## 2005. The mission met Deputy Prime Minister Zhukov, Minister of Finance Kudrin,

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### Executive summary and outlook
- GDP growth slowed since mid-2004 despite high oil prices; slowdown mainly reflects a sudden deceleration in oil output and investments and emerging resource constraints.
- Fiscal policy had offset much of the stimulus from large terms-of-trade gains, but a major relaxation is now underway as high oil prices and the swelling stabilization fund undermine support for saving the oil revenue windfall.
- Monetary policy remained accommodative: the CBR continued to resist ruble appreciation through large unsterilized interventions.
- Structural reforms outside the banking system have come to a virtual standstill.
- GDP growth is projected to amount to 5½ percent in 2005, compared to 7¼ percent in 2004.
- Main downside risk: a weakening in consumption growth.
- Fiscal relaxation in the pipeline could temporarily boost GDP growth closer to last year’s level.
- Inflation is almost certain to exceed the official target again in 2005; the CBR is likely to allow just enough exchange rate flexibility to prevent inflation from increasing above last year’s level.
- Vulnerabilities likely to remain low, but a sharp correction in the oil price could cause significant distress in the banking sector.

### Recent developments and drivers of growth
- Recovery drivers and constraints:
  - Recovery driven by large and sustained terms-of-trade gains, increased political and economic stability.
  - Higher oil output and investments have been main conduits of growth; companies used own resources to increase extraction from existing wells.
  - Investments outside the oil sector have fueled growth in total factor productivity and real wages, spurring consumption.
  - Growth in small and medium-sized enterprises remains limited; foreign direct investment outside energy remains low; concerns about investment climate persist.
- Slowdown and causes:
  - Real GDP growth decelerated from 7½ percent in the first half of 2004 to a provisional 5½ percent in the same period of 2005 (y-o-y).
  - Slowdown mainly reflects deceleration in oil output and investments from Q3 2004; policy-induced supply disruptions (notably the Yukos affair) and sharp rise in marginal tax rates in the oil sector—to almost 90 percent at prices above $25 per barrel—may have reduced output and investment incentives.
- Resource constraints and inflation risks:
  - Resource constraints emerged before the 2004 slowdown; near-term room for fast expansion of oil production appears exhausted due to transportation bottlenecks and limited exploration investment.
  - Staff calculations suggested the output gap had been virtually closed and that GDP could not grow by more than 5-6 percent without causing higher inflation.
  - Headline inflation climbed from 10 percent in June 2004 to 13¾ percent in June 2005; core inflation entrenched at 10–11 percent since 2002.

### Fiscal policy, Oil Stabilization Fund (OSF), and public finances
- Fiscal stance and projections:
  - Headline general government surplus increased every year since 2001 as oil revenues were taxed and saved.
  - Under WEO assumption for 2005 (Russian crude price of $47 per barrel), the amended 2005 budget will entail an overall surplus of 7½ percent of GDP, compared to 5 percent of GDP in 2004.
  - Federal government overall balance (percent of GDP): 2001: 2.7; 2002: 1.3; 2003: 1.6; 2004: 4.4; 2005 Proj.: 7.5.
  - General government overall balance (percent of GDP): 2001: 2.7; 2002: 0.6; 2003: 1.1; 2004: 5.0; 2005 Proj.: 7.6.
- OSF mechanics and recent use:
  - OSF introduced in January 2004; revenues from the mineral extraction tax and export customs duty in excess of the OSF reference price (currently $20 per barrel) are earmarked for the OSF.
  - Reference price: $20 per barrel; each additional $1 in the oil price above $25 per barrel increases revenues earmarked for the OSF by about Rub 55 billion.
  - OSF financed with unspent fiscal surplus: Rub 106 billion in 2003 and Rub 218 billion in 2004.
  - OSF resources used to prepay the IMF (Rub 93.5 billion) in January 2005 and to prepay US$ 15 billion to Paris Club creditors; OSF reserves currently deposited in an unremunerated account with the central bank.
- Recent and proposed budget changes:
  - The 2005 budget amendment will raise expenditures by 1¾ percent of GDP relative to the original budget.
  - Planned investment incentives in the form of VAT and profit tax reductions will cost ¾ percent of GDP.
  - Benchmark oil price above which revenues are saved in the OSF will be raised from $20 to $27 per barrel.
  - Staff estimates fiscal changes raise the oil price at which the federal budget is in balance from $22 per barrel in 2004 to, at least, $31 per barrel in 2006.
  - OSF projected to swell to $50 billion by end-2005 under current oil prices.
- Staff fiscal guidance:
  - Delay further fiscal relaxation until cyclical pressures ease to avoid adding to inflationary pressures.
  - The benchmark price for the stabilization fund should not be increased again; OSF should not be used except for prepayment of debt.
  - Higher revenues from oil sector taxes not covered by the stabilization fund should be saved.
  - Reform OSF to limit discretionary adjustment in the trigger price and prepare an integrated program for accelerated structural reforms and increased spending of oil revenues to ensure spending raises potential GDP growth.

### Monetary, exchange rate policy, and staff stance
- Monetary conditions:
  - Monetary policy remained accommodative; unsterilized interventions caused large increases in reserve money and rapid growth in bank credits.
  - Reserve money growth slowed somewhat since mid-2004 due to accelerated build-up of government deposits with the CBR after increased oil taxation.
  - Staff recommendation: monetary policy should be primarily focused on inflation control, unburdened by exchange rate considerations.
- Exchange rate and staff-CBR disagreement:
  - Staff advocated increased exchange rate flexibility and urged the CBR to subordinate its exchange rate target to the inflation target by scaling back interventions whenever inflation exceeds the charted course.
  - Pace of appreciation: staff projects a real effective exchange rate appreciation of 11 percent in 2005, above the official target of 8 percent.
  - CBR officials disagreed with subordinating exchange rate policy and intended to continue pursuing dual targets; they saw only limited scope for more exchange rate flexibility.

### Banking sector, financial stability, and vulnerabilities
- Banking sector dynamics:
  - Rapid changes increased vulnerabilities: increasing competition and declining margins, renewed access to foreign capital markets, rising consumer lending and mortgages, increased lending to SMEs.
  - CBR stress tests indicate credit risk has increased somewhat while non-performing loan ratios have stayed low.
  - A shock comparable to the 1998 crisis would result in a loss of 2¾ percent of GDP in 2004 compared to 2¼ percent a year earlier.
  - Liquidity ratios remain high by international standards but have declined; maturity mismatches and a segmented interbank market amplify liquidity risks.
  - Banks are generally well capitalized and sufficiently provisioned; profitability and asset quality are good on average.
- Reform and supervision:
  - Deposit insurance scheme first round: of 1,137 banks that applied, 824 were admitted; admitted banks account for 98 percent of household deposits.
  - Remaining banking reforms: full IAS accounting, strengthening creditor rights, strategic plans for state banks.
  - Staff concerned that admission to deposit insurance scheme may not entail a sufficient break with past regulatory forbearance.
- Staff caution:
  - While systemic risks are currently low and manageable, the rapid rise in banks’ balance sheets suggests risks could rise without supervisory vigilance; the banking system remains an important vulnerability, especially in the event of a major drop in oil prices.

### Structural reforms, trade policy, and investment climate
- Structural reform progress and delays:
  - Structural reforms are behind schedule; social benefits reforms experienced dilution and implementation problems.
  - Reforms progressed in railroads, electricity (separation of transmission/distribution and establishment of internal wholesale market), and mortgage facilitation in housing; Gazprom reform at a standstill.
  - Yukos affair damaged the investment climate; government reformers agreed reforms are at a standstill.
- Trade and WTO accession:
  - Russia’s trade regime somewhat restrictive; agreements reached with trading partners accounting for almost 85 percent of Russia’s external trade.
  - Upon WTO entry: average import tariff on industrial products to be reduced from 10¼ percent to 7 percent; average import tariff on agricultural products from 21 percent to 20 percent.
  - Outstanding differences: dual energy pricing, subsidies to agriculture and aviation, quotas on meat and poultry, and inadequate protection of intellectual property rights.
  - Staff urged early resolution of differences hindering WTO accession.

### Risks, stress tests, and scenarios
- Main risks:
  - A much faster and deeper drop in oil prices than assumed in staff’s baseline.
  - Rapid fiscal relaxation combined with constrained supply could increase inflation and real appreciation risks.
- Sensitivity/worst-case scenario (illustrative):
  - Oil price falls to $15 per barrel.
  - Initial contraction in GDP of 2 percent.
  - A major devaluation of the ruble.
  - Even under this scenario public debt would be about 34 percent of GDP.
- Stress-test scenario outputs (six-year sequences shown in source for selected scenarios):
  - 1. Real GDP growth, real interest rate, and primary balance are at historical averages in 2005-2010: 19.3, 18.5, 17.2, 15.7, 14.5, 13.3
  - 2. Real interest rate is at historical average plus two standard deviations in 2005 and 2006: 24.9, 33.0, 30.3, 27.9, 26.2, 24.8
  - 3. Real GDP growth is at historical average minus two standard deviations in 2005 and 2006: 16.8, 16.7, 14.9, 13.2, 12.1, 11.2
  - 4. Primary balance is at historical average minus two standard deviations in 2005 and 2006: 30.1, 41.3, 38.2, 35.5, 33.4, 31.7
  - 5. Combination of 2-4 using one standard deviation shocks: 31.7, 44.5, 35.5, 28.0, 21.1, 15.2
  - 6. One time 30 percent real depreciation in 2005: 28.2, 24.9, 22.7, 20.6, 19.2, 18.1
  - 7. Fall in the oil prices to 15 US$ per barrel in 2005 and 2006 and to 20 US$ afterwards: 31.0, 33.3, 33.4, 33.3, 33.5, 34.1

### Key numeric indicators and projections (selected figures preserved)
- GDP growth: 7¼ percent in 2004; projected 5½ percent in 2005.
- Real GDP growth: decelerated from 7½ percent in 2004H1 to a provisional 5½ percent in 2005H1 (y-o-y).
- Headline inflation: 10 percent in June 2004; 13¾ percent in June 2005; staff projection: 11½ percent by end-year (2005) under limited nominal appreciation assumption.
- Core inflation: entrenched at 10–11 percent since 2002.
- Unemployment fell to 7½ percent; real wages grew by 11¼ percent in 2004.
- Gross foreign reserves rose by $27 billion during the year through end-June 2005, to $152 billion.
- Current account surplus in 2004: 10 percent of GDP.
- OSF reference price: $20 per barrel; benchmark raised to $27 per barrel in proposed changes.
- OSF flows: Rub 106 billion in 2003 and Rub 218 billion in 2004; OSF used to prepay IMF Rub 93.5 billion and to prepay US$ 15 billion to Paris Club creditors.
- Federal government overall balance (percent of GDP): 2001: 2.7; 2002: 1.3; 2003: 1.6; 2004: 4.4; 2005 Proj.: 7.5.
- General government overall balance (percent of GDP): 2001: 2.7; 2002: 0.6; 2003: 1.1; 2004: 5.0; 2005 Proj.: 7.6.
- Fiscal impulse (defined as yearly change in fiscal stance): 2001: -0.9; 2002: 1.4; 2003: -1.5; 2004: -4.2; 2005 Proj.: -2.9.
- Nominal GDP (billions of U.S. dollars): 2004 582; 2005 774; 2006 903.
- Exchange rate (rubles per U.S. dollar, period average): 2004 28.8; 2005 27.7; 2006 27.7.
- World oil price (U.S. dollars per barrel, WEO): 2004 28.9; 2005 37.8; 2006 50.7.
- Gross international reserves (GIR, billions of U.S. dollars): 2002 47.8; 2003 76.9; 2004 124.5; Dec. 2005 139.5; projections thereafter provided in source.
- Public sector debt net of foreign reserves swung from a net liability of $140 billion shortly after the 1998 crisis to a net asset position of almost $30 billion.

