## _cr06429 - Executive Summary ## Source details **Canonical URL:** [_cr06429 - Executive Summary](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06429.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06429.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06429.pdf.json) --- ### Background and recent developments - GDP growth accelerated, "running at about 7 percent (annualized) by mid-2006". - Fixed investment: "about 18 percent of GDP". - Consumption: main source of growth; fiscal stance change in early 2005 allowed a substantially larger share of the terms-of-trade gain to translate into higher demand. - Capacity and resource constraints: - Potential GDP growth estimated at "about 6¼−6½ percent". - Output gap: "close to eliminated". - Measures of capacity utilization: "at historical highs". - Oil production growth stabilized at "2–3 percent", reducing energy-sector contribution to GDP growth by more than one percentage point. - Imports relative to GDP in constant prices: increased by "3 percentage points in 2005, to almost 50 percent". - Real ruble appreciation: "9 percent (year-on-year) by June 2006". - Labor market: - Official unemployment: "0.8 percent in Moscow and 2.2 percent in St. Petersburg". - Real wage growth: "more than 10 percent (year-on-year)". - Evidence of large unregistered immigration and inter-sectoral mobility. - TFP and potential growth: - Labor force and capital stock together accounted for "about one percentage point" of the "5¾ percent" growth of potential GDP during 2003–05; the balance attributed to TFP. - Inflation and exchange rate: - Headline CPI inflation: "13½ percent in May 2005", "9 percent in June 2006", "9½ percent in August (year-on-year)". - Moderation due to monetary tightening, NEER appreciation, good harvest, reduced duties on beef above quota, lower increases in administered prices, and a cap on petroleum prices. - Large unsterilized interventions continue to fuel money growth. - Balance of payments and reserves: - Gross international reserves: "rose by $57 billion during 2005, and by almost $85 billion during the first seven months of 2006, to $267 billion". - Headline current account surplus: "about 11½ percent of GDP on an annual basis (from 11 percent in 2005)". - Current account surplus in constant oil prices: "declined by 3¾ percent of GDP in 2005". - Private capital inflows: "net inflow of $27 billion during the year through mid-2006, compared to $7 billion during the previous year". - Paris Club prepayments: "$15 billion in the second half of 2005; $22 billion in 2006 (remainder of outstanding debt to Paris Club creditors)". ### Short-term outlook - Real GDP projected to grow by "6½ percent in 2006 and 2007" (same rate as in 2005). - Risks to outlook: "evenly balanced" and depend mostly on oil price developments. - With output gap close to zero, GDP growth of "6½ percent or more will be increasingly difficult to achieve without fueling inflationary pressures". ### Fiscal policy — stance, figures, and outlook - A notable fiscal relaxation underway since early 2005; fiscal relaxation will continue in 2007 despite economy being close to full capacity. - Staff warning: rapid and ill-targeted relaxation during the last "1½ year" risks a gradually emerging non-oil deficit and an unsustainable spending structure if oil prices drop sharply. - Staff recommendation: any increase in the non-oil fiscal deficit should be used for advancing structural reforms that support faster potential growth. - Selected fiscal figures (Proj. for 2006): - Federal Government (percent of GDP): Overall Balance: "8.5"; Non-Oil Balance: "-4.7"; Fiscal Impulse 1/: "-0.6"; Non-Oil Fiscal Impulse 2/: "1.4". - General Government (percent of GDP): Overall Balance: "9.2"; Non-Oil Balance: "-6.9"; Fiscal Impulse 1/: "-0.5"; Non-Oil Fiscal Impulse 2/: "1.6". - Other fiscal measures: - Terms-of-trade Gain: "4.7". - A. Change in Energy Exports: "4.6". - B. Change in General Government Overall Balance: "2.6". - Combined Contribution to GDP growth (A-B): "2.0". - Fiscal outlook for 2007 (staff estimates based on preliminary 2007 budget): - Noninterest expenditures of the general government will rise by "1½ percent of GDP in 2007". - Non-oil primary deficit will widen by "about ½ percent of GDP in 2007". - Deterioration in the non-oil deficit of the general government since early 2005: "3¾ percent of GDP (compared to 2004)". - Excluding expected amendment to the 2006 budget, combined impact of additional terms of trade gains and changes in fiscal stance = stimulus of "1¼ percent of GDP in 2007". ### Long-term fiscal sustainability (illustrative staff analysis) - Scenarios — Changes in spending envelopes relative to 2005 actual primary expenditure (in percent of GDP): - Permanent consumption rule — Variant A: Short-term "4.9"; Medium-term "4.9"; Long-term "4.9". - Permanent consumption rule — Variant B: Short-term "-2.0"; Medium-term "0.6"; Long-term "6.9". - Bird-in-hand rule: Short-term "-4.3"; Medium-term "-1.4"; Long-term "8.1". - Key assumptions: - Nominal crude oil price: increases to "$72 per barrel in 2007" and edges down to "$65¾ per barrel in 2011", then constant in real terms at the 2011 level. - Oil output growth: picks up gradually over 2006-11 to reach "4 percent per year in 2011–12", then decelerates; proven/probable/possible reserves assumed depleted in "50 years". - Gas output growth: "2 percent per year until 2011, 1 percent per year for 2012–16, zero afterwards"; gas reserves not depleted for "another 300 years". - Hydrocarbon taxes: tax burden remains at "57 percent (2005 value)"; hydrocarbon tax revenue declines from "14 percent of GDP (2005) to zero in 2106". - Non-hydrocarbon tax revenue share unchanged at 2005 level, increasing from "about 27 percent of GDP (2005) to 35 percent of GDP in the long run (constant prices)". ### Monetary policy and exchange rate - Monetary policy: remains accommodative despite some tightening during the last year; "large unsterilized interventions" continue and fuel money growth. - CBR actions: modified intervention policy to allow some limited ruble appreciation; CBR not prepared to commit to scaling back interventions fully and acknowledged inflation target might be missed. - Staff recommendations: - Greater focus on inflation control is welcome, but "additional exchange rate flexibility would be needed to meet the end-2006 target". - CBR should stand ready to scale back interventions and allow ruble appreciation as needed. - Urged CBR to refrain from announcing exchange rate targets and avoid setting real exchange rate targets in forward-looking reports. - Suggested focusing on a continuous inflation path rather than an end-year target. ### Banking sector — soundness, vulnerabilities, and recommendations - Rapid credit expansion: banking sector credit expanded by "almost 45 percent during the year through April 2006". - Financial soundness indicators generally favorable, but rapid credit growth strains liquidity. - Capital adequacy ratios: "falling since 2004" and for some systemic banks "close to the minimum requirement of 10 percent". - Nonperforming loans: overall ratio "low and declining", but "considerable increase in past-due loans to households"; data quality questioned. - Concerns: regulatory forbearance, poor prudential data, concentrated lending, lending to related parties, limited number of institutions barred from deposit insurance. - Stress test (CBR pessimistic scenario): for the 200 largest banks, total losses would amount to "2.9 percent of GDP" under a scenario similar to the 1998 crisis with no growth. - Staff recommended priorities: - Supervision on a consolidated basis. - Thorough assessment of internal credit-risk models. - Ensure banks maintain adequate capital to cover direct and indirect risks. - Swift move to full IFRS reporting. - Strengthen legal/regulatory framework: widen definition of connected parties; reinforce fit-and-proper tests; improve ownership transparency; strengthen non-bank supervision. - Financial Sector Assessment Program Update scheduled for "early 2007". ### Structural reforms, investment climate, and long-term growth - TFP was main driver of potential output growth in recent years; capital accumulation contribution "negligible". - Need to boost investment from "current low levels" to sustain strong potential GDP growth; infrastructure bottlenecks noted (power generation and pipeline network). - Recent reform advances cited by authorities: break-up of RAO UES, judicial law drafting, administrative reform action plan, law on concession agreements, special economic zones, tax and subsoil law initiatives. - Staff assessment: overall progress "disappointing"; implementation "slow"; political support weak amid high oil prices. - Staff urged prioritization of reforms that improve the investment climate, including restructuring natural monopolies and streamlining public administration; careful sequencing with socially sensitive reforms needed. - WTO accession: bilateral agreements outstanding with four countries; veterinarian control procedures and application of WTO rules for state trading companies remain key outstanding issues. - Staff noted risk that increased state ownership in the oil sector could impede future dynamism; poor performance of state-controlled gas sector highlighted. ### Risks and vulnerabilities - Short-term: main non-policy risks pertain to oil price assumptions and GDP running at or above potential. - Policy uncertainties: - (i) Supplementary 2006 budget and the 2007 budget could entail a combined relaxation of the non-oil primary deficit of "more than one percent of GDP". - (ii) The CBR may not allow sufficient exchange rate flexibility to meet the inflation target. - Staff view: risks "evenly balanced for GDP growth but skewed to the upside for inflation". - External vulnerability: "low" — international reserves almost four times short-term debt; public debt low and declining; current account surplus "11 percent of GDP". - Corporate and financial sector vulnerabilities: rapid increase in corporate foreign borrowing and weak corporate governance. ### Key numerical indicators and diagnostics (as reported) - Real GDP growth (mid-2006, annualized): "about 7 percent". - Potential GDP growth: "about 6¼−6½ percent". - Output gap: "close to eliminated". - Fixed investment: "about 18 percent of GDP". - Imports (in percent of real domestic demand): increased by "3 percentage points in 2005, to almost 50 percent". - Real ruble appreciation: "9 percent (year-on-year) by June 2006". - Headline CPI inflation: "13½ percent in May 2005; 9 percent in June 2006; 9½ percent in August (year-on-year)". - Gross international reserves: "rose by $57 billion during 2005; rose by almost $85 billion during the first seven months of 2006; reserves reached $267 billion". - Headline current account surplus: "about 11½ percent of GDP (annual basis); 11 percent in 2005". - Current account surplus in constant oil prices: "declined by 3¾ percent of GDP in 2005". - Private capital inflows: "$27 billion (year through mid-2006) versus $7 billion (previous year)". - Paris Club prepayments: "$15 billion (second half of 2005); $22 billion (2006)". - Unemployment: "0.8 percent in Moscow; 2.2 percent in St. Petersburg". - Real wage growth: "more than 10 percent (year-on-year)". ### Staff appraisal, policy priorities and recommendation - Overarching issue: ensure oil wealth spurs growth without fueling inflationary pressures