## _cr07351 ## Source details **Canonical URL:** [_cr07351](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07351.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07351.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07351.pdf.json) --- ### Fiscal policy and fiscal outlook - Authorities considering a further fiscal relaxation that, together with the already approved 2007 budget, will increase the non-oil deficit by 2¼–3¼ percent of GDP through 2009. - Implication: most of Russia’s remaining terms-of-trade windfall will be spent; Russia’s twin fiscal and current-account surpluses will disappear within 2–3 years—having amounted to 8½–10 percent only last year. - Staff cautions: - Additional fiscal stimulus would accelerate real appreciation and add to the nominal appreciation necessary for inflation to be kept on track. - Planned fiscal relaxation would likely eliminate the remaining undervaluation of the ruble over the next few years, increasing risk of fiscally induced overshooting of the real exchange rate, especially if above-trend oil prices add to spending pressures. - Questioned back-loading of new fiscal framework which would entail large spending cuts in 2010-11 to prevent procyclical tightening. - Noted challenge of saving up to 2 percent of GDP in run-up to the 2011 elections given stalled reforms and pressures for social transfers. - Authorities’ position: - New fiscal framework for saving oil revenues welcomed, but officials indicated intent to limit borrowing; Ministry of Finance aimed to limit increase in the non-oil deficit to 2¼ percent of GDP while other officials suggested full use of the new framework is realistic. - Argued supplementary 2007 budget targeted investments expected to boost long-term growth (infrastructure, housing, research, aluminum, petrochemical, nuclear power) and some efficiency gains via Public Private Partnerships. - Indicated increased saving of oil revenues over the medium term; increase in spending under supplementary budget meant to be temporary with subsequent lowering by about 2 percent of GDP to stay within deficit ceilings for 2010–11. ### Growth, composition, and potential - Drivers: high oil prices, strong catch-up potential, and sound fiscal policy underpin robust growth. - Productivity and factor contributions: - Double-digit terms-of-trade gains annually since 2003 supported strong investment growth. - Capital and labor have accounted for less than half of the increase in GDP since 2003; the balance due to higher total factor productivity. - Recent performance: - GDP growth accelerated to 7.9 percent (year-on-year) in Q1 2007; high-frequency indicators show undiminished momentum into Q2 2007. - Staff projects GDP growth: 6.7 (2006), 7.0 (2007), 6.8 (2008), 6.6 (2009). - Composition: - Growth becoming better balanced with investment pickup; consumption remains main engine, spurred by annual increases in real incomes of more than 10 percent. - Acceleration coming mainly from nontradable sector: retail trade and construction growth running well above 10 percent (year-on-year); manufacturing growth 6–7 percent. - Oil production growth stabilized at about 2–3 percent after slowing from earlier double-digit rates. - Resource constraints and potential: - Productivity growth remains high, but labor shortages in high-growth areas, high labor utilization, and real wage growth of 18.5 percent during the year through April 2007 tighten resources. - Standard output gap analysis suggests GDP is close to potential. ### Inflation, exchange rate, and monetary policy - Inflation developments: - Decline in inflation halted: from almost 14 percent (year-on-year) in April 2005 to 7.4 percent in March 2007, then firmed to 7.8 percent in May 2007 and later to over 8½ percent as of August 2007. - Staff view: keeping inflation on target requires returning to a more flexible exchange rate. - Estimated impact on annual inflation from planned increases in administered energy prices over 2008–11 ranged from ½ to 1½ percentage points. - Exchange rate and interventions: - CBR resumed a fixed nominal exchange rate policy since mid-2006, resisting further nominal appreciation of the ruble vis-à-vis a EUR-U.S. dollar basket. - Record-high interventions due to surging capital inflows led to sharp acceleration in base money growth, to 41 percent through April (year-on-year). - Staff recommendation: scale back interventions and allow the ruble to appreciate; successive increases in reserve requirements are not an effective substitute. - Monetary aggregates and credit: - Base money growth: 41 percent through April (year-on-year). - Broad money growth (including foreign currency deposits): 48 percent by April (year-on-year). - Growth of ruble broad money: 57 percent by April (year-on-year). - Real credit growth close to 40 percent year-on-year. - Share of household loans in newly extended credit rose from 20 percent in 2003 to 33 percent in 2006. - CBR stance and staff concerns: - CBR increased reserve requirements and considered further increases; expected one-off capital inflows to decline. - Staff warns interventions that fuel liquidity growth risk overshooting the inflation target and suggest monetary policy is already overly accommodating. - Recommendation to develop CBR market-based instruments and deepen domestic money market to strengthen interest-rate channel. ### External sector, capital flows, and reserves - Reserves and flows: - Reserves increased by a record $156 billion during the year through May 2007, to $403 billion. (Elsewhere in the document: reserves increased by $113 billion so far in 2007 to $416 billion; and by early September reserves reached $417 billion; table projects 2007 GIR 431.8 and 2008 GIR 524.4.) - Net private capital (selected, in billions of US$): 11.3 (2005), 40.7 (2006), -4.5 (Q1 2006), 13.3 (Q1 2007); of which large one-off transactions: 5.5 (2005), -12.5 (2006), ..., 18.0 (Q1 2007). - Russia became a major FDI recipient with gross inflows of 3 percent of GDP. - Current account and trade: - Current account surplus declining due to strong import growth (imports accelerated to about 40 percent in January–April 2007 year-on-year) and slowdown in energy export growth; surplus relative to GDP in Q4 2006–Q1 2007 was only half that of a year earlier. - Staff projects current account: 9.6 (2006), 5.1 (2007), 2.9 (2008), 0.3 (2009). - Energy exports (percent of GDP): 19.4 (2006), 15.6 (2007), 13.8 (2008), 11.8 (2009). - External valuation: - Staff’s CGER estimates indicate the ruble undervalued by 20 percent (external-sustainability approach) and by 1 percent (macro-balance approach), implying a mid-point undervaluation of about 10 percent (compared with estimated 15 percent last year). - External vulnerability: - Russia’s external vulnerability low by most measures, but nongovernment indebtedness rose from $109 billion at end-2004 to $261 billion at end-2006 while government external indebtedness fell from $106 billion to $49 billion over the same period. ### Financial sector and regulatory concerns - Rapid financial deepening: - Financial sector assets increased to more than 150 percent of GDP as of end 2006. - Bank loans’ share in investment grew from 5 percent in 2003 to almost 9 percent in 2006. - Household credit grew at an average rate of more than 100 percent a year during the past three years; consumer credit reached almost 12 percent of household income (16 percent of consumption) in 2006. - Mortgage market small, financing about 5 percent of real estate transactions. - Risks and supervisory issues: - Surge in overseas borrowing by banks to fund domestic loan portfolios; arbitrage from high domestic lending rates and expectations of ruble strength. - Weaknesses: poor prudential data, limited transparency, weak governance, high concentration of ownership, concerns about connected lending. - CBR stress tests: - Less-severe scenario: capital in banking system would drop by 38.7 percent or 2.5 percent of GDP. - Most severe scenario: capital reduction equal to 63.1 percent or 4.0 percent of GDP. - Even under the more benign scenario, many institutions would lose over 50 percent of their capital. - Staff recommends close monitoring of banks with fast-growing or large household loan portfolios and more in-depth review of vulnerabilities (FSAP update). ### Investment climate and long-term growth - Long-term constraints: - Diminishing catch-up gains in productivity and a declining labor force make long-term growth particularly dependent on raising investment. - Demographic factors caused labor force to contract since 2006. - Overall level of investment remains low despite recent increases. - Policy and reform priorities: - Reinvigorate structural reforms: public-administration, civil-service, judicial, legal reforms to improve investment climate. - Control expenditures and improve efficiency in social sectors to realize savings needed under fiscal framework. - Adopt cautious approach to government interventions; prioritize infrastructure, basic public services, and alleviating social problems associated with rapid transformation. - Complementary reforms essential for state-led investment initiatives to succeed; staff questions whether increased state control in energy sector will support large long-gestation projects. - Authorities hope to complete WTO accession by early next year; staff urged early conclusion of bilateral issues. ### Policy tensions, risks, and staff recommendations - Main risks identified: - Planned fiscal relaxation (up to 3.2 percent of GDP increase in non-oil deficit if fully spent) risks overheating, accelerating real appreciation, aggravating inconsistency between inflation and exchange-rate targets, and narrowing margins of competitiveness. - Failure to contain spending creates risk of procyclical tightening over the medium term and potential overshooting of current account and real exchange rate. - Rapid credit growth and deepening financial markets may mask vulnerabilities (declining capital-adequacy ratios, increase in overdue loans). - Staff recommendations: - Delay increases in spending until the economy can absorb them without undue pressure on prices; no increase in the non-oil deficit in the remainder of 2007 and in 2008 beyond that envisaged in the approved 2007 budget. - Control expenditures urgently; recognize difficulty of realizing 2 percent of GDP savings without social-sector reforms. - Return to a more flexible exchange rate and scale back unsterilized interventions; allow appreciation as needed to keep inflation on target. - Develop CBR market-based instruments and deepen domestic money market. - Reinstate momentum on structural reforms to improve investment climate and unlock private-sector potential. - Closely monitor banking system vulnerabilities, with an FSAP update providing opportunity for in-depth review. ### Selected key statistics and projections (as presented) - Real GDP (annual percent change): 2003 7.3; 2004 7.2; 2005 6.4; 2006 6.7; 2007 7.0; 2008 6.8. - Terms of trade: 11.3 (2006), -5.1 (2007), 2.0 (2008), -1.5 (2009). - Inflation (end of period): 9.0 (2006), 8.0 (2007), 7.0 (2008), 7.0 (2009). - Current account (percent of GDP): 9.6 (2006), 5.1 (2007), 2.9 (2008), 0.3 (2009). - Energy exports (percent of GDP): 19.4 (2006), 15.6 (2007), 13.8 (2008), 11.8 (2009). - Non-energy current account (percent of GDP): -9.8 (2006), -10.4 (2007), -10.9 (2008), -11.4 (2009). - Federal primary spending increased by 2¾ percentage points of GDP during 2005–07. - Pension fund revenue decline by 4 percent of GDP (due to discretionary tax cut and compliance problems). - Change in Overall Balance (percent of current year GDP): 3.8, 4.3, 1.9, -2.4 (for years shown). - Change in Oil Revenues: 3.7, 6.6, 2.5, -1.0. - Change in Non-Oil Balance: 0.1, -2.3, -0.7, -1.4. - Base money growth: 41 percent through April (year-on-year). - Broad money growth: 48 percent by April (year-on-year). - Growth of ruble broad money: 57 percent by April (year-on-year). - Real credit growth close to 40 percent year-on-year. - Bank sector indicators: regulatory capital to risk-weighted assets 14.9 (2006), 16.2 (2007); nonperforming loans to total gross loans 2.6 (2006), 2.4 (2007). - Gross international reserves (GIR, US$ billions): 2003 76.9; 2004 124.5; 2005 182.2; 2006 303.7; 2007 431.8; 2008 524.4. - Federal government budget (percent of GDP, including supplementary 2007): - Non-oil balance: -3.8 (2006), -4.3 (2007), -5.9 (2008), -7.0 (2009). - Oil revenues: 11.2 (2006), 9.0 (2007), 8.4 (2008), 7.2 (2009). - Overall balance: 7.4 (2006), 4.7 (2007), 2.5 (2008), 0.2 (2009). - Memo — Oil price (Urals, USD bbl): 61.1 (2006), 57.6 (2007), 61.6 (2008), 61.3 (2009). - Staff estimate of ruble undervaluation: 20 percent (external-sustainability), 1 percent (macro-balance), midpoint about 10 percent. *Source: _cr07351 - IMF staff report and related sections (text extracted from the provided IMF chapter).