### Staff and Board policy recommendations (summary)
- Fiscal:
  - Do not reduce the surplus on a constant oil price basis further in 2005 and 2006.
  - Do not increase the benchmark price for the OSF again; limit OSF use to prepayment of debt.
  - Save higher-than-budgeted oil revenues not earmarked for the stabilization fund.
  - Prepare an integrated medium-term fiscal and structural reform plan to spend oil wealth on raising potential GDP.
- Monetary and exchange rate:
  - Prioritize the inflation target over the exchange rate target; scale back interventions and allow ruble appreciation whenever inflation exceeds the targeted path.
  - Tighten monetary policy enabled by increased exchange rate flexibility to manage inflationary risks from fiscal relaxation.
- Financial sector:
  - Strengthen prudential standards, complete admission rounds for deposit insurance, adopt IAS accounting, strengthen creditor rights, and prepare strategic plans for state banks.
  - Maintain supervisory vigilance given rapid bank balance sheet growth.
- Structural reforms:
  - Accelerate civil service and public administration reforms, reforms of natural monopolies, and measures to improve the investment climate.
  - Use oil wealth for reforms and investments that augment productive capacity; avoid recurrent spending that does not raise potential growth.

*Source: IMF staff report (2005) — mission met Deputy Prime Minister Zhukov, Minister of Finance Kudrin, Central Bank Governor Ignatiev, and other officials.*

### 2005. The mission met Deputy Prime Minister Zhukov, Minister of Finance Kudrin,

### _cr05377 - 2005. The mission met Deputy Prime Minister Zhukov, Minister of Finance Kudrin,

### Executive Summary
- Background
  - GDP growth slowed since mid-2004 despite high oil prices; slowdown mainly reflects a sudden deceleration in oil output and investments and emerging resource constraints.
  - Fiscal policy had offset much of the stimulus from large terms-of-trade gains, but a major relaxation is now underway as high oil prices and the swelling stabilization fund undermine support for saving the oil revenue windfall.
  - Monetary policy remained accommodative: the CBR continued to resist ruble appreciation through large unsterilized interventions.
  - Structural reforms outside the banking system have come to a virtual standstill.
- Outlook
  - GDP growth is projected to amount to 5½ percent in 2005, compared to 7¼ percent in 2004.
  - Main downside risk: a weakening in consumption growth.
  - Fiscal relaxation in the pipeline could temporarily boost GDP growth closer to last year’s level.
  - Inflation is almost certain to exceed the official target again in 2005; the CBR is likely to allow just enough exchange rate flexibility to prevent inflation from increasing above last year’s level.
  - Vulnerabilities likely to remain low, but a sharp correction in the oil price could cause significant distress in the banking sector.
- Policy discussions focused on:
  - The amendment of the 2005 budget that entails a significant relaxation of fiscal policy; staff warned this would add to inflationary pressures and advised delaying further relaxation until cyclical pressures ease.
  - Room for fiscal relaxation over the medium term exists, but staff argued oil wealth should be harnessed to support reforms and spending that bolster potential GDP growth; little scope to increase such spending now without risking waste due to flagging reforms.
  - Staff advocated increased exchange rate flexibility and warned that resisting appreciation while fiscal policy is relaxed poses a risk to stability; CBR officials disagreed, stating they would continue to pursue both inflation and exchange rate targets.
  - Concerns about regulatory forbearance and the new deposit insurance scheme: staff noted admission to the scheme had not entailed as strong a break with regulatory forbearance as hoped; CBR officials disagreed.
  - All key government reformers agreed reforms are at a standstill and that the Yukos affair damaged the investment climate; Kremlin officials said delays are due to administrative obstacles that will soon be overcome.

### Background — Recent Economic Developments
- Broad-based recovery and drivers
  - Russia is in its seventh year of robust GDP growth; recovery driven by large and sustained terms-of-trade gains, increased political and economic stability.
  - Higher oil output and investments have been the main conduits of growth.
  - Companies used their own resources to introduce technology increasing extraction from existing wells, reversing the decade-long contraction in Russian oil output.
  - Investments outside the oil sector have fueled growth in total factor productivity and real wages, spurring consumption.
  - Growth in small and medium-sized enterprises remains limited; foreign direct investment outside the energy sector remains low; concerns about the investment climate persist.
- Recent slowdown
  - Real GDP growth decelerated from 7½ percent in the first half of 2004 to a provisional 5½ percent in the same period of 2005 (year-on-year).
  - Slowdown mainly reflects a sudden deceleration in growth of oil output and investments from Q3 2004, with no clear evidence yet of a recovery.
  - Real wages and consumption growth have appeared to be weakening.
- Causes and risks
  - Slowdown widely attributed to policy-induced supply disruptions and jolts to the investment climate, notably the Yukos affair and perceived heavy-handedness by tax authorities and other agencies.
  - Sharp rise in marginal tax rates in the oil sector—to almost 90 percent at prices above $25 per barrel—may have reduced oil output and investment incentives.
  - The increase in the share of the oil revenue windfall being taxed has reduced the impetus to GDP growth from oil price increases.
  - Supply disruptions from the change in ownership of Yukos last fall have not yet been fully reversed.
- Resource constraints
  - Resource constraints had emerged before the 2004 slowdown: excess capacity had been gradually soaked up during prolonged high GDP growth.
  - Near-term room for continued fast expansion of oil production appears exhausted due to transportation bottlenecks and limited investment in exploration of new oil fields.
  - Acceleration in domestic demand in 2004 spilled over into much higher imports while leaving GDP growth unchanged compared to 2003.
  - Staff calculations suggested the output gap had been virtually closed and that GDP could not grow by more than 5-6 percent without causing higher inflation.

### Policy and Institutional Developments
- Fund relations and mission composition
  - Russia has accepted the obligations of Article VIII, Sections 2, 3, and 4.
  - Restrictions on current account transactions identified at the 2003 Article IV consultation and not approved by the board have been removed, although a new restriction has emerged (Appendix I).
  - Russia subscribed to the SDDS in January, 2005.
  - Statistics: Russia’s statistical database is adequate for surveillance, albeit with some shortcomings (Appendix III).
  - The mission met Deputy Prime Minister Zhukov, Minister of Finance Kudrin, Central Bank of Russia Governor Ignatiev, other senior officials, members of the Duma, representatives of the business and academic communities, and the press.
  - The staff team comprised Mr. Thomsen (head), Messrs. Figliuoli and Zebregs, Ms. Oomes (all EUR), Mmes. Ilyina (ICM) and Nkuzu (PDR), and Mr. Lohmus (MFD), and was assisted by Mr. Mates (Moscow Office). Mr. Mozhin, Executive Director for Russia, participated in the discussions.

### Box 1 — Oil Taxation and the Oil Stabilization Fund
- Oil taxation
  - Main taxes on the oil sector:
    - Mineral extraction tax: levied on all extracted oil at a rate of 22 percent of the excess over $9 per barrel.
    - Export customs duty: applies to oil exports only when the Urals c.i.f. price exceeds $15 per barrel. Rates are proportional to the level of the Urals price:
      - When price is between $15 and $20 per barrel the marginal rate is 35 percent.
      - When price is between $20 and $25 per barrel, the marginal rate is 45 percent.
      - When price is beyond $25 per barrel, the marginal rate is 65 percent.
  - Combined marginal rate: 22 percent for prices below $22 per barrel but increases rapidly with the oil price to reach 88 percent when the price is above $25 per barrel.
  - The rates of these two taxes were substantially increased in August 2004 and again in January 2005; especially for oil prices above $25 per barrel.
  - Oil companies are also subject to the profit tax at a fixed rate of 24 percent. Oil derivatives are subject to excises.
- Oil Stabilization Fund (OSF)
  - Introduced in January 2004 to save the fiscal windfall from exceptionally high oil prices.
  - Revenues from the mineral extraction tax and the export customs duty on oil in excess of the OSF reference price (currently $20 per barrel) are earmarked for the OSF.
  - At current extraction and export rates, each additional dollar in the oil price above $25 per barrel increases revenues earmarked for the OSF by about Rub 55 billion.
  - OSF financed with unspent fiscal surplus of the previous year: Rub 106 billion in 2003 and Rub 218 billion in 2004.
  - By law, OSF resources may be used to finance the federal budget deficit when the current oil price is below the reference price, and also for other purposes such as repaying foreign debt if resources exceed Rub 500 billion.
  - To date, government used OSF resources to prepay the IMF (Rub 93.5 billion) in January 2005 and to prepay US$ 15 billion to Paris Club creditors.
  - As a temporary measure, OSF resources will be used to finance the gap in the pension fund in 2005 that emerged due to the cut in the unified social tax.
  - OSF reserves are currently deposited in an unremunerated account with the central bank.
  - Note: The increase of the mineral extraction tax in January 2005 was implemented to offset the budget cost of the repeal of the VAT on oil and natural gas exports to CIS countries (previously taxed at 18 percent; starting January 2005 subject to a zero percent Russian VAT rate).

### Key Figures and Indicators (preserved as in source)
- GDP growth: 7¼ percent in 2004; projected 5½ percent in 2005.
- Real GDP growth: decelerated from 7½ percent in 2004H1 to a provisional 5½ percent in 2005H1 (y-o-y).
- Marginal oil tax rates: combined marginal rate reaches 88 percent when price is above $25 per barrel; marginal rates shown for thresholds at $15, $20, $25 per barrel (35 percent, 45 percent, 65 percent respectively for export duty).
- OSF mechanics: reference price $20 per barrel; each additional $1 above $25 per barrel increases OSF earmarked revenues by about Rub 55 billion.
- OSF flows: unspent fiscal surplus contributions of Rub 106 billion in 2003 and Rub 218 billion in 2004; OSF used to prepay the IMF Rub 93.5 billion and to prepay US$ 15 billion to Paris Club creditors.

