if administered effectively: increased investment and technology adoption, higher recovery ratio, and contribution to a sustainable future for the Russian oil and gas industry. *Annex I. Oil Sector Resilience, IMF Russian Federation report.* ### 1. The non-financial corporate (NFC) sector in Russia entered the crisis from a relative ### 1rusea2021001 - 1. The non-financial corporate (NFC) sector in Russia entered the crisis from a relative ### NFC sector pre-crisis position - Leverage ratio of NFCs by end-2017: 55 percent (noted as relatively low and lower than the median leverage ratio of other emerging economies, which is described as over 100 percent). - Deleveraging after the 2014–2015 crisis: NFC external borrowings reduced by 10 percent between end-2014 and early 2017. - Profitability: NFCs’ return on assets was robust by end-2017 and similar to that of other advanced European economies. - Data sample: 2017 sample of unconsolidated non-financial corporate balance sheets from the Orbis BvD database covering 1,040,430 firms in Russia as of 2017, which accounts for 97% of the total operating turnover registered in the Structural Demographics and Business Statistics of the OECD. ### Impact of the Covid-19 and oil shocks — simulations and vulnerabilities - Pre-crisis firm distress: - Illiquid firms pre-crisis: roughly 7.4 percent of NFCs in Russia. - Firms running with negative equity pre-crisis: 14.5 percent. - Simulated end-2020 liquidity outcomes (without rolling over short-term liabilities such as bank loans and trade credits): - Share of illiquid NFCs would increase from 7.5 percent to 34 percent. - Corporate liquidity shortfalls (the “liquidity gap”) could be as large as 15.4 percent of GDP post-crisis. - Solvency outcomes: - Share of firms with negative equity increases from 15 percent to 19 percent (an increase of 4 percentage points). - Equity gap increases from 3.8 percent pre-crisis to 4.8 percent of GDP after the crisis. - Comparative assessment: - The increase in illiquid firms and equity gap is smaller than median levels for advanced and emerging European countries; Russia’s NFC sector is assessed as less vulnerable post-crisis relative to many peers. ### Policy measures implemented and assessed effectiveness - Types of support: - Targeting: systemically important enterprises (SIEs) and firms in sectors affected by the pandemic. - SME-targeted measures above the line: wage subsidies, interest rate subsidies, subsidized credits. - SME-targeted foregone revenue measures: permanent reduction in social security contributions. - Below-the-line measures: guarantees for bank loans. - SIEs and affected sectors benefited from subsidized credits to retain employment, often transformable into grants ex-post. - Effectiveness (simulation-based): - Solvency-support measures (including wage subsidies and reduction in social security contributions) could make up almost 80 percent of the increase in the corporate equity gap and leave NFC solvency conditions almost the same as pre-COVID. - Liquidity-support measures (debt and tax holidays and labor market policies) provided initial support but are expected to be complemented by additional sources. - Role of the banking sector: - Rolling over bank loans could reduce the share of illiquid firms by 9.4 percent. - Rolling over bank loans could reduce the liquidity gap by 7.4 percentage points of GDP. - Note: Bank credit does not resolve solvency problems because it must be repaid later. ### Distributional impact: SMEs versus large corporates - After accounting for all policy measures and market funding (including additional bank loans and market issuance of corporate debt securities and equities): - SMEs with liquidity gaps: around 12.2 percent. - SMEs with equity gaps: around 16.2 percent. - Large corporates with liquidity needs: 3.9 percent. - Large corporates with equity needs: 6.9 percent. - Implication: SMEs are in a weaker position than large corporates after the crisis, reflecting greater reliance on internal funding and less access to external finance. *Source: IMF staff analysis in the provided chapter excerpt.* ### Annex VII. Estimating Potential Real GDP and the Output Gap ### Annex VII. Estimating Potential Real GDP and the Output Gap During the Pandemic ### Role of the output gap for policy - Spare capacity (output gap) guides fiscal and monetary policy responses: - Negative output gap → downward price pressure → monetary policy should be loosened. - Positive output gap → inflation likely to increase → monetary policy should be tightened. - Assessing spare capacity is critical in a crisis to judge how much fiscal stimulus can be used without triggering excessive wage growth or inflation. ### Uncertainty about COVID-19 effects on potential output - The pandemic’s effects combine supply shocks (government-imposed restrictions) and demand shocks (behavioral responses), often simultaneously for a given