and exchange rate overshooting. - Two reference points: - Considerable scope for increased fiscal spending or lower taxation over the medium term once demand pressures ease; 2006 budget balanced at an oil price of "about $30 per barrel". - Illustrative staff analysis suggests long-term spending envelope could be relaxed by "at least 5 percent of GDP over the long run (Box 4)" under certain rules. - Staff policy guidance emphasized: - Tax and save oil revenue windfalls as long as cyclical pressures persist. - Delay VAT reform or ensure it is revenue-neutral (authorities postponed until 2009). - Focus monetary policy on inflation control with sufficient exchange rate flexibility. - Use fiscal room to finance structural reforms that raise potential growth rather than create persistent non-oil deficits. - Address banking sector weaknesses: full IFRS, concentrated/related-party lending, strategic plans for dominant state banks, broaden deposit insurance coverage and enforcement. - Recommendation explicitly stated: "It is recommended that Russia’s next Article IV consultation be held on the standard 12-month cycle." ### Statistical issues and data dissemination - Data provision: "broadly adequate for surveillance", though accuracy and frequent revisions remain a concern. - Rosstat: - Compiles national accounts using the 1993 SNA; introduced chain-linking in 2006 for 2003 onwards. - CPI and PPI: monthly indices (2000=100); weekly headline inflation publication stopped in January 2003. - Data limitations: revisions not flagged; weights of CPI/PPI components not disclosed; basic components not readily available in time series format. - Government finance statistics: - Monthly federal data available; annual local government and extrabudgetary funds data with long delay. - No unified debt monitoring and reporting system; continued improvements agreed with STA. - Monetary statistics: generally in line with international standards; CBR to complete SRFs and expand coverage. - External sector statistics: compiled on BPM5; scope to improve coverage of certain current and capital/financial account components; customs valuation/coverage issues persist. - Data templates and SDDS: Russia a subscriber to SDDS since "January 31, 2005"; reserves and external debt templates available. - Table of Common Indicators: selected entries (dates of latest observation) include Exchange Rates "9/7/06", International Reserve Assets "8/25/06", Consumer Price Index latest observation "Aug 2006", and others. *Source: Executive Summary and selected excerpts (IMF Staff Report CR/06429).* ### Executive Summary ...................................................................................................... ### _cr06429 - Executive Summary ### Background and recent developments - Propelled by large terms-of-trade gains, GDP growth has accelerated and is running close to potential. - Real GDP growth: running at about 7 percent (annualized) by mid-2006, broadly the same pace as before the 2004 slowdown. - Fixed investment: about 18 percent of GDP. - Recovery in investments has occurred after negative factors in late 2004 abated. - Consumption remains the main source of growth; fiscal stance change in early 2005 allowed a substantially larger share of the terms-of-trade gain to translate into higher demand, in particular consumption. - Capacity and resource constraints: - Potential GDP growth estimated at about 6¼−6½ percent at present (Box 1). - Output gap estimated to be close to eliminated. - Measures of capacity utilization at historical highs. - Oil production growth stabilized at 2–3 percent, reducing the energy sector’s contribution to GDP growth by more than one percentage point. - Imports relative to GDP in constant prices increased by 3 percentage points in 2005, to almost 50 percent. - Real ruble appreciation: 9 percent (year-on-year) by June 2006. - Labor market: - Official unemployment: 0.8 percent in Moscow and 2.2 percent in St. Petersburg. - Real wage growth: more than 10 percent (year-on-year). - Evidence of large unregistered immigration from other CIS countries and substantial inter-sectoral mobility. - Total factor productivity (TFP) and potential growth: - Labor force and capital stock together accounted for about one percentage point of the 5¾ percent growth of potential GDP during 2003–05; the balance attributed to TFP. - Rapid TFP growth likely reflects catch-up efficiency gains. - Inflation and exchange rate developments: - Headline CPI inflation moderated from 13½ percent in May 2005 to 9 percent in June 2006, rebounding to 9½ percent in August (year-on-year). - Moderation partly reflects monetary tightening, NEER appreciation, a good harvest, reduced duties on importation of beef above quota, lower increases in administered prices, and a cap on petroleum prices. - Large unsterilized interventions to stem ruble appreciation continue to fuel money growth. - Balance of payments and reserves: - Gross international reserves: rose by $57 billion during 2005, and by almost $85 billion during the first seven months of 2006, to $267 billion. - Headline current account surplus: about 11½ percent of GDP on an annual basis (from 11 percent in 2005). - Current account surplus in constant oil prices declined by 3¾ percent of GDP in 2005 due to rapid import growth. - Private capital inflows: net inflow of $27 billion during the year through mid-2006, compared to $7 billion during the previous year. - Paris Club prepayments: $15 billion in the second half of 2005; $22 billion in 2006 (remainder of outstanding debt to Paris Club creditors). ### Short-term outlook - Real GDP is projected to grow by 6½ percent in 2006 and 2007, the same rate as in 2005. - The risks to the outlook are evenly balanced and depend mostly on oil price developments. - With an estimated output gap close to zero, GDP growth of 6½ percent or more will be increasingly difficult to achieve without fueling inflationary pressures. ### Policy discussions and staff analysis - Fiscal policy and fiscal relaxation: - A notable fiscal relaxation has been underway since early 2005 as calls for more spending of oil revenues mounted in the face of a ballooning oil stabilization fund and upcoming elections. - Fiscal relaxation will continue in 2007 despite the economy being close to full capacity. - The Ministry of Finance agreed that fiscal relaxation exacerbates demand pressures, but other parts of the government press for more spending as oil revenues swell. - Staff warned about medium-term risks: the rapid and ill-targeted relaxation during the last 1½ year risks a gradually emerging non-oil deficit and a spending structure that cannot be sustained if oil prices drop sharply, potentially leading to pro-cyclical fiscal tightening and real exchange rate overshooting its long-term equilibrium. - Staff recommendation: any increase in the non-oil fiscal deficit should be used for advancing structural reforms that support faster potential growth. - Monetary policy and inflation control: - Staff welcomed greater focus on inflation control but cautioned that additional exchange rate flexibility would be needed to meet the end-2006 target, especially when demand pressures are exacerbated by fiscal relaxation. - The CBR could not commit to such flexibility and acknowledged that the inflation target might be missed. - Large unsterilized foreign exchange interventions are continuing to fuel money growth. - Structural reform and growth prospects: - Structural reforms outside the banking sector remain very slow. - Authorities agreed reforms are behind schedule and argued high oil prices and robust growth make it difficult to mobilize political support for reforms. - Staff advocated using fiscal room to finance structural reforms that raise potential growth rather than create persistent non-oil deficits. - Banking sector and financial soundness: - Staff expressed concerns about regulatory forbearance and warned that the favorable macroeconomic environment might be disguising vulnerabilities. - Staff commended the CBR for withdrawing licenses of banks engaged in money laundering and other illegal activities. - Staff expressed concern about the limited number of deposit-taking institutions barred from the new deposit insurance scheme. - The CBR agreed that a sharp drop in oil prices could cause turmoil, but did not believe risks were systemic. ### Key numerical indicators and diagnostics (as reported) - Real GDP growth (mid-2006, annualized): about 7 percent. - Potential GDP growth: about 6¼−6½ percent. - Output gap: close to eliminated. - Fixed investment: about 18 percent of GDP. - Imports (in percent of real domestic demand): imports relative to GDP in constant prices increased by 3 percentage points in 2005, to almost 50 percent. - Real ruble appreciation: 9 percent (year-on-year) by June 2006. - Headline CPI inflation: 13½ percent in May 2005; 9 percent in June 2006; 9½ percent in August (year-on-year). - Gross international reserves: rose by $57 billion during 2005; rose by almost $85 billion during the first seven months of 2006; reserves reached $267 billion. - Headline current account surplus: about 11½ percent of GDP (annual basis); 11 percent in 2005. - Current account surplus in constant oil prices: declined by 3¾ percent of GDP in 2005. - Private capital inflows: $27 billion (year through mid-2006) versus $7 billion (previous year). - Paris Club prepayments: $15 billion (second half of 2005); $22 billion (2006). - Unemployment: 0.8 percent in Moscow; 2.2 percent in St. Petersburg. - Real wage growth: more than 10 percent (year-on-year). *Source: Executive Summary (IMF Staff Report CR/06429).* ### 9. Equity and real estate prices are rising sharply. The stock market had increased ### 9. Equity and real estate prices are rising sharply. The stock market had increased ### Equity and real estate price developments - The stock market had increased more than 40 percent since end-2005 before tumbling by 30 percent in late spring, during the turmoil in emerging markets worldwide. - Since then, the market has recovered strongly, to almost the same level as before the turmoil, and equity prices have doubled in real terms since mid-2005. - Real estate prices in the Moscow-region rose by 25–30 percent annually in real terms in 2004–05, and have reportedly continued their sharp upward trend in 2006. ### Economic policies — fiscal stance and impulses - A notable fiscal relaxation has been underway since early 2005. - The headline surplus of the general government has continued to increase as oil prices have risen sharply, reflecting marginal tax rates with respect to oil prices of almost 90 percent. - The non-oil primary deficit is set to increase by almost 3 percent of GDP in 2005–06 as oil revenues are being used to reduce taxes and increase expenditures. - Combined net impact of changes in energy exports and the headline government surplus: - A negative impulse of about ¼ percent of GDP in 2004 was followed by a stimulus of about 2 percent of GDP in 2005. - A further stimulus of 2 percent of GDP is in store for 2006, possibly more if the budget is amended. - Selected fiscal figures (In percent of GDP) — Federal Government (Proj. for 2006): - Overall Balance: 8.5 - Non-Oil Balance: -4.7 - Fiscal Impulse 1/: -0.6 - Non-Oil Fiscal Impulse 2/: 1.4 - Selected fiscal figures (In percent of GDP) — General Government (Proj. for 2006): - Overall Balance: 9.2 - Non-Oil Balance: -6.9 - Fiscal Impulse 1/: -0.5 - Non-Oil Fiscal Impulse 2/: 1.6 - Other related measures: - Terms-of-trade Gain: 4.7 - A. Change in Energy Exports: 4.6 - B. Change in General Government Overall Balance: 2.6 - Combined Contribution to GDP growth (A-B): 2.0 ### Monetary policy, exchange rate, and credit - Monetary policy remains accommodative despite some tightening during the last year. - The CBR modified its intervention policy and began to allow some limited ruble appreciation in response to a pick-up in base money growth and inflation running well above target. - In nominal effective terms, the appreciation during the year through mid-2006 was 3 percent, compared to a depreciation of about one percent during the previous 12-month period. - Large unsterilized interventions to stem ruble appreciation have remained prominent, and monetary aggregates have continued to grow rapidly. - Banking sector credit expanded by almost 45 percent during the year through April 2006. ### Banking sector soundness and vulnerabilities - Financial soundness indicators are generally favorable, although rapid credit growth is beginning to strain bank liquidity. - Profitability in the banking system is robust and has improved despite increased competition from foreign banks. - Capital adequacy ratios are at comfortable levels by international standards, but have been falling since 2004 and, for some systemic banks, are now close to the minimum requirement of 10 percent. - Several banks are not meeting the minimum requirement on the basis of IFRS/IAS, which have yet to be fully implemented. - Concerns persist about regulatory forbearance and poor prudential data: - CBR has closed a large number of small banks involved in money laundering and other illegal activities, but concerns remain about enforcement of prudential standards for the banking system at large. - Last year’s admission of banks accounting for 98 percent of total deposits into the new deposit insurance scheme highlighted improvements but also shortcomings, including concentrated lending and lending to related parties. - Official data show overall non-performing loan ratio is low and declining, except for a considerable increase in past-due loans to households; quality of data is questioned. - Foreign banks report considerably higher provisions against loans to households than domestic banks, possibly indicating underreporting of nonperforming loans. ### Structural reforms and governance - Structural reforms are progressing only slowly despite strengthened legislative and institutional frameworks. - Implementation has been slow compared to the government’s own goals; examples include health and education sector reforms, civil service and public administration, and natural monopolies. - The number of civil servants has increased by almost one third since 2001 and by 10 percent in 2005, despite intentions to reduce it. - State involvement in the energy sector has increased: forced acquisition of Yukos’ largest asset by Rosneft and the purchase of Sibneft by Gazprom have fueled concerns about state reassuming control over the sector. ### Short-term outlook (2006–07) - Demand pressures are expected to remain strong in 2006–07, most likely intensifying. - Staff projects growth of 6½ percent in both 2006 and 2007, slightly above the consensus forecast, but close to estimated potential growth. - Growth in consumption and investment is expected to remain strong, possibly accelerate, consistent with the WEO forecast of an increase in the average oil price of $16 per barrel in 2006, and a further, smaller increase in 2007. - Cumulative terms-of-trade gain of 11 percent of GDP during 2003–05 is still providing substantial impulse as spending plans adjust only gradually. - Increase in the oil price is driving a further rise in the current account surplus to above 12 percent of GDP in 2006. - As oil price increases start to taper off, the underlying increase in the non-energy current account deficit will begin to reduce the headline surplus to about 11 percent of GDP in 2007. - The authorities will struggle to reach their inflation target of 8½ percent by end-2006. ### Risks and vulnerabilities - Short-term projections are subject to notable uncertainty; main non-policy risks pertain to assumptions about oil prices and GDP growth already running at or above potential. - Main policy uncertainties: - (i) A supplementary 2006 budget and the 2007 budget could entail a combined relaxation of the non-oil primary deficit of more than one percent of GDP. - (ii) The CBR may not allow sufficient exchange rate flexibility to meet the inflation target. - Staff views risks as evenly balanced for GDP growth but skewed to the upside for inflation. - External vulnerability is low: international reserves almost four times short-term debt, public debt low and declining rapidly, current account surplus of 11 percent of GDP. - Corporate and financial sector vulnerabilities remain due to rapid increase in corporate foreign borrowing and weak corporate governance; banking sector remains vulnerable. ### Report on discussions — policy priorities and recommendations - Overarching issue: ensure Russia’s oil wealth spurs economic growth without fueling inflationary pressures and exchange rate overshooting. - Two key reference points: - Considerable scope for increased fiscal spending or lower taxation over the medium term once demand pressures ease: - 2006 budget is still balanced at an oil price of about $30 per barrel, suggesting large permanent terms of trade gains are being taxed and saved. - Illustrative staff analysis suggests the long-term spending envelope could be relaxed by at least 5 percent of GDP over the long run (Box 4). - Excessive and ill-targeted fiscal relaxation could cause the real exchange rate to overshoot its long-term equilibrium, especially if non-oil deficit is relaxed too quickly and if reforms that boost potential growth lag. - Box 3: Policy implementation and past IMF recommendations — summary of staff advice: - Fiscal policy: tax and save oil revenue windfalls as long as cyclical pressures persist; recommended delaying VAT reform or ensuring it is revenue-neutral (authorities postponed until 2009). - Monetary policy: focus primarily on inflation control, unburdened by exchange rate considerations; staff noted CBR has increased emphasis on inflation control but continues large unsterilized interventions. - Banking sector reforms: address full IFRS accounting, concentrated lending, lending to related parties, and strategic plans for dominant state banks; deposit insurance catalyzed changes but regulatory forbearance lingers. - Structural reforms: staff found government’s long-term program comprehensive and well-targeted but implementation disappointing. ### Long-term fiscal sustainability (Box 4) — illustrative results - Staff analysis of alternative spending rules produces estimates of additional fiscal room relative to actual primary expenditures in 2005 under three rules: - Scenarios (Changes in spending envelopes relative to 2005 actual primary expenditure, in percent of GDP): - Permanent consumption rule — Variant A: Short-term 4.9; Medium-term 4.9; Long-term 4.9 - Permanent consumption rule — Variant B: Short-term -2.0; Medium-term 0.6; Long-term 6.9 - Bird-in-hand rule: Short-term -4.3; Medium-term -1.4; Long-term 8.1 - Key assumptions underlying analysis: - Oil and gas prices: nominal crude oil price increases to $72 per barrel in 2007 and edges down to $65¾ per barrel in 2011, then remains constant in real terms at the 2011 level. - Oil output growth: picks up gradually over 2006-11 to reach 4 percent per year in 2011–12, then decelerates; stock of proven, probable, and possible reserves assumed depleted in 50 years. - Gas output growth: 2 percent per year until 2011, 1 percent per year for 2012–16, zero afterwards; stock of proven and unproven reserves projected not depleted for another 300 years. - Hydrocarbon taxes: tax burden for hydrocarbon sector remains unchanged at 57 percent (2005 value); hydrocarbon tax revenue declines from 14 percent of GDP (2005) to zero in 2106. - Non-hydrocarbon tax revenue as a share of non-hydrocarbon GDP remains unchanged at 2005 level, increasing from about 27 percent of GDP (2005) to 35 percent of GDP in the long run (constant prices). ### Fiscal outlook for 2007 - Fiscal relaxation will continue in 2007. - Staff estimates, based on the preliminary 2007 budget discussed with the mission: - Noninterest expenditures of the general government will rise by 1½ percent of GDP in 2007. - The non-oil primary deficit will widen by about ½ percent of GDP in 2007. - This brings the deterioration in the non-oil deficit of the general government since early 2005 to 3¾ percent of GDP (compared to 2004). - Excluding an expected amendment to the 2006 budget, staff estimates the combined impact of additional terms of trade gains and changes in the fiscal stance will amount to a stimulus of 1¼ percent of GDP in 2007. *Source: IMF staff report (excerpt).* ### 20. The planned fiscal relaxation reflects a trade off between short- and medium- ### _cr06429 - 20. The planned fiscal relaxation reflects a trade off between short- and medium- ### Fiscal policy trade-offs and stance - The planned fiscal relaxation reflects a trade off between short- and medium-term considerations. - Ministry of Economy view: - Considered the relaxation to be measured in view of the scope for relaxation over the medium term and of spending needs. - Did not believe cyclical pressures were set to increase and found the relaxation to be, if anything, too cautious. - Ministry of Finance view: - Concerned that the relaxation during the last 1½ years had been associated with a notable acceleration in the pace of real ruble appreciation. - Believed further relaxation would keep the ruble appreciating at a faster-than-desirable pace in real terms. - Hoped increased exchange rate flexibility could keep inflation on the targeted downward path, but saw some upside risks. - Considered risks manageable and viewed the proposed fiscal stance as the best feasible given surging oil stabilization fund and favorable outlook for oil prices. - More concerned about pressures for additional relaxation over and above what was planned in the run-up to next year’s elections and beyond. ### Spending increases and composition (2006–07) - Non-interest expenditures were set to increase by 1¼ percent of GDP in 2006–07 at the federal level, and by 2¼ percent of GDP at the general government level. - This included spending of about ¾ of a percent of GDP on a new National Priority Program (NPP) in 2006–07, consisting of four programs (healthcare, housing, education, agricultural sectors). - Much of the spending increase was for targeted wage increases; similar rationale justified large wage increases in sectors not covered by the NPP (military and judicial sectors). - Note in-text projection: Noninterest expenditures by the federal government are projected to increase by 1 percent of GDP (staff assumption difference with general government reflects assumption that local governments maintain a balanced budget). - Authorities noted the 2007 budget also entailed a rise in capital spending. ### Staff concerns on pace and composition of fiscal relaxation - Since 2003, policy of taxing and saving oil revenues was key to preventing overheating amid large terms-of-trade gains; staff concerned support for this policy appeared to be flagging given rapid increase in the