*Source: IMF staff report (2005) — mission met Deputy Prime Minister Zhukov, Minister of Finance Kudrin, Central Bank Governor Ignatiev, and other officials.*

### 5.      Labor market conditions have also continued to tighten. Real wages grew by

### 5.      Labor market conditions have also continued to tighten. Real wages grew by

### Labor market conditions
- Real wages grew by 11¼ percent in 2004, catching up with productivity gains in recent years and bringing unit labor costs in rubles to broadly the same level as before the 1998 crisis.
- Unemployment fell to 7½ percent.
- Reports of labor shortages in high-growth areas:
  - Moscow unemployment rate: 1½ percent.
  - St. Petersburg unemployment rate: 2¾ percent.
- Labor market mobility remains limited, owing to severe housing shortages among other reasons.

### Inflation and exchange rate dynamics
- Headline inflation climbed from 10 percent in June 2004 to 13¾ percent in June 2005.
- Core inflation has been entrenched at 10–11 percent since 2002.
- The ruble appreciated in real terms by 6¾ percent in the first half of this year compared to the same period last year.
- Staff projection: inflation of 11½ percent by end-year (2005) under assumption that the CBR permits only limited nominal appreciation.
- Staff projects a real effective exchange rate appreciation of 11 percent in 2005, above the official target of 8 percent.

### Competitiveness and unit labor costs
- CPI-based real effective exchange rate is currently at almost the level prevailing prior to the August 1998 devaluation but likely still below its long-run equilibrium.
- Considerable appreciation since 1999 has been in line with or somewhat slower than the change in Russia’s productivity differential with the Euro area and the United States.
- Unit labor costs in some non-fuel sectors have increased faster than in the fuel sector, suggesting those non-fuel sectors may be affected by real appreciation.
- The share of the Russian non-fuel sector in world exports has remained broadly stable.
- Relative price level (deviation from PPP) remains well below the level expected given Russia’s relative income level, indicating real exchange rate undervaluation.

### External sector and reserves
- Gross foreign reserves rose by $27 billion during the year through end-June 2005, to $152 billion, more than 3½ times short-term debt.
- Public sector debt net of foreign reserves swung from a net liability of $140 billion shortly after the 1998 crisis to a net asset position of almost $30 billion.
- Current account surplus in 2004: 10 percent of GDP, boosted by higher oil and gas prices and some increase in oil export volumes.
- Net private capital outflows (including errors and omissions) rose to 2 percent of GDP in 2004.
- Pre-payment of debt: agreement to pre-pay $15 billion of Paris Club debt, causing the official capital account to turn sharply negative; net public capital outflows will amount to about 2¼ percent of GDP in 2005 compared to a very small outflow in 2004.
- Authorities consider prepayment of remaining Paris Club debt of about $28 billion in 2006–07.
- Russia made early repurchase of all obligations to the Fund subject to repurchase in March 2005.

### Fiscal policy and public finances
- Headline general government surplus has increased every year since 2001 as the government has taxed and saved much of rapidly increasing oil revenues.
- Under WEO assumption for 2005 (Russian crude price of $47 per barrel), the amended 2005 budget will entail an overall surplus of 7½ percent of GDP, compared to 5 percent of GDP in 2004.
- Federal government overall balance (percent of GDP): 2001: 2.7; 2002: 1.3; 2003: 1.6; 2004: 4.4; 2005 Proj.: 7.5.
- General government overall balance (percent of GDP): 2001: 2.7; 2002: 0.6; 2003: 1.1; 2004: 5.0; 2005 Proj.: 7.6.
- Federal government overall balance at constant $20/barrel (percent of GDP): 2001: 1.9; 2002: 0.2; 2003: -1.0; 2004: -0.8; 2005 Proj.: -2.6.
- General government overall balance at constant $20/barrel (percent of GDP): 2001: 1.8; 2002: -0.3; 2003: -1.5; 2004: -0.2; 2005 Proj.: -2.7.
- General government non-oil balance (percent of non-oil GDP): 2001: -4.8; 2002: -6.9; 2003: -7.6; 2004: -6.1; 2005 Proj.: -9.4.
- Fiscal impulse (defined as the yearly change in the fiscal stance): 2001: -0.9; 2002: 1.4; 2003: -1.5; 2004: -4.2; 2005 Proj.: -2.9.
- Fiscal impulse (excluding oil sector): 2001: 0.0; 2002: 2.0; 2003: -4.6; 2004: -2.8; 2005 Proj.: 1.5.
- Combined impulse from oil export earnings and fiscal policy (A-B): 2001: 0.1; 2002: 3.2; 2003: 3.7; 2004: 0.7; 2005 Proj.: 3.2.
- The government has gradually increased spending of oil revenues; non-oil fiscal deficit has increased (or surplus on constant oil price basis declined), coinciding with core inflation entrenchment and faster real ruble appreciation.
- Federal budget would still have balanced at a price for Russian crude oil of $22 per barrel in 2004.

### Monetary policy and banking
- Monetary policy has remained accommodative, despite some tightening since mid-2004.
- Unsterilized interventions caused large increases in reserve money; rapid growth in bank credits contributed to buoyant domestic demand.
- Reserve money growth slowed somewhat since mid-2004 due to accelerated build-up of government deposits with the CBR after increased oil taxation in mid-2004.
- Tumult in banking sector in prior year may have contributed to slowdown in credit growth; slowdown largely considered to reflect weakening demand for credits as investment growth decelerated.
- Rising inflation, declining nominal interest rates, and larger capital outflows suggest monetary conditions have remained accommodative.
- Staff recommendation: monetary policy should be primarily focused on inflation-control, unburdened of exchange rate considerations; the CBR has disagreed and continued to pursue dual targets.

### Structural reforms and banking sector reform
- Structural reforms are behind schedule.
- Social benefits reforms effective early 2005 were an important step but experienced dilution of the original plan and implementation problems.
- Opposition to social benefits reform reduced resolve to move ahead with health and education reforms.
- Deposit insurance scheme implementation: first round completed at end-March 2005 — of 1,137 banks that applied, 824 were admitted; admitted banks account for 98 percent of household deposits. Rejected banks may apply again in a second round to be completed by end-September 2005.
- Remaining key banking reforms: full IAS accounting, strengthening of creditor rights, development of strategic plans for state banks.
- Staff supports deposit insurance scheme as opportunity to strengthen prudential standards and abandon regulatory forbearance.

### Near-term outlook and medium-term framework
- Staff projects GDP growth of 5½ percent for 2005 as a whole, broadly in line with private sector consensus but less than government forecasts of almost 6 percent.
- Exports and investment growth expected to remain subdued; consumption is the main engine of growth, supported by accommodating macroeconomic policies.
- Near-term outlook is uncertain: activity and investment indicators volatile; consumption growth eased recently; further fiscal relaxation could boost GDP growth closer to last year’s level, but resource constraints and expenditure switching to imports may check a durable rise.
- Inflation is likely to exceed the official target in 2005; official end-year target of 8½ percent is beyond reach given year-on-year inflation of 13¾ percent through June.
- Medium-term potential: conditional on accelerated structural reforms and better public infrastructure, staff expects potential output growth to be 6–7 percent over the medium term. Without such progress, staff expects growth to slow further in the coming years.

*Source: IMF staff report excerpt (text and tables provided in the source content).*

### 18.      Balance of payments constraints are unlikely to restrict economic policies and

### _cr05377 - 18.      Balance of payments constraints are unlikely to restrict economic policies and

### External position and balance-of-payments
- Balance of payments constraints are unlikely to restrict economic policies and GDP growth over the medium to long term.
- Conservative forecasts for oil prices are significantly above the new benchmark price for the oil stabilization fund of $27 per barrel, suggesting Russia under current policies is taxing and saving at least a partially permanent terms-of-trade gain.
- There is considerable scope for policies that will bring about or accommodate a gradual lowering of the savings-investment surplus without jeopardizing balance-of-payments viability.
- External vulnerability considerations weigh much less on economic policies following the decline in external debt to low levels and the sharp rise in foreign reserves.
- As the current account adjusts to the terms-of-trade gain, the ruble should be expected to appreciate steadily in real terms.

### Fiscal position, projections, and room for relaxation
- Staff projections indicate considerable room for fiscal relaxation over the medium term.
- Under conservative assumptions about oil prices, the projected headline primary surplus is about 6 percent of GDP higher than the debt-stabilizing primary surplus over the medium term.
- Medium-term fiscal scenario assumptions and outcomes:
  - Spending on structural reforms and public infrastructure increases by ½ percent of GDP each year, starting in 2007.
  - Public debt drops from an already low 20 percent of GDP to less than 10 percent of GDP by 2010.
- Recent and proposed budget changes:
  - The 2005 budget amendment will raise expenditures by 1¾ percent of GDP relative to the original budget, financed by one-time back-taxes from Yukos and higher-than-budgeted oil tax revenues not earmarked for the stabilization fund.
  - Planned investment incentives in the form of VAT and profit tax reductions will cost ¾ percent of GDP.
  - The 2005 amendment and preliminary 2006 plans will worsen the balance of the federal government on a constant oil price basis by about 3 percent of GDP compared to 2004 (1¾ percent of GDP in 2005 and 1½ percent of GDP in 2006).
  - To fund increased spending, the benchmark oil price above which revenues are saved in the stabilization fund will be raised from $20 to $27 per barrel.
  - Taking into account spending financed by profit and excise taxes on the oil sector not channeled to the stabilization fund, staff estimates the fiscal changes raise the oil price at which the federal budget is in balance from $22 per barrel in 2004 to, at least, $31 per barrel in 2006.
- Stabilization fund and pressures:
  - The oil stabilization fund is projected to swell to $50 billion by end-2005 under current oil prices.
  - Pressures to relax fiscal policy further are mounting; proposals range from accelerated increases in wages and social expenditures (President Putin promised public sector wages will be raised by 50 percent in real terms over the next three years and pensions will be increased significantly) to increased funding of infrastructure and investment projects.

### Risks, stress scenarios, and robustness
- Macroeconomic vulnerabilities appear low, barring a major deterioration in macroeconomic policies.
- Main risk: a much faster and deeper drop in oil prices than assumed in staff’s baseline.
- Sensitivity/worst-case scenario described:
  - Oil price falls to $15 per barrel.
  - Initial contraction in GDP of 2 percent.
  - A major devaluation of the ruble.
  - Even under this scenario public debt would be about 34 percent of GDP.
- Staff notes the external position is also robust to sizeable disturbances (referenced Tables and Figure in source).

