## _cr08309

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### Summary and Macro Challenges
- Rising investment is increasingly propelling GDP growth and unlocking catch-up gains in productivity as labor reallocates to more productive sectors.
- Surging oil prices, large capital inflows, and financial deepening are providing financing and retained earnings for investment.
- Growth in real incomes and consumption is supported by large terms-of-trade gains and financial deepening that enables household borrowing against expected future income gains.
- Key macroeconomic challenges: containing inflation pressures, preventing the exchange rate from overshooting its equilibrium level, and bolstering long-term GDP growth. Related issues: appropriate macro policy stance, spillovers from global financial turmoil, reinvigorating structural reforms, and financial-sector vulnerabilities.

### Overheating Economy — Recent Developments
- GDP and demand
  - GDP growth accelerated sharply in the final quarter of 2007, to an annual rate of about 8 percent, and continued momentum into the first half of 2008.
  - GDP growth is running notably higher than staff’s and the authorities’ estimates of potential of 5 ½ to 6 percent.
  - Domestic demand growth rose to an annual rate of 15 percent (real terms).
  - Investment strength is rising, though consumption remains the main engine due to rapid real wage growth and consumer lending.
- Prices and labor
  - Headline inflation rose from 7.4 percent (year-on-year) in March 2007 to 15.1 percent in May 2008, overshooting the end-2007 target of 8.5 percent.
  - Consumer-price inflation excluding food, energy, and public services picked up since August 2007 and is currently running at 10.7 percent (year-on-year).
  - Real wage growth accelerated to an annual rate of 15 percent.
  - Unit-labor costs were up 5 percent in 2007, compared to an increase of 1.8 percent in 2006.
  - Labor utilization rates reached record highs and unemployment continues to decline, with acute labor shortages in Moscow and St. Petersburg.
- External sector and reserves
  - Foreign reserves rose by US$145 billion in the year through end-May 2008, reaching US$549 billion.
  - Current account balance in the year through March 2008 was 6.6 percent of GDP, up from 6.1 percent of GDP in 2007.
  - Import volume growth is running at an annual rate of almost 30 percent.
  - Non-oil current-account deficit increased driven by import growth and stagnant oil export volumes since 2005.
- Exchange rate and competitiveness
  - The pace of real exchange rate appreciation has picked up to about 7 percent per year; nominal effective exchange rate has remained virtually unchanged since Q3 2006.
  - Despite appreciation, manufacturing grew by 10 percent year-on-year during the first five months of 2008.
- Capital inflows and external debt
  - Capital inflows declined initially after global financial turmoil but recovered; recent months saw a strong return to the Euro bond market.
  - Total external debt declined to 35.2 percent of GDP and is now exceeded by official foreign exchange reserves.
  - The net international position, slightly negative in 2006 (-6 percent of GDP), is estimated to have turned to balance in 2007.

### Monetary Policy, Exchange-rate Regime, and Liquidity
- Fixed/less flexible exchange rate policy since 2006, combined with fiscal relaxation and rising oil prices, has hampered monetary policy, contributing to very high money and credit growth and rising inflation.
- The de facto peg required "equally-large unsterilized interventions in the foreign-exchange market," which translated into excess liquidity in the banking system.
- Interbank market was "extremely liquid on the eve of the global financial turmoil."
- CBR actions and liquidity support (Box 2, 2007–08)
  - Lombard list minimum acceptable rating reduced to B+/B1, estimated to provide additional 160 billion rubles (US$6 billion) in support.
  - Average haircuts on collateral lowered from 19 percent to 10 percent.
  - Required reserve ratios reduced temporarily by 100 bps, for three months (October 11, 2007–January 14, 2008), estimated to provide an additional 100 billion rubles (US$4 billion) in support.
  - Currency swap rate reduced from 10 percent to 8 percent.
  - Six-month term-lending facility collateralized with bank loans tapped by a few banks.
  - List of eligible collateral extended in February 2008 to include Eurobonds of Russian corporates not traded publicly in Russia.
  - Government offered to recycle a limited portion of its cash surplus via weekly one-month deposit auctions starting in April, 2008.
- Monetary conditions and credit
  - Real interest deposit rates declined to minus 8 percent and average real lending rates to minus 4 percent.
  - Credit growth continued to expand at more than 50 percent year-on-year.
  - Evidence that the decline in velocity is starting to slow; remonetization has begun to slow amid "very limited demand for long-term ruble denominated assets."
  - Recent CBR efforts to tighten monetary conditions, by raising interest rates and reserve requirements, "will have only marginal impact on liquidity conditions."

### Inflation Outlook and Monetary Recommendations
- Official and staff projections
  - Official revised end-year target for 2008: "10.5 percent."
  - Original end-year inflation target: "9.5 percent."
  - Staff projects inflation to be "14.1 percent by the end of 2008."
- CBR expectations and measures
  - CBR officials expected headline inflation to peak within the next few months and to decline significantly, reaching a low double-digit level by the end of the year.
  - CBR cited slowing broad-money growth, recent rate and reserve requirement hikes, and expected easing of global food-price inflation to curb pressures.
  - CBR reaffirmed readiness to raise reserve requirements more aggressively if banks were more liquid than deemed desirable.
- Staff recommendations
  - Staff advocated substantially more exchange-rate flexibility and cautioned that recent monetary tightening had been marginal and likely insufficient to materially affect inflation or inflationary expectations.
  - Staff urged stronger monetary tightening given buoyant private demand and expansionary fiscal policy keeping GDP growth above potential.
  - Transition plan endorsed: progressive widening of the band as inflows slow, ultimately moving to an inflation-targeting framework within three years—conditional on central bank independence and credible commitment to inflation.

### Exchange-rate Competitiveness and CGER Findings
- Overall assessment
  - Despite rapid real appreciation in recent years, Russia remains competitive; the historical undervaluation of the ruble has narrowed significantly and the real exchange rate is now getting close to its equilibrium level; a small competitive margin remains.
  - Transition-related productivity gains (Balassa-Samuelson effects) will generate steady and sizable real appreciation over the medium term without necessarily implying deterioration in competitiveness.
  - If the authorities maintain a procyclical fiscal stance, there is significant risk of the real exchange rate overshooting the equilibrium path.
- Staff empirical findings
  - Manufacturing wage is now consistent with underlying productivity; Russia’s competitive edge in wages has weakened over the past five years.
  - An undervaluation as large as 50 percent in 2002 had been mostly closed by 2007.
- CGER estimates and ranges (February 2008)
  - Funds’ standardized CGER exercise indicates the extent of undervaluation ranges from 0-20 percent.
  - Equilibrium exchange-rate approach finds the ruble is overvalued by about 2 percent.
  - External-sustainability approach finds the currency is undervalued by 21 percent.
  - Macroeconomic balance approach suggests the currency is undervalued by 2 percent.
  - Macroeconomic-balance estimate based on a medium-term current-account norm for Russia of 2.6 percent of GDP and an estimated underlying current account balance of 3.1 percent of GDP in 2007, taking into account a projected real appreciation of about one-third.
  - Note: figures are from February 2008; a 5-percent real appreciation over the past few months suggests the range may now be around +5 to -15 percent.

### Capital Flows, Borrowing Costs, and External Vulnerabilities
- Capital inflows and market access
  - Onset of global financial turmoil increased volatility and spreads, delaying some corporate Eurobond placements; decline mitigated by continued Eurobond issuance by state-dominated energy companies and banks, syndicated loans, FDI, and carry-trade inflows.
  - Net capital inflows in Q2 2008: about US$37 billion.
- External vulnerability indicators
  - Total external debt modest at 35.2 percent of GDP and is exceeded by official reserves.
  - Private-sector borrowing rose sharply; low sovereign spreads likely aided large state-controlled enterprises perceived to enjoy implicit sovereign guarantees (such borrowing is classified as private).
  - Short-term foreign liabilities of the financial sector rose to 30.5 (In billions of US$) by 2007 (Table 4).