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Fiscal policy and fiscal outlook - The authorities are considering a further fiscal relaxation that, together with the already approved 2007 budget, will increase the non-oil deficit by 2¼–3¼ percent of GDP through 2009. - This implies that most of Russia’s remaining terms-of-trade windfall will be spent, and that Russia’s twin fiscal and current-account surpluses will disappear within 2–3 years—having amounted to 8½–10 percent only last year. - Staff cautioned that the additional fiscal stimulus would accelerate real appreciation and add to the nominal appreciation necessary for inflation to be kept on track. - Staff argued the planned fiscal relaxation would likely eliminate the remaining undervaluation of the ruble over the next few years, leaving little room for additional loss of competitiveness and pointing to the risk of fiscally induced overshooting of the real exchange rate, especially if above-trend oil prices add to spending pressures beyond what was discussed with the mission. - The authorities noted a new fiscal framework for saving oil revenues that will entail large spending cuts in 2010-11 to prevent a future drop in oil prices from forcing a procyclical tightening; staff welcomed this but questioned the back-loading. - Staff noted it would be challenging to save up to 2 percent of GDP in the run-up to the 2011 elections, especially given stalled efficiency-enhancing reforms and strong pressures for social transfers. - The authorities agreed progress with public-sector reforms would be key to expenditure control. ### Growth, composition, and potential - High oil prices, strong catch-up potential, and sound fiscal policy underlie Russia’s long spell of robust growth. - Double-digit terms-of-trade gains annually since 2003 have underpinned strong investment growth; capital and labor have accounted for less than half of the increase in GDP since 2003, with the balance due to higher total factor productivity. - GDP growth accelerated to 7.9 percent (year-on-year) in Q1 2007, with undiminished momentum into Q2 2007 per high-frequency indicators. - Growth is becoming better balanced with a pickup in investment, though consumption remains the main engine, spurred by annual increases in real incomes of more than 10 percent. - The acceleration in growth is coming mainly from the nontradable sector: retail trade and construction growth running well above 10 percent (year-on-year), while manufacturing growth is 6–7 percent. - Growth in oil production has not recovered from the decline in 2004–05, when it fell from 12 to 3 percent. - Productivity growth remains high, but resource constraints are tightening: labor shortages in high-growth areas, high and increasing labor utilization rates, and growth in real wages of 18.5 percent during the year through April 2007. - Standard output gap analysis suggests GDP is close to potential. ### Inflation, exchange rate, and monetary policy - The decline in inflation halted: after falling from almost 14 percent (year-on-year) in April 2005 to 7.4 percent in March 2007, inflation firmed to 7.8 percent in May 2007. - The prior decline in inflation reflected lower administered-price increases and lower tradable-price inflation associated with a modest appreciation of the ruble under a less interventionist exchange rate policy; the recent uptick followed a return to a less flexible exchange rate policy since mid-2006. - Staff argued keeping inflation on target would require returning to a more flexible exchange rate. - Record-high interventions, prompted by surging capital inflows, led to a sharp acceleration in money growth in recent months that is inconsistent with the inflation target. - Added exchange rate flexibility would also discourage speculative capital inflows; the authorities resisted calls for such flexibility, arguing they would regain control over money growth through increased reserve requirements and that capital inflows would decline after large one-off inflows. ### External sector and capital flows - Reserves increased by a record $156 billion during the year through May 2007, to $403 billion. - The current account surplus is declining due to continued strong import growth (imports accelerated to about 40 percent in January–April 2007 year-on-year) and a notable slowdown in energy export growth; the surplus relative to GDP in Q4 2006–Q1 2007 was only half that of a year earlier. - Staff’s CGER estimates indicate the ruble is undervalued by 20 percent (external-sustainability approach) and by 1 percent (macro-balance approach), implying a mid-point undervaluation of about 10 percent, compared with an estimated 15 percent undervaluation last year. - Net private capital inflows surged across categories; Russia became a major FDI recipient among emerging market economies with gross inflows of 3 percent of GDP. - Net private capital flows (selected): net private capital was 11.3, 40.7, -4.5, and 13.3 (in billions of US$) for 2005, 2006, Q1 2006, and Q1 2007 respectively; of which large one-off transactions were 5.5, -12.5, ..., and 18.0 (in billions of US$) for the same periods. - Russia’s external vulnerability is low by most measures, but nongovernment indebtedness rose from $109 billion at end-2004 to $261 billion at end-2006 while government external indebtedness fell from $106 billion to $49 billion over the same period. ### Financial sector and regulatory concerns - Financial-sector discussions focused on regulatory and legislative obstacles to further development. - There has been a surge in overseas borrowing by banks to fund domestic loan portfolios, reflecting an arbitrage opportunity from high domestic lending rates and expectations of continued ruble strength. - Large share issuances by two state-owned banks boosted capital inflows in Q1 2007. ### Long-term growth and investment climate - Discussions on long-term growth emphasized the need to raise investment as the scope for catch-up gains in productivity will eventually diminish. - While investment has increased, the overall level of investment remains low; in 2006 the budget would have been balanced at an oil price of $30 per barrel. - Staff noted that progress with public-sector reforms would be key to expenditure control and to supporting sustained investment and growth. *Source: _cr07351 - EXECUTIVE SUMMARY* ### 8. The relaxation reflects higher recurrent expenditures and a decline in social ### _cr07351 - 8. The relaxation reflects higher recurrent expenditures and a decline in social ### Fiscal developments and primary spending - Federal primary spending increased by 2¾ percentage points of GDP during 2005–07, mostly because of higher recurrent expenditures in the social and security sectors. - A substantial part of this increase was due to higher transfers to extrabudgetary social funds, notably to the pension fund, which saw a sharp deterioration in its financial position as a large discretionary tax cut and continued compliance problems caused a decline in revenues by 4 percent of GDP. - At the level of the consolidated general government: - Primary expenditures rose by 0.4 percentage points of GDP during 2005–07. - Non-oil revenues declined by 2.6 percentage points of GDP during 2005–07. ### Fiscal indicators and recent changes (changes in percent of current year GDP 1/) - Change in Overall Balance (A): 3.8, 4.3, 1.9, -2.4 (for years shown) - Change in Oil Revenues: 3.7, 6.6, 2.5, -1.0 - Change in Non-Oil Balance: 0.1, -2.3, -0.7, -1.4 - Change in Energy Exports (B): 3.6, 6.1, 3.6, -1.3 - Oil windfall net of absorption by the budget (B-A): -0.1, 1.9, 1.8, 1.1 (Sources: Russian authorities and Fund staff estimates. Calculated as (X_t - X_t-1)/GDP_t) ### Monetary policy stance and monetary aggregates - The CBR resumed a fixed nominal exchange rate policy since mid-2006, resisting further nominal appreciation of the ruble vis-à-vis a EUR-U.S. dollar basket. - Associated dynamics: - Surge in capital inflows and record-high interventions. - Sharp acceleration in base money growth, to 41 percent through April (year-on-year). - Perception that the CBR will eventually allow renewed appreciation is exacerbating capital inflows through the banking system. - Refraining from active sterilization is resulting in much-faster base money growth as the source of foreign exchange inflows shifts from oil revenues (sterilized automatically through the stabilization fund) to the capital account. - Broad money and credit growth: - Broad money growth (including foreign currency deposits) reached 48 percent by April (year-on-year). - Growth of ruble broad money was 57 percent by April (year-on-year). - Real credit growth close to 40 percent year-on-year. - Share of household loans in newly extended credit rose from 20 percent in 2003 to 33 percent in 2006. - Banking system soundness: - Bank profits have surged; aggregate NPL ratios are low; liquidity buffers remain relatively high. - Weaknesses remain: poor prudential data, limited transparency, weak governance, high concentration of ownership, and concerns about connected lending. ### Near-term outlook (staff projections and key indicators) - Macroeconomic backdrop: stable; WEO projects a small terms-of-trade loss in 2007 largely absorbed through lower savings in the stabilization fund. - Growth and resource constraints: - Staff projects GDP growth to continue at 7 percent in 2007 (above consensus forecast of 6.6 percent). - Demand pressures to increase; resource constraints to tighten further. - Continued real appreciation and rapid import growth expected