### Policy discussions and staff recommendations
- Near-term concerns:
  - Staff urged delaying fiscal relaxation until cyclical pressures ease to avoid adding to rising inflationary pressures and the risk of a real ruble appreciation overshooting its long-term path.
  - Staff preferred no increase in the non-oil deficit in 2005–06 and warned that recent budget amendments and preliminary 2006 plans would increase inflationary pressures.
- Macroeconomic policy mix:
  - Spending more of the terms-of-trade gain will inevitably cause an accelerated real appreciation of the ruble.
  - Continuing to resist appreciation via monetary and exchange rate policies would exacerbate inflationary risks associated with fiscal relaxation.
  - Staff argued that managing the risks associated with the 2005 amendment hinges on a tightening of monetary policy enabled by an increase in exchange rate flexibility.
- Fiscal management guidance:
  - Staff suggested reform of the OSF to limit discretionary adjustment in the trigger price in short-run oil price developments to facilitate better fiscal management.
  - Staff noted the need to prepare an integrated program for accelerated structural reforms and increased spending of oil revenues to ensure spending raises potential GDP growth.
  - Staff highlighted limited scope for effective spending at this juncture given structural reforms are largely at a standstill and recent relaxation is overwhelmingly for public sector wages and other recurrent spending.

### Structural reforms and long-term fiscal sustainability (Box 4)
- Key long-term assumptions:
  - GDP growth falls gradually from a conservative 5 percent per year in 2006–10 to a long-run level of 2 percent per year.
  - Staff assumes nominal oil price remains constant at around $50 per barrel until 2013, implying a gradual fall to $40 per barrel at 2004 prices, after which it will remain constant in real terms at this level (equivalent to around US$36.60 Urals).
  - Energy taxes: tax burden for energy sector remains the same as in 2006, so ratio of energy tax revenues to GDP declines with the contraction in energy GDP share.
  - Non-energy tax revenues gradually increase from about 28 percent of GDP (projected in 2006) to around 30 percent of GDP in 2050.
  - Non-reform public expenditure contained at 30 percent of GDP.
- Six major structural reforms contemplated with associated fiscal costs amounting to about 4½ percent of GDP. Selected reform cost details:
  - Civil sector reform: additional 0.6 percent of GDP per year for wage adjustments; civil employment should be reduced by at least one quarter by 2010 (World Bank).
  - Housing and communal service reforms: higher utility tariffs will raise costs for budget organizations by about 0.5 percent of GDP a year (World Bank).
  - Pension reform: unified social tax cut created an annual financing gap of about 1 percent of GDP; overall expenditure on pensions increases by 2 percent of GDP per year by 2014 (World Bank).
  - Health and education reform: expenditure on education and health should rise by 1.4 percent of GDP; general government currently spends about 7 percent of GDP on education and health.
- Contingent liabilities and sustainability:
  - Contingent liabilities seem limited; largest associated with a major banking crisis through deposit insurance estimated at about 2–3 percent of GDP.
  - Energy-related revenue will be 4.1 percent of GDP in 2050 (down from 13 percent of GDP in 2005).
  - An increase in non-oil revenues (or cut in expenditures) by around 2 percent of GDP is sufficient to preserve sustainability.
  - Public debt will not exceed 15 percent of GDP by 2050 and will remain stable afterwards.
  - Fiscal sustainability would be compromised if reforms are implemented while simultaneously cutting non-oil revenues: permanently reducing non-oil revenues by 2 percent of GDP compared to the baseline would increase public debt to over 100 percent of GDP by 2050.

### Monetary policy views and inflation outlook
- CBR stance and targets:
  - CBR officials considered the end-year target of 8½ percent still achievable and argued the increase in inflation to 13¾ percent in June 2005 mainly reflected supply-side shocks.
  - They did not see a need for monetary tightening at that time given assumptions about administered prices and seasonal factors.
- Staff assessment:
  - Staff argued monetary policy was too accommodative given rising inflationary pressures, declining interest rates, and large capital outflows.
  - Staff warned seasonal administered-price moderation would be insufficient to decelerate headline inflation to meet targets and cautioned against relying on delayed administered price increases to bear down on inflation.
- Sustainable non-oil balance criteria discussed:
  - Two staff-calculated criteria indicate the sustainable non-oil balance would be approximately 5–6 percent of GDP higher than the current actual non-oil balance.
  - The sustainable non-oil deficit corresponding to preserving oil wealth (Norway-style rule) would amount, in the medium term, to about 10 percent of GDP.
  - Staff noted this ceiling could be increased if government spending adds to human or physical capital.

*Source: IMF staff report excerpt (chapter 18).*

### 34.      Staff advocated increased exchange rate flexibility. It was concerned that the end-

### _cr05377 - 34.      Staff advocated increased exchange rate flexibility. It was concerned that the end-

### Exchange rate policy and inflation
- Staff advocated increased exchange rate flexibility and urged the CBR to subordinate its exchange rate target to the inflation target by standing ready to scale back interventions whenever inflation exceeds the charted course.
- Staff concern: the end-year inflation target could be missed by a considerable margin without increased exchange rate flexibility.
- Key rationale:
  - Pace of inflation reduction was less important than the need to firmly signal that the inflation target would not give way to the exchange rate target.
  - Spill-over of unsterilized interventions into inflation was set to quicken as spare capacity was being soaked up.
  - Increased exchange rate flexibility could no longer be delayed now that fiscal policy is being relaxed if inflationary risks are to be contained.
  - Making clear that monetary policy would focus on reducing inflation rather than on limiting ruble appreciation will in time increase short-term exchange rate uncertainty, discouraging speculative capital flows.
- CBR officials’ stance:
  - Saw only limited scope for more exchange rate flexibility.
  - Accepted that some additional appreciation of the ruble could become necessary if headline inflation does not recede as expected during the second semester.
  - Reluctant to subordinate exchange rate policy to the achievement of the end-year target and intended to continue pursuing dual targets, stressing that limiting real ruble appreciation remained an important political objective.
- Staff recommendation reiterated in appraisal:
  - The CBR is unlikely to be able to set inflation on a steady downward path without increased exchange rate flexibility.
  - The CBR should give priority to its inflation target, standing ready to scale back interventions and allow ruble appreciation whenever inflation exceeds the targeted path.
  - Real appreciation is unavoidable as the terms of trade gain is increasingly being spent; resisting such appreciation would pose a risk to macroeconomic stability.

### Fiscal policy, oil revenues, and stabilization fund guidance
- Staff concern: policy of saving oil revenues is being relaxed just as investment is slowing and resource constraints are emerging.
- Measured impacts cited:
  - Recent decisions since the spring of this year have amounted to a weakening of the fiscal position by some 3 percent of GDP.
  - This weakening entails an increase in the oil price required to balance the budget by almost 10 dollars per barrel.
- Staff recommendations:
  - The surplus on a constant oil price basis should not be reduced further in 2005 and 2006.
  - The benchmark price for the stabilization fund should not be increased again.
  - There should be no further use of the resources of the stabilization fund, except for prepayment of debt.
  - Higher revenues from oil sector taxes not covered by the stabilization fund should also be saved.
  - A need for an integrated medium-term fiscal and structural reform plan for how to spend Russia’s oil wealth.

### Financial sector issues and banking system vulnerabilities
- Observations on banking sector dynamics:
  - Rapid changes in the banking system have increased vulnerabilities.
  - Increasing competition and declining margins, renewed access to foreign capital markets, rising consumer lending and mortgages, and increased lending to small- and medium-sized enterprises.
  - CBR stress tests indicate credit risk has increased somewhat while non-performing loan ratios have stayed low.
  - A shock comparable to the 1998 crisis would result in a loss of 2¾ percent of GDP in 2004 compared to 2¼ percent a year earlier.
  - Equity and interest rate risks have edged up; liquidity ratios—while still high by international standards—have declined, amplified by increasing maturity mismatches and a segmented interbank market.
  - Banks are generally well capitalized and sufficiently provisioned; profitability and asset quality are good on average.
- Supervision and regulatory framework:
  - Process for admission into the deposit insurance scheme resulted in a substantial reduction in the number of banks and strengthened prudential standards.
  - Officials intended to tighten standards further, including addressing shortcomings in connected lending limits and consolidated supervision.
  - Further banking consolidation expected to start in 2006 in preparation for the increase in the minimum capital requirement for banks to EUR 5 million effective in 2007.
  - Adoption of the new Bankruptcy Law for Financial Institutions in 2004 will speed up bank liquidation processes.
- Staff cautions:
  - Key reforms are delayed and the favorable environment could be masking more serious vulnerabilities.
  - Concern about much delayed adoption of international accounting standards, unresolved judicial system problems regarding creditor rights, and absence of a strategic plan for dominant state banks.
  - Noted that banks accounting for 98 percent of total deposits had been admitted to the new deposit insurance scheme; staff questioned whether the admission process entailed the hoped-for break with past regulatory and supervisory forbearance.
  - Staff view: while systemic risks are currently low and manageable, the rapid rise in banks’ balance sheets suggests such risks could rise without supervisory vigilance; the banking system remains an important vulnerability, especially in the event of a major drop in oil prices.

### Structural reforms and trade policy
- Progress and delays:
  - Authorities acknowledged reforms generally running well behind target.
  - Reasons cited: political complacency due to high oil prices and limited administrative capacities.
  - Progress noted in specific sectors:
    - Railroad sector: separation of current operations from infrastructure management; private operators granted access.
    - Electricity sector: separation of transmission and distribution networks from production; establishment of an internal wholesale market for electricity.
    - Housing sectors: use of mortgages facilitated.
  - Reform of Gazprom reported at a standstill.
- Social reforms and political economy:
  - Fierce resistance to social benefit reforms surprised authorities and tempered the pace of reforms in social areas, delaying health and education reforms.
  - Concerns about social impact mean reforms will be slower and require more budgetary resources than previously expected.
- Trade regime and WTO accession:
  - Russia’s trade regime remains somewhat restrictive, but WTO accession is expected to further liberalize the system.
  - Agreements reached with trading partners accounting for almost 85 percent of Russia’s external trade.
  - Authorities indicated that upon entry into the WTO:
    - The average import tariff on industrial products will be reduced from 10¼ percent to 7 percent.
    - The average import tariff on agricultural products will be reduced from 21 percent to 20 percent.
  - Outstanding differences pertain to Russia’s dual energy pricing, subsidies to agriculture and aviation, quotas on meat and poultry, and inadequate protection of intellectual property rights.
  - Staff urged authorities to work towards an early resolution of these differences holding up WTO accession.
- Regional integration:
  - The process of establishing the Common Economic Space (CES) has run into opposition; delay could increase the role of the Euro-Asian Economic Community.