### Fiscal Policy Stance, Projections, and Recommendations
- Recent fiscal developments
  - Primary expenditures by the federal government rose by 15 percent in real terms in 2007.
  - The non-oil deficit (adjusted for a one-off collection of tax arrears from Yukos) rose by 0.8 percent of GDP in 2007, to 4.7 percent of GDP.
  - The 2008 budget (including the proposed supplement) implies a further impulse: the federal non-oil deficit is set to increase by 0.9 percent of GDP to 5.6 percent of GDP.
  - Government proposed a supplementary budget of "0.3 percent of GDP," adding to a prior "0.6 percent increase in the non-oil deficit contained in the original 2008 budget."
- Medium-term fiscal framework
  - Ministry of Finance projects non-oil deficit set to decline from "6.8 percent of GDP in 2008 to 4.5 percent of GDP in 2011."
  - Implied reduction in total federal government spending from "17.9 percent of GDP in 2008 to 16.6 percent of GDP in 2011."
- Staff recommendations
  - Warned against further procyclical fiscal stimulus; urged reconsideration of the proposed supplementary budget and to "save any revenues above budgeted amounts, and underexecute the 2008 budget to the extent possible."
  - For 2009, fiscal policy should aim to provide counter-cyclical stimulus; as a second best, authorities should avoid a further "0.7 percent increase in the non-oil deficit" implied by the approved medium-term budget.
  - Staff agreed with the Ministry of Finance that the ceilings in the medium-term budget "should not be relaxed" and that room should be created within the ceilings to accommodate reform and infrastructure spending.
- VAT debate
  - Ministry of Economy suggested unifying general and special rates at "12 percent," close to estimated effective VAT rate of "11.4 percent."
  - Ministry of Finance opposed significant VAT changes; staff supported the Ministry of Finance's opposition and noted that unification of VAT rates at "16 percent, combined with the elimination of exemptions, would be broadly revenue neutral" per staff calculations.

### Outlook: Growth, Current Account, and Inflation Projections
- GDP growth projections (staff baseline)
  - 2008: "real GDP growth is expected to ease slightly in 2008, to 7¾ percent."
  - 2009: "growth is projected to slow further in 2009, to about 7¼ percent."
  - Estimated potential growth: "about 6 percent."
- Terms-of-trade and current account
  - Terms-of-trade improvement estimated at "almost 30 percent" supporting domestic demand in 2008.
  - Headline surplus in the current account will "revert temporarily in 2008" due to terms-of-trade increase, before resuming in 2009.
  - Non-energy current account deficit projected to deteriorate from "10.8 percent in 2007 to 11.9 percent in 2009."
  - Stabilization fund automatic stabilizer: the oil stabilization fund "absorbs almost 85 percent of the change in revenues associated with changes in oil prices."
- Inflation
  - Staff projects inflation to be "14.1 percent by the end of 2008."
  - Food price inflation expected to moderate in second half of 2008 owing to base effects from H2 2007, but domestic pressures could continue under procyclical fiscal and accommodative monetary policies.

### Medium-term Risks and Scenarios
- Near-term risks: risks to growth "are broadly balanced"; outlook for oil prices favorable; rapid unwinding of the capital account surplus largely subsided.
- Medium-term downside risk: "leaving inflation unchecked" which could force a significant monetary tightening later.
- Staff baseline medium-term scenario assumptions
  - Continuation of fixed exchange rate policy and adherence to ceilings in the medium-term fiscal framework, implying a gradual decline in the non-oil deficit starting in 2010.
  - Reinvigoration of structural reforms allowing continued catch-up productivity gains.
  - Under this scenario, overshooting of the real effective exchange rate and the current account is avoided.
- Alternative medium-term scenario
  - In the absence of medium-term fiscal consolidation, "the real effective exchange rate and the current account balance are likely to overshoot their equilibrium paths," increasing the risk of forced procyclical fiscal tightening if oil prices fall sharply.

### Financial Sector Resilience, Vulnerabilities, and FSAP Recommendations
- Near-term resilience
  - Agreement that the Russian banking system was weathering turmoil in global capital markets well; no bank required direct support from the CBR.
  - Refinancing requirements over the near term not seen as a problem; banks appear well prepared for the next peak in repayments in the third quarter of 2008.
- Vulnerabilities and data concerns
  - Chief near-term challenge: credit risk due to extremely rapid credit growth, especially to households.
  - Liquidity risk concerns for banks with limited or no access to the interbank market—typically smaller banks with a limited deposit base.
  - Reported capital may be overstated because of weaknesses in loan classification and provisioning—the adoption of more prudent provisioning would decrease capital by as much as 50 percent.
- FSAP update recommendations and supervisory priorities
  - Strengthen loan classification and provisioning practices.
  - Enhance the CBR’s tools for managing interbank liquidity.
  - Strengthen the framework for resolving problem banks at an early stage.
  - Improve internal coordination for monitoring systemic risk and bolster consolidated supervision.
  - Authorities concurred with most FSAP findings but disagreed that loan classification and provisioning practices were problematic; agreed on importance of consolidated supervision as a priority.
- Financial soundness indicators (selected, Table 3)
  - Regulatory capital to risk-weighted assets (2002–2008): 19.1; 19.1; 17.0; 16.0; 14.9; 15.5; 15.3.
  - Nonperforming loans to total gross loans (2002–2008): 5.6; 5.0; 3.3; 2.6; 2.4; 2.5; 2.4.
  - Individuals (share of loans to total loans): 8.0; 11.5; 16.2; 19.6; 23.9; 24.8; 24.7.
  - Return on assets (2002–2008): 2.6; 2.6; 2.9; 3.2; 3.3; 3.0; 0.7.

### Structural Reform and Long-term Growth Priorities
- Growth constraints and drivers
  - Increases in capacity utilization and productivity have been main sources of potential GDP growth; with the economy virtually at full capacity, further increases in capital and labor utilization are very limited.
  - Contribution from labor force growth will remain limited owing to Russia’s ageing population.
  - Key to sustaining strong potential growth is higher investment.
- Government reform priorities to boost investment
  - Increase infrastructure spending, including through public-private partnerships, to address severe bottlenecks.
  - Strengthen the judiciary and tackle corruption; reinvigorate reform of the civil service and public administration.
  - President Medvedev identified improving the investment climate as a key priority to be reflected in the government’s long-term development strategy.
- Social sector reforms
  - Priority reforms: improving quality of education and the health system, and strengthening the public pension system.
  - Current replacement rate is 24 percent and is projected to decline to 17 percent by 2027 under current policies.
  - Staff estimates showed that maintaining the replacement rate at its current level would require additional annual transfers to the pension fund averaging 1½ percent of GDP over 2008 to 2050.
- Trade and WTO accession
  - Authorities expected Russia to be able to join the WTO by early 2009.
  - Staff welcomed expiration of prohibitive export taxes on wheat and other grains as of July 1, 2008 and urged authorities to refrain from new measures that would limit international trade in food staples.

### Fiscal and External Tables — Key Quantitative Projections and Indicators (selected)
- Real GDP (Annual percent change): 2004: 7.2; 2005: 6.4; 2006: 7.4; 2007: 8.1; 2008: 7.8; 2009: 7.3.
- Consumer prices (End of period): 2007: 11.9; 2008: 14.1; 2009: 13.5.
- Gross international reserves (In billions of U.S. dollars): 2004: 124.5; 2005: 182.2; 2006: 303.7; 2007: 476.4; 2008: 660.7; 2009: 828.8.
- World oil price (U.S. dollars per barrel, WEO): 2008: 116.5; 2009: 125.0.
- External current account (In percent of GDP): 2004: 10.1; 2005: 11.0; 2006: 9.5; 2007: 6.1; 2008: 8.1; 2009: 4.6.
- Selected monetary figures (Table 8)
  - Base money (Dec. 2007): 3,687 (In billions of rubles); Dec. 2008: 5,608.
  - Broad money (Dec. 2007): 12,082 (In billions of rubles); Dec. 2008: 14,638.
- Balance of Payments (Table 2) — Current Account (In billions of U.S. dollars): 2007: 78.3; 2008: 150.1; 2009: 106.4.

### IMF Relations, Exchange Arrangements, and Governance of Oil Funds
- Fund relations and membership
  - Membership Status: Joined 06/01/1992; Article VIII.
  - Article IV Consultation: Russia is on the standard 12-month consultation cycle. The last consultation was concluded on September 12, 2007.
- Exchange arrangements and de facto peg
  - De jure arrangement: managed float with no pre-determined path for the exchange rate.
  - De facto arrangement change: starting date of February 1, 2006, from managed floating to a conventional fixed peg to a composite, reflecting stability of the ruble against the euro-dollar basket.
  - CBR intervenes to limit fluctuations in the exchange rate of the ruble against a basket of the euro and dollar in the short run; the dollar is the main intervention currency.
- Sovereign wealth funds (early 2008 split)
  - Reserve Fund (RF) capped at "the equivalent of 10 percent of GDP," invested in liquid, triple A, sovereign or quasi-sovereign securities.
  - National Welfare Fund (NWF) to be invested eventually in somewhat more risky and longer-term assets; investment strategy and risk management still under consideration; resources to remain in liquid assets in the meantime.
  - Authorities intend to follow principles and practices being developed by the International Working Group of Sovereign Wealth Funds (IWG).