in 2007–08. - Current account surplus expected to decline from almost 10 percent of GDP in 2006 to near-balance in 2009. - Decline in energy exports relative to GDP expected as oil prices assumed largely unchanged while energy output not expected to regain previous buoyancy. - Inflation and prices: - Upward pressures on prices will remain strong given robust demand growth and plans to gradually raise domestic energy prices starting next year. - Staff view: achieving the relatively slow decline in inflation targeted by the authorities during the remainder of 2007 and 2008 will require a change in policies, including additional nominal appreciation. - Key staff projection table (selected rows): - Real GDP: 6.7 (2006), 7.0 (2007), 6.8 (2008), 6.6 (2009) - Terms of trade: 11.3 (2006), -5.1 (2007), 2.0 (2008), -1.5 (2009) - Inflation (e.o.p): 9.0 (2006), 8.0 (2007), 7.0 (2008), 7.0 (2009) - Current account: 9.6 (2006), 5.1 (2007), 2.9 (2008), 0.3 (2009) - Energy exports: 19.4 (2006), 15.6 (2007), 13.8 (2008), 11.8 (2009) - Non-energy current account: -9.8 (2006), -10.4 (2007), -10.9 (2008), -11.4 (2009) ### Policy discussions and risks - Policy tensions: - Tensions between envisaged further fiscal relaxations and a fixed exchange rate policy amid tightening resource constraints. - Supplementary 2007 budget discussed could entail small fiscal and current account deficits within 2–3 years, down from surpluses of 8½–10 percent of GDP only last year, even with broadly unchanged oil prices. - Real exchange rate and competitiveness: - Staff projections: in absence of further fiscal relaxation, real exchange rate appreciation will slow gradually to 3–5 percent over the medium term (broadly in line with Balassa-Samuelson-type effects). - Planned fiscal relaxation would mean appreciation would continue at a 7–9 percent rate. - Staff suggest planned fiscal relaxation will mostly eliminate remaining undervaluation of the ruble by 2009, but warn of downside risks, especially for manufacturing. - Fiscal policy options and outlook: - Approved annual federal 2007 and three-year budgets entail a relaxation of the non-oil deficit of 2½ percent of GDP by 2009, following a cumulative expansion of 1½ percent of GDP during 2005–06. - Supplementary 2007 budget discussed would increase spending authorizations by an additional 2¼ percent of GDP, to be distributed over the next three to four years. - With the supplementary budget, planned expansion in the non-oil deficit over 2007–09 would reach 3.2 percent of GDP if fully spent and borrowing margin fully exploited. - Ministry of Finance indicated intent to limit borrowing and resist pressures to spend reserves, aiming to limit increase in the non-oil deficit to 2¼ percent of GDP; other officials suggested full use of the new framework is realistic. - On staff estimates, the oil price at which the budget would be balanced increases from less than $30 per barrel (Urals) in 2006 (actual price $61 per barrel) to $55–62 per barrel by 2009 (projected price $61 per barrel, according to the WEO). - Staff advice and concerns: - Staff recommended delaying increases in spending until the economy could absorb them without undue pressure on prices; under the current outlook, no increase in the non-oil deficit in the remainder of 2007 and in 2008 beyond that envisaged in the approved 2007 budget. - Staff cautioned that the planned increase in the non-oil deficit would increase upward pressures on prices and the ruble, exacerbate tensions in the macroeconomic policy mix, and aggravate inconsistency between inflation and exchange rate targets. - Staff questioned feasibility of medium-term spending plans: assumed spending cut of 2 percent of GDP is ambitious given federal government non-interest expenditures amount to about 16 percent of GDP; much savings would require socially difficult cuts in education, health, and other social sectors. - Staff noted that annual transfers to the pension fund would have to be gradually increased to 2-3 percent of GDP merely to stabilize the replacement rate at the already low level. - Staff warned failure to contain spending creates risks of procyclical tightening over the medium term and potential overshooting of the current account and real exchange rate. - Authorities’ position: - Ministry of Finance officials acknowledged macroeconomic pressures and the trade-off between cyclical considerations and funding programs to foster long-term growth. - They argued supplementary 2007 budget targeted investments expected to boost long-term growth (infrastructure, housing, research programs, and investments in aluminum, petrochemical, nuclear power, and other priority sectors), with some efficiency gains planned through Public Private Partnerships. - Officials asserted government commitment to increase saving of oil revenues over the medium term per the new budgetary framework; increase in spending under the supplementary budget meant to be temporary and spending would subsequently have to be lowered by about 2 percent of GDP to stay within deficit ceilings for 2010–11. ### Key fiscal table (federal government budget, including preliminary supplementary 2007 budget; in percent of GDP) - Non-oil balance: -3.8 (2006), -4.3 (2007), -5.9 (2008), -7.0 (2009) - Oil revenues: 11.2 (2006), 9.0 (2007), 8.4 (2008), 7.2 (2009) - Overall balance: 7.4 (2006), 4.7 (2007), 2.5 (2008), 0.2 (2009) - Memo item — Oil price (Urals, USD bbl): 61.1 (2006), 57.6 (2007), 61.6 (2008), 61.3 (2009) *Source: Russian authorities and IMF staff estimates and projections (content extracted from the provided IMF chapter).* ### 24. CBR officials were confident that they could keep inflation on a downward ### _cr07351 - 24. CBR officials were confident that they could keep inflation on a downward ### Monetary policy and inflation - Year-on-year inflation was still running below the 2007 end-year target of 8 percent despite a recent uptick. - Acceleration in money growth in recent months resulted from surging capital inflows and record-high foreign exchange interventions. - The increase in reserve requirements was prompted by these developments; the CBR would consider increasing such requirements further if necessary to reduce money growth. - CBR expected capital inflows to decline as the recent surge largely reflected a series of one-off transactions relating to mergers in the energy sector and to share issuances by the two large state-owned banks. - Staff view: keeping inflation on the targeted path requires returning to a more flexible exchange rate policy; interventions that fuel liquidity growth risk overshooting the inflation target and suggest monetary policy is already overly accommodating. - Staff recommendation: scale back interventions and allow the ruble to appreciate; successive increases in reserve requirements are not an effective substitute because they would increase the spread between deposit and lending rates and encourage disintermediation. - Agreement on need to develop CBR market-based instruments and deepen the domestic money market to strengthen the interest-rate channel and increase flexibility of lending rates. - Estimated impact on annual inflation from planned increases in administered energy prices over 2008–11 ranged from ½ to 1½ percentage points. ### Exchange rate and capital inflows - CBR expected the nominal exchange rate to remain broadly unchanged and aimed to keep the currency steady during the remainder of the year. - Rapid real appreciation had raised political concerns about competitiveness; the return to a stable ruble was motivated by the finding that appreciation, by fueling expectations of continued appreciation, exacerbated capital inflows. - Staff argument: stabilizing the exchange rate would likely prevent the CBR from adopting an appropriately restrictive monetary stance amid rising demand pressures from procyclical fiscal relaxation. - Conflicting inflation and exchange-rate targets had exacerbated capital inflows; medium-term inflows—particularly through the banking system—were driven by expectations of further appreciation. - Staff recommendation: signal that monetary policy is firmly focused on inflation reduction while allowing the exchange rate to appreciate as needed to reduce scope for arbitrage-related inflows. - Caveat: tension persists if the ruble is allowed to appreciate while fiscal relaxation necessitates tighter monetary conditions. ### Financial sector risks and resilience - Rapid development and deepening of financial markets expected to continue; new financial products improved financial intermediation and spurred growth. - Concerns from market participants about inconsistencies among different laws and regulatory institutions hampering development of hedging instruments, including derivatives. - CBR sees prudential regulatory framework as broadly complete but seeks to strengthen supervision effectiveness, loan review practices, capital adequacy evaluation, clarification of agency responsibilities, and supervisor skills. - CBR stress-testing results: - Under the less-severe scenario (credit, market, and liquidity shocks), capital in the banking system would drop by 38.7 percent or 2.5 percent of GDP. - Under the most severe scenario, the capital reduction will be equal to 63.1 percent or 4.0 percent of GDP. - Even under the more benign scenario, a large number of institutions will lose over 50 percent of their capital. - Authorities' assessment: neither scenario is likely to materialize in the near future given positive macroeconomic conditions; for a more-likely range of shocks, banks are generally well capitalized and sufficiently provisioned and the risk of a systemic crisis is considered low. - Staff concerns: - Favorable external environment may mask vulnerabilities: rapid credit expansion has resulted in declining capital-adequacy ratios and an increase in overdue loans in 2006, especially household loans. - Recommend close monitoring of banks with fast-growing or large household loan portfolios. - Vulnerabilities from banks funding ruble lending through foreign-currency borrowing and from large increases in banks’ holdings of ruble-denominated corporate bonds. - Weaknesses in access to interbank or foreign funding and in Russia’s prudential framework heighten risks. - Recommend a more in-depth review of vulnerabilities, with the ongoing FSAP update providing an early opportunity. ### Investment climate and long-term growth prospects - Agreement that diminishing catch-up gains in productivity and a declining labor force make long-term growth particularly dependent on raising investment. - Staff and authorities: productivity gains have been the key engine of growth; combined contribution from labor force growth and capital accumulation has accounted for less than half of GDP growth in recent years. - Demographic factors (low life expectancy and low birth rate) caused the labor force to contract since 2006, weighing on long-term growth potential. - Urgency of increasing Russia’s still low level of investment and reinforcing the investment climate through economic policies. - Authorities’ initiatives to boost investment and diversification: increased government interventions under the supplementary 2007 budget to overcome infrastructure bottlenecks