non-oil deficit during the last 1½ years. - With GDP growth already close to potential and additional large terms-of-trade gains expected, staff argued further fiscal relaxation would exacerbate cyclical pressures. - Staff recommendation: any significant increase in the non-oil fiscal deficit should be postponed until demand pressures ease. - Staff questioned efficiency of 2006–07 spending increase, pointing to notable increases in wages and other current expenditures and doubting effectiveness of targeted wage increases in sectors where comprehensive reforms are on hold. - Staff concern: recent trends foreshadow a slow but steady increase in the non-oil deficit and emergence of a government spending structure that cannot be sustained if oil prices drop substantially. - Conditional assessment: implications of fiscal relaxation would be limited provided exchange rate remained sufficiently flexible. ### Tax system, budgetary framework, and Stabilization Fund administration (authorities’ considerations and staff views) - Oil sector taxes: - Authorities considering a ten-year tax holiday for new oil fields in East Siberia and offshore and tax rebates for existing oil fields that are more than 80 percent depleted. - Staff cautioned scheme could exacerbate compliance problems; staff suggested accelerated depreciation as an alternative, but authorities argued monitoring investments underlying depreciation allowances would also pose compliance issues. - VAT reforms: - VAT reforms are on hold despite strong pressures for a cut in the general rate, partly due to concerns over political support in the run-up to elections for offsetting a cut by eliminating preferential rate and exemptions. - Staff welcomed postponement of reduction and reiterated that the VAT is among the least distortionary taxes in Russia. - Staff suggested reform of the Unified Social Tax (UST) could be more warranted; noted 2005 cut in UST rate had failed to improve compliance and authorities said further UST reforms were not on the agenda. - Budgetary framework changes: - Ministry of Finance gaining support for suggestions to more explicitly account for implications for the non-oil deficit when determining the headline budget limit. - Starting in 2007, federal budget to be framed in rolling three-year budgets with a detailed expenditure breakdown. - Staff: these initiatives could help focus budgetary discussions on productive use of oil wealth if linked to structural reform implementation; cautioned rolling three-year framework would not be effective if annual budgets are regularly revised as in recent years. - Stabilization Fund investment strategy: - Balance at the CBR to be converted from rubles into foreign currency, with remuneration determined by yield on basket of first-rate foreign sovereign bonds. - This constitutes a redenomination of the CBR’s liabilities to the Stabilization Fund and will not affect the foreign exchange position of the CBR. ### Monetary policy: CBR views and staff recommendations - CBR outlook: - Confident inflation will continue to decline toward official targets: close to 8½ percent target for end-2006 and to the lower end of the 6½–8 percent target range for end-2007. - Tightening of monetary policy in past 12–15 months reflected a gradual shift toward inflation reduction and heightened political awareness that some ruble appreciation is inevitable. - Political support for exchange rate flexibility is fragile; an increase in inflationary pressures from a larger fiscal relaxation would test such support. - Not prepared to prioritize meeting inflation target by committing to scale back interventions as needed. - Staff assessment: - Welcomed renewed decline in inflation but cautioned additional exchange rate flexibility needed to consolidate and extend the decline. - Noted much of inflation reduction due to one-off supply-side measures and monetary policy remained very accommodative. - With fiscal policy set to exacerbate cyclical pressures, staff believed inflation would exceed end-2006 target unless the CBR allowed accelerated appreciation. - Recommended CBR stand ready to scale back interventions and allow ruble to appreciate as needed to meet inflation target. - Urged CBR to refrain from announcing exchange rate targets and avoid setting real exchange rate targets in its annual forward-looking report on monetary policy. - While formal inflation targeting still premature, staff suggested focusing on a continuous inflation path rather than an end-year target. - Liquidity and central bank instruments: - CBR concerned about ability to meet banking system liquidity needs if current account surplus wanes; liquidity injections to date had almost entirely resulted from foreign exchange interventions. - Considering expanding acceptable collateral to include high-rated corporate paper. - Staff urged caution with corporate collateral refinancing and argued reduced current account surplus could be offset by additional capital inflows attracted by stable macroeconomy, robust growth, and limited external vulnerability. - Staff welcomed recent initiative to liberalize remaining capital account restrictions. - Context note: abolition of capital account restrictions implemented on July 1, 2006; staff ascertaining whether abolition also applies to payments of commissions or expenses related to purchase of external securities acquired before July 1, 2006. ### Banking sector: developments, risks, and supervision - CBR assessment of banking sector: - Recent developments regarded as favorable: robust profitability, improved transparency and resiliency from stricter prudential requirements and deposit insurance scheme. - High rates of credit growth seen as generally healthy and posing limited risk given relatively small financial sector and comparatively low household and corporate indebtedness. - Low and declining non-performing loan ratios; expansion warrants close monitoring. - Decline in capitalization rate noted, though still high by international comparison. - Planned increase in minimum capital requirement to Euro 5 million effective from 2007 expected to support bank consolidation. - Banking supervision considered broadly adequate; strengthened prudential regulations in 2004–05 enabled withdrawal of a large number of banking licenses. - Plans to tighten enforcement of capital adequacy ratio requirements and broaden definition of related party lending. - Remaining concern: CBR’s still limited ability to impose bankruptcy on commercial banks. - Stress tests and systemic risk: - Stress tests indicate resilience to large plausible shocks. - Pessimistic scenario assumes shocks similar to 1998 crisis and no economic growth: for the 200 largest banks, total losses would amount to 2.9 percent of GDP under this scenario. - CBR view: banks generally well capitalized and sufficiently provisioned; systemic crisis considered remote though turbulence episodes cannot be ruled out. - Staff cautions and recommendations: - Welcomed supervision improvements but highlighted remaining weaknesses: regulatory forbearance, delays in adopting IFRS, connected lending issues, corporate governance problems, and concerns about data quality on loan loss provisions and collateral values. - Concern that stress tests might underestimate vulnerabilities given favorable macro environment. - Recommended priorities: - Supervision on a consolidated basis. - Thorough assessment of internal credit-risk models. - Ensure banks maintain adequate capital to cover direct and indirect risks. - Swift move to full IFRS reporting. - Reinvigorate legal and regulatory basis by: (i) widening definition of connected parties; (ii) reinforcing powers of supervisors to conduct fit-and-proper tests for owners and managers; (iii) improving transparency of bank ownership; (iv) strengthening non-bank financial sector supervision. - Noted Financial Sector Assessment Program Update scheduled for early 2007 would provide an opportunity for in-depth review of vulnerabilities. ### Long-term growth prospects and structural reforms - Key constraint: - Long-term growth prospects hinge on improvement in the investment climate. - TFP was main driver of potential output growth in recent years; capital accumulation contribution negligible. - Labor force growth increasingly constrained by demographics. - Agreement that scope for realizing large TFP gains remains; authorities somewhat more optimistic than staff. - Need to boost investment from current low levels to sustain strong potential GDP growth. - Infrastructure needs highlighted: power generation and pipeline network bottlenecks becoming evident. - Recent reform advances cited by authorities: - Energy sector reform: imminent break-up of RAO UES and steps to attract private investment. - Judicial reform: drafting of new law to enhance independence of judges and transparency of rulings. - Administrative reforms: adoption of action plan to streamline and improve quality of government services. - Measures to improve incentives for foreign investment: law on concession agreements, creation of special economic zones. - Planned changes affecting competition and business climate: law on tax administration, taxation of the oil sector, subsoil and strategic sectors law to clarify modalities for foreign investment and ceilings on foreign ownership. - Authorities acknowledged uncertainties regarding subsoil and strategic sectors law need quick resolution as investors are in doubt. - Staff assessment: - Found overall progress disappointing given favorable environment. - Welcomed electricity sector reform acceleration and noted judicial and administrative reforms as key for investment climate improvement. - Observed many changes not part of comprehensive reforms; implementation remains slow. - Authorities acknowledged difficulty in mobilizing political support for implementation as high oil prices and robust growth foster complacency. *Source: _cr06429 - 20. The planned fiscal relaxation reflects a trade off between short- and medium-* ### 35. Staff urged the authorities to give priority to reforms that are important for the ### Staff urged the authorities to give priority to reforms that are important for the investment climate. ### Investment climate and structural reforms - Key reforms identified: the restructuring of natural monopolies and the streamlining and strengthening of the public administration and civil service. - Such reforms need careful sequencing with comprehensive reforms of communal services, military, judiciary, health, and education sectors. - Staff urged prioritization of reforms that improve the investment climate and highlighted that many reforms are socially sensitive and should be advanced while high energy prices and large productivity gains boost growth and real incomes. - Concern expressed about increased state ownership in the oil sector and whether this would allow the sector to regain growth momentum and again become an important source of GDP growth; the poor performance of the state-controlled gas sector was noted as a sobering reminder. ### WTO accession and trade-related issues - Authorities had expected early WTO accession; Russia has yet to conclude bilateral agreements with four countries, including the United States. - Key outstanding issues: - Procedures and measures under Russian legislation for veterinarian control (also outstanding in multilateral negotiations and at the heart of recent trade disputes with several neighboring