### World Bank Group Engagement and Regional Focus (ANNEX II)
- CPS orientation (FY07–09) and objectives
  - Country Partnership Strategy FY07–09 endorsed December 2006; CPS primary objectives: (a) sustaining rapid growth, (b) improving public sector management and performance, (c) improving delivery of social services, (d) enhancing Russia’s global role.
- Major Bank Group activities
  - Support on macroeconomic policy, fiscal sustainability, and management of large external inflows; technical assistance on alternative uses for windfall oil revenues.
  - Investment climate monitoring, PPP support, energy efficiency studies, and sub-national infrastructure projects.
  - IFC priorities: build long-term relationships with medium-sized regional banks; support mortgage financing, consumer finance, leasing; support corporate governance and energy-efficiency financing.
  - MIGA: political risk guarantees for infrastructure and support for FDI and capital markets transactions.
- Sub-national and social service focus
  - Emphasis on regional poverty, education, health, housing and communal services, and municipal infrastructure.
  - Housing finance and energy efficiency through IFC’s PEP program; Primary Mortgage Development Project and Sustainable Energy Efficiency Program with a US$60 million pipeline.

### Statistical Issues and Data Quality (ANNEX III)
- Overall assessment
  - Economic and financial data provided to the Fund are broadly adequate for surveillance purposes, with a comprehensive and timely statistical database, but difficulties remain in data accuracy and frequent revisions.
  - Russian Federation subscribed to the Special Data Dissemination Standard on January 31, 2005.
- Specific data issues
  - Merchandise import data published by the State Customs Service tends to under-record transactions due to "shuttle trade," smuggling, and undervaluation.
  - CBR developed a methodology for calculating export and import transactions unrecorded by customs for use in balance of payments statistics.
  - Need to improve coverage and quality of surveys on direct investment and trade in services.
  - National accounts: chain-linking introduced in 2006; production approach considered more accurate; statistical discrepancy between production and expenditure approaches generally no more than two percent.
  - Government finance statistics: ongoing improvements; Treasury began reporting detailed government finance statistics for IFS publication on a cash basis beginning in 2007.
  - Monetary and financial statistics: reasonably comprehensive; CBR intends further compilation revisions to conform with Monetary and Financial Statistics Manual 2000.
  - External sector statistics compiled on BPM5; scope remains to improve coverage of components of current and capital and financial accounts.

### Executive Board and Staff Appraisal — Key Policy Messages
- Positive assessment
  - Russia’s economic expansion is gaining strength; investment, productivity, real incomes, and consumption are rising.
  - Recovery is supported by strong investment increasingly underpinned by endogenous factors beyond the commodity price boom.
- Core recommendations and risks
  - Risk of overheating is rising owing to an expansionary macroeconomic policy mix: domestic demand booming at an unsustainable annual rate of 15 percent in real terms.
  - Need for stronger monetary tightening and a more prudent fiscal stance aimed at containing domestically generated inflationary pressures.
  - Greater exchange-rate flexibility recommended to restore monetary independence and to help anchor inflation expectations; raising reserve requirements is not a sustainable substitute.
  - Avoid additional fiscal stimulus and reconsider the 2008 supplementary budget; adhere to medium-term fiscal ceilings and create room within them for priority reforms and infrastructure.
  - Continue to improve regulatory and prudential frameworks in line with FSAP update recommendations and press ahead with structural reforms to improve the investment climate.

*Source: IMF staff report, “Russia’s External Competitiveness” (document _cr08309).*

### 1.   Russia’s External Competitiveness..................................................................................

### 1.   Russia’s External Competitiveness

### Summary
- Rising investment is increasingly propelling GDP growth and unlocking catch-up gains in productivity as labor reallocates to more productive sectors.
- Surging oil prices, large capital inflows, and financial deepening are providing financing and retained earnings for investment.
- Growth in real incomes and consumption is supported by large terms-of-trade gains and financial deepening that enables household borrowing against expected future income gains.
- Key macroeconomic challenges: containing inflation pressures, preventing the exchange rate from overshooting its equilibrium level, and bolstering long-term GDP growth. Related issues: appropriate macro policy stance, spillovers from global financial turmoil, reinvigorating structural reforms, and financial-sector vulnerabilities.

### An overheating economy — Recent developments
- GDP growth:
  - GDP growth accelerated sharply in the final quarter of 2007, to an annual rate of about 8 percent, and continued momentum into the first half of 2008.
  - GDP growth is running notably higher than staff’s and the authorities’ estimates of potential of 5 ½ to 6 percent.
- Domestic demand and composition:
  - Domestic demand growth rose to an annual rate of 15 percent (real terms).
  - Investment strength is rising, though consumption remains the main engine due to rapid real wage growth and consumer lending.
- Inflation:
  - Headline inflation rose from 7.4 percent (year-on-year) in March 2007 to 15.1 percent in May 2008, overshooting the end-2007 target of 8.5 percent.
  - Consumer-price inflation excluding food, energy, and public services picked up since August 2007 and is currently running at 10.7 percent (year-on-year).
- Labor markets and unit labor costs:
  - Real wage growth accelerated to an annual rate of 15 percent.
  - Unit-labor costs were up 5 percent in 2007, compared to an increase of 1.8 percent in 2006.
  - Labor utilization rates reached record highs and unemployment continues to decline, with acute labor shortages in Moscow and St. Petersburg.
- Exchange rate and competitiveness:
  - The pace of real exchange rate appreciation has picked up to about 7 percent per year; nominal effective exchange rate has remained virtually unchanged since Q3 2006.
  - Despite appreciation, manufacturing grew by 10 percent year-on-year during the first five months of 2008.
- External sector and reserves:
  - Foreign reserves rose by US$145 billion in the year through end-May 2008, reaching US$549 billion.
  - Current account balance in the year through March 2008 was 6.6 percent of GDP, up from 6.1 percent of GDP in 2007.
  - Import volume growth is running at an annual rate of almost 30 percent.
  - Non-oil current-account deficit increased driven by import growth and stagnant oil export volumes since 2005.
- Capital inflows and external debt:
  - Capital inflows declined initially after global financial turmoil but recovered; recent months saw a strong return to the Euro bond market.
  - Private-sector capital inflows were supported by state-dominated energy companies and banks issuing Eurobonds, syndicated loans, continued FDI, and carry-trade inflows.
  - Total external debt declined to 35.2 percent of GDP and is now exceeded by official foreign exchange reserves.
  - The net international position, slightly negative in 2006 (-6 percent of GDP), is estimated to have turned to balance in 2007.

### An overheating economy — Economic policies
- Fiscal policy and demand:
  - Primary expenditures by the federal government rose by 15 percent in real terms in 2007.
  - The non-oil deficit (adjusted for a one-off collection of tax arrears from Yukos) rose by 0.8 percent of GDP in 2007, to 4.7 percent of GDP.
  - The 2008 budget (including the proposed supplement) implies a further impulse: the federal non-oil deficit is set to increase by 0.9 percent of GDP to 5.6 percent of GDP.
  - Fiscal spending was heavily back-loaded in 2007, providing strong stimulus toward year-end.
- Monetary and exchange-rate environment:
  - A fixed/less flexible exchange rate policy since 2006, combined with fiscal relaxation and rising oil prices, has hampered monetary policy, contributing to very high money and credit growth and rising inflation.