and increase investments through public-private partnerships; funding of a development bank; introduction of a venture capital fund, special economic zones, and an institute for nanotechnology research; continued structural reforms, including electricity sector reforms involving separation of generation and transmission and privatization. - Staff caution: complementary reforms are essential; many important reforms lagging and need reinvigoration after forthcoming elections. - Concerns that increased state control over the energy sector could reduce willingness to undertake large-scale, long-gestation projects; question whether the state is the best steward given poor performance of state-controlled portion versus privately controlled part. - Authorities hope to complete WTO accession by early next year; most bilateral negotiations concluded but a number of bilateral issues remain before multilateral discussions can commence; issues include level of agricultural support and enforcement of intellectual property rights. Staff urged early conclusion of discussions. ### Staff appraisal and policy recommendations - Russia’s macroeconomic performance continues to impress, driven by high oil prices, large capital inflows, and good economic management; the stabilization fund provides notable stability supporting rising investments and a positive nexus among productivity, real wages, and consumption. - Private demand gathering momentum: restructuring, consolidation, and privatization are accelerating investment growth; financial sector development and foreign appetite for Russian assets add impetus; private consumption to strengthen via consumer credit and mortgages. - Risks identified: - Planned fiscal relaxation risks causing overheating: raising the non-oil deficit by up to 3.2 percent of GDP in the next few years would add unhelpful fiscal stimulus while private demand is gaining strength and the economy is already growing at potential. - Staff view: increased spending of oil revenues should be delayed until demand pressures ease; non-oil deficit should not increase further during the remainder of 2007 and in 2008 under the current outlook. - Planned fiscal relaxation will entail continued rapid real appreciation, potentially crowding out private tradable-sector activity and undermining the objective of boosting growth. - Margins of competitiveness will narrow further; current undervaluation of the ruble will largely be eliminated by fiscal plans combined with strong private demand. - Downside risks if catch-up productivity gains wane, as demand-induced pressures fuel appreciation and rapid wage growth, potentially harming manufacturing growth and export diversification. - Narrowing freedom of action raises risks of procyclical tightening and real exchange rate overshooting; balanced-budget oil price rise from about $30 per barrel last year to $55–60 per barrel by 2009 illustrates speed of narrowing margins for maneuver. - Policy priorities recommended by staff: - Control expenditures urgently; the new framework for spending oil revenues is close to best practice but credibility is undermined by large back-loaded spending cuts it assumes. - Realize significant expenditure savings will be difficult without reinvigorating efficiency-enhancing social sector reforms, given politically sensitive transfers to the pension fund. - Adopt a more cautious approach to government interventions in the economy, prioritizing spending on infrastructure, basic public services, and alleviating social problems associated with rapid economic transformation. - Reinvigorate structural reforms, including public-administration and civil-service reforms, to improve the investment climate and unlock private-sector potential. *IMF staff report content as provided in the source material.* ### 45. Turning to monetary policy, the renewed policy of maintaining a stable exchange ### _cr07351 - 45. Turning to monetary policy, the renewed policy of maintaining a stable exchange rate threatens to undo gains in reducing inflation ### Monetary policy and exchange-rate stance - Renewed policy of maintaining a stable exchange rate threatens to undo gains in reducing inflation. - Sharp increase in money growth in recent months as a result of record-high foreign exchange intervention is inconsistent with keeping inflation on track. - Staff view: the CBR should return to a policy of giving priority to inflation reduction, standing ready to allow appreciation as needed to keep inflation on target. - Frequent changes in reserve requirements are not an effective substitute for a flexible exchange rate policy; such changes tend to encourage disintermediation and discourage savings. - Recommendation urgency: adopting a more flexible exchange rate policy is a matter of some urgency to avoid entrenching inflation expectations. ### Exchange-rate target inconsistency and capital inflows - Inconsistent exchange rate and inflation targets are fueling capital inflows. - Market expectation: policy of resisting appreciation will eventually have to give way to keep control of inflation, which exacerbates capital inflows and undermines control over money growth and inflation. - Signaling that the CBR will give priority to inflation reduction and allow appreciation if needed would discourage speculative capital flows. - Much of the capital inflows are strategic in nature and relatively insensitive to monetary conditions; these flows are likely to increase in the coming years. - Policy implication: to the extent such inflows add to demand pressures, they are best offset through fiscal policy. ### Financial sector development and vulnerabilities - Rapid development of the financial sector is welcomed, but financial sector vulnerabilities are rising. - Drivers: access to international capital markets and entrance of foreign players causing rapid deepening and broadening of financial markets. - Supervisory challenge: pace of credit growth places a premium on effective supervision and prudential regulation. - Areas of concern to keep under close review: - Rapid increase in banks’ consumer lending. - Banks’ holding of ruble-denominated corporate bonds. - Open foreign exchange positions. - Additional vulnerabilities: lack of access of many banks to the interbank market heightens vulnerabilities and adds urgency to strengthen Russia’s prudential framework and regulatory practices. - Assessment tool: Financial Sector Assessment Program update with a joint Fund-Bank expert team will provide an opportunity for an early in-depth review of vulnerabilities and regulatory practices. ### Investment climate and long-term challenges - Improving the investment climate is identified as the main long-term challenge. - Despite recent increases, the level of investments remains relatively low. - Russia scores poorly in international comparisons of the investment climate. - Limited progress on important reforms—civil service, public administration, and legal reforms—has had limited consequence so far because high oil prices and strong catch-up potential have entailed robust growth. - Policy priority: to maintain growth as catch-up gains wane, the new government after the elections should reinvigorate such reforms. ### Timing of next consultation - Recommendation: the next Article IV consultation should take place on the standard 12-month cycle. ### Box 1 — The Increasing Role of Financial Markets in Economic Growth - Overall sector expansion: the financial sector, measured by assets, increased to more than 150 percent of GDP as of end 2006. - Rising share of investment financed with debt. - Bank loans: - Share of bank loans in investment grew from 5 percent in 2003 to almost 9 percent in 2006. - Bulk of bank lending remains short-term (less than three years). - Corporate bond market: - Expanded rapidly and financed 6–9 percent of investments in 2006, up from virtually nil in 2003. - Supply driven by ample liquidity in the banking system, expanding base of domestic institutional investors, and increasing foreign participation after removal of all remaining capital controls in July 2006 and acceptance of the ruble as a full settlement currency by the two major clearing and settlement systems. - Demand driven by competitive financing conditions: high-rated companies obtain bonds at more favorable interest rates and maturities than commercial bank loans; lower-rated companies often rely on the bond market as their only external financing source. - Diversity of issuers: retail trade, power generation, and metals and mining are the fastest growing sectors. - Household credit and consumption: - Household credit grew at an average rate of more than 100 percent a year during the past three years as banks increased exposure to retail lending. - Consumer credit reached almost 12 percent of household income (16 percent of consumption) in 2006. - Consumer credit growth moderated but was still growing at 75 percent year-on-year. - Slowdown drivers: market saturation in some segments and tightening of lending standards due to concerns about loan quality. - Mortgage market: - Remains small, financing about 5 percent of all real estate transactions, mostly serving relatively high-income households. - Market expanding steadily, supported by increasing competition among banks and recently introduced refinancing instruments. - Data excerpt (as presented in the source): - Banks - Assets42424552 - Private credit14162530 - Household credit 1/36912 - Stock market capitalization383353102 - Coporate bond market capitalization 1234 - Source: CBR, Finam, MICEX, RTS - 1/ In percent of household income - 2003 2004 20052006 - (in percent of GDP, unless noted otherwise) - Corporate bonds by sector, 2007 (shares as presented): - Financial institutions, 35% - Energy, 9% - Chemical, 3% - Machinery, 9% - Metals and mining, 9% - Consumer goods, 9% - Retail, 9% - Development, 4% - Telecoms, 7% - Transport, 7% ### Box 2 — The Budget Framework—Issues and Recent Developments - New budget framework features: - Creation of a second oil fund. - Introduction of three-year budgets. - Steps towards performance budgeting. - Oil stabilization fund (OSF) and National Welfare Fund: - From 2008, the existing OSF will be capped at 10 percent of GDP. - OSF to continue invested in highly liquid securities and serve as a buffer for the budget against a drop in the oil price. - Once OSF reaches 10 percent of GDP, additional oil revenues will be accumulated in a new National Welfare Fund which will invest in higher-yielding securities. - Institutional arrangements for management of these funds are currently being discussed. - Multi-year budgeting and performance indicators: - Introduction of three-year rolling budgets for the federal government and the federal extrabudgetary funds; first adopted for 2008–10. - Government started to include performance indicators in the federal budget covering 70 percent of expenditure as a gradual move toward performance budgeting. - Demand management and non-oil balance: - Introduction of the concept of the non-oil balance, capped at a deficit of 4.7 percent of GDP starting in 2011. - Of this deficit, up to 3.7 percent of GDP may be financed from oil and gas revenues, which under the new framework will also encompass the extraction and export taxes on natural gas and oil products, while the cutoff price will be abolished. - Remaining deficiency: - Corporate income tax and dividend revenues from oil, as well as extraction tax revenues accruing to regional governments, will remain excluded from the stabilization fund mechanism and accrue to the budget as non-oil revenue. *IMF staff report excerpt as provided in the source content.