countries). - Application to the service sector of WTO rules for state trading companies, which would particularly affect Gazprom and Transneft. - Staff welcomed progress on intellectual property rights protection and noted that WTO accession could help catalyze reforms and enterprise restructuring. ### Import restrictions and dispute resolution - Authorities imposed new restrictions on imports from neighboring countries for health reasons. - Staff encouraged adherence to a transparent process for imposing such restrictions and urged a rapid resolution of disputes, noting significant adverse impacts on affected neighboring countries because of their smaller economies. - Authorities acknowledged staff’s concerns. ### Macro appraisal — growth, productivity, and demographic outlook - Oil prices have been a major driver of the economy, yet the supply response has been impressive and the private sector has used large external inflows to upgrade equipment and expand into new activities. - Macroeconomic reflections include strong growth in productivity, real wages, and consumption, with the oil windfall improving efficiency and growth potential. - Long-run growth depends on strengthening the investment climate and initiating delayed reforms; recent strong growth has been driven largely by increases in total factor productivity rather than by rising investment and employment. - Catch-up potential remains but will diminish, at which point potential growth will increasingly depend on raising investments from their low level. - Russia’s unfavorable demographic trends, which suggest that the labor force will soon start declining, increase urgency for improving the investment climate. - Staff considers recent developments less reassuring from a long-term perspective. ### Pace of reforms and sequencing - The pace of economic reforms is described as disappointing. - Reinvigoration is needed for stalled or slow reforms, notably of highly inefficient and under-capitalized natural monopolies and the overreaching civil service and public administration. - These reforms must be carefully sequenced with a broad range of other reforms that are also advancing hesitantly and piecemeal. - Fiscal capacity from oil wealth provides scope to absorb social costs of reforms over the medium term, offering an opportunity to accelerate reforms. ### Oil and gas sector prospects - The sector’s contribution to GDP growth has declined in recent years. - Changes to the tax regime designed to improve investment incentives in the sector are welcomed. - Increased state ownership in the oil sector raises concern about future dynamism and the risk that the energy sector might not become a key engine of growth if the state retains a strong presence. - Private Russian oil companies increased investments during the steady rise in energy prices from 1999, reversing prior contraction in output, whereas the state-controlled gas sector experienced virtual stagnation during the same period. ### Banking sector vulnerabilities - Banking sector profitability is strong and improving; direct exposures to market risks are low. - Risk management in the banking sector is still weak. - The CBR’s plan to align prudential standards with international best practices is generally ambitious and the supervisory framework is strengthening, but concerns about implementation remain. - The limited number of deposit-taking institutions barred from deposit insurance has reinforced concerns about regulatory vigilance. - The favorable macroeconomic environment could be masking underlying vulnerabilities. ### Fiscal policy, inflation, and exchange rate policy - Staff views the fiscal relaxation as excessive; taxing and saving oil revenues had served Russia well, and the rapid rise in the non-oil deficit raises concerns about premature relaxation. - The relaxation in store for 2006-07, when cyclical pressures are set to remain strong and possibly increase, is likely to cause inflation to exceed the targeted path and keep the pace of real ruble appreciation above what is politically palatable. - Much of the current relaxation supports higher wages and other current expenditures rather than well-targeted investments to boost long-term growth. - Staff is concerned about the effectiveness of rapid increases in spending of oil wealth while the government struggles to reinvigorate structural reforms. - Improved inflation performance is welcomed, but more exchange rate flexibility is needed for sustained progress. - Decline in inflation partly reflects one-off supply-side factors and greater nominal appreciation rather than inflation. - Exchange rate flexibility remains limited; unsterilized interventions continue to cause a very accommodative monetary policy. - Staff believes an accelerated pace of ruble appreciation would be required to reach the end-2006 inflation target. - The CBR should be ready to scale back interventions and allow ruble appreciation if needed to keep inflation on a downward path. ### Risks, fiscal sustainability, and global implications - Overall risks lie mainly in the medium term; macroeconomic tensions may rise in the short term but a major deterioration is unlikely. - Main concerns: the pace of fiscal relaxation and real ruble appreciation amid strong pressure for higher public sector wages and limited support for reforms. - Fiscal risk: emergence of a non-oil deficit and a structure of public spending unsustainable with oil prices at their long-term trend. - Despite current non-oil deficit and real exchange rate being below long-term levels, broad reinvigoration of reforms is needed to prevent overshooting. - From a global perspective, the main concern is the investment climate in the energy sector: policy changes that reverse the decline in output growth could significantly affect world energy prices over the medium term, contributing importantly to reducing global imbalances. *IMF staff appraisal extracted from the provided chapter content.* ### 47. It is recommended that Russia’s next Article IV consultation be held on the standard ### 47. It is recommended that Russia’s next Article IV consultation be held on the standard 12-month cycle. ### Macroeconomic activity and labor market - GDP growth: "Notwithstanding a weather related deceleration in Q1 2006, growth has rebounded..." - Contribution to GDP growth (figure context): ranges shown between -9 and 15 (In percent; yoy growth). - Investment and retail sales (annual percent change): series shown from Jan-04 to Jan-06 with Investment and Retail sales up to 17 (chart scale). - Crude oil production (quarterly, yoy growth rate): series from Mar-03 to Mar-06 with values up to 15 (chart scale); "Exports were the main drag on growth as oil production slowed." - Output gap and Unemployment: unemployment rates listed: 10.5, 9.1, 8.1, 8.6, 8.2, 7.6, 13.0 (chart labels). Text: "The economy is close to full capacity and unemployment is falling." - Industries: Real wages and productivity (annual percent changes): Real wages and Productivity series with values up to 21 (chart scale). Text: "Real wage growth is high, but is being matched by productivity gains." - Overall fiscal balance and terms of trade (changes in percent of GDP): series from -2 to 6 (chart scale). Text: "Large terms of trade gains are only partially neutralized." ### External sector and reserves - External trade (In billions of U.S. dollars): Exports and Imports series 1999–2005 with Current account balance (rhs) shown. - Current account balance (in billions of U.S. dollars): values shown in Table 2 and Table 6. - Net capital inflows (cumulative sum for the trailing 4 quarters, excludes FDI): chart shows non-bank and bank inflows from 03-Q1 to 06-Q1; text: "Net private capital inflows have increased helped by a benign external environment." - Gross international reserves (In billions of U.S. dollars): time series including explicit points: 36.6, 47.8, 76.9, 124.5, 182.2, 267; note "As of end-July, 2006." - Reserves commentary: "Reserves have continued to swell." - REER and productivity differential (January 1994 = 100): REER and Productivity differential series up to 2006 with index range 60–200. Text: "The real effective exchange rate has appreciated further, in line with productivity gains." - External debt: external debt series (In percent of GDP) shows Private and Public components with trend: "The external debt-to-GDP ratio has declined, but private sector borrowing has increased sharply." ### Monetary developments and liquidity - Contribution to quarterly base money growth (In percent): components shown include OIN, Net credit to banks, Net credit to government, NIR with ranges -60 to 80 (chart scale). Text: "Large foreign exchange interventions have continued to boost liquidity." - Monetary aggregates (QoQ percent change, SA, 3-quarter MA): Credit to economy, Base money, Broad money series from 03Q1 to 06Q1 with values up to 12 (chart scale). Text: "Growth in monetary aggregates has accelerated since the beginning of 2005 as growth picked up." - Interest rates (In percent): Bank lending rate and Household deposit rate series from Jan-03 to Jan-06 with values from 5 to 23. Text: "Yet, monetary conditions have slightly tightened as interest have stopped declining..." - Nominal Effective Exchange Rate (2000 = 100): series Jan-04 to Jan-06 with values 94–99. Text: "... and the nominal effective exchange rate has appreciated." ### Debt sustainability (external and public) - External debt DSA: Figures present baseline and scenario-bound tests with shocks including: - Permanent one-half standard deviation shocks to variables. - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. - One-time real depreciation of 30 percent occurs in 2006. - Public debt DSA: Figures present baseline and scenario-bound tests with shocks including: - Permanent one-half standard deviation shocks. - Permanent 1/4 standard deviation shocks to real interest rate, growth rate, and primary balance. - One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2006. - Selected bound-test averages and label excerpts: - "Baseline:5.9 Scenario:3.6 Historical:3.8" (growth shock box notation). - "Baseline:2.9 Scenario:11.4 Historical:-17.1" (public debt box notation). - "Baseline:6.5 Scenario:4.1 Historical:2.7" and "Baseline:5.9 Scenario:3.5 Historical:4.0" (additional box notations). ### Key macroeconomic indicators and projections (selected exact figures from tables) - Table 1 (Selected Macroeconomic Indicators, 2002–07): - Real GDP: 2002: 4.7; 2003: 7.3; 2004: 7.2; 2005: 6.4; 2006: 6.5; 2007: 6.5 (Annual percent change). - Consumer prices (Period average): 2002: 15.8; 2003: 13.7; 2004: 10.9; 2005: 12.6; 2006: 9.7; 2007: 8.5. - Overall balance (General government, percent of GDP): 2002: 0.6; 2003: 1.4; 2004: 4.9; 2005: 8.1; 2006: 9.2; 2007: 8.2. - Revenue (percent of GDP): 2002: 37.6; 2003: 36.3; 2004: 36.8; 2005: 40.0; 2006: 41.7; 2007: 41.9. - Gross international reserves (In billions of U.S. dollars): 2002: 47.8; 2003: 76.9; 2004: 124.5; 2005: 182.2; 2006: 284.8; 2007 (proj.): 416.8. - Nominal GDP (in billions of U.S. dollars): 2002: 345; 2003: 431; 2004: 589; 2005: 763; 2006: 975; 2007 (proj.): 1,159. - World oil price (U.S. dollars per barrel, WEO): 2002: 25.0; 2003: 28.9; 2004: 37.8; 2005: 53.4; 2006: 69.2; 2007 (proj.): 75.5. - Table 2 (Balance of Payments, 2002–07, In billions of U.S. dollars): - Current Account: 2002: 29.1; 2003: 35.4; 2004: 58.6; 2005: 83.6; 2006: 120.1; 2007 (proj.): 