### Staff appraisal: macroeconomic risks and policy priorities
- Growth and policy assessment:
  - Russia’s robust growth owes much to gradual escalation of taxation and saving of oil revenues, which helped prevent demand pressures from the windfall.
  - Concern that relaxation of this policy coincides with slowing investment and emerging resource constraints, exacerbating upward pressures on inflation and the ruble.
- Policy guidance and priorities:
  - Staff believes no further reduction of the surplus on a constant oil price basis in 2005 and 2006.
  - Exchange rate policy should become much more flexible to manage inflationary pressures arising from fiscal relaxation.
  - Postpone further relaxation of the non-oil balance until inflation is on a clear downward path.
  - Use oil wealth to support reforms and investments that raise potential GDP growth, but avoid spending in ways that do not augment productive capacity.
  - Prioritize reforms to bolster the investment climate: civil service and public service administration reforms, and reforms of the natural monopolies.
  - Measured increase in infrastructure spending possible but constrained by administrative capacities and slow civil service and public administration reforms.
- Political and institutional concerns:
  - The Yukos affair has raised concerns about interventionism and heavy-handedness by regulatory and law enforcement agencies, harming investor confidence.
  - A determined acceleration of structural reforms is critical to overcoming concerns and repairing the investment climate.
- Data and statistics:
  - Russia’s economic and financial statistics are broadly adequate for surveillance, but frequent revisions raise concerns about data accuracy, particularly in the real sector.
  - The components of the CPI and PPI are not readily available, and the weights are not disclosed, rendering analysis difficult.

*Source: Excerpt from the IMF staff report (text provided).*

### 54.      It is recommended that the next Article IV consultation take place on the standard

### _cr05377 - 54.      It is recommended that the next Article IV consultation take place on the standard

### Scheduling
- It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Macroeconomic projections (selected)
- Real GDP (annual percent change): 2001 5.1; 2002 4.7; 2003 7.3; 2004 7.2; 2005 5.5; 2006 5.3.
- Consumer prices (period average): 2001 21.5; 2002 15.8; 2003 13.7; 2004 10.9; 2005 12.9; 2006 10.8.
- Consumer prices (end of period): 2001 18.6; 2002 15.1; 2003 12.0; 2004 11.7; 2005 11.5; 2006 10.0.
- GDP deflator (percent): 2001 16.5; 2002 15.5; 2003 14.0; 2004 18.0; 2005 21.4; 2006 10.8.
- Nominal GDP (billions of rubles): 2004 16,752; 2005 21,459; 2006 25,019.
- Nominal GDP (billions of U.S. dollars): 2004 582; 2005 774; 2006 903.
- Exchange rate (rubles per U.S. dollar, period average): 2004 28.8; 2005 27.7; 2006 27.7.
- World oil price (U.S. dollars per barrel, WEO): 2004 28.9; 2005 37.8; 2006 50.7.

### Public sector / Fiscal indicators
- General government (commitment basis) overall balance (percent of GDP): 2001 2.7; 2002 0.6; 2003 1.1; 2004 5.0; 2005 7.6; 2006 6.5.
- Revenue (percent of GDP): 2001 37.3; 2002 37.7; 2003 36.7; 2004 38.6; 2005 43.2; 2006 41.0.
- Expenditures (percent of GDP): 2001 34.6; 2002 37.1; 2003 35.6; 2004 33.6; 2005 35.6; 2006 34.5.
- Primary balance (percent of GDP): 2001 5.4; 2002 2.7; 2003 2.8; 2004 6.2; 2005 8.8; 2006 7.4.
- Overall balance at constant oil price (percent of GDP, at $20 per barrel): 2001 1/1.8; 2002 -0.3; 2003 -1.4; 2004 -0.2; 2005 -2.7; 2006 -4.7.
- Federal government overall balance (commitment basis, percent of GDP): 2001 2.7; 2002 1.3; 2003 1.6; 2004 4.4; 2005 7.5; 2006 6.6.

### Fiscal operations (2002–06, percent of GDP)
- Total revenue: 2002 37.7; 2003 36.7; 2004 38.6; 2005 43.2; 2006 41.0.
- Tax revenue: 2002 35.1; 2003 34.1; 2004 36.1; 2005 40.8; 2006 38.6.
  - VAT: 2002 7.0; 2003 6.7; 2004 6.4; 2005 6.3; 2006 5.4.
  - Corporate profit tax: 2002 4.3; 2003 4.0; 2004 5.2; 2005 6.9; 2006 6.1.
  - Personal income tax: 2002 3.3; 2003 3.4; 2004 3.4; 2005 3.9; 2006 3.9.
- Total expenditure: 2002 37.1; 2003 35.6; 2004 33.6; 2005 35.6; 2006 34.5.
  - Interest: 2002 2.1; 2003 1.7; 2004 1.2; 2005 1.1; 2006 0.9.
  - Non-interest: 2002 35.0; 2003 33.9; 2004 32.4; 2005 34.4; 2006 33.5.
- Primary balance: 2002 2.7; 2003 2.8; 2004 6.2; 2005 8.8; 2006 7.4.
- Overall balance: 2002 0.6; 2003 1.1; 2004 5.0; 2005 7.6; 2006 6.5.
- Financing (percent of GDP): 2003 -1.1; 2004 -5.0; 2005 -7.6; 2006 -6.5.
  - Foreign financing: 2003 -1.6; 2004 -1.7; 2005 -0.5; 2006 -2.5; 2007 -0.3.
  - Domestic financing: 2003 1.0; 2004 0.6; 2005 -4.5; 2006 -5.1; 2007 -6.2.

### Monetary developments and monetary accounts (selected)
- Base money (annual percent change): 2002 38.1; 2003 30.4; 2004 49.6; 2005 24.8; 2006 36.6; 2005 projection 32.1.
- Ruble broad money (annual percent change): 2002 40.1; 2003 32.3; 2004 51.6; 2005 35.8; 2006 41.2; 2005 projection 36.4.
- Monetary survey (billions of rubles): Broad money end-2004 5,298; end-2005 5,497; projection 5,731; further projection ...7,293.
- Currency issued (billions of rubles): Dec. 2002 814; Dec. 2003 1,225; Dec. 2004 1,670; March 2005 1,579; May 2005 1,686; June 2005 1,756; Dec. 2005 projection 2,277.
- Net international reserves (NIR) of monetary authorities (billions of U.S. dollars): Dec. 2002 1,313; Dec. 2003 2,117; Dec. 2004 3,358; Dec. 2005 3,871; projections 4,225; 4,413; 5,237.
- GIR (in billions of U.S. dollars): 2002 47.8; 2003 76.9; 2004 124.5; Dec. 2005 139.5; projections 152.3; 159.0; 188.7.

### External sector and balance of payments (2002−10 projections, selected)
- External current account (billions of U.S. dollars): 2002 30.9; 2003 35.4; 2004 59.9; 2005 91.7; 2006 92.2; 2007 75.6; 2008 56.6; 2009 41.6; 2010 29.2.
- Current account (percent of GDP): 2002 9.0; 2003 8.2; 2004 10.3; 2005 11.9; 2006 10.2; 2007 7.4; 2008 4.9; 2009 3.2; 2010 2.0.
- Trade balance (billions of U.S. dollars): 2002 46.3; 2003 59.9; 2004 87.1; 2005 121.3; 2006 124.7; 2007 111.1; 2008 95.9; 2009 85.2; 2010 77.6.
  - Exports (fob, billions of U.S. dollars): 2002 107.2; 2003 135.9; 2004 183.5; 2005 248.8; 2006 271.7; 2007 275.8; 2008 278.2; 2009 285.0; 2010 294.2.
    - Non-energy exports: 2002 51.8; 2003 62.2; 2004 83.0; 2005 103.2; 2006 107.7; 2007 107.7; 2008 107.1; 2009 109.1; 2010 112.2.
    - Energy exports: 2002 55.5; 2003 73.7; 2004 100.4; 2005 145.6; 2006 164.0; 2007 168.6; 2008 171.1; 2009 175.9; 2010 182.0.
      - Oil (billions of U.S. dollars): 2002 39.6; 2003 53.7; 2004 78.6; 2005 114.4; 2006 126.4; 2007 130.1; 2008 133.1; 2009 138.2; 2010 144.3.
      - Gas (billions of U.S. dollars): 2002 15.9; 2003 20.0; 2004 21.9; 2005 31.2; 2006 37.6; 2007 38.5; 2008 38.0; 2009 37.7; 2010 37.7.
  - Imports (fob, billions of U.S. dollars): 2002 -61.0; 2003 -76.1; 2004 -96.3; 2005 -127.4; 2006 -147.0; 2007 -164.7; 2008 -182.3; 2009 -199.7; 2010 -216.6.
- Services (net, billions of U.S. dollars): 2002 -15.0; 2003 -24.1; 2004 -26.4; 2005 -28.8; 2006 -31.6; 2007 -34.6; 2008 -38.4; 2009 -42.6; 2010 -47.4.
- Capital and financial account (billions of U.S. dollars): 2002 -10.9; 2003 0.9; 2004 -2.4; 2005 -15.2; 2006 -6.9; 2007 -4.3; 2008 -2.1; 2009 5.4; 2010 5.2.
- Errors and omissions, net: 2002 -7.5; 2003 -5.7; 2004 -9.9; 2005 -8.8; 2006 0.0; 2007 0.0; 2008 0.0; 2009 0.0; 2010 0.0.
- Overall balance (billions of U.S. dollars): 2002 12.5; 2003 30.5; 2004 47.7; 2005 67.7; 2006 85.3; 2007 71.3; 2008 54.5; 2009 47.0; 2010 34.4.
- Financing (net international reserves changes, billions of U.S. dollars): 2002 -12.5; 2003 -30.5; 2004 -47.7; 2005 -67.7; 2006 -85.3; 2007 -71.3; 2008 -54.5; 2009 -47.0; 2010 -34.4.
- Gross international reserves (billions of U.S. dollars): 2002 47.8; 2003 76.9; 2004 124.5; 2005 188.7; 2006 274.0; memorandum further projections 345.3; 399.8; 446.8; 481.2.
- Gross reserves in months of imports of GNFS: 2002 5.6; 2003 7.1; 2004 8.9; 2005 11.8; 2006 15.3; later 17.5; 18.5; 19.1; 18.9.