* ### 3.7 percent of GDP to the budget is consistent with the calculations of the optimal level of spending of ### _cr07351 - 3.7 percent of GDP to the budget is consistent with the calculations of the optimal level of spending of ### Optimal use of oil and gas revenues - "3.7 percent of GDP to the budget is consistent with the calculations of the optimal level of spending of oil and gas revenues based on an intergenerational framework discussed in Chapter I of the 2006 Selected Issues Paper." ### Fiscal stance and policy recommendations (staff observations and Board views) - Directors recommended that "fiscal policy not be loosened further" in light of buoyant demand and strong inflationary pressures. - Directors welcomed the improved inflation performance but cautioned that "more exchange rate flexibility would be needed for the progress to be consolidated." - Directors stressed that long-run growth prospects depended on accelerating the implementation of structural reforms and strengthening the investment climate; they were "concerned about the slow pace of reforms." ### Key macroeconomic projections and outcomes (selected indicators and projections) - Real GDP growth: 2003 7.3; 2004 7.2; 2005 6.4; 2006 6.7; 2007 7.0; 2008 6.8 (annual percent change). - Consumer prices (period average): 2006 9.7; 2007 7.7; 2008 7.5. - GDP deflator (annual percent change): 2006 16.1; 2007 7.0; 2008 9.6. - General government overall balance (in percent of GDP): 2003 1.4; 2004 4.9; 2005 8.2; 2006 8.4; 2007 4.9; 2008 2.8. - General government revenue (percent of GDP): 2006 39.7; 2007 36.5; 2008 34.6. - General government expenditures (percent of GDP): 2006 31.3; 2007 31.5; 2008 31.8. - General government primary balance (percent of GDP): 2006 9.2; 2007 5.5; 2008 3.3. - General government non-oil balance (in percent of GDP): 2003 -3.9; 2004 -2.9; 2005 -4.6; 2006 -4.4; 2007 -5.3; 2008 -6.6. - Federal government overall balance (percent of GDP): 2003 1.7; 2004 4.3; 2005 7.5; 2006 7.4; 2007 4.7; 2008 2.5. - External current account (in percent of GDP): 2003 8.2; 2004 10.0; 2005 11.0; 2006 9.6; 2007 5.1; 2008 2.9. - Gross international reserves (GIR), in billions of U.S. dollars: 2003 76.9; 2004 124.5; 2005 182.2; 2006 303.7; 2007 431.8; 2008 524.4. - GIR in months of imports: 2003 8.9; 2004 11.4; 2005 13.3; 2006 17.4; 2007 19.8; 2008 20.6. - Total merchandise exports, fob (in billions of U.S. dollars): 2003 135.9; 2004 183.2; 2005 243.8; 2006 303.9; 2007 315.2; 2008 332.6. - Total merchandise imports, fob (in billions of U.S. dollars): 2003 -76.1; 2004 -97.4; 2005 -125.4; 2006 -164.7; 2007 -210.3; 2008 -249.2. - World oil price (U.S. dollars per barrel, WEO): 2003 28.9; 2004 37.8; 2005 53.4; 2006 64.3; 2007 60.8; 2008 64.8. - Russian oil price (memorandum): 2004 34.4; 2005 50.6; 2006 61.1; 2007 57.6; 2008 61.6. ### Fiscal composition and fiscal rule-related indicators - General government total revenue (percent of GDP): 2004 36.6; 2005 39.7; 2006 39.7; 2007 36.5; 2008 34.6. - Of which: Oil revenue (percent of GDP): 2004 7.8; 2005 12.7; 2006 12.8; 2007 10.2; 2008 9.4. - Tax revenue (percent of GDP): 2004 34.1; 2005 37.6; 2006 36.9; 2007 36.5; 2008 32.2. - Total expenditure (percent of GDP): 2004 31.7; 2005 31.6; 2006 31.3; 2007 31.5; 2008 31.8. - Primary balance (percent of GDP): 2004 6.1; 2005 9.1; 2006 9.2; 2007 5.5; 2008 3.3. - "Russian oil price balancing the budget" (memorandum): General government 2006 34.0; 2007 47.0; Federal government 2006 31.0; 2007 44.0. ### External vulnerability and debt metrics (selected) - External current account (in billions of U.S. dollars): 2003 35.4; 2004 59.0; 2005 83.8; 2006 94.5; 2007 61.7; 2008 42.8. - Total external debt (in billions of U.S. dollars): 2003 186.0; 2004 214.5; 2005 257.2; 2006 309.7; 2007 418.4; 2008 504.5. - Total external debt (percent of GDP): 2003 43.1; 2004 36.2; 2005 33.7; 2006 31.4; 2007 34.8; 2008 34.7. - Public sector debt (percent of GDP): 2003 29.6; 2004 22.3; 2005 14.8; 2006 8.5; 2007 6.7; 2008 5.0. - Public sector debt-to-revenue ratio (selected): 2003 81.5; 2004 60.9; 2005 37.3; 2006 21.3; 2007 18.3; 2008 14.5. - Gross external financing need (in billions of U.S. dollars): 2002 12.9; 2003 10.3; 2004 7.7; 2005 4.4; 2006 20.9; 2007 25.5. - External current account (in percent of GDP): 2004 10.0; 2005 11.0; 2006 9.6; 2007 5.1; 2008 2.9. ### Financial sector and monetary indicators (selected) - Broad money (percent change, 12-month): 2003 51.6; 2004 35.8; 2005 38.6; 2006 48.8. - Private sector credit (percent change, 12-month): 2003 46.6; 2004 46.7; 2005 34.2; 2006 48.6. - Regulatory capital to risk-weighted assets: 2002 19.1; 2003 19.1; 2004 17.0; 2005 16.0; 2006 14.9; 2007 16.2. - Nonperforming loans to total gross loans: 2002 5.6; 2003 5.0; 2004 3.8; 2005 3.2; 2006 2.6; 2007 2.4. - Net international reserves of monetary authorities (GIR, US$ billions): 2004 124.5; 2005 182.2; 2006 203.5; 2007 242.3; 2008 255.7; later entries 303.7, 336.8, 431.8, 524.4 (table series). ### Debt sustainability and stress scenarios (public and external) - Baseline public sector debt (percent of GDP): 2002 35.4; 2003 29.6; 2004 22.3; 2005 14.8; 2006 8.5; 2007 6.7; 2008 5.0; projections continue downward to 2.6 by 2012. - Identified debt-creating flows and automatic debt dynamics are shown as material contributors to the decline in debt ratios, with "residual, including asset changes" positive in several recent years (e.g., 2006 5.7). - Stress test scenarios include "Scenario with key variables at their historical averages" and "Scenario with no policy change (constant primary balance) in 2007-12" with substantially different debt outcomes. ### Institutional and surveillance notes - Article IV consultation discussions were held in Moscow during May 14–25, 2007; mission met with Deputy Prime Minister Zhukov, Minister of Finance Kudrin, Central Bank of Russia Deputy Governor Ulyukaev, other senior officials, members of the Duma, representatives of the business and academic communities, and the press. - Staff team composition: Mr. Thomsen (head), Messrs. Takizawa, Tiffin, and Zebregs, Ms. Ivaschenko (all EUR), Mr. Hauner (FAD), and Mr. Sadikov (PDR); assisted by Mr. Mates (Moscow Office). Mr. Mozhin, Executive Director for Russia, participated. - Russia has accepted the obligations of Article VIII, Sections 2, 3, and 4, and "maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions." - "Russia’s statistical database is adequate for surveillance, albeit with some shortcomings (Appendix III)." Russia subscribed to the SDDS in January 2005. - Exchange rate regime: "managed float with the central bank intervening heavily in the foreign exchange market to limit nominal appreciation of the ruble." *Source: IMF staff report and informational annex (Staff Report for the 2007 Article IV Consultation, European Department), July 13, 2007.* ### 1. World Bank Group activities in Russia are guided by the recent three-year Country ### _cr07351 - 1. World Bank Group activities in Russia are guided by the recent three-year Country ### Overview - The Country Partnership Strategy (CPS) covers FY07-09 and was endorsed by the Bank’s Board in December 2006. - The CPS reflects a transition in modalities: new federal borrowing will be limited over the CPS period while guarantees, sub-national borrowing, and fee-for-service arrangements for investment and policy advice are likely to grow. - The federal government no longer needs the financial support of the World Bank but values World Bank knowledge, experience, and project management skills. - Russia is IFC’s and MIGA’s largest exposure. - Successful full transition to new modalities will require increased coordination among IBRD, IFC and MIGA. ### CPS objectives - The CPS sets four primary objectives: - sustaining rapid growth; - improving public sector management and performance; - improving the delivery of social services; - enhancing Russia’s global role. - The first three pillars align closely with the previous CAS and the government’s Medium-Term Economic Program, with particular focus on the regions. - The fourth pillar addresses Russia’s integration in the world economy and donor community. ### (a) Sustaining rapid growth — World Bank Group activities and instruments - Macroeconomic policy and management of external inflows: - Contributions via the periodic Russian Economic Report, on-demand policy notes, and knowledge sharing. - Advisory services include training and impact monitoring related to WTO accession. - World Bank Treasury discussions on advising alternative uses of windfall oil revenues and the development of an institutional framework for managing a diversified portfolio of foreign assets. - Investment climate monitoring and policy advice: - Continued periodic BEEPS surveys, regional investment climate assessments, and administrative barriers studies by FIAS for interested regions. - Regional capacity building and investment promotion programs (example: Rostov Region initiative). - WBI capacity-building activities related to investment climate assessments. - Supporting government investment and PPPs for growth and diversification: - Two proposed projects in support of Special Economic Zones and IT Parks (both in FY07). - A microfinance infrastructure development project (FY08) focusing on financial cooperatives. - On-going projects supporting land registration and a national cadastre. - Possible partial risk guarantees to attract investment in the electricity sector and to support construction of an aluminum complex (SUAL) in the Komi Republic, possibly alongside an IFC investment. - Regular and reimbursable TAs to support PPP development across sectors. - Working with regions to identify engines of growth: - Preparation of a Country Economic Memorandum focused on sub-national barriers to growth and regional agglomerations. - Development of fee-for-service arrangements for regional investment strategies and growth analyses. - Supporting investments in priority areas at the regional level: - IFC/Bank Sub-National Development Program to support priority regional public investments; government interest in expanding this mechanism for direct lending to well-performing regions and municipalities without sovereign guarantees. - One to three such sub-national operations per year are contemplated over the CPS. - Infrastructure priorities: transport, logistics, municipal infrastructure; MIGA support for sub-sovereign FDI including water and solid waste sectors. - Providing direct support to the private sector (IFC priorities): - Finance projects with important spill-over effects (infrastructure, financial markets), sectors with comparative advantage (processing of natural resources, knowledge economy), and projects increasing product/service range outside Moscow. - Continued concentration in the financial sector with priorities: - (i) building