124.4. - Exports: 2002: 107.3; 2003: 135.9; 2004: 183.2; 2005: 243.6; 2006: 319.2; 2007 (proj.): 347.5. - Imports: 2002: -61.0; 2003: -76.1; 2004: -97.4; 2005: -125.3; 2006: -158.5; 2007 (proj.): -185.1. - Overall balance (In billions of U.S. dollars): 2002: 13.6; 2003: 27.8; 2004: 46.7; 2005: 64.3; 2006: 102.5; 2007 (proj.): 132.1. - Net international reserves financing (In billions of U.S. dollars): -12.9; -28.3; -46.9; -64.9; -102.5; -132.1 (financing entries mirror reserve accumulation). - Table 3 (Fiscal operations, percent of GDP): - General Government Total Revenue: 2003: 36.3; 2004: 36.8; 2005: 40.0; 2006 (proj.): 41.7; 2007 (proj.): 41.9. - Total Expenditure: 2003: 34.9; 2004: 31.9; 2005: 31.9; 2006 (proj.): 32.5; 2007 (proj.): 33.6. - Primary Balance (general government): 2003: 3.3; 2004: 6.3; 2005: 9.2; 2006 (proj.): 10.0; 2007 (proj.): 8.7. - Non-oil balance (in percent of GDP): 2003: -5.2; 2004: -4.6; 2005: -4.3; 2006 (proj.): -5.9; 2007 (proj.): -6.9. - Table 6 (Macroeconomic framework, selected projections): - Real GDP growth (projections): 2006: 6.5; 2007: 6.1; 2008: 5.9; 2009: 5.7; 2010: 5.5; 2011: 5.5. - CPI inflation, end of period (projections): 2006: 9.0; 2007: 8.0; 2008: 7.0; 2009: 6.0; 2010: 5.5; 2011: 5.0. - External current account (in billions of U.S. dollars): 2006: 120.1; 2007: 124.4; 2008: 111.1; 2009: 100.2; 2010: 88.5; 2011: 77.4. - Official reserves projections (In billions of U.S. dollars): 2006: 182.2; 2007: 284.8; 2008: 416.8; 2009: 538.7; 2010: 656.7; 2011: 766.1. ### Financial sector indicators - Financial soundness indicators (Table 7, 2002–05 highlights): - Regulatory capital to risk-weighted assets: 2002: 19.1; 2003: 19.1; 2004: 17.0; 2005: 16.0. - Nonperforming loans to total gross loans: 2002: 5.6; 2003: 5.0; 2004: 3.8; 2005: 3.2. - Return on assets: 2002: 2.6; 2003: 2.6; 2004: 2.9; 2005: 3.2. - Return on equity: 2002: 18.0; 2003: 17.8; 2004: 20.3; 2005: 24.2. - Indicators of external vulnerability (Table 8 highlights): - Broad money (percent change, 12-month basis): 2002: 32.3; 2003: 51.6; 2004: 35.8; 2005: 38.6. - Private sector credit (percent change, 12-month basis): 2002: 36.0; 2003: 46.6; 2004: 47.6; 2005: 34.2. - Gross official reserves (in billions of US$): 2002: 47.8; 2003: 76.9; 2004: 124.5; 2005: 182.2. ### Policy implications and recommendation - Recommendation explicitly stated: "It is recommended that Russia’s next Article IV consultation be held on the standard 12-month cycle." - Observations relevant for policy: - Rapid reserve accumulation: Gross reserves increased to 267 (chart point) and table values up to 284.8 and projected higher, with text "Reserves have continued to swell." - Large terms of trade gains and oil price windfalls: World oil price series and Russian oil price entries (e.g., World Oil Price: 25.0; 28.9; 37.8; 53.4; 69.2; 75.5). - Fiscal strength in headline balances but large non-oil deficits: General government overall balances positive (e.g., 2005: 8.1 percent of GDP) while non-oil balances remain negative (e.g., non-oil balance 2005: -5.9 percent of GDP). - External and public debt trajectories show declining ratios but exposures to shocks (real depreciation, growth, current account) are highlighted in DSA scenarios and sensitivity analyses. *Source: IMF staff report content (figures, tables, and text excerpts provided).* ### APPENDIX II. RUSSIAN FEDERATION: RELATIONS WITH THE WORLD BANK GROUP ### APPENDIX II. RUSSIAN FEDERATION: RELATIONS WITH THE WORLD BANK GROUP ### Overall WBG strategy and CAS/CASPR directions - Current Country Assistance Strategy (CAS) approved June 2002; CAS Progress Report (CASPR) approved April 2005. A new Country Partnership Strategy (CPS) until 2009 was under preparation in 2006. - CAS emphasizes continued support to implementation of structural reforms at the federal and sub-national levels, with particular need to: - (1) improve the business environment in order to encourage new firm growth; - (2) strengthen public sector management (including civil service reform, intergovernmental finance reform and support of judicial reforms); - (3) safeguard against the social and environmental risks of transition. - CASPR further emphasizes four areas for collaboration through mid-2006 and for the subsequent CPS: - (1) design and implementation of complex federal-level institutional reforms; - (2) regional development; - (3) establishment of an efficient framework for developing private-public partnerships; - (4) Russia’s integration into the G-8 framework. - Given limited federal sovereign borrowing needs, World Bank work will be concentrated increasingly in the regions on the basis of direct cooperation with selected Subjects of the Federation, using new modalities: direct regional operations, co-financing, and fee-for-service. ### Improving the business environment and enhancing competition — WBG activities and results - Analytical and diagnostic work: - Bank-supported survey by the Center for Economic and Financial Research (CEFIR) informing investors of improvements from the “de-bureaucratization” package. - Investment climate diagnostics in ten Russian regions, coordinated by the Foreign Investment Advisory Service (FIAS) of the Bank and IFC, to develop regional strategies. - Russia Country Economic Memorandum (CEM) 2004 From Transition to Development focused on constraints to development of the competitive environment. - Regular Russian Economic Reports provide independent assessments of economic and social developments and government reform effort. - An Investment Climate Assessment (joint with the Moscow Higher School of Economics) was being finalized, based on a survey instrument covering competitiveness questions. - New stage of CEM work examining barriers to growth at the regional level. - IFC FIAS conducted recent work on administrative barriers to access to land. - Private sector and guarantees: - MIGA provided guarantees to increase foreign investment and industrial restructuring; worked with several regions on investment promotion programs. - IFC maintained strategic presence in manufacturing, infrastructure, and the financial sector. - Land reform outcomes (LARIS project): - Some 14 percent of all the districts (rayons) in Russia were supplied with automated land registration systems. - About 90 percent of all land in those districts is now inventoried for purposes of the state cadastre. - Over 60 percent of all cadastre enterprises were supplied with modern digital equipment. ### Strengthening public sector management — programs and projects - Administrative and budget reform: - Ongoing TA on reforming government administration at federal and regional levels, including civil service reforms. - Since 2004, Bank technical assistance on design of a performance-based budgeting system. - Multi-year project on Improving Measurement, Monitoring, and Analysis of Poverty to improve monitoring and analytical capacity. - Tax, treasury and customs: - Three projects assisting development and upgrade of administrative, methodological and human capacity to collect taxes and duties and manage budgetary flows through the federal treasury. - Tax Modernization loan launching a country-wide modernization effort. - Customs Development loan piloting ways to accelerate customs clearance and improve trade facilitation while improving efficiency of fiscal revenue collection. - Treasury Development loan assisting in increasing efficiency of processing budget flows and improving financial control. - Fiscal federalism: - Fiscal Federalism and Regional Fiscal Reform loan: Regional Fiscal Reform Fund provided incentive-based fiscal grants to 15 participating regions that implemented broad-ranging reforms in fiscal and asset management, budget execution, and transparent regulations for equalizing transfers and tax sharing. - As of 2006, project expanded to the municipal level. - Public service delivery at local level: - Municipal Water and Heating Systems loans aim to increase efficiency of communal service delivery, upgrade infrastructure, and alleviate municipal financial burdens. - Completed Community Social Infrastructure Project developed and tested a model of regional social infrastructure development fund. ### Mitigating social and environmental risks — sectoral support and outcomes - Health care: - Bank objectives: (i) help establish an accessible, affordable, and efficient health care system; (ii) strengthen public policy response to premature mortality and HIV/AIDS risks. - Health Reform Implementation loan assists in designing and piloting health sector restructuring, new financing mechanisms, and medical protocols. - Bank supports implementation of the Strategy on the Prevention and Control of Social Diseases. - A US$150 million project enhances the country’s capacity to prevent the spread of HIV/AIDS. - Education: - Support for reform of university level social science education, development of secondary school textbook provision (Education Innovation Project), and piloting regional models for secondary education upgrade (Education Reform Project). - Reforms led to introduction of a single entrance exam for all institutes of higher education in 16 regions and helped universities introduce better governance systems and increase resource-use efficiency. - E-learning in Schools project provides better access to quality education in several remote destinations. - Social protection: - Focus on designing upgraded social assistance and reforming social service provision for vulnerable groups (the poor, children at risk, residents of the North). - Completed analysis of labor market and child welfare policies at the regional level. - Northern Restructuring Pilot Project supports migration from the North efficiently and affordably. - Environment: - Bank-funded program and the Global Environment Facility (GEF) administered by the Bank contributed to eliminating Russia’s previous status as one of the world’s largest producers of ozone depleting substances. - Sustainable Forestry project supported drafting of the new Forestry Code, increased efficiency of forest management institutions, and revision of forest lease policies. ### Government priorities and CASPR/CPS focus areas — demand-driven modalities - Context and priorities: - Russia’s strong fiscal position and access to financial markets limit sovereign borrowing needs, while key tasks remain (e.g., housing and communal reform, public-private partnerships, regional disparities). - Capacity and financial constraints slow local reform implementation; addressing these constraints requires mobilization of domestic and international resources. - Government preferences for partnership with the World Bank: - Continue collaboration as a source of development knowledge and project implementation capacity. - Preference for a more flexible arrangement to access a wide menu of Bank instruments and services. - Federal-level institutional reform design and implementation: - Demand concentrated on high-complexity areas where Bank brings international experience and efficient project implementation mechanisms. - Possible Bank role: provide start-up and pilot financing and help set up project implementation mechanisms for Federal Targeted Programs; government to scale up and provide larger co-financing. - Regional development — three-pronged approach: - Well-performing, creditworthy regions: - Benefit from fee-for-service arrangements or lending without sovereign guarantees (opportunity exists through IFC