### External competitiveness (Box 1 findings)
- Overall assessment:
  - Despite rapid real appreciation in recent years, Russia remains competitive, but the historical undervaluation of the ruble has narrowed significantly and the real exchange rate is now getting close to its equilibrium level; a small competitive margin remains.
  - Transition-related productivity gains will generate steady and sizable real appreciation over the medium term (Balassa-Samuelson effects) without necessarily implying deterioration in competitiveness.
  - If the authorities maintain a procyclical fiscal stance, there is significant risk of the real exchange rate overshooting the equilibrium path.
- Staff empirical findings:
  - Staff research suggests Russia’s competitive edge in wages has weakened over the past five years; manufacturing wage is now consistent with underlying productivity.
  - Estimates indicate that an undervaluation as large as 50 percent in 2002 had been mostly closed by 2007.
- CGER estimates and ranges (as reported):
  - Funds’ standardized CGER exercise suggests the underrvaluation of the ruble is narrowing; current estimates indicate the extent of undervaluation ranges from 0-20 percent.
  - More specifically:
    - The equilibrium exchange-rate approach finds the ruble is overvalued by about 2 percent.
    - The external-sustainability approach finds the currency is undervalued by 21 percent.
    - The macroeconomic balance approach suggests the currency is undervalued by 2 percent.
  - The macroeconomic-balance estimate is based on a medium-term current-account norm for Russia of 2.6 percent of GDP and an estimated underlying current account balance of 3.1 percent of GDP in 2007, taking into account a projected real appreciation of about one-third.
  - Note on timing: figures are from the most recent CGER exercise in February 2008; updated figures were not yet available, but a 5-percent real appreciation over the past few months suggests the range may now be around +5 to -15 percent.

### Capital flows, borrowing costs, and vulnerabilities
- Capital inflows and market access:
  - The onset of global financial turmoil increased volatility and spreads, delaying some corporate Eurobond placements.
  - The decline in inflows was mitigated by continued Eurobond issuance by some state-dominated energy companies and banks, syndicated loans, FDI, and carry-trade inflows.
  - Exceptionally large inflows prior to the turmoil were driven by large share issuances by two state banks and substantial Eurobond borrowing by a state oil company to finance purchase of Yukos assets.
  - In recent months Russian borrowers returned to the Euro bond market in force; spreads rose but U.S. dollar-denominated bond interest rates were only modestly affected for higher-rated state-owned entities due to lower dollar benchmark rates.
- External vulnerability indicators:
  - Private capital inflows have benefited from a significant reduction in external vulnerability and low sovereign spreads.
  - The trend decline in public-sector indebtedness accompanied a sharp increase in private-sector debt; private-sector borrowing is consistent with a falling private-sector savings-investment surplus.
  - Low sovereign spreads likely aided large state-controlled enterprises perceived to enjoy implicit sovereign guarantees (such borrowing is classified as private).
  - Total external debt is modest at 35.2 percent of GDP and is exceeded by official reserves.

*Source: IMF staff report, “Russia’s External Competitiveness.”*

### 10.      The fixed exchange rate policy continues to cause a lax monetary stance. In

### _cr08309 - 10.      The fixed exchange rate policy continues to cause a lax monetary stance. In

### Fixed exchange rate, interventions, and banking-system liquidity
- The de facto peg required "equally-large unsterilized interventions in the foreign-exchange market," which translated into excess liquidity in the banking system.
- Interbank market was "extremely liquid on the eve of the global financial turmoil."
- Bank IPOs and Yukos-related auctions in the first half of 2007 led to substantial inflows and a dramatic surge in banks’ excess reserves with the CBR.
- Following the onset of the global turmoil in the second half of 2007, the existing pool of reserves "provided a significant cushion for the banking system," offsetting the impact of lower inflows on domestic liquidity.
- The CBR stepped up repo operations and broadened eligible collateral when money market rates began to rise.
- At the time of reporting:
  - "Russia’s banking system remains comfortably liquid,"
  - "overnight interbank rates are at the lower end of the usual trading range,"
  - "CBR repo operations have been scaled back sharply."
- Recent CBR efforts to tighten monetary conditions, by raising interest rates and reserve requirements, "will have only marginal impact on liquidity conditions."

### Box 2 — Liquidity Support Measures, 2007–08 (CBR actions)
- Lombard list minimum acceptable rating reduced to B+/B1, estimated to provide additional 160 billion rubles (US$6 billion) in support.
- Average haircuts on collateral lowered from 19 percent to 10 percent.
- Required reserve ratios reduced temporarily by 100 bps, for three months (October 11, 2007–January 14, 2008), estimated to provide an additional 100 billion rubles (US$4 billion) in support.
- Currency swap rate reduced from 10 percent to 8 percent, aligning with overnight direct repo and Lombard rates.
- A six-month term-lending facility, collateralized with bank loans, was tapped for the first time by a few banks (available since 2005, but never exercised until then).
- The list of eligible collateral extended in February 2008 to include Eurobonds of Russian corporates not traded publicly in Russia.
- An end-year surge in government spending helped ease liquidity, including capitalization of Russia’s new development institutions.
- Starting in April, 2008, the government offered to recycle a limited portion of its cash surplus via weekly one-month deposit auctions.

### Monetary conditions, interest rates, credit, and money demand
- Real interest deposit rates declined to minus 8 percent and average real lending rates to minus 4 percent.
- Credit growth continued to expand at more than 50 percent year-on-year.
- Evidence that the decline in velocity is starting to slow; remonetization has begun to slow amid "very limited demand for long-term ruble denominated assets."
- Global financial turmoil raised concerns about availability of long-term foreign financing and led to increased private-sector calls to place part of the stabilization fund’s assets with the domestic banking system.

### Outlook: Growth, current account, and inflation projections
- GDP growth projections:
  - 2008: "real GDP growth is expected to ease slightly in 2008, to 7¾ percent."
  - 2009: "growth is projected to slow further in 2009, to about 7¼ percent."
  - Estimated potential growth: "about 6 percent."
- Terms-of-trade improvement estimated at "almost 30 percent" supporting domestic demand in 2008.
- Current account:
  - The headline surplus in the current account will "revert temporarily in 2008" due to terms-of-trade increase, before resuming in 2009.
  - Non-energy current account deficit projected to deteriorate from "10.8 percent in 2007 to 11.9 percent in 2009."
- Stabilization fund automatic stabilizer: the oil stabilization fund "absorbs almost 85 percent of the change in revenues associated with changes in oil prices."
- Inflation:
  - Official revised end-year target for 2008: "10.5 percent."
  - Original end-year inflation target: "9.5 percent."
  - Staff projects inflation to be "14.1 percent by the end of 2008."
  - Food price inflation expected to moderate in second half of 2008 owing to base effects from H2 2007, but domestic pressures could continue under procyclical fiscal and accommodative monetary policies.

### Medium-term risks and scenarios
- Main near-term and medium-term risks:
  - Near term: risks to growth "are broadly balanced"; outlook for oil prices favorable; rapid unwinding of the capital account surplus largely subsided.
  - Medium term: downside risk stems from "leaving inflation unchecked" which could force a significant monetary tightening later.
- Staff baseline medium-term scenario assumptions:
  - Continuation of fixed exchange rate policy and adherence to ceilings in the medium-term fiscal framework, implying a gradual decline in the non-oil deficit starting in 2010.
  - Reinvigoration of structural reforms allowing continued catch-up productivity gains.
  - Under this scenario, overshooting of the real effective exchange rate and the current account is avoided.
- Staff alternative medium-term scenario:
  - In the absence of medium-term fiscal consolidation, "the real effective exchange rate and the current account balance are likely to overshoot their equilibrium paths," increasing the risk of forced procyclical fiscal tightening if oil prices fall sharply.

### Fiscal policy stance, measures, and recommendations
- 2008 fiscal actions:
  - Government proposed a supplementary budget of "0.3 percent of GDP."
  - This adds to a prior "0.6 percent increase in the non-oil deficit contained in the original 2008 budget."
  - Ministry of Finance officials concerned that procyclical relaxation at a time of strong demand would increase pressures on prices and the ruble, though they judged incremental inflationary pressures "manageable."
  - Ministry of Economy officials did not view ongoing fiscal relaxation as adding to inflationary pressures.
- Fiscal medium-term projections and ceilings:
  - Ministry of Finance expects demand on public resources to increase for infrastructure, health, and pension reform; nevertheless, they emphasized adherence to ceilings in the medium-term framework.
  - Non-oil deficit set to decline from "6.8 percent of GDP in 2008 to 4.5 percent of GDP in 2011."
  - Implied reduction in total federal government spending from "17.9 percent of GDP in 2008 to 16.6 percent of GDP in 2011."
- Staff recommendations:
  - Warned against further procyclical fiscal stimulus; urged reconsideration of the proposed supplementary budget and to "save any revenues above budgeted amounts, and underexecute the 2008 budget to the extent possible."
  - For 2009, fiscal policy should aim to provide counter-cyclical stimulus; as a second best, authorities should avoid a further "0.7 percent increase in the non-oil deficit" implied by the approved medium-term budget.
  - Staff agreed with the Ministry of Finance that the ceilings in the medium-term budget "should not be relaxed" and that room should be created within the ceilings to accommodate reform and infrastructure spending, noting slow GDP impact of such projects.
- VAT debate:
  - Calls intensified for reduction or elimination of general VAT rate.
  - Ministry of Economy suggested unifying general and special rates at "12 percent," close to estimated effective VAT rate of "11.4 percent."
  - Ministry of Finance opposed significant VAT changes; suggested improving VAT administration and reducing long delays in refunds.
  - Staff supported the Ministry of Finance's opposition to the proposed VAT change and noted that unification of VAT rates at "16 percent, combined with the elimination of exemptions, would be broadly revenue neutral" per staff calculations.