long-term relationships with medium-sized independent private regional banks; - (ii) supporting specialized banking products (mortgage, consumer finance, leasing); - (iii) supporting privatization of state-owned banks as requested; and - (iv) supporting new financial instruments (partial guarantees of local currency bonds, securitization). - Continuing IFC advisory work through the Private Enterprise Partnership and FIAS: - Objectives include strengthening local suppliers and community development, building capacity of private banks for new products, and improving corporate governance and environmental sustainability. - FIAS work with select regions to improve business climate and kick-start land and commercial real estate markets. - MIGA activities: - Continued provision of political risk guarantees to support foreign investment in infrastructure and exploration of capital markets transactions including asset-backed securitizations. - Promotion of foreign bank expansion in Russia and potential further involvement in manufacturing, agribusiness and services sectors. ### (b) Improving public sector management and performance - Continued and deepened engagement to modernize selected public sector institutions and improve government administration, judiciary, local self-government, and budgetary management at federal and sub-national levels. - Modernization of public institutions: - Completion of ongoing projects and a new project in the pipeline covering tax modernization, customs development, cadastre and registration, fiscal federalism, performance-based budgeting, treasury development, and a statistical development project (FY08). - Supporting the government program in administrative reform: - Continued coordination and implementation of substantial donor funds with emphasis on encouraging sub-national initiatives. - Sub-national work concentrated in the Southern Federal Okrug and North-West regions; possible project for administrative reform in lagging regions. - Stepping up engagement on judicial reform: - Recently approved project supports judicial reform (FY07) focusing on dispute resolution, enforcement, and transparency. - Support for budgetary reforms: - Continued assistance in budgetary reform and performance-based budgeting; partnership in scaling up the Fiscal Federalism Project (now financed by the Russian government) and its expansion to the municipal level. - Supporting reform of local self-government: - Ongoing dialogue, monitoring and assistance in rural areas (Perm, Penza, Adygeya); potential replication of the Fiscal Federalism Project model for municipal capacity building. - Investments in municipal development: - Current Kazan and Saint Petersburg municipal development projects, a housing and communal services project under preparation (FY08), and possible regional projects on water and heating system upgrades. - Supporting anti-corruption initiatives: - Exploration of possible Bank contributions as coherent national-level anti-corruption programs emerge. ### (c) Improving the delivery of social and communal services - Strategic shift to concentrate social service delivery support at the sub-national level in cooperation with regions. - Continuation of poverty work: - Emphasis on regional-level monitoring and improvement of social assistance programs, including labor market policies (in cooperation with DFID). - Development of regional social protection strategies for Tver, Tomsk, Kalmykia and three other regions. - Improving population health: - Continued engagement on adult health and development of a national strategy to reverse negative trends in premature mortality and morbidity. - Support for family support, preventive social welfare and child care at federal and regional levels (joint with international donors). - Advice on risk pooling, insurance, and sustainable health financing. - IFC work with private companies on occupational health, including HIV-AIDS. - Support for public-private partnerships in health via Bank TA and IFC financing; lessons from TB/AIDS project to inform targeted regional interventions. - Potential regional projects to remove environmental hotspots posing major health risks. - Modernization and improvement of education and vocational training: - Completion of current projects; regional TA and possible projects to improve professional and vocational education and labor market assessments. - Use of the recently completed Youth Strategy recommendations to advance youth policies in education and training. - Improvement in housing and communal services (HCS): - Large portfolio focused on heating, water, electricity, and other municipal services (including Kazan and Saint Petersburg municipal development, municipal heating, municipal water and electricity reform projects). - A housing and communal services project (FY08) will support reforms and investments on a grant basis allocated to regions competitively. - An electricity generation guarantee (FY08) will support improvements in utilities and housing services. - A large share of sub-national lending is expected to focus on these services. - Housing finance and energy efficiency via IFC's PEP program: - PEP focuses on housing finance and energy efficiency, complemented by IFC investments. - The Primary Mortgage Development Project works to streamline mortgage lending. - IFC's Sustainable Energy Efficiency Program provides credit lines to banks for on-lending and technical assistance; first credit line disbursed to Center Invest Bank in Rostov. - Program currently has a US$60 million pipeline of potential deals across all regions of Russia. - Additional IFC programs include support for corporate governance in banking, forestry management improvements in the Northwest, and development of local suppliers to the mining sector in Magadan. ### (d) Enhancing Russia’s global role - Support for Russia’s emergence as an international donor and active multilateral participant. - Assistance in formulation of an ODA strategy for Russia as an emerging donor: - Support includes training/capacity events, information sharing, and advisory services. - Engagement on international policy initiatives under Russia’s G-8 presidency (education quality, energy poverty, spread of infectious diseases). - Providing access to Bank instruments for channeling Russian developmental assistance: - Assistance with arranging an Africa debt-for-development swap, establishing an Avian Flu Trust Fund, implementing Education For All/Fast Track Initiatives, and facilitating Russia’s participation in the Global Village Energy Partnership. - Facilitation of Russia’s expanded role in IDA and organization of development aid seminars and international events (beginning with a high-level Emerging Donor Meeting in April 2006). - Opportunities for increased engagement of Russian experts in global development policy debates and staff secondments. - Fulfilling international obligations related to global goods: - Assistance in procedures and mechanisms for Climate Change and Biodiversity Conventions; TA on low-carbon technologies and climate mitigation. - Readiness to support carbon-finance projects if government introduces financial instruments for low-carbon technologies. - Three GEF projects in the Bank’s pipeline awaiting legal and institutional frameworks at the regional level with federal oversight; additional biodiversity and climate projects could be prepared. - Continued participation in the Ministerial Conference on Forest Law Enforcement and Governance in Europe and North Asia. - Linking Russian companies to global markets: - IFC support for South-South investment by strong Russian clients in other emerging markets. - MIGA engagement to support Russian companies investing in emerging markets through guarantees. ### Focus on Russian regions - A central CPS theme is deeper Bank Group involvement in select regions, including: - economic analysis (growth and business environment diagnostics); - regional development strategies; - related investment projects. - Regions are focal points for poverty monitoring, social protection strategies, administrative and judicial reform pilots, municipal infrastructure and HCS investments, and sub-national lending and guarantees. *Source: _cr07351 - 1. World Bank Group activities in Russia are guided by the recent three-year Country* ### 7. The Bank is working with the federal government in identifying a small sub-set of ### _cr07351 - 7. The Bank is working with the federal government in identifying a small sub-set of ### Bank engagement with sub-set of regions - Target: a small sub-set of 6–10 regions for concentrated Bank work programs. - Regions selected from wealthier, middle income, and poorer areas. - Important selection criteria: - (i) the willingness and commitment of the regional administration to work with the Bank; - (ii) a past history of successful cooperation; - (iii) the reform-orientation and competence of the regional administration; - (iv) strategic importance of the region for Russian development and the existence of other similar regions for possible scaling up of successful cooperation; - (v) the region’s creditworthiness and potential interest in Bank operations (for wealthier or middle income regions). - Modalities after initial engagement: - Strategic directions and modalities of cooperation to be included in joint Memoranda of Understanding, to be signed with the leaders of the focus regions. - Bank involvement at the regional level to combine targeted AAA diagnostics of the local economy and investment climate, development of regional strategies, and selected lending operations to address key challenges. ### World Bank Group focus on poorer regions - Concentration of some work in poorer Russian regions, which are often most in need of development assistance. - The list of priority regions will include some poorer regions. - IBRD engagement in poorer regions lacking creditworthiness will depend significantly on: - opportunities for participation in federal programs, or - coordination of donor funds. - IFC actions: - Special efforts to support private sector activities in poorer areas. - For poorer regions that have achieved creditworthiness: - potential opportunities for fee-for-service activities or sub-national lending without sovereign guarantees. - Discussions on new instruments will give particular attention to facilitating Bank work in poorer areas. ### Appendix III — Statistical issues: overview - Economic and financial data provided to the Fund are considered broadly adequate for surveillance purposes. - Russia has a reasonably comprehensive and timely statistical database, but difficulties remain in data accuracy and frequent data revisions. - State and private enterprise activities measured through forms sent to firms in enterprise registers; sample surveys increasingly replacing full-count collections. - Authorities are generally cooperative in reporting data to the Fund. - Russia reports data for IFS, Government Finance Statistics Yearbook, Direction of Trade Statistics, and Balance of Payments Statistics Yearbook. - A draft ROSC on data dissemination practices was prepared in 1999–2000 (never published); a new data ROSC prepared in October 2003 was approved for publication in April 2004. - Since