municipal development facility; first operation completed in the Chuvashia Republic). - WBG considering a new instrument to expand cooperation along these lines. - Regions making progress but lacking resources or creditworthiness: - Cooperation to proceed with federal government, donors, and limited Bank resources — example: a current project in the Southern Federal Okrug focusing on government administration. - (Third prong implied: targeted assistance to diverse economic, social and human development needs across agreed regions.) - Establishing framework for public-private partnerships (PPPs): - WBG to assist government in designing and implementing programs to facilitate PPP emergence, including necessary legal and regulatory structures. - Initial PPP focus: infrastructure projects (transport and housing and communal sector); WBG to also support PPPs in education, healthcare, science and technology. - Support tools to include advisory services, guarantees, and project finance. - Russia’s integration into the G-8 framework, Kyoto, and WTO: - Kyoto Protocol ratification, approaching WTO accession, and upcoming G-8 chairmanship present opportunities for Bank technical expertise. - Kyoto mechanisms, GEF, carbon finance and advisory services offer avenues for energy infrastructure upgrades. - Bank to continue analytical work and TA on WTO accession opportunities and costs, especially for regions. - Bank providing analytical support on global development issues for Russia’s G-8 chairmanship. - Operational modalities and government interests: - Strong interest in flexible access to a broad menu of Bank instruments (AAA, TA, lending, fee-for-service, guarantees). - Bank-supported federal projects to be integrated into the Russian Federation budget and Federal Targeted Programs, with a three to five year planning horizon to support mid-term development programs. - Government interest in flexible co-financing arrangements to minimize sovereign borrowing; government moving to increase its share of financing up to 90 percent under some ongoing and future projects. - Interest in development of a facility for sub-national lending without sovereign guarantee. - Other instruments of interest: investment loans with contingent disbursements, partial credit risk guarantees, and fee-for-service work with no borrowing requirements. --- ### APPENDIX III. RUSSIAN FEDERATION: STATISTICAL ISSUES - General assessment: - Economic and financial data provided to the Fund are considered broadly adequate for surveillance purposes. - Russia has a reasonably comprehensive and timely statistical database, though difficulties remain in data accuracy and frequent revisions. - State and private enterprise activities measured through forms sent to firms in enterprise registers, with sample surveys increasingly replacing full-count collections. - Authorities are generally cooperative in reporting data to the Fund, mainly through the resident representative office and during missions. - Russia reports data for IMF publications: International Financial Statistics (IFS), Government Finance Statistics Yearbook, Direction of Trade Statistics, and Balance of Payments Statistics Yearbook. - ROSC and data dissemination: - A draft ROSC module on data dissemination practices was prepared in 1999–2000 but never published. - A new data ROSC was prepared in October 2003 and the authorities approved publication on the IMF website in April 2004. - Since January 31, 2005, the Russian Federation is a subscriber to the SDDS. - Data on general government operations (GGO) in the National Summary Data Page (NSDP) currently refer to 2003. - Data templates and external series: - Reserves template series for the Russian Federation are available on http://www.imf.org/external/np/sta/ir/colist.htm - External debt series are available on http://www.worldbank.org/data/working/QEDS/sdds_countrydata.html - National accounts specifics: - Rosstat compiles and publishes quarterly and annual national accounts using the 1993 System of National Accounts. - Rosstat introduced chain-linking into quarterly and annual national accounts in 2006; chain-linked data have been published for 2003 onwards. - Source data obtained from business and household surveys, including financial surveys of businesses and employment surveys of households, supplemented by administrative data. - Efforts underway to improve coverage; further progress needed to cover small and medium enterprises. - GDP estimates are compiled by type of economic activity and expenditure category; estimates by type of activity are considered more accurate. - Statistical discrepancy between production and expenditure approaches is generally no more than 2 percent. - Data are also presented by income category. - Estimates of the financial account by institutional sector are not compiled. *Source: APPENDIX II and APPENDIX III — _cr06429 - APPENDIX II. RUSSIAN FEDERATION: RELATIONS WITH THE WORLD BANK GROUP* ### 6. The delay in finalizing a modern statistics law⎯requiring firms to provide data with ### 6. The delay in finalizing a modern statistics law⎯requiring firms to provide data with credible penalties for noncompliance, together with a guarantee of confidentiality⎯is an impediment to further improvement of national accounts data. ### National accounts and data revisions - The delay in finalizing a modern statistics law (requiring firms to provide data with credible penalties for noncompliance, together with a guarantee of confidentiality) is an impediment to further improvement of national accounts data. - Revisions to the data are not flagged when they are disseminated, making it difficult for users, including the Fund, to maintain any form of consistent time series. ### Prices - Rosstat compiles a national consumer price index (CPI) of good quality, developed with Fund technical assistance. - Following a moderation of inflation, Rosstat stopped the weekly publication of headline inflation in January 2003, retaining only monthly reports. - Rosstat has begun publication of monthly core inflation data. - Further improvements could be made on the basis of a new household budget survey (which has been under consideration for some time) and by current efforts to improve the treatment of seasonal items in the index. - World Bank and TACIS assistance is available in these areas. - Rosstat publishes a producer price index (PPI); the State Customs Committee has initiated development of foreign trade price indexes. - Monthly CPI and PPI, both Laspeyres indices (2000=100), cover all regions of the Russian Federation. - Rosstat publishes indices for foodstuffs, non-food products, and services in addition to the general CPI. - Data limitations: - Data on the basic components of the CPI and PPI are not readily available in time series format. - The weights of the CPI and PPI components are not disclosed, rendering time series analysis difficult. ### Government finance statistics (GFS) - IMF staff are provided with: - Monthly information on revenues, expenditures, and financing of the federal government. - Annual information on revenues, expenditures, and financing of local governments and extrabudgetary funds. - The published functional classification of expenditure differs slightly from international standards. - Expenditure data classified by economic type need improvement. - Annual data are compiled with a long delay. - Data on domestic and external federal debt are compiled monthly but made public only in summary form on a quarterly basis. - No unified debt monitoring and reporting system exists. - Ongoing improvements in coverage and quality of GFS data are part of a work program agreed with STA, although expenditure data remain poor. - Budgetary accounting reform is well advanced and includes the introduction of accrual accounting for the whole of government. - In the 2005 Government Finance Statistics Yearbook (GFSY), data for the central, local and general government were reported to 2004 on both accrual and cash basis in accordance with GFSM 2001 methodology. - The Treasury has been reporting 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. - Classification and sectorization are in line with methodological guidelines, except that financial derivatives (at an initial stage of development) are not included in the instrument classification. - Basis of recording broadly follows methodological recommendations. - Since 2006, monetary gold is valued at current quotations set by the CBR. - Following 2003 data ROSC recommendations, authorities included all non-operational credit institutions in the coverage of the monetary statistics and reclassified their deposits as restricted deposits. - The Central Bank of Russia (CBR) intends to revise further its compilation procedures to conform fully to the guidelines of the Monetary and Financial Statistics Manual 2000. - Analytical accounts for the monetary authorities and commercial banks are reported for publication in IFS with a lag of one month. - Timely interest rate data are available. - The CBR has yet to conclude compilation of monetary data using new Standardized Report Forms (SRFs). - A TA mission is slated to visit Moscow in April 2007 to assist in expanding coverage to include other (non-depository) financial corporations and to facilitate completion of the SRFs. ### External sector statistics - Balance of payments statistics are compiled on the basis of BPM5. - Significant improvements have been made, but scope remains to improve coverage of certain components of the current and the capital and financial accounts. - Improving detail of data on the financial account would facilitate analysis of relatively complex flows. - The State Customs Committee needs to improve substantially the coverage and valuation of exports and imports. - Merchandise imports data are subject to large adjustments for under recording, especially for “shuttle trade” by individuals, smuggling, and undervaluation. - Large differences between partner country and customs data on imports persist; statistical agencies are seeking reconciliation. - The CBR has developed a methodology for calculating components of export and import transactions unrecorded by the customs authorities. - Need to improve coverage and quality of surveys on direct investment and trade in services including travel. - The CBR has moved toward direct data collection to address these limitations. - Russia disseminates the data template on international reserves and foreign currency liquidity; however, published historic series on reserves have not been corrected for changes in definitions. - Headline data on reserves are reported to the Fund and the markets on a weekly basis with a four-business day lag. - The Fund receives additional detail on reserves and reserve liabilities through the central bank balance sheet, but this is not as comprehensive as the reserve template, which is disseminated with a lag of twenty days. - Quarterly external debt data are published by sector, maturity, instrument, and currency, with a lag of one quarter as prescribed by the SDDS. - Remaining gaps include lack of a debt service schedule and historical external debt data for pre-2003 periods. - Information on gross external payments (for example, for the banking system) is needed for monitoring liquidity risk. - Need to monitor corporate sector off-balance sheet obligations and information on interest and exchange rate exposure. - The CBR has commenced publishing an