### Indicators of external vulnerability and financial markets (2002–04)
- Public sector debt (percent of GDP): 2002 34.5; 2003 27.8; 2004 21.7.
- Broad money (12-month percent change, end-year): 2002 33.9; 2003 39.4; 2004 33.7.
- Private sector credit (12-month percent change, end-year): 2002 36.0; 2003 46.6; 2004 46.7.
- Treasury Bill Rate (short-term, average): 2002 12.7; 2003 5.4; 2004 3.1.
- Exports (percent change in US$): 2002 5.3; 2003 26.7; 2004 35.0.
- Imports (percent change in US$): 2002 13.4; 2003 24.8; 2004 26.6.
- Gross official reserves (in billions of US$): 2002 47.8; 2003 76.9; 2004 124.5.
- Total external debt (in billions of US$): 2002 152.1; 2003 185.9; 2004 215.1.
- Total external debt to exports (percent): 2002 126.4; 2003 122.2; 2004 105.6.
- Stock market index (RTS, end of period): 2002 359.1; 2003 603.7; 2004 656.6.
- Foreign currency debt rating (S&P long-term foreign currency debt rating, eop): 2002 BB/Stable; 2003 BBB; 2004 BBB+.
- Spread of benchmark bonds (basis points, end of period, 2007, 10-year Eurobond in US$): 2002 374.0; 2003 202.0; 2004 120.0.

### Debt dynamics and fiscal sustainability (selected)
- Public sector debt-to-GDP trajectory (percent): 1998 75.4; 1999 96.0; 2000 57.6; 2001 48.5; 2002 34.5; 2003 27.8; 2004 21.7; 2005 14.1; 2010 projection 7.3.
- Change in public sector debt (percentage points): 1998 22.9; 1999 20.6; 2000 -38.4; 2001 -9.0; 2002 -14.1; 2003 -6.7; 2004 -6.0; 2005 -7.6.
- Identified debt-creating flows (percent of GDP): 1998 93.5; 1999 -19.7; 2000 -33.2; 2001 -10.2; 2002 -7.1; 2003 -9.2; 2004 -11.9; 2005 -12.4.
- Primary deficit (percent of GDP, implied series): 1998 3.6; 1999 -2.9; 2000 -7.5; 2001 -5.4; 2002 -2.7; 2003 -2.8; 2004 -6.2; 2005 -8.8; 2006 -7.4; 2007 -6.6; 2008 -6.1; 2009 -5.5; 2010 -5.0.
- Debt-stabilizing primary surplus (percent): 1998 0.3; 1999 -7.6; 2000 -3.9; 2001 -1.8; 2002 -1.6; 2003 -0.7; 2004 -0.8; 2005 -0.8; 2006 -0.2; 2007 -0.1; 2008 -0.1; 2009 -0.1; 2010 -0.1.

### Consolidated macro framework (2002–10, highlights)
- Overall economy consumption (percent of GDP): 2002 68.9; 2003 68.2; 2004 65.3; 2005 65.7; 2006 67.4; 2007 70.0; 2008 72.2; 2009 73.7; 2010 74.8.
- Gross investment (percent of GDP): 2002 20.1; 2003 20.4; 2004 21.1; 2005 20.2; 2006 20.6; 2007 21.1; 2008 21.6; 2009 21.9; 2010 22.0.
- National savings - investment (current account, percent of GDP): 2002 9.0; 2003 8.2; 2004 10.3; 2005 11.8; 2006 10.2; 2007 7.4; 2008 4.9; 2009 3.2; 2010 2.0.
- CPI inflation (end of period): 2002 15.1; 2003 12.0; 2004 11.7; 2005 13.6; 2006 13.8; 2007 13.7; 2008 11.5; 2009 9.0; 2010 8.0.

*Source: Russian authorities; and Fund staff estimates.*

### 1. Real GDP growth, real interest rate, and primary balance are at historical averages in 2005-2010

### 1. Real GDP growth, real interest rate, and primary balance are at historical averages in 2005-2010

### Stress-test scenarios and projected debt outcomes
- Scenario labels and projected sequence values (six-year sequences shown in source):
  - 1. Real GDP growth, real interest rate, and primary balance are at historical averages in 2005-2010:
    - 19.3, 18.5, 17.2, 15.7, 14.5, 13.3
  - 2. Real interest rate is at historical average plus two standard deviations in 2005 and 2006:
    - 24.9, 33.0, 30.3, 27.9, 26.2, 24.8
  - 3. Real GDP growth is at historical average minus two standard deviations in 2005 and 2006:
    - 16.8, 16.7, 14.9, 13.2, 12.1, 11.2
  - 4. Primary balance is at historical average minus two standard deviations in 2005 and 2006:
    - 30.1, 41.3, 38.2, 35.5, 33.4, 31.7
  - 5. Combination of 2-4 using one standard deviation shocks:
    - 31.7, 44.5, 35.5, 28.0, 21.1, 15.2
  - 6. One time 30 percent real depreciation in 2005 8/:
    - 28.2, 24.9, 22.7, 20.6, 19.2, 18.1
  - 7. Fall in the oil prices to 15 US$ per barrel in 2005 and 2006 and to 20 US$ afterwards 9/:
    - 31.0, 33.3, 33.4, 33.3, 33.5, 34.1

### Historical statistics for key variables (past 10 years)
- Historical Average, Standard Deviation, 2005-10 (as presented):
  - Primary deficit:
    - Historical Average: -1.4
    - Standard Deviation: 4.3
    - 2005-10: -6.6
  - Real GDP growth (in percent):
    - Historical Average: 2.9
    - Standard Deviation: 5.5
    - 2005-10: 5.1
  - Nominal interest rate (in percent) 6/:
    - Historical Average: 9.7
    - Standard Deviation: 4.7
    - 2005-10: 7.2
  - Real interest rate (in percent):
    - Historical Average: -30.0
    - Standard Deviation: 39.4
    - 2005-10: -2.8
  - Inflation rate (GDP deflator, in percent):
    - Historical Average: 39.8
    - Standard Deviation: 41.2
    - 2005-10: 10.0
  - Revenue to GDP ratio:
    - Historical Average: 36.5
    - Standard Deviation: 1.9
    - 2005-10: 40.0

### External debt sustainability framework (selected lines and projections)
- External debt (percent of GDP) projections and key lines:
  - External debt (actual/projections) series for 2000–2010 (selected values):
    - 2000: 60.9
    - 2001: 49.4
    - 2002: 44.1
    - 2003: 42.8
    - 2004: 37.0
    - 2005: 28.9
    - 2006: 28.1
    - 2007: 27.9
    - 2008: 27.7
    - 2009: 27.9
    - 2010: 28.2
  - Change in external debt:
    - -30.1, -11.5, -5.3, -1.2, -5.9, -8.1, -0.8, -0.2, -0.2, 0.1, 0.3
  - Identified external debt-creating flows (4+8+9):
    - -39.3, -20.1, -14.1, -16.6, -21.7, -13.7, -11.8, -8.9, -6.4, -4.7, -3.6
  - Current account deficit, excluding interest payments:
    - -21.3, -13.7, -11.2, -10.0, -11.9, -13.2, -11.6, -8.8, -6.4, -4.8, -3.6
  - Deficit in balance of goods and services:
    - -20.6, -13.0, -10.8, -11.3, -12.7, -13.6, -11.6, -8.5, -5.9, -4.1, -2.9
  - Exports of goods and services:
    - 44.1, 36.8, 34.8, 35.1, 35.0, 35.3, 32.9, 29.5, 26.4, 24.1, 22.5
  - Imports of goods and services:
    - 23.5, 23.8, 24.1, 23.8, 22.3, 21.7, 21.3, 21.0, 20.6, 20.1, 19.6
  - Net non-debt creating capital inflows (negative):
    - 0.2, 0.1, 0.4, 0.4, -0.4, -0.3, -0.3, -0.3, -0.3, -0.3, -0.3
  - Automatic debt dynamics 1/ (contributions):
    - -18.2, -6.5, -3.3, -7.0, -9.4, -0.1, 0.1, 0.2, 0.3, 0.3, 0.3
    - Contribution from nominal interest rate:
      - 4.2, 2.8, 2.2, 1.8, 1.6, 1.4, 1.4, 1.5, 1.5, 1.5, 1.6
    - Contribution from real GDP growth:
      - -6.9, -2.6, -2.1, -2.6, -2.3, -1.5, -1.3, -1.2, -1.2, -1.2, -1.3
    - Contribution from price and exchange rate changes 2/:
      - -15.4, -6.7, -3.4, -6.2, -8.8, ...
  - Residual, incl. change in gross foreign assets (2-3):
    - 9.3, 8.6, 8.8, 15.3, 15.9, 5.6, 11.0, 8.8, 6.2, 4.9, 3.9
  - External debt-to-exports ratio (in percent):
    - 138.1, 134.1, 126.4, 122.2, 105.6, 81.8, 85.3, 94.7, 104.9, 115.4, 125.5
  - Gross external financing need (in billions of US dollars) 4/:
    - -25.2, -3.6, -0.5, -10.2, -36.6, -37.7, -56.4, -37.7, -15.7, -4.0, 9.6
    - in percent of GDP:
      - -9.7, -1.2, -0.1, -2.4, -6.3, -4.9, -6.3, -3.7, -1.4, -0.3, 0.7
  - Scenario with key variables at their historical averages 5/:
    - 28.9, 32.4, 33.0, 30.7, 27.1, 22.1, -1.0

### Key macroeconomic assumptions underlying baseline (selected series)
- Real GDP growth (in percent), 2000–2010 (selected values):
  - 2000: 10.0
  - 2001: 5.1
  - 2002: 4.7
  - 2003: 7.3
  - 2004: 7.2
  - 2005: 5.5
  - 2006: 5.3
  - 2007: 5.0
  - 2008: 5.0
  - 2009: 5.0
  - 2010: 5.0
- GDP deflator in US dollars (change in percent):
  - 20.5, 12.3, 7.5, 16.5, 25.8, 26.0, 10.9, 7.9, 7.2, 6.9, 5.7
- Nominal external interest rate (in percent):
  - 6.1, 5.5, 5.0, 5.1, 5.2, 5.0, 5.6, 5.8, 6.1, 6.2, 6.4
- Growth of exports (US dollar terms, in percent):
  - 35.4, -1.7, 6.8, 26.5, 33.9, 34.0, 8.8, 1.5, 0.9, 2.5, 3.3
- Growth of imports (US dollar terms, in percent):
  - 15.5, 19.5, 13.8, 24.2, 26.0, 29.3, 14.6, 11.6, 10.3, 9.4, 8.3
- Current account balance, excluding interest payments:
  - 21.3, 13.7, 11.2, 10.0, 11.9, 13.2, 11.6, 8.8, 6.4, 4.8, 3.6
- Net non-debt creating capital inflows:
  - -0.2, -0.1, -0.4, -0.4, 0.4, 0.3, 0.3, 0.3, 0.3, 0.3, 0.3