January 31, 2005, the Russian Federation is a subscriber to the SDDS. Data on general government operations in the NSDP currently refer to 2003. The Russian Federation has not provided certification of its metadata. - Reserves template series and external debt series are available via specified IMF and World Bank pages (URLs present in source). ### National accounts - 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 published for 2003 onwards. - Source data: surveys of businesses and households, financial surveys of businesses, employment surveys of households, supplemented by administrative data. - Efforts underway to improve coverage; further progress needed to cover small and medium enterprises. - GDP estimates compiled by type of economic activity and expenditure category; estimates by type of activity considered more accurate. - Statistical discrepancy between production and expenditure approaches generally no more than 2 percent. - Data presented by income category, but estimates of the financial account by institutional sector are not compiled. - Impediment: delay in finalizing a modern statistics law (requiring firms to provide data with credible penalties for noncompliance, and guaranteeing confidentiality). - Revisions to the data are not flagged when disseminated, making consistent time series maintenance difficult. ### Prices - Rosstat compiles a national CPI of good quality (developed with Fund technical assistance). - Weekly publication of headline inflation stopped in January 2003; monthly reports retained; monthly core inflation data published. - Further improvements possible with a new household budget survey and improved treatment of seasonal items; World Bank and TACIS assistance available. - Rosstat publishes a PPI and the State Customs Committee has initiated development of foreign trade price indexes. - Monthly CPI and PPI are Laspeyres indices (2000=100) covering all regions. - Rosstat publishes indices for foodstuffs, non-food products, and services. - Weights of CPI components have been made available since 2006; PPI components are not disclosed, rendering time series analysis difficult. ### Government finance statistics - Staff receives monthly information on federal revenues, expenditures, and financing; annual information on local governments and extrabudgetary funds. - Published functional classification of expenditure differs slightly from international standards; expenditure data classified by economic type need improvement. - Annual data currently compiled with a long delay. - Domestic and external federal debt compiled monthly, but publicly released only in summary form quarterly; no unified debt monitoring and reporting system. - Ongoing improvements in coverage and quality of GFS data under a work program agreed with STA, although expenditure data remain poor. - Reform of budgetary accounting well advanced; introduction of accrual accounting for whole of government. - 2006 GFSY: data for central, local and general government reported through 2005 on both accrual and cash basis per GFSM 2001. - The Treasury has been reporting aggregate government finance data for publication in IFS on a cash basis since April 1996. ### Monetary statistics - Monetary data reasonably comprehensive and generally in accordance with international standards. - Classification and sectorization align with methodological guidelines, except financial derivatives not included in instrument classification. - Since 2006, monetary gold valued at current quotations set by the CBR. - Following 2003 ROSC recommendations, authorities included all non-operational credit institutions in monetary statistics and reclassified their deposits as restricted deposits. - CBR intends further revisions to conform fully to Monetary and Financial Statistics Manual 2000 guidelines. - Analytical accounts for monetary authorities and commercial banks are reported to IFS with a lag of one month; timely interest rate data available. - CBR has yet to conclude compilation using new Standardized Report Forms (SRFs). A TA mission visited Moscow in April 2007 to assist expanding coverage to other (nondepository) financial corporations and facilitate completion of the SRFs. ### External sector statistics - Balance of payments statistics compiled on basis of BPM5. - Significant improvements made, but scope remains to improve coverage of certain current and capital and financial account components, especially detail of the financial account. - State Customs Committee needs substantial improvement in coverage and valuation of exports and imports. - Merchandise imports data subject to large adjustments for under recording (e.g., “shuttle trade”, smuggling, undervaluation). - Large differences between partner country and customs data on imports persist; agencies seeking reconciliation. - CBR has developed a methodology for calculating export and import transactions unrecorded by customs authorities. - Need to improve coverage and quality of surveys on direct investment and trade in services including travel; CBR moved toward direct data collection. - Russia disseminates the data template on international reserves and foreign currency liquidity; published historic series on reserves have not been corrected for changes in definitions. - Headline data on reserves reported to the Fund and markets on a weekly basis with a four-business day lag. - Fund receives additional detail on reserves and reserve liabilities through the central bank balance sheet; this information is less comprehensive than the reserve template, which is disseminated with a lag of twenty days. - Quarterly external debt data published by sector, maturity, instrument, and currency with a lag of one quarter as prescribed by the SDDS; CBR started publishing quarterly debt service projections by sector and instruments. - CBR has commenced publishing an annual international investment position for all sectors with data starting in 2000. - International investment position for the banking sector available on a quarterly basis since 2001Q1 and published with a three-month lag. ### Table of Common Indicators Required for Surveillance (as of June 18, 2007) — selected entries - Exchange Rates: Date of latest observation 6/15/07; Date received 6/15/07; Frequency D; Frequency of reporting D; Frequency of publication D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 6/8/07; Date received 6/14/07; Frequency W; Frequency of reporting W; Frequency of publication W. - Reserve/Base Money: Date of latest observation 6/11/07; Date received 6/18/07; Frequency W; Frequency of reporting W; Frequency of publication W. - Broad Money: Date of latest observation 5/1/07; Date received 6/7/07; Frequency M; Frequency of reporting M; Frequency of publication M. - Central Bank Balance Sheet: Date of latest observation 6/1/07; Date received 6/7/07; Frequency M; Frequency of reporting M; Frequency of publication M. - Consolidated Balance Sheet of the Banking System: Date of latest observation 5/1/07; Date received 6/7/07; Frequency M; Frequency of reporting M; Frequency of publication M. - Interest Rates: Date of latest observation 6/15/07; Date received 6/15/07; Frequency D/W/M; Frequency of reporting D/W/M; Frequency of publication D/W/M. - Consumer Price Index: May. 2007; Date received 6/5/07; Frequency M; Frequency of reporting M; Frequency of publication M; Data Quality – Methodological soundness LO, LO, LO, LO; Data Quality – Accuracy and reliability O, O, O, O, NA. - Revenue, Expenditure, Balance and Composition of Financing – General Government: latest observation 2006; Date received Feb. 2007; Frequency A; Frequency of reporting A; Frequency of publication A; Data Quality – Methodological soundness LNO, LO, LO, O; Data Quality – Accuracy and reliability O, O, O, O, O. - External Current Account Balance: latest observation Q1 2007; Date received 4/5/07; Frequency Q; Frequency of reporting Q; Frequency of publication Q; Data Quality – Methodological soundness O, O, LO, O; Data Quality – Accuracy and reliability O, O, O, O, O. - GDP/GNP: latest observation Q1 2007; Date received 6/15/07; Frequency Q; Frequency of reporting Q; Frequency of publication Q; Data Quality – Methodological soundness O, O, LNO, O; Data Quality – Accuracy and reliability LO, LO, O, O, O. - Gross External Debt: latest observation Q4 2006; Date received 3/30/07; Frequency Q; Frequency of reporting Q; Frequency of publication NA. ### Statement by the IMF Staff Representative (September 12, 2007) — key points and statistics - Overall appraisal: thrust of staff appraisal unchanged; the statement summarizes information available since the staff report. - Growth and demand: - Output grew by 7.8 percent year-on-year in the first half of 2007. - Real wages increased by 17 percent during the first half of 2007, compared to the same period of last year. - Ministry of Economy increased its 2007 forecast for real GDP growth from 6.5 percent to 7.2–7.4 percent. - Consensus forecast increased to 7.1 percent. - IMF staff maintained its forecast of 7 percent for 2007 but notes risks are mainly on the upside. - Current account: - The current account surplus continued to decline rapidly; in the second quarter of 2007 the current account surplus relative to GDP almost halved compared to the same period of 2006. - Inflation and monetary policy: - Headline inflation (year-on-year) rose from 7.4 percent in March to 8.6 percent in August, above the official end-year target of 8 percent. - Trend attributed mainly to return to a more fixed exchange rate policy from mid-2006, surge in capital inflows, and unsterilized interventions. - Since June, CBR allowed slightly greater exchange rate flexibility; ruble appreciated until mid-August, when capital outflows and market turmoil prompted CBR intervention to support the currency. - Staff believes risks biased toward overshooting the end-year inflation target of 8 percent. - Fiscal policy: - Authorities planning a notable fiscal relaxation in a supplementary 2007 budget; Duma approval expected in October. Parameters remain as described in paragraph 18 of the staff report (detail in staff report not reproduced here). - Financial markets and reserves: - Russia weathered recent world financial market turmoil relatively well. - Sovereign spreads increased by about 50 bps to about 150 bps compared to beginning of August, then stabilized. - Local stock market dropped about 8 percent over first half of August, then ended the month down by only 5 percent after Fed action. - CBR intervened intermittently to smooth downward pressure on exchange rate; small loss of official reserves during August. - Reserves increased by $113 billion so far in 2007 and currently stand at $416 billion. - Banking system liquidity and interbank market: - Liquidity squeeze in late August: overnight money-market rates doubled from about 4 percent to 8 percent. - CBR injected liquidity via one-day repo facility; rolled-over repo operations reached Rub 272 billion ($10.6 billion) at the peak. - After tax-payment period ended, money-market rates dropped to 5–6 percent and repo operations are minimal. - Turmoil increased vulnerability of some banks due to fragmented and inefficient interbank market; some regional or mid-size banks relying on foreign borrowing may face difficulty as cost of funding rises. - An FSAP-update mission scheduled to visit Moscow in October. *Source: IMF staff report and Statement by the IMF Staff Representative (text as provided).