annual international investment position for all sectors with data starting in 2000. - The international investment position for the banking sector has been available on a quarterly basis since 2001Q1 and published with a three-month lag. ### Table of Common Indicators (selected entries as of September 7, 2006) - Exchange Rates: Date of latest observation 9/7/06; Date received 9/7/06; Frequency of data D; Frequency of reporting D; Frequency of publication D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 8/25/06; Date received 8/31/06; Frequency W; Frequency of reporting W; Frequency of publication W. - Reserve/Base Money: Date of latest observation 8/28/06; Date received 9/1//06; Frequency W; Frequency of reporting W; Frequency of publication W. - Broad Money: Date of latest observation 7/1/06; Date received 8/7/06; Frequency M; Frequency of reporting M; Frequency of publication M. - Central Bank Balance Sheet: Date of latest observation 8/1/06; Date received 8/7/06; Frequency M; Frequency of reporting M; Frequency of publication M. - Consolidated Balance Sheet of the Banking System: Date of latest observation 7/1/06; Date received 8/7/06; Frequency M; Frequency of reporting M; Frequency of publication M. - Interest Rates: Date of latest observation 9/7/06; Date received 9/7/06; Frequency D/W/M; Frequency of reporting D/W/M; Frequency of publication D/W/M. - Consumer Price Index: latest observation Aug 2006; Date received 9/5/06; Frequency M; Frequency of reporting M; Frequency of publication M. - Revenue, Expenditure, Balance and Composition of Financing – General Government: latest observation 2004; Date received June 05; Frequency A; Frequency of reporting A; Frequency of publication A. - External Current Account Balance: latest observation Q1 2006; Date received 07/10/06; Frequency Q; Frequency of reporting Q; Frequency of publication Q. - Exports and Imports of Goods and Services: latest observation Q1 2006; Date received 07/10/06; Frequency Q; Frequency of reporting Q; Frequency of publication Q. - GDP/GNP: latest observation Q1 2006; Date received 8/9/06; Frequency Q; Frequency of reporting Q; Frequency of publication Q. - Gross External Debt: latest observation Q1 2006; Date received 6/30/06; Frequency Q; Frequency of reporting Q; Frequency of publication NA. ### Statement by the IMF Staff Representative (October 18, 2006) - Since the issuance of the staff report there has been a significant decline in oil prices and the government has changed proposals for the supplementary 2006 budget and the 2007 budget. - Oil price projections and impacts: - The new WEO oil price projections imply a decline in the average oil price of 7¼ percent in 2006 and 17 percent in 2007, compared to the assumptions in the staff report. - Despite this decline, the average oil price is still projected to be more than 20 percent higher in 2006 than in 2005. - Approximately two-thirds of the lower oil revenues will automatically be absorbed by lower savings in the oil stabilization fund. - Staff maintained projections of real GDP growth at 6½ percent in both 2006-07. - Staff lowered projections of the current account surplus and reserve accumulation (Table 1 in source). - Budget changes and fiscal impulse: - Authorities changed the proposed supplementary budget for 2006 and the 2007 budget (2007 budget has passed the second reading by the Duma). - Changes imply increases in spending of about ¼ percent of GDP in 2006 and ½ percent of GDP in 2007, compared to projections in the staff report. - The oil price at which the 2007 budget is balanced was increased to $40 per barrel. - Lower oil price assumptions project government revenues to be considerably lower than in the staff report. - Staff estimates these changes entail an additional impulse of ½ percent of GDP in 2006 and ¾ percent of GDP in 2007 in terms of the combined effect of changes in the terms-of-trade and in the fiscal stance. - The relaxation of the fiscal stance more than compensates for the negative impact of lower oil prices. - Staff increased its inflation projection by ¼ percentage points for both 2006 and 2007, compared to the staff report. *Source: IMF staff report text (October 18, 2006) contained in the provided PDF content.* ### 3. The thrust of the staff appraisal has not changed. At the same time, the revisions have ### _cr06429 - 3. The thrust of the staff appraisal has not changed. At the same time, the revisions have ### Staff appraisal: core message - The thrust of the staff appraisal has not changed. - Revisions have reinforced staff’s concerns that: - The relaxation in the non-oil fiscal balance at a time when private sector demand remains very buoyant will add to inflationary pressures. - Over the medium term there will emerge a non-oil deficit and structure of public spending that cannot be sustained. ### Macroeconomic outlook and risks - Growth and demand - Real GDP: 4.7 (2002), 7.3 (2003), 7.2 (2004), 6.4 (2005), 6.5 (2006), 6.5 (2007) (Annual percent change) - Consumption remains the main source of growth, supported by strong real wage growth and a fiscal relaxation beginning in early 2005. - GDP growth is running increasingly close to potential; capacity utilization and constraints, particularly in the oil sector, are tightening. - Inflation and monetary conditions - Consumer prices (period average): 15.8 (2002), 13.7 (2003), 10.9 (2004), 12.7 (2005), 9.7 (2006), 8.6 (2007) - Consumer prices (end of period): 15.1 (2002), 12.0 (2003), 11.7 (2004), 10.9 (2005), 9.3 (2006), 8.0 (2007) - GDP deflator: 15.7 (2002), 14.0 (2003), 19.5 (2004), 19.6 (2005), 14.4 (2006), 7.5 (2007) - Monetary aggregates: Base money growth 30.4 (2002), 49.6 (2003), 24.9 (2004), 31.7 (2005), 47.6 (2006), 42.5 (2007); Ruble broad money growth 32.3 (2002), 51.6 (2003), 35.8 (2004), 38.6 (2005), 50.5 (2006), 43.8 (2007) - Unsterilized foreign exchange interventions have remained high, contributing to accelerated growth of monetary aggregates and renewed pickup in inflation. - External sector - Export volumes (annual percent change): 7.1 (2002), 12.4 (2003), 10.5 (2004), 4.8 (2005), 4.7 (2006), 4.7 (2007) - Import volumes: 10.9 (2002), 24.4 (2003), 21.3 (2004), 18.5 (2005), 19.1 (2006), 17.1 (2007) - Total merchandize exports, fob (in billions of U.S. dollars): 107.3 (2002), 135.9 (2003), 183.2 (2004), 243.6 (2005), 307.8 (2006), 317.9 (2007) - Total merchandize imports, fob (in billions of U.S. dollars): -61.0 (2002), -76.1 (2003), -97.4 (2004), -125.3 (2005), -158.6 (2006), -187.4 (2007) - External current account (in billions of U.S. dollars): 29.1 (2002), 35.4 (2003), 58.6 (2004), 83.2 (2005), 108.2 (2006), 93.3 (2007) - External current account (in percent of GDP): 8.4 (2002), 8.2 (2003), 9.9 (2004), 10.9 (2005), 11.2 (2006), 8.2 (2007) - Gross international reserves (in billions of U.S. dollars): 47.8 (2002), 76.9 (2003), 124.5 (2004), 182.2 (2005), 273.6 (2006), 377.2 (2007) - Reserves in months of imports: 6.8 (2002), 8.9 (2003), 11.4 (2004), 13.3 (2005), 16.0 (2006), 19.1 (2007) - Reserves as percent of short-term debt: 135 (2002), 128 (2003), 198 (2004), 172 (2005), 388 (2006), 486 (2007) ### Fiscal stance and concerns - General government (percent of GDP) - Overall balance: 0.6 (2002), 1.4 (2003), 4.9 (2004), 8.1 (2005), 7.6 (2006), 4.7 (2007) - Revenue: 37.6 (2002), 36.3 (2003), 36.8 (2004), 40.0 (2005), 39.8 (2006), 37.9 (2007) - Expenditures: 37.0 (2002), 34.9 (2003), 31.9 (2004), 31.9 (2005), 32.3 (2006), 33.2 (2007) - Primary balance: 2.7 (2002), 3.3 (2003), 6.3 (2004), 9.2 (2005), 8.4 (2006), 5.2 (2007) - Nonoil balance (in percent of GDP): -5.2 (2002), -4.6 (2003), -4.3 (2004), -5.9 (2005), -7.4 (2006), -8.3 (2007) - Federal government overall balance: 1.3 (2002), 1.7 (2003), 4.3 (2004), 7.5 (2005), 6.9 (2006), 4.0 (2007) - Staff notes: - In 2004 policy saved most of the oil windfall; in 2005–06 the non-oil primary deficit is set to rise by almost 3 percent of GDP as oil revenues are used to reduce taxes and increase expenditures. - The draft 2007 budget entails a significant further easing. - Staff projects GDP growth of 6½ percent in both 2006 and 2007. - Inflation was 7 percent in the first eight months of the year and is likely to exceed the official end-year target of 8½ percent. ### Executive Board assessment and recommendations - Overall appraisal - Directors commended strong performance: robust real GDP growth, strong external and fiscal positions, and productivity and consumption growth. - Directors attributed performance to high oil prices and significant supply responses within generally prudent macroeconomic policies, notably taxing and saving the large oil windfall. - Risks and policy guidance - Directors expected robust growth to continue in 2006 and 2007 but noted a more challenging macroeconomic environment as the economy runs close to potential. - Fiscal policy: Directors stressed refraining from further fiscal relaxation in the near term given buoyant demand and strong inflationary pressures; urged authorities not to weaken the non-oil balance further. - Monetary and exchange rate policy: Directors emphasized increasing the focus of monetary policy on inflation control, supported by more exchange rate flexibility; urged the CBR to give clear priority to its inflation target and be ready to scale back interventions and allow ruble appreciation if inflation exceeds the targeted path. - Structural reforms: Directors stressed that long-term growth depends on accelerating structural reforms, particularly in inefficient and undercapitalized natural monopolies and public administration; encouraged reinvigorating reforms while favorable energy prices and productivity gains are boosting growth and real incomes. - Banking sector: Directors welcomed strengthening but called for improved regulatory vigilance and risk management; welcomed planned FSAP update for further analysis of vulnerabilities. - Trade and external policy: Directors welcomed elimination of all capital account restrictions and encouraged swift resolution of import restrictions from neighboring countries; expressed disappointment at further delay in WTO accession and urged resisting prolonged transition agreements. - Specific cautions - Concern that the rapid loosening since early 2005 has mainly supported higher wages, recurrent expenditures, and tax cuts that are unlikely to boost potential growth. - Warning that such spending, coupled with sluggish structural reforms, could cause the exchange rate to overshoot its long-term equilibrium and lead to an unsustainable non-oil deficit and spending structure. - Concern that increased state ownership in the oil sector might negatively impinge on future dynamism; disappointing performance of state-controlled gas sector noted. ### Key numeric highlights (preserved) - Real GDP growth: 4.7; 7.3; 7.2; 6.4; 6.5; 6.5 (2002–2007) - Consumer prices (period average): 15.8; 13.7; 10.9; 12.7; 9.7; 8.6 (2002–2007) - Nonoil balance (percent of GDP): -5.2; -4.6; -4.3; -5.9; -7.4; -8.3 (2002–2007) - External current account (in percent of GDP): 8.4; 8.2; 9.9; 10.9; 11.2; 8.2 (2002–2007) - Gross international reserves (in billions of U.S. dollars): 47.8; 76.9; 124.5; 182.2; 273.6; 377.2 (2002–2007) - Projected GDP growth for 2006–2007: 6½ percent (each year) - Official end-year inflation target cited: 8½ percent *Source: IMF staff report and Public Information Notice (PIN) No. 06/128, November 6, 2006.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06429.pdf_