### Figures and bound tests (summary)
- Figure descriptions (as presented):
  - External debt sustainability bound tests apply permanent one-half standard deviation shocks; boxes show average projections for baseline and scenarios, and ten-year historical averages are shown.
  - Interest rate shock (in percent) and other scenario charts label baseline and shock magnitudes (10, 15, 20, 25, 30, 35, 40, 45, 50, 55, 60, 65) across 2000–2010.
  - Specific scenario highlights with labels and numbers shown in figures:
    - Historical: 22
    - Baseline: 28
    - Interest rate shock box: 29
    - Non-interest current account shock box: 43
    - CA shock box: 28
    - Combined shock box: 39
    - Real depreciation shock (30 % depreciation) box: 30
    - Growth shock box: 34

### Selected IMF country information (institutional and program data)
- Membership Status:
  - Joined 06/01/1992; Article VIII.
- General Resources Account:
  - Quota: 5,945.40 (SDR Million) — 100.00 (Percent of Quota)
  - Fund holdings of currency: 5,943.54 — 99.97
  - Reserve position: 1.95 — 0.03
- SDR Department:
  - Holdings: 3.89 (SDR Million)
- Outstanding Purchases and Loans:
  - None
- Latest Financial Arrangements (selected entries):
  - Stand-by: Approval Date 07/28/1999, Expiration Date 12/27/2000, Amount Approved 3,300.00 (SDR million), Amount Drawn 471.43
  - EFF: Approval Date 03/26/1996, Expiration Date 03/26/1999, Amount Approved 13,206.57 (SDR million), Amount Drawn 5,779.71
  - Stand-by: Approval Date 04/11/1995, Expiration Date 03/26/1996, Amount Approved 4,313.10, Amount Drawn 4,313.10
- Projected Obligations to Fund:
  - None
- Exchange Arrangements:
  - Managed float; interbank foreign exchange market unified on June 29, 1999; official rate set equal to previous day's weighted average interbank rate.
  - New Federal Law on Foreign Exchange Regulation and Foreign Exchange Control (No. 173-FZ) and implementing regulations introduced rules including requirement for residents to use special bank account “R2” and an unremunerated reserve requirement (URR) in rubles equivalent to 25 percent of the amount of a transaction for 15 calendar days for certain transactions.
- Article IV Consultation:
  - Standard 12-month cycle; last consultation concluded on September 1, 2004.
- FSAP and ROSCs:
  - Financial Sector Assessment Program during 2002; FSSA report discussed May 2003. MFD TA mission April 2004. Long-term advisor on banking supervision present until October 2006. Fiscal Transparency ROSC visited July 2003; Data ROSC module October 2003.
- Resident Representative:
  - Mr. Neven Mates, Senior Resident Representative, since October 1, 2004.

### World Bank Group contributions (high-level highlights)
- CAS priorities and Bank emphasis:
  - Improve business environment and competition; strengthen public sector management; safeguard against social and environmental risks of transition.
- Selected Bank-supported activities and outcomes:
  - Investment climate diagnostics coordinated with IFC and Foreign Investment Advisory Service; CEM 2004 "From Transition to Development".
  - MIGA guarantees and IFC strategic presence in manufacturing, infrastructure, and financial sector.
  - Land Reform Implementation Support (LARIS): 14 percent of rayons supplied with automated land registration systems; about 90 percent of all land in those rayons inventoried for state cadastre; over 60 percent of cadastre enterprises supplied with modern digital equipment.
- Public sector management support:
  - Administrative and budget reform assistance, performance-based budgeting design (2004), multi-year project on Improving Measurement, Monitoring, and Analysis of Poverty.
  - Tax Modernization loan; Customs Development loan; Treasury Development loan.
  - Fiscal Federalism and Regional Fiscal Reform loan — Regional Fiscal Reform Fund provided incentive-based fiscal grants to 15 participating regions.
  - Municipal Water and Heating Systems loans; Community Social Infrastructure Project.
- Social and environmental programs:
  - Health Reform Implementation loan; US$150 million HIV/AIDS prevention project.
  - Education reforms: university social science education, Education Innovation Project, Education Reform Project, single entrance exam introduced in 16 regions, E-learning in Schools project.
  - Northern Restructuring Pilot Project; Sustainable Forestry project supporting the new Forestry Code and forest lease policy revisions.
  - Ozone-depleting substances program supported by Bank and Global Environmental Facility.

*Source: IMF Country Report content provided in the supplied PDF extract.*

### 5.      Russia’s strong fiscal position and access to financial markets limit the need for

### 5.      Russia’s strong fiscal position and access to financial markets limit the need for 

### Overview
- Russia’s strong fiscal position and access to financial markets reduce the need for sovereign borrowing.
- Major tasks remain: unfinished transition issues (e.g., housing and communal reform), and new objectives (e.g., public-private partnerships) to drive diversification and growth.
- Progress is uneven across regions; a growing gap exists between prosperous and lagging regions.
- Capacity and financial constraints slow local implementation; addressing these constraints requires mobilizing all domestic and international resources.

### Federal-level institutional reforms
- Demand for Bank assistance is focused on high-complexity areas where the Bank provides international experience and efficient project implementation mechanisms.
- One option: Bank provides start-up and pilot financing and helps set up project implementation mechanisms for Federal Targeted Programs; scaling up becomes the government’s responsibility.
- If relatively large volumes of government co-financing leverage Bank funds, the project framework may significantly increase efficiency of government spending on investment and structural reforms.

### Regional development
- The sub-national development agenda is extensive; demand for stable project financing and project management expertise remains high.
- The Bank’s approach: concentrate work on a small number of regions agreed with the government and use a three-pronged approach:
  - Well-performing and creditworthy regions: benefit from lending without sovereign guarantees via the IFC municipal development facility; demand is significant and Russia is interested in further instrument development.
  - Regions making progress but not leading reforms: support programs using a competitive model for accessing funds; provide technical assistance and, if necessary, project finance.
  - Poorer and less advanced regions: main instrument is support for efficient and effective design and implementation of federal targeted programs.
- Subnational projects will be tools to strengthen implementation of national reforms and improve local restructuring capacity.

### Establishing efficient framework for public-private partnerships (PPPs)
- PPPs are a new dimension to improve competitiveness and achieve public policy goals.
- The WBG will assist in designing and implementing programs to facilitate PPP emergence, including legal and regulatory structures.
- Expected benefits: improved efficiency in targeted sectors, access to multiple finance sources, and better consumer services.
- Initial primary focus: infrastructure projects (transport and the housing and communal sector).
- Additional sectors for PPP formation assistance: education, healthcare, science and technology.
- Support modalities: advisory services, guarantees, and project finance.

### Russia’s integration into the G-8 framework
- Opportunities: Ratification of the Kyoto Protocol, approaching WTO accession, and upcoming G-8 chairmanship.
- Kyoto Protocol mechanisms: unique opportunities to upgrade energy infrastructure; engagement via the Global Environment Facility (GEF) and carbon finance instruments and advisory services.
- WTO accession: continued analytical work and technical assistance to create knowledge on accession opportunities and costs, particularly for regions.
- G-8 chairmanship: Bank to provide analytical support on global development issues, building on prior G-8 country experience.

### Operational modalities and government preferences
- Government shows strong interest in flexible access to a broad menu of Bank instruments: AAA, TA, lending, guarantees.
- Bank-supported projects should be fully integrated into the Russian Federation budget, including Federal Targeted Programs, with a three to five year planning horizon.
- Government preferences:
  - Flexible co-financing arrangements that minimize sovereign borrowing.
  - Increasing government financing share up to 80 percent, and possibly even more, under some ongoing and future projects.
  - Development by the Bank of a facility for sub-national lending without a sovereign guarantee.
  - Interest in instruments including investment loans with contingent disbursements, partial credit risk guarantees, and fee-for-service work with no borrowing requirements.

### Statistical issues — general assessment
- Economic and financial data provided to the Fund are broadly adequate for surveillance, with reasonable comprehensiveness and timeliness, but accuracy and frequent revisions remain concerns.
- Data collection: forms sent to firms in enterprise registers; sample surveys increasingly replace full-count collections.
- Authorities are generally cooperative in reporting data to the Fund via the resident representative office and missions.
- Russia reports data for IFS, Government Finance Statistics Yearbook, Direction of Trade Statistics, and Balance of Payments Statistics Yearbook.

### Data dissemination and ROSC
- A draft ROSC module on data dissemination practices was prepared in 1999–2000 but never published.
- A new ROSC data module was prepared in October 2003; the authorities approved publication on the IMF website on April 25, 2004; it was posted in May 2004.
- On January 31, 2005, the Russian Federation became the 60th subscriber to the SDDS.
- However, central government operations data have not been updated since subscribing to the SDDS; the NSDP is disseminating data only for the reference periods of October and November 2004.
- Russia is redisseminating historic reserves data and historic external debt data on IMF and World Bank webpages respectively.
- Russia disseminates the data template on international reserves and foreign currency liquidity; historic series on reserves have not been corrected for definition changes.
- Headline reserve data: reported weekly with a four-business day lag; the reserve template is disseminated with a lag of twenty days.

### National accounts
- Goskomstat compiles quarterly and annual national accounts using the 1993 System of National Accounts.
- Source data: business and household surveys, administrative data; coverage improvements are ongoing but small and medium enterprises need better coverage.
- GDP estimates by type of economic activity and expenditure; estimates by type of activity are considered more accurate.
- Statistical discrepancy between production and expenditure approaches generally no more than 2 percent.
- Estimates of the financial account by institutional sector are not compiled but needed.
- Delay in finalizing a modern statistics law (requiring firms to provide data with penalties and guaranteeing confidentiality) impedes national accounts improvements.
- Authorities do not publish separate export and import volumes; revisions are not flagged when disseminated.

### Prices
- Goskomstat compiles a national CPI developed with Fund technical assistance.
- Since January 2003, weekly publication of headline inflation stopped; monthly reports continue; monthly core inflation data started.
- Further improvements depend on a new household budget survey and improved treatment of seasonal items; World Bank and TACIS assistance available.
- Producer price index published; State Customs Committee developing foreign trade price indexes.
- Since November 2003, monthly CPI and PPI presented in two formats: index with 1995=100, and percentage of previous month (previous month and same month in previous year).
- Basic components of CPI and PPI not readily available in time series format; weights of CPI and PPI components are not disclosed.

### Government finance statistics (GFS)
- Staff receives monthly information on revenues, expenditures, and financing of federal and local governments; quarterly information for extrabudgetary funds.
- Published functional classification of expenditure differs slightly from international standards; expenditure data by economic type need improvement and are compiled annually with a one-year publication lag.
- Data on domestic and external federal debt compiled monthly but made public only in summary annual form; no unified debt monitoring and reporting system exists.
- Ongoing improvements in GFS coverage and quality under an STA work program, though expenditure data remain poor.
- Reform of budgetary accounting is well advanced; objectives include introduction of accrual accounting for the whole of government.
- Latest data provided for GFS Yearbook for 2002 were reported on an accrual basis per Government Finance Statistics Manual 2001.
- Treasury has reported aggregate government finance data for publication in IFS on a cash basis since April 1996.