* ### 9. Recent developments have reinforced the thrust of the staff appraisal. In ### _cr07351 - 9. Recent developments have reinforced the thrust of the staff appraisal. In ### Recent developments and staff appraisal - Staff continues to believe that further fiscal relaxation should be avoided at this juncture when the economy is gaining additional momentum spurred by strong domestic demand, and when inflation is already rising and the ruble is appreciating rapidly in real terms. ### Background: growth drivers and composition - Russia’s economic growth remains robust, underpinned by high oil prices, a strong catch-up potential, and sound fiscal policy. - Several years of double-digit terms-of-trade gains, rapidly developing financial markets, and improved access to foreign borrowing have supported strong investment growth, with only a soft spot in late 2004. - Capital and labor accounted for less than half of the increase in GDP since 2003; the balance was due to higher total factor productivity. - Robust growth has reflected reallocation of resources to more dynamic sectors and a nexus of strong productivity growth, rising real incomes, and higher consumption. ### Recent GDP and demand dynamics - GDP growth rose from 6.7 percent in 2006 to 7.8 percent for the first half of 2007. - Much of the momentum reflects a pickup in investment; consumption remains the main engine, spurred by real income growth of over 10 percent. ### Capacity constraints and inflation - With surging growth, the economy is running increasingly close to capacity; measures of capacity utilization are at historical highs. - Constraints are particularly evident in the oil sector: after about 10 percent annual increases through 2003, oil production growth slowed sharply in 2004–05 and appears to have stabilized at about 2–3 percent. - Inflation: from a peak of almost 14 percent (year-on-year) in mid-2005, inflation dropped to 7½ percent in March 2007, but has since firmed to over 8½ percent as of August, standing above the end-year target of 8 percent. ### External sector, reserves, and vulnerabilities - Current account surplus narrowed due to accelerating import growth and slowing energy exports. - Sharply higher capital inflows more than offset the narrowing current account surplus: as of early September, reserves increased by a record $113 billion in the year to date, reaching a total of $417 billion. - With a still-substantial current account surplus, rapidly increasing foreign exchange reserves and declining external debt, Russia’s external vulnerability is judged low, although non-government debt is rising rapidly. ### Fiscal policy and non-oil balance - The overall fiscal surplus has continued to increase because of higher oil revenues. - Since 2005 fiscal policy has allowed an increasing share of Russia’s oil-revenue windfall to pass through to the economy, reflected in deterioration in the general government’s non-oil balance. - Staff projects that the non-oil balance will decline further under the 2007 budget, by 0.9 percent of GDP. ### Monetary policy and capital inflows - Monetary policy has become more accommodative over the past year, reflecting the CBR’s resumption of a more steady exchange rate policy in mid-2006, reversing a policy introduced in early 2005. - Return to a more stable exchange rate policy associated with a surge in capital inflows, record-high interventions, and a sharp acceleration in base-money growth to 40 percent through July (year-on-year). - In the context of a year-end inflation target of 8 percent, rising inflationary pressures and market expectations of possible appreciation exacerbated capital inflows, notably through the banking system. - Since June, the CBR has allowed for greater exchange-rate flexibility to help stem inflation. - The worldwide market turmoil of August eased the pace of capital inflows. ### Outlook and staff projections - Demand pressures expected to remain strong in 2007. - Russia’s terms-of-trade projected to ease slightly in 2007, but overall environment remains broadly supportive. - Balance of payments expected to strengthen further, with capital inflows more than offsetting a lower current account surplus. - Staff projects GDP growth of around 7 percent over the near term, driven by robust consumption and investment demand. - Outlook also reflects a substantial fiscal impulse in 2007 and rapid expansion of consumer credit. - Inflation threatens to exceed the official end-year target of 8 percent. ### Executive Board assessment and policy recommendations - Directors commended the strong performance of the Russian economy, attributing it to high oil prices, large capital inflows, and good macroeconomic management, including saving the large oil revenue windfall. - Directors noted tensions in the policy mix aimed at reducing inflation while preserving exchange rate stability. - Demand pressures are intensifying due to acceleration in investment and strong private consumption growth; with output close to potential, upward pressures on prices and the real exchange rate are likely to persist. - Directors warned that planned fiscal relaxation in the next few years would provide an undesirable fiscal stimulus, increasing pressures for real ruble appreciation and making it more difficult to reduce inflation; it could exhaust remaining competitiveness margin and raise the risk of real exchange rate overshooting. - Directors called on the authorities to avoid increasing the non-oil deficit during the remainder of 2007 and in 2008. - Emphasized need to control public spending and pay more attention to quality and efficiency of expenditures; welcomed the new framework for spending oil revenues but cautioned that back-loading of spending cuts in socially sensitive areas in 2010–11 is risky unless efficiency-enhancing social and public sector reforms are reinvigorated. - Advised against extending government mandate into areas where private sector participation might be more efficient. - Noted recent rise in inflation stemmed from return to a less flexible exchange rate policy since mid-2006 and large unsterilized interventions; keeping inflation on target would require returning to a more flexible exchange rate policy. - Urged the central bank to be ready to scale back interventions as needed to keep inflation within target; greater focus on inflation target while allowing more exchange rate flexibility could help curb one-way bets and reduce speculative capital inflows. - Welcomed rapid development of Russia’s financial sector but cautioned that high rates of credit growth might increase vulnerabilities—rapid increase in consumer lending, corporate-bond issuances, and open foreign-exchange positions should be closely reviewed. - Noted that tightening access to foreign capital markets could increase vulnerability of a number of banks; welcomed the Financial Sector Assessment Program update for vulnerability review. - Identified key long-term challenge as improving Russia’s investment climate; despite impressive recent investment growth, investment level remains relatively low and Russia ranks poorly in international comparisons of the business climate. - Stressed importance of raising investment levels given projected decline in the labor force and declining prospect for continued high productivity gains; progress on public administration and civil service reforms has been limited and must be reinvigorated by the new government. ### Selected macroeconomic indicators (2003–08) — key figures from Table 1 - Real GDP (annual percent change): 2003: 7.3; 2004: 7.2; 2005: 6.4; 2006: 6.7; 2007 (Proj.): 7.0; 2008 (Proj.): 6.8 - Consumer prices, period average (annual percent change): 2003: 13.7; 2004: 10.9; 2005: 12.7; 2006: 9.7; 2007 (Proj.): 7.7; 2008 (Proj.): 7.5 - Consumer prices, end of period (annual percent change): 2003: 12.0; 2004: 11.7; 2005: 10.9; 2006: 9.0; 2007 (Proj.): 8.0; 2008 (Proj.): 7.0 - GDP deflator (annual percent change): 2003: 14.0; 2004: 20.1; 2005: 19.2; 2006: 16.1; 2007 (Proj.): 7.0; 2008 (Proj.): 9.6 - General government overall balance (in percent of GDP): 2003: 1.4; 2004: 4.9; 2005: 8.2; 2006: 8.4; 2007 (Proj.): 4.9; 2008 (Proj.): 2.8 - Revenue (in percent of GDP): 2003: 36.3; 2004: 36.6; 2005: 39.7; 2006: 39.7; 2007 (Proj.): 36.5; 2008 (Proj.): 34.6 - Expenditures (in percent of GDP): 2003: 34.8; 2004: 31.7; 2005: 31.6; 2006: 31.3; 2007 (Proj.): 31.5; 2008 (Proj.): 31.8 - Primary balance (in percent of GDP): 2003: 3.1; 2004: 6.1; 2005: 9.1; 2006: 9.2; 2007 (Proj.): 5.5; 2008 (Proj.): 3.3 - Non-oil balance (in percent of GDP): 2003: -3.9; 2004: -2.9; 2005: -4.6; 2006: -4.4; 2007 (Proj.): -5.3; 2008 (Proj.): -6.6 - Federal government overall balance (annual percent change): 2003: 1.7; 2004: 4.3; 2005: 7.5; 2006: 7.4; 2007 (Proj.): 4.7; 2008 (Proj.): 2.5 - Base money (annual percent change): 2003: 49.6; 2004: 24.9; 2005: 31.7; 2006: 39.6; 2007 (Proj.): 36.1; 2008 (Proj.): 30.2 - Ruble broad money (annual percent change): 2003: 51.6; 2004: 35.8; 2005: 38.6; 2006: 48.8; 2007 (Proj.): 49.4; 2008 (Proj.): 32.2 - Export volumes (annual percent change): 2003: 12.4; 2004: 10.5; 2005: 4.7; 2006: 5.8; 2007 (Proj.): 4.7; 2008 (Proj.): 5.0 - Import volumes (annual percent change): 2003: 24.4; 2004: 21.3; 2005: 18.3; 2006: 24.0; 2007 (Proj.): 22.4; 2008 (Proj.): 20.3 - Total merchandise exports, fob (in billions of U.S. dollars): 2003: 135.9; 2004: 183.2; 2005: 243.8; 2006: 303.9; 2007 (Proj.): 315.2; 2008 (Proj.): 332.6 - Total merchandise imports, fob (in billions of U.S. dollars): 2003: -76.1; 2004: -97.4; 2005: -125.4; 2006: -164.7; 2007 (Proj.): -210.3; 2008 (Proj.): -249.2 - External current account (in billions of U.S. dollars): 2003: 35.4; 2004: 59.0; 2005: 83.8; 2006: 94.5; 2007 (Proj.): 61.7; 2008 (Proj.): 42.8 - External current account (in percent of GDP): 2003: 8.2; 2004: 10.0; 2005: 11.0; 2006: 9.6; 2007 (Proj.): 5.1; 2008 (Proj.): 2.9 - Gross international reserves, in billions of U.S. dollars: 2003: 76.9; 2004: 124.5; 2005: 182.2; 2006: 303.7; 2007 (Proj.): 431.8; 2008 (Proj.): 524.4 - Reserves in months of imports: 2003: 8.9; 2004: 11.4; 2005: 13.3; 2006: 17.4; 2007 (Proj.): 19.8; 2008 (Proj.): 20.6 - Reserves in percent of short-term debt: 2003: 128; 2004: 198; 2005: 161; 2006: 348; 2007 (Proj.): 434; 2008 (Proj.): 517 - Nominal GDP (in billions of U.S. dollars): 2003: 431; 2004: 592; 2005: 764; 2006: 985; 2007 (Proj.): 1,201; 2008 (Proj.): 1,452 - Exchange rate (rubles per U.S. dollar, period average): 2005: 30.7; 2006: 28.8; 2007 (Proj.): 28.3; 2008 (Proj.): 27.2 - World oil price (U.S. dollars per barrel, WEO): 2003: 28.9; 2004: 37.8; 2005: 53.4; 2006: 64.3; 2007 (Proj.): 60.8; 2008 (Proj.): 64.8 - Real effective exchange rate (average percent change): 2003: 3.0; 2004: 7.8; 2005: 8.7; 2006: 9.5; 2007 (Proj.): 9.9; 2008 (Proj.): 8.1 *Source: IMF Executive Board Concludes 2007 Article IV Consultation with the Russian Federation (Public Information Notice No. 07/123, October 4, 2007).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07351.pdf_