### Sovereign wealth funds and governance
- Russia split the former oil stabilization fund into two SWFs in early 2008:
  - Reserve Fund (RF) capped at "the equivalent of 10 percent of GDP," invested in liquid, triple A, sovereign or quasi-sovereign securities.
  - National Welfare Fund (NWF) to be invested eventually in somewhat more risky and longer-term assets; investment strategy and risk management still under consideration; resources to remain in liquid assets in the meantime.
- Authorities intend to follow principles and practices being developed by the International Working Group of Sovereign Wealth Funds (IWG), with Russia participating.
- Staff underscored the importance of Russia’s active participation in the IWG.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08309.pdf*

### 23.      CBR officials were confident that the rise in inflation could be reversed without

### _cr08309 - 23.      CBR officials were confident that the rise in inflation could be reversed without

### Monetary policy and inflation outlook
- CBR officials expected headline inflation to peak within the next few months and to decline significantly, reaching a low double-digit level by the end of the year.
- Authorities judged the revised official end-2008 target of 10½ percent would be difficult to attain.
- Factors cited by CBR to curb inflationary pressures:
  - the rate of broad-money growth had slowed over the first quarter of 2008, which would help curb inflationary pressures by the third quarter;
  - recent measures to raise interest rates and reserve requirements would start to have an impact at around the same time;
  - global food-price inflation was expected to ease substantially over the second half of 2008.
- For 2009, assumptions and anticipated developments:
  - lower oil prices and continued strong import growth;
  - an expected drop in currency inflows would ease upward pressure on the exchange rate, removing the need for continued large-scale liquidity injections through the foreign-exchange window;
  - CBR reaffirmed readiness to raise reserve requirements more aggressively if banks were more liquid than deemed desirable.
- Staff view on inflation control:
  - Staff advocated substantially more exchange-rate flexibility and cautioned that recent monetary tightening had been marginal and likely insufficient to materially affect inflation or inflationary expectations.
  - Staff warned that prospects for a decline in inflation over 2008 depended largely on a hoped-for, but still uncertain, slowdown in external food-price inflation.
  - Staff urged stronger monetary tightening given buoyant private demand and expansionary fiscal policy keeping GDP growth above potential.

### Exchange-rate policy, transition, and inflation targeting
- Near-term exchange-rate approach:
  - The CBR would maintain tight control over the level of the currency basket while increasing day-to-day uncertainty by buying predetermined amounts of foreign exchange within the band to discourage excessive speculation.
- Medium-term transition plan:
  - As the pace of inflows slowed, a progressive widening of the band would allow a gradual step-by-step transition to a more freely-floating exchange-rate, and ultimately to an inflation-targeting framework.
  - Authorities confirmed their intention to move to inflation targeting within three years.
- Staff recommendations on framework and communications:
  - Staff agreed immediate formal inflation targeting may be premature but urged a more aggressive, less-formal focus on inflation.
  - Key precondition emphasized: an independent central bank that can credibly commit to placing inflation ahead of other objectives.
  - To anchor expectations, the CBR was encouraged to strengthen its communications strategy: provide a realistic assessment of current trends, clearly outline thinking and intentions, demonstrate how policy measures will bring prices back into line.
  - At this stage, this would entail explaining that the end-year inflation target for 2008 would likely be missed, and outlining measures to bring inflation back on target by end-2009.

### Fiscal and external context influencing monetary policy
- Staff highlighted policy mix risks:
  - Procyclical fiscal relaxation and revival of capital inflows would increase upward pressure on the currency unless the peg was relaxed.
  - The de facto basket peg could become increasingly unsustainable given the strength of Russia’s economy relative to the United States and European Union.
  - Under current policies, Russia’s inflationary path would continue to be largely determined by external events beyond the CBR’s control.
- Specific quantitative fiscal and stabilization facts:
  - With the budget balanced at an oil price of less than half the current world market prices, and with close to 85 percent of marginal earnings absorbed by the stabilization fund, Russia is described as well protected against even a sharp drop in oil prices.

### Financial sector resilience and vulnerabilities
- Near-term resilience:
  - Agreement that the Russian banking system was weathering turmoil in global capital markets well; no bank required direct support from the CBR.
  - Refinancing requirements over the near term not seen as a problem; banks appear well prepared for the next peak in repayments in the third quarter of 2008.
  - Authorities indicated local owners could provide substantial additional funding if needed.
- Key vulnerabilities noted by staff and FSAP update:
  - Chief near-term challenge: credit risk due to extremely rapid credit growth, especially to households.
  - Liquidity risk concerns for banks with limited or no access to the interbank market—typically smaller banks with a limited deposit base.
  - Market risk and currency risk viewed as less concerning; interest rate risk potentially significant for some banks but data limitations precluded detailed analysis.
  - Reported capital may be overstated because of weaknesses in loan classification and provisioning—the adoption of more prudent provisioning would decrease capital by as much as 50 percent.
- FSAP update recommendations and supervisory priorities:
  - Strengthen loan classification and provisioning practices.
  - Enhance the CBR’s tools for managing interbank liquidity.
  - Strengthen the framework for resolving problem banks at an early stage.
  - Improve internal coordination for monitoring systemic risk and bolster consolidated supervision.
- Authorities’ stance:
  - Concurred with most FSAP findings but disagreed that loan classification and provisioning practices were problematic, asserting CBR methodology and supervisory practice had become more advanced and conservative in the past 4–5 years.
  - Agreed on the importance of consolidated supervision as a future priority.

### Structural reform and long-term growth
- Growth drivers and constraints:
  - Increases in capacity utilization and productivity have been main sources of potential GDP growth in recent years; with the economy virtually at full capacity, further increases in capital and labor utilization are very limited.
  - Contribution from labor force growth will remain limited owing to Russia’s ageing population.
  - Key to sustaining strong potential growth is higher investment.
- Government reform priorities to boost investment:
  - Increase infrastructure spending, including through public-private partnerships, to address severe bottlenecks.
  - Strengthen the judiciary and tackle corruption; reinvigorate reform of the civil service and public administration.
  - President Medvedev identified improving the investment climate as a key priority to be reflected in the government’s long-term development strategy—action plans to be decided in the coming months.
- Social sector reforms:
  - Priority reforms: improving quality of education and the health system, and strengthening the public pension system.
  - Current replacement rate is 24 percent and is projected to decline to 17 percent by 2027 under current policies.
  - Staff estimates showed that maintaining the replacement rate at its current level would require additional annual transfers to the pension fund averaging 1½ percent of GDP over 2008 to 2050.
- Trade and WTO accession:
  - Authorities expected Russia to be able to join the WTO by early 2009.
  - Progress noted on outstanding issues including export duties on timber, treatment of state-trading companies, and budget support for agriculture.
  - Staff welcomed expiration of prohibitive export taxes on wheat and other grains as of July 1, 2008 and urged authorities to refrain from new measures that would limit international trade in food staples.

### Staff appraisal and key risks
- Positive assessment:
  - Russia’s economic expansion is gaining strength; investment, productivity, real incomes, and consumption are rising.
  - Recovery is supported by strong investment that is increasingly underpinned by endogenous factors beyond the commodity price boom.
- Risks and policy recommendations:
  - Risk of overheating is rising owing to an expansionary macroeconomic policy mix: domestic demand booming at an unsustainable annual rate of 15 percent in real terms.
  - Procyclical fiscal policy combined with an exchange rate policy that resists appreciation through unsterilized interventions exacerbates demand pressures and undermines ability to arrest and reverse rising inflation.
  - Need for stronger monetary tightening and a more prudent fiscal stance aimed at containing domestically generated inflationary pressures.
  - Reliance on external developments (e.g., global food prices, unwinding of current account surplus) to reduce inflation is risky and insufficient; monetary policy should be able to set conditions independently with a view to inflationary conditions in Russia.