### Monetary statistics
- Monetary data are reasonably comprehensive and generally in accordance with international standards.
- 2003 data ROSC methodological issues identified:
  1. Scope excluded financial institutions issuing deposit substitutes (mutual funds, financial companies) and credit institutions in liquidation.
  2. Classification/sectorization: repurchase operations with nonresidents not treated as collateralized loans; financial derivatives not included in instrument classification.
  3. Basis of recording: monetary gold and securities for investment not valued at current market prices; accrued interest not included in underlying instrument.
- Post-ROSC: authorities included all unoperational credit institutions in monetary statistics and reclassified their deposits as restricted deposits.
- CBR intends further revisions to conform with Monetary and Financial Statistics Manual 2000.
- Analytical accounts for monetary authorities and commercial banks are reported for IFS publication with a one-month lag; timely interest rate data are available.
- In October 2004, STA requested CBR to pilot monetary data compilation using new Standardized Report Forms (SRFs); project not concluded.

### External sector statistics
- Balance of payments compiled using BPM5; significant progress made with Fund cooperation.
- Coverage of certain current and capital and financial account components can be improved; public detail on the financial account remains limited.
- State Customs Committee needs to improve coverage and valuation of exports and imports; merchandise imports subject to large adjustments for under recording (shuttle trade, smuggling, undervaluation).
- Persistent differences between partner country and customs import data remain; agencies are reconciling with partner country data.
- CBR developed methodology to calculate export/import transactions unrecorded by customs.
- Goskomstat needs to improve coverage and quality of direct investment and trade in services surveys; CBR has moved toward direct data collection.
- Quarterly external debt data published by sector, maturity, instrument, and currency with a one-quarter lag as prescribed by SDDS; gaps remain, notably lack of a debt service schedule.
- Need for surveillance: information on gross external payments (e.g., banking system) and monitoring of corporate sector off-balance sheet obligations and interest and exchange rate exposure.
- CBR has commenced publishing an annual international investment position for all sectors with data starting in 2001; banking sector IIP available quarterly.

### Key dates and numeric items
- ROSC data module prepared: October 2003; authorities approved publication: April 25, 2004; posted: May 2004.
- SDDS subscription date: January 31, 2005; Russia became the 60th subscriber.
- Government moving to increase its financing share up to 80 percent, and, possibly, even more, under some projects.
- CPI and PPI monthly formats: (i) 1995=100; (ii) percentage of previous month and same month in previous year.
- Headline reserve data: reported weekly with a four-business day lag; reserve template disseminated with a lag of twenty days.
- Table A1 reference date: As of August 3, 2005.

*Source: _cr05377 - 5.      Russia’s strong fiscal position and access to financial markets limit the need for*

### 1. Since the issuance of the staff report, the Russian authorities have formulated a

### _cr05377 - 1. Since the issuance of the staff report, the Russian authorities have formulated a

### Budget revisions and fiscal implications
- Authorities formulated a second supplementary 2005 budget (to be submitted to the Duma later this year) and submitted a draft 2006 budget to the Duma. The staff report discussion reflects only the first supplementary 2005 budget and key assumptions for 2006 differ from those of the draft budget.
- Oil price assumptions for both 2005 and 2006 were revised upward, producing higher revenue projections and larger headline fiscal surpluses.
- Increased spending plans in response to higher revenues raise the deficit on the basis of a constant oil price in both years.
- The oil price at which the overall budget would balance increased to almost $29 per barrel in 2005 and almost $34 per barrel in 2006 (to be compared with the $27 and $31, respectively, shown in the staff report).

### Fiscal impulse and balances
- Staff estimates the second supplementary budget for 2005 entails an additional fiscal impulse (excluding the oil sector) of about ½ percent of GDP.
- The revisions do not change the thrust of the staff appraisal: staff remain concerned that policy for taxing and saving oil revenues should not be relaxed at this juncture given emerging supply constraints and upward pressures on inflation and the ruble.
- From the Summary Table (Table 2, revised):
  - Fiscal impulse (excluding oil sector) historical/forecast entries: 0.0; 2.0; -4.6; -2.8; 1.5; 2.0 (percent of GDP) [as listed under "Fiscal impulse (excluding oil sector) 3/"].
  - A. Change in energy exports: -0.4; 1.1; 4.2; 4.6; 5.8; 7.2 (percent of GDP).
  - B. Change in overall balance 4/: -0.5; -2.1; 0.5; 3.9; 3.1; 3.9 (percent of GDP).
  - A-B (combined impulse from oil export earnings and fiscal policy): 0.1; 3.2; 3.7; 0.7; 2.7; 3.3 (percent of GDP).

### Staff and Executive Board assessment and policy recommendations
- Staff and Directors cautioned against relaxing the policy of taxing and saving oil revenues amid capacity constraints and inflationary pressures.
- Directors urged that the benchmark price above which oil revenues are saved in the Oil Stabilization Fund (OSF) should not be increased again; the use of the OSF should continue to be limited to the prepayment of debt; and additional higher-than-budgeted oil revenues should be saved.
- Directors strongly advised that fiscal policy not be loosened further and cautioned about risks of increasing recurrent expenditures that do not raise potential growth rates.
- Directors recommended priority on structural reforms to bolster the investment climate, nurture new private enterprises, and promote economic diversification, with emphasis on civil service and public administration reforms.
- Regarding monetary and exchange rate policy, most Directors considered targeting both inflation and the exchange rate unsustainable and called on the Central Bank of Russia to signal that the inflation target takes precedence; they urged allowing the ruble to appreciate if inflation runs above the targeted path.
- On banking sector reform, Directors welcomed progress but cautioned against regulatory forbearance and stressed supervisory vigilance given rapid increases in banks’ balance sheets.

### Macroeconomic outlook and recent developments
- Russia in seventh year of robust growth; higher output and investment in the oil sector have been key.
- Economy softened since mid-2004 despite record high oil prices; yearly GDP growth decelerated from 7½ percent in the first half of 2004 to 5½ percent in the same period in 2005, mainly due to lower growth in oil production and investment.
- Consumption remained buoyant, driven by rapid increases in real wages.
- Softening attributed to policy-induced supply disruptions (including the Yukos affair), higher oil taxation since the middle of last year, and tightening resource constraints (notably in oil sector and labor markets).
- Fiscal policy has offset much of the terms-of-trade shock by taxing and saving oil revenues; staff projects overall budget surplus of 7½ percent of GDP in 2005, up from 5 percent of GDP in 2004, and 6½ percent of GDP in 2006 under the current oil price outlook.
- Underlying fiscal stance has been relaxing; benchmark price for saving oil revenues in the stabilization fund increased from US$20 per barrel to US$27 per barrel.
- Monetary policy remains relatively lax: reserve money growth slowed somewhat since mid-2004 but remains high; rising inflation, declining interest rates, and large capital outflows point to a continued accommodative stance.
- Staff projects GDP growth of 5½ percent in 2005, fueled by consumption; exports and investment expected to remain subdued.
- Inflation was running at an annual rate of 7¾ percent in the first half of 2005 and likely to exceed the official target again this year.
- External vulnerability reduced: large foreign reserves of more than 3½ times short term debt.

### Key fiscal and macroeconomic figures (selected from Tables 1 and summary indicators)
- Table 1 — Federal Government Budget, 2004-06 (in billions of rubles and percent of GDP in italics):
  - Revenues (2004 staff report / August / 2005 staff report / August / 2006 staff report / August): 2,987; 3,060; 4,319; 4,705; 4,742; 5,025; 4,128; 4,744; 5,279; 6,172
  - Revenues (percent of GDP sequence shown): 17.8; 16.3; 21.2; 22.4; 22.1; 23.4; 17.7; 19.5; 21.1; 24.7
  - Expenditure (billions of rubles): 2,257; 2,781; 3,129; 3,238; 3,129; 3,238; 3,628; 3,968; 3,628; 3,968
  - Expenditure (percent of GDP sequence shown): 13.5; 14.9; 15.4; 15.4; 14.6; 15.1; 15.5; 16.3; 14.5; 15.9
  - Balance (billions of rubles): 730; 279; 1,190; 1,467; 1,613; 1,787; 500; 776; 1,651; 2,204
  - Balance (percent of GDP sequence shown): 4.4; 1.5; 5.8; 7.0; 7.5; 8.3; 2.1; 3.2; 6.6; 8.8
  - Balance at constant oil prices (percent of GDP sequence shown): -0.8; -1.5; -2.7; -3.1; -2.6; -3.0; -3.3; -3.7; -4.0; -5.0
  - Oil price balancing budget (US$): 22.3; 24.2; 27.6; 28.5; 27.4; 28.7; 29.1; 29.9; 31.2; 33.8
  - GDP (billions of rubles): 16,752; 18,720; 20,380; 21,000; 21,459; 21,459; 23,380; 24,380; 25,019; 25,019
  - Russian oil price (US$): 34.3; 28.0; 43.0; 48.0; 47.3; 50.7; 35.0; 40.0; 49.5; 58.3
- Selected economic indicators (annual percent change / percent of GDP / USD billions):
  - Real GDP growth: 4.7; 7.3; 7.2; 5.5
  - Consumer prices annual average: 15.8; 13.7; 10.9; 12.9
  - Consumer prices end of period: 15.1; 12.0; 11.7; 11.5
  - GDP deflator: 15.5; 14.0; 18.0; 21.4
  - General government overall balance (percent of GDP): 0.6; 1.1; 5.0; 7.6
  - General government revenue (percent of GDP): 37.7; 36.7; 38.6; 43.2
  - General government expenditures (percent of GDP): 37.1; 35.6; 33.6; 35.6
  - Federal government overall balance (percent of GDP): 1.3; 1.6; 4.4; 7.5
  - Total exports, fob (USD billions): 107; 136; 183; 249
  - Total imports, fob (USD billions): -61; -76; -96; -127
  - External current account (deficit -) (USD billions): 31; 35; 60; 92
  - Stock of public external debt (USD billions): 103; 105; 104; 81
  - Gross reserves coverage (in months of imports of GNFS): 5.6; 7.1; 8.9; 11.8
  - Nominal GDP (in billions of rubles): 10,818; 13,243; 16,752; 21,459
  - Exchange rate (rubles per U.S. dollar, period average): 31.3; 30.7; 28.8; ...
  - Russian oil price (U.S. dollars per barrel): 23.5; 27.3; 34.3; 47.3

*Source: IMF staff report; Public Information Notice (PIN) No. 05/130, September 21, 2005.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05377.pdf_