sector. - It is impossible in practice to know exactly the relative importance of demand and supply factors, making potential output estimates highly uncertain. ### Financial flows evidence (BoR weekly data) - BoR weekly data compare current financial flows to a “normal” level (average daily incoming payments Jan 20, 2020–Mar 13, 2020, seasonally adjusted). - Financial flows imply activity was some 22 percent below normal in April 2020. - Financial flows recovered gradually through the summer and, according to the data, were close to normal in November 2020. ### Quantified “mobility events” and estimated impact on output - Three mobility-event categories are quantified from aggregated financial flows: - Severe shutdown (late-March to mid-May): estimated to reduce output by some 14 percent. - Moderate shutdown (mid-May to late-June; mid-October onward): estimated to reduce output by around 6¼ percent. - Post-shutdown period (late-June to mid-October): estimated to reduce output by about 4½ percent. ### Model implementation and baseline assumptions - The supply component of mobility events is inserted into the IMF’s annual G20 model. - Baseline attribution of shocks in 2020: - Severe shutdown: 100 percent a shock to supply (declines potential output). - Moderate shutdown: 50 percent supply shock and 50 percent demand shock. - Post-shutdown period: entirely a demand shock. - Persistence and other shocks in baseline: - 25 percent of the resulting supply (“lockdown”) shock in 2020 is assumed to persist into 2021. - Additional shocks included: negative shock to oil production (in line with Russia’s OPEC+ commitments), positive government spending shock (fiscal anti-crisis package), foreign demand shocks, global financial spillover shock. - A stylized domestic demand shock is used to force the model to match staff’s real GDP projections. - Note: the model does not incorporate monetary and macroprudential measures introduced by the authorities. Foreign demand and global financial spillover shocks are calibrated by the IMF’s Research Department. ### Simulation findings and key statistics - Staff’s forecasts: decline in real GDP of 5½ percent relative to the pre-crisis baseline in 2020. - Attribution of the 5½ percent contraction: - Slightly more than 50 percent is due to negative supply shocks that depress potential real GDP. - The remainder is attributable to demand shocks that widen the output gap. - Fiscal anti-crisis package impact: - Fiscal stimulus is estimated to have reduced the contraction in real GDP in 2020 by around 2¼ percentage points. - Lockdown (“supply”) shock impact: - The lockdown supply shock is estimated to have reduced potential GDP by nearly 2¾ percent in 2020. - Dynamics into 2021: - Output gap is likely to widen in 2021 as lifting of restrictions triggers a rebound in potential GDP that outpaces the recovery in aggregate demand. - Potential real GDP rebounds in 2021 as the lockdown is lifted but is weighed down by the impact of the decline in investment during the crisis on the productive capital stock. ### Sensitivity analysis and scenario ranges - Alternative assumptions examined (holding real GDP growth unchanged so only potential output is affected): - Increase share of supply shocks in the moderate shutdown period to ⅔ (from ½ in baseline). - Increase persistence of the composite “lockdown” shock to 50 percent (from 25 percent in baseline). - Add a negative shock to the capital stock (e.g., from increased bankruptcies). - Add an increase in steady-state unemployment (e.g., labor market hysteresis). - Results of sensitivity analysis: - The (negative) output gap in 2020 is likely to be in the range of 2–3 percent. - The output gap is likely to be as large, if not larger, in 2021. ### Projections beyond 2021 - After the 2021 rebound, potential growth is assumed to settle at its long-run value of 1.6 percent. - Under staff’s baseline growth projections: - The (negative) output gap narrows to around ½ percent of GDP by 2025. - In 2025, real GDP is some 2½ percent below what was projected pre-crisis, implying a significant portion of 2020 output losses will be permanent. *Source: Annex VII. Estimating Potential Real GDP and the Output Gap* ### Annex IX. Key FSAP Recommendations ### Annex IX. Key FSAP Recommendations ### Banking Stability - Conduct an asset quality review (AQR) to ensure adequate bank capitalization (CBR). - Timing: ST/MT* - Progress: In progress. The Bank of Russia is conducting asset quality reviews on a continuous manner. Progress continues in improving the collateral registry to ensure the timeliness and completeness of the valuation of assets and collateral. - Enhance stress testing practices, including on a consolidated basis and by currency (CBR). - Timing: ST/MT - Progress: In progress. Currently, stress tests are performed on a solo basis but stress losses are calculated on a consolidated basis. In 2019, the Bank of Russia performed another macroprudential stress test (MST) of the financial sector. In the MST, the BoR included development institutes and improved the methodology for private pension funds and insurers. Stress-testing of broker’s capital and liquidity risk of brokers was also conducted. ### Liquidity Management - Re-establish T-bill program. - Timing: ST - Progress: Not done. The Bank of Russia and the Federal Treasury are using various tools to manage excess liquidity. The authorities do not see a need to use the T-bill program. ### Financial Sector Oversight and Regulation - Require prior approval for banks’ domestic investments in nonbank institutions (CBR). - Timing: ST - Progress: In progress. After consultation with the banks, the Bank of Russia decided to drop the draft law requiring banks seeking BoR approval for acquisition of large stakes in non-bank institutions, due to the difficulty in establishing proper criteria, and possible loopholes in the draft law. Provisions regulating BoR’s 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: Not done. The authorities do not consider this recommendation relevant for Russia. - Upgrade framework for relations with and use of banks’ external auditors (CBR). - Timing: ST - Progress: In progress. A draft law that allows the CBR to regulate and supervise audit activities has been prepared, but it has been under consideration by the State Duma for more than a year with no approval yet. - Strengthen further the legal framework applicable to related parties (CBR). - Timing: ST - Progress: In progress. The Bank of Russia updated the methodology for calculating related party exposure in November 2019. A new draft Law that requires credit institutions to deal with related parties on an arm’s length basis was communicated to the Ministry of Finance in March 2019. No other progress has been made in terms of the legal framework. - Upgrade framework for prudential oversight of banks’ operational risk (CBR). - Timing: ST - Progress: In progress. Bank of Russia issued Regulation No.716-P on the requirements for the operational risk management system in a credit institution and a banking group in April 2020. Credit institutions should fully comply with the regulation by January 1, 2022. Another draft regulation related to the calculation of operational risk has been developed, which would require full compliance of all credit institutions by January 1, 2023. - 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 September 1, 2020: 34 were fully implemented; 35 were partially implemented, 22 have been started; 23 were found to be inappropriate, and 1 has not yet started. The Bank of Russia completed a self-assessment of the compliance of Russia’s insurance legislation with the principles of the IAIS. - Ensure the effective implementation of the AML/CFT framework (CBR, MoF monitoring). - Timing: ST - Progress: In progress. The 2019 AML/CFT mutual evaluation report (MER) recognized that Russia has an in-depth understanding of its money laundering and terrorist financing risks and has established policies and laws to address them. The authorities are currently working towards ensuring a swift and effective implementation of the recommendations arising from the report, with the recent adoption of an Interagency Action plan (August 2020) and a tailored roadmap by the BoR (October 2020). ### Macroprudential Policy - Adopt legal changes to provide a comprehensive policy toolkit (CBR, MoF). - Timing: ST/MT - Progress: In progress. The Bank of Russia has continued to improve the efficiency of its macroprudential policy. In February 2020, a new methodological recommendation was issued for calculating borrowers’ debt burdens. The BoR has embarked on a consultation process with financial market participants to discuss their views on the potential implementation of direct borrower-based tools. In addition, the BoR has prepared a legislative proposal to incorporate direct borrower-based tools in its macroprudential toolkit. ### 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. The authorities consider this recommendation as not relevant for Russia. - 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 authorities consider this recommendation as not relevant for Russia. - 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: Not done. The authorities consider this recommendation as not relevant for Russia. ### 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. No further progress since. - Continue gradual privatization of SOBs (MoF, CBR) as conditions permit. - Timing: MT - Progress: Not done. Market conditions do not seem favorable at this time. - Note: * “ST–short term” is within one year; “MT–medium term” is one to three years. *Annex IX. Key FSAP Recommendations — Staff Report for the 2020 Article IV Consultation — Informational Annex.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1rusea2021001.pdf_