*Source: _cr08309 - 23.      CBR officials were confident that the rise in inflation could be reversed without*

### 40.      Monetary tightening will require greater exchange rate flexibility. The policy of

### Monetary tightening will require greater exchange rate flexibility

### Exchange rate policy and monetary independence
- The policy of pegging the ruble to a dollar-euro basket is becoming increasingly inflationary, as Russia’s cyclical position continues to strengthen relative to that of the U.S. and the euro area.
- With the liberalization of capital controls, exchange rate flexibility is likely to be unavoidable in order to ensure an independent monetary policy, calibrated with a view to inflationary pressures in Russia.
- Raising reserve requirements is not a sustainable substitute for exchange rate flexibility, in part because this instrument will encourage financial disintermediation if used too aggressively.
- Increasing tensions between the authorities’ inflation and exchange rate targets is exacerbating capital inflows, as the market expects that the latter will eventually give way to the former.
- Scaling back interventions and permitting ruble appreciation is necessary to:
  - set inflation on a sustained downward path;
  - guard against the risk that further exogenous shocks feed into additional price increases.
- Acting soon would reduce the risk of higher inflation expectations getting entrenched.

### Fiscal stance and near-term recommendations
- Additional fiscal stimulus should be avoided.
- While the bulk of oil and gas taxes are still being saved, the steady increase in the non-oil deficit has entailed adding stimulus just as private demand has become more buoyant.
- This procyclical fiscal stance shifts more of the burden of demand management onto a monetary policy already somewhat hamstrung by political and social resistance to appreciation.
- With little evidence of broad support for substantially greater exchange-rate flexibility, further unbalancing of the macroeconomic policy mix will most likely increase inflationary pressures in the near term.
- Recommendation: prevent a further increase in the non-oil deficit in 2008–09, suggesting that the decision to supplement the 2008 budget should be reconsidered.

### Competitiveness and equilibrium exchange rate risks
- Staff estimates suggest that the ruble is approaching its equilibrium level, with margins reduced as the ruble has steadily become less undervalued.
- Risk: continuation of the increase in the non-oil fiscal deficit, in face of very buoyant domestic demand, could cause the real exchange rate and the external current account deficit to overshoot their equilibrium levels.
- Under the assumption that the authorities will adhere to their plans for a reduction in the non-oil deficit from 2010, staff believes that the ruble will remain within its equilibrium range over the medium term, despite the still relatively fast real appreciation expected over 2008–09.
- Failure to adhere to these plans would most likely prompt the ruble to overshoot its equilibrium path.
- A slowdown in productivity growth that would likely result over the medium term if reforms were not reinvigorated as planned would also likely prompt overshooting.

### Financial sector vulnerabilities and supervisory priorities
- The sector has weathered the recent global financial turmoil well; CBR officials and leaders of key financial institutions are confident about its ability to withstand further turmoil.
- The FSAP update finds that the financial system, including the regulatory and supervisory system, has strengthened significantly since the original FSAP.
- Concerns remain that, after years of negative real interest rates and extremely fast lending growth, a significant increase in real interest rates—if the CBR is forced to undertake a sharp monetary tightening—would take a significant toll on the banking system.
- Priority actions:
  - further improve the regulatory and prudential framework as recommended by the FSAP update;
  - strengthen loan classification and provisioning standards;
  - finalize legal amendments to allow effective consolidated supervision.

### Investment climate and structural reform priorities
- The government’s focus on improving the investment climate is most welcome.
- Raising investment is key to sustaining strong potential GDP growth in Russia and will need to be supported by the elimination of infrastructure bottlenecks and the promotion of a favorable investment climate.
- The broad outline of the government’s long-term development strategy and policy priorities are encouraging, and are appropriately focused on strengthening the judiciary and tackling corruption.
- Plans to reinvigorate reform of the civil service and public administration are important for the investment climate.
- In several of these areas, plans have been well-advanced for some time, which should make early implementation feasible.

*Source: _cr08309 - 40. Monetary tightening will require greater exchange rate flexibility.*

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

### _cr08309 - 45.      It is recommended that the next Article IV consultation take place on the

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

### Selected Macroeconomic Indicators, 2004–09 (Table 1) — Production, Prices, Public Sector, Money, External Sector
- Real GDP (Annual percent change): 2004: 7.2; 2005: 6.4; 2006: 7.4; 2007: 8.1; 2008: 7.8; 2009: 7.3
- Consumer prices (Period average): 2004: 10.9; 2005: 12.7; 2006: 9.7; 2007: 9.0; 2008: 14.6; 2009: 13.8
- Consumer prices (End of period): 2004: 11.7; 2005: 10.9; 2006: 9.0; 2007: 11.9; 2008: 14.1; 2009: 13.5
- GDP deflator (Annual percent change): 2004: 20.1; 2005: 19.2; 2006: 15.7; 2007: 13.5; 2008: 24.5; 2009: 14.8
- General government overall balance (In percent of GDP): 2004: 4.9; 2005: 8.2; 2006: 8.3; 2007: 6.8; 2008: 6.8; 2009: 4.4
- General government revenue (In percent of GDP): 2004: 36.6; 2005: 40.9; 2006: 39.5; 2007: 40.2; 2008: 40.7; 2009: 39.2
- General government expenditures (In percent of GDP): 2004–2009: 31.7; 32.8; 31.2; 33.4; 33.8; 34.8
- Primary balance (In percent of GDP): 2004: 6.1; 2005: 9.1; 2006: 9.1; 2007: 7.4; 2008: 7.3; 2009: 4.9
- Nonoil balance (In percent of GDP): 2004: -2.9; 2005: -4.6; 2006: -4.5; 2007: -3.9; 2008: -7.2; 2009: -7.6
- Base money (Annual percent change): 2004: 24.9; 2005: 31.7; 2006: 39.6; 2007: 33.1; 2008: 31.4; 2009: 28.3
- Ruble broad money (Annual percent change): 2004: 35.8; 2005: 38.6; 2006: 48.8; 2007: 47.5; 2008: 42.6; 2009: 38.5
- Export volumes (Annual percent change): 2004: 10.5; 2005: 4.7; 2006: 5.8; 2007: 4.6; 2008: 5.2; 2009: 5.4
  - Oil export volumes: 2004: 11.3; 2005: 3.2; 2006: 0.3; 2007: 5.4; 2008: 2.2; 2009: 2.2
  - Gas export volumes: 2004: 5.5; 2005: 3.7; 2006: -2.5; 2007: -5.4; 2008: 1.0; 2009: -1.5
  - Non-energy export volumes: 2004: 11.2; 2005: 6.9; 2006: 18.2; 2007: 7.3; 2008: 13.4; 2009: 14.7
- Import volumes (Annual percent change): 2004: 21.3; 2005: 18.3; 2006: 24.0; 2007: 26.0; 2008: 29.3; 2009: 24.0
- Total merchandise exports, fob (In billions of U.S. dollars): 2004: 183.2; 2005: 243.8; 2006: 303.6; 2007: 355.5; 2008: 522.4; 2009: 561.6
- Total merchandise imports, fob (In billions of U.S. dollars): 2004: -97.4; 2005: -125.4; 2006: -164.3; 2007: -223.4; 2008: -312.9; 2009: -389.6
- External current account (In billions of U.S. dollars): 2004: 59.5; 2005: 84.4; 2006: 94.4; 2007: 78.3; 2008: 150.1; 2009: 106.4
- External current account (In percent of GDP): 2004: 10.1; 2005: 11.0; 2006: 9.5; 2007: 6.1; 2008: 8.1; 2009: 4.6
- Gross international reserves (In billions of U.S. dollars): 2004: 124.5; 2005: 182.2; 2006: 303.7; 2007: 476.4; 2008: 660.7; 2009: 828.8
- Reserves in months of imports: 2004: 11.4; 2005: 13.3; 2006: 17.4; 2007: 20.2; 2008: 20.5; 2009: 20.9
- Memorandum: Nominal GDP (In billions of rubles): 2004: 17,048; 2005: 21,625; 2006: 26,880; 2007: 32,987; 2008: 44,270; 2009: 54,546
- World oil price (U.S. dollars per barrel, WEO): 2004: 37.85; 2005: 53.46; 2006: 64.37; 2007: 71.11; 2008: 116.5; 2009: 125.0

### Balance of Payments, 2004–09 (Table 2) — Current Account, Capital and Financial Account, Overall Balance
- Current Account (In billions of U.S. dollars): 2004: 59.5; 2005: 84.4; 2006: 94.4; 2007: 78.3; 2008: 150.1; 2009: 106.4
- Trade Balance (In billions of U.S. dollars): 2004: 85.8; 2005: 118.4; 2006: 139.3; 2007: 132.0; 2008: 209.6; 2009: 172.0
  - Exports (In billions of U.S. dollars): 2004: 183.2; 2005: 243.8; 2006: 303.6; 2007: 355.5; 2008: 522.4; 2009: 561.6
    - Non-energy exports: 2004: 83.0; 2005: 94.9; 2006: 112.8; 2007: 136.9; 2008: 162.6; 2009: 179.8
    - Energy exports: 2004: 100.2; 2005: 148.9; 2006: 190.8; 2007: 218.6; 2008: 359.8; 2009: 381.8
      - Oil: 2004: 78.3; 2005: 117.2; 2006: 147.0; 2007: 173.7; 2008: 293.4; 2009: 322.6
      - Gas: 2004: 21.9; 2005: 31.7; 2006: 43.8; 2007: 44.8; 2008: 66.5; 2009: 59.2
  - Imports (In billions of U.S. dollars): 2004: -97.4; 2005: -125.4; 2006: -164.3; 2007: -223.4; 2008: -312.9; 2009: -389.6
- Services (In billions of U.S. dollars): 2004: -12.7; 2005: -13.9; 2006: -13.7; 2007: -19.8; 2008: -17.1; 2009: -24.2
- Income (In billions of U.S. dollars): 2004: -12.8; 2005: -19.0; 2006: -29.6; 2007: -30.4; 2008: -34.5; 2009: -30.6
  - Public sector interest (net): 2004: -2.2; 2005: 0.5; 2006: 7.8; 2007: 16.0; 2008: 15.7; 2009: 28.3
  - Other income: 2004: -10.6; 2005: -19.4; 2006: -37.5; 2007: -46.4; 2008: -50.2; 2009: -58.9
- Capital and financial account (In billions of U.S. dollars): 2004: -6.4; 2005: -11.7; 2006: 6.9; 2007: 84.2; 2008: 34.2; 2009: 61.7
- Overall balance (In billions of U.S. dollars): 2004: 46.7; 2005: 64.4; 2006: 108.7; 2007: 148.9; 2008: 184.3; 2009: 168.1
- Net international reserves financing (Financing row): -46.7; -64.4; -108.7; -148.9; -184.3; -168.1
  - Gross reserves ( - increase): -45.2; -61.5; -107.5; -148.9; -184.3; -168.1
- Memorandum: Gross reserves 1/ (In billions of U.S. dollars): 2004: 124.5; 2005: 182.2; 2006: 303.7; 2007: 476.4; 2008: 660.7; 2009: 828.8
- Current account (in percent of GDP): 2004: 10.1; 2005: 11.0; 2006: 9.5; 2007: 6.1; 2008: 8.1; 2009: 4.6
- World oil price ($/barrel) (WEO): 2004: 37.85; 2005: 53.46; 2006: 64.37; 2007: 71.11; 2008: 116.5; 2009: 125.0

### Financial Soundness Indicators, 2002–08 (Table 3)
- Regulatory capital to risk-weighted assets (2002–2008): 19.1; 19.1; 17.0; 16.0; 14.9; 15.5; 15.3
- Nonperforming loans to total gross loans (2002–2008): 5.6; 5.0; 3.3; 2.6; 2.4; 2.5; 2.4
- Sectoral distribution of loans to total loans (selected): Industry: 36.7; 33.3; 28.0; 22.1; 20.5; 18.3; 18.2
- Individuals (share of loans to total loans): 8.0; 11.5; 16.2; 19.6; 23.9; 24.8; 24.7
  - House mortgages (included): ...; ...; 0.5; 1.0; 3.0; 5.1; 5.5
- Return on assets: 2.6; 2.6; 2.9; 3.2; 3.3; 3.0; 0.7
- Return on equity: 18.0; 17.8; 20.3; 24.2; 26.3; 22.7; 4.8
- Liquid assets to total assets: 39.1; 36.1; 30.4; 27.4; 26.8; 24.8; 23.9
- Customer deposits to total (noninterbank) loans (2002–2008): 24.8; 27.2; 27.9; 28.5; 27.3; 25.6; ...
- Data for 2008 is as of April 1, 2008.

### Indicators of External Vulnerability, 2003–07 (Table 4)
- Public sector debt (In percent of GDP): 2003: 31.6; 2004: 23.1; 2005: 14.2; 2006: 9.1; 2007: 7.3
- Broad money (percent change, 12-month basis): 2003: 51.6; 2004: 35.8; 2005: 38.6; 2006: 48.8; 2007: 47.5
- Private sector credit (percent change, 12-month basis): 2003: 46.6; 2004: 46.7; 2005: 34.2; 2006: 48.5; 2007: 48.5
- Exports (percent change in US$): 2003: 26.7; 2004: 34.8; 2005: 33.1; 2006: 24.5; 2007: 17.1
- Imports (percent change in US$): 2003: 24.8; 2004: 28.0; 2005: 28.8; 2006: 31.0; 2007: 36.0
- Current account balance (In billions of US$): 2003: 35.4; 2004: 59.5; 2005: 84.4; 2006: 94.4; 2007: 78.3
- Gross official reserves (In billions of US$): 2003: 76.9; 2004: 124.5; 2005: 182.2; 2006: 303.7; 2007: 476.4
- Short-term foreign liabilities of the financial sector (In billions of US$): 2003: 9.1; 2004: 9.1; 2005: 9.8; 2006: 20.7; 2007: 30.5
- Official reserves in months of imports GS: 2003: 8.9; 2004: 11.4; 2005: 13.3; 2006: 17.4; 2007: 20.2
- Total short-term external debt to reserves: 2003: 81.8; 2004: 91.1; 2005: 95.1; 2006: 55.8; 2007: 36.8
- Stock market index (RTS index, end of period): 2003: 567.3; 2004: 614.1; 2005: 1125.6; 2006: 1921.9; 2007: 2290.5
- Foreign currency debt rating (S&P long-term foreign currency debt rating, eop): 2003: BBBB+; 2004: BBBB; 2005: BB+; 2006: BBB+

### External Debt Sustainability Framework, Projections and Assumptions (Table 5 excerpt)
- Baseline external debt (percent of GDP): 2003: 43.1; 2004: 36.2; 2005: 33.7; 2006: 31.4; 2007: 35.6; 2008: 30.1; 2009: 29.7; 2010: 29.9; 2011: 30.7; 2012: 32.0; 2013: 33.7
- Change in external debt: 2003: -1.0; 2004: -6.9; 2005: -2.6; 2006: -2.2; 2007: 4.2; 2008: -5.5; 2009: -0.4; 2010: 0.2; 2011: 0.8; 2012: 1.3; 2013: 1.7
- Identified external debt-creating flows (lines 4+8+9), 2003–2013: -16.7; -22.1; -19.1; -18.7; -15.1; -10.5; -6.9; -3.6; -1.5; 0.0; 1.2
- Current account deficit, excluding interest payments: 2003: -10.3; 2004: -11.9; 2005: -12.7; 2006: -11.2; 2007: -7.8; 2008: -9.2; 2009: -5.9; 2010: -3.2; 2011: -1.3; 2012: 0.1; 2013: 1.3
- Exports (percent of GDP): 2003: 35.3; 2004: 34.4; 2005: 35.2; 2006: 33.9; 2007: 30.6; 2008: 31.2; 2009: 27.0; 2010: 23.0; 2011: 20.3; 2012: 18.1; 2013: 16.3
- Imports (percent of GDP) — series listed starting 2010: 23.9; 22.1; 21.5; 21.2; 21.9; 20.8; 20.6; 20.1; 19.3; 18.5; 17.8 (layout matches table)
- Automatic debt dynamics (line 9): 2003: -6.7; 2004: -9.8; 2005: -6.6; 2006: -6.0; 2007: -5.7; 2008: -0.8; 2009: -0.4; 2010: 0.1; 2011: 0.2; 2012: 0.4; 2013: 0.4
- Contribution from nominal interest rate (line 10): 2003: 2.0; 2004: 1.9; 2005: 1.6; 2006: 1.6; 2007: 1.7; 2008: 1.1; 2009: 1.3; 2010: 1.7; 2011: 1.8; 2012: 1.8; 2013: 1.9
- Contribution from real GDP growth (line 11): 2003: -2.6; 2004: -2.3; 2005: -1.8; 2006: -1.9; 2007: -2.0; 2008: -1.9; 2009: -1.8; 2010: -1.6; 2011: -1.5; 2012: -1.5; 2013: -1.5
- Residual, incl. change in gross foreign assets (line 13): 2003: 15.7; 2004: 15.2; 2005: 16.5; 2006: 16.5; 2007: 19.3; 2008: 5.0; 2009: 6.5; 2010: 3.9; 2011: 2.3; 2012: 1.3; 2013: 0.5
- External debt-to-exports ratio (in percent): 2003: 122.2; 2004: 105.2; 2005: 95.7; 2006: 92.8; 2007: 116.4; 2008: 96.5; 2009: 109.9; 2010: 130.1; 2011: 151.4; 2012: 176.5; 2013: 206.6
- Gross external financing need (In billions of US dollars): 2003: 10.3; 2004: 6.7; 2005: 3.8; 2006: 21.0; 2007: 95.9; 2008: 19.2; 2009: 69.0; 2010: 146.2; 2011: 221.4; 2012: 299.1; 2013: 393.9
- Gross external financing need (in percent of GDP): 2003: 2.4; 2004: 1.1; 2005: 0.5; 2006: 2.1; 2007: 7.4; 2008: 1.0; 2009: 3.0; 2010: 5.2; 2011: 6.7; 2012: 7.6; 2013: 8.5
- Key macroeconomic assumptions (selected):
  - Real GDP growth (percent): 2008: 7.3; 2009: 6.7; 2010: 6.1; 2011: 5.7; 2012: 5.5
  - GDP deflator in US dollars (change in percent): 2008: 33.5; 2009: 15.8; 2010: 13.3; 2011: 12.3; 2012: 11.7; 2013: 11.5
  - Nominal external interest rate (percent): 2008: 4.6; 2009: 5.5; 2010: 7.0; 2011: 7.1; 2012: 7.1; 2013: 7.1
  - Growth of exports (US$ terms, percent): 2008: 46.7; 2009: 7.7; 2010: 2.8; 2011: 5.0; 2012: 5.7; 2013: 5.7
  - Growth of imports (US$ terms, percent): 2008: 36.8; 2009: 23.1; 2010: 17.8; 2011: 14.6; 2012: 13.3; 2013: 12.7
  - Current account balance, excluding interest payments (percent of GDP): 2008: 9.2; 2009: 5.9; 2010: 3.2; 2011: 1.3; 2012: -0.1; 2013: -1.3
- Scenario with key variables at their historical averages (line shown partially): 30.1; 26.4; 19.8; 11.9; 3.5; -5.1; -0.2 (table layout)

### Fiscal Operations, 2004–09 (Table 6)
- General government total revenue (In percent of GDP): 2004: 36.6; 2005: 40.9; 2006: 39.5; 2007: 40.2; 2008: 40.7; 2009: 39.2
  - Oil revenue (In percent of GDP): 2004: 7.8; 2005: 12.7; 2006: 12.9; 2007: 10.7; 2008: 14.0; 2009: 12.0
  - Corporate profit tax: 5.1; 6.2; 6.2; 6.6; 6.2; 6.2
  - Personal income tax: 3.4; 3.3; 3.5; 3.8; 3.8; 3.8
  - VAT: 6.3; 6.8; 5.6; 6.9; 5.5; 5.6
  - Custom tariffs: 5.0; 7.5; 8.3; 7.0; 9.0; 8.0
- Total expenditure (In percent of GDP): 2004: 31.7; 2005: 32.8; 2006: 31.2; 2007: 33.4; 2008: 33.8; 2009: 34.8
- Interest (In percent of GDP): 2004: 1.2; 2005: 1.0; 2006: 0.7; 2007: 0.6; 2008: 0.5; 2009: 0.5
- Primary balance (In percent of GDP): 2004: 6.1; 2005: 9.1; 2006: 9.1; 2007: 7.4; 2008: 7.3; 2009: 4.9
- Non-oil primary balance (In percent of GDP): 2004: -1.7; 2005: -3.6; 2006: -3.8; 2007: -3.3; 2008: -6.7; 2009: -7.1
- Federal government overall balance (In percent of GDP): 2004: 4.3; 2005: 7.5; 2006: 7.4; 2007: 6.2; 2008: 6.7; 2009: 4.3
- Memorandum: World oil price: 2004: 37.85; 2005: 53.46; 2006: 64.37; 2007: 71.11; 2008: 116.5; 2009: 125.0
- Memorandum: Russian oil price: 2004: 31.04; 2005: 45.25; 2006: 56.36; 2007: 64.31; 2008: 109.7; 2009: 118.2
- General government debt (In percent of GDP): 2004: 23.1; 2005: 14.2; 2006: 9.1; 2007: 7.3; 2008: 7.8; 2009: 8.4
- Current account balance (In percent of GDP): 2004: 10.1; 2005: 11.0; 2006: 9.5; 2007: 6.1; 2008: 8.1; 2009: 4.6
- Real GDP (percent growth): 2004: 7.2; 2005: 6.4; 2006: 7.4; 2007: 8.1; 2008: 7.8; 2009: 7.3
- CPI (percent growth; average): 2004: 11.7; 2005: 10.9; 2006: 9.7; 2007: 9.0; 2008: 14.6; 2009: 13.8

### Federal Government Budget, 2007–11 (Table 7 excerpt)
- Revenue (In percent of GDP) — series with multiple years and projections present; selected quoted lines show revenue and oil revenue split in planning years (table layout indicates projections for 2009–2011).
- Oil Stabilization/Reserve Fund and National Welfare Fund series presented in memorandum items (values shown for various years including 10.0 and 12.7).

### Monetary Accounts, 2005–09 (Table 8)
- Base money (In billions of rubles) — selected entries: Dec. 2005: 2,299; Dec. 2006: 3,208; Dec. 2007: 3,687; Dec. 2008: 5,608; Dec. 2009 (Proj.): 7,196
- Currency issued (In billions of rubles): 2005 Dec.: 2,195; 2006 Dec.: 3,062; 2007 Dec.: 3,470; 2008 Dec.: 5,385; 2009 Dec. (Proj.): 6,878
- Net international reserves (NIR) (In billions of rubles): 2005 Dec.: 5,245; 2006 Dec.: 7,998; 2007 Dec.: 10,577; 2008 Dec.: 11,694; 2009 Dec. (Proj.): 12,024
- GIR (in billions of U.S. dollars): 2005 Dec.: 182.2; 2006 Mar.: 303.7; 2006 Dec.: 336.8; 2007 Dec.: 401.7; 2008 Dec.: 410.1; 2009 Dec. (Proj.): 476.4
- Broad money (In billions of rubles): 2005 Dec.: 7,224; 2006 Dec.: 10,151; 2007 Dec.: 12,082; 2008 Dec.: 14,638; 2009 Dec. (Proj.): 20,342
- Ruble broad money (In billions of rubles): 2005 Dec.: 6,046; 2006 Dec.: 8,996; 2007 Dec.: 10,874; 2008 Dec.: 13,272; 2009 Dec. (Proj.): 18,926
- Net foreign assets of commercial banks (In billions of U.S. dollars, negative signs): -12.0; -41.8; -32.6; -66.1; -62.0; -72.3; -62.8; -78.8; -112.5; -164.6 (series across quarters)
- Nominal GDP (in billions of rubles) (selected): 2006: 21,625; 2007: 26,880; 2008: 32,987; 2009: 44,270; 2010: 54,546
- CPI inflation (eop, 12-month change) (selected): 2006: 10.9; 2007: 9.0; 2008: 7.4; 2009: 8.5; 2010: 9.4; 2011: 11.9; 2012: 13.3; 2013: 14.3; 2014: 14.1; 2015: 13.5

### Macroeconomic Framework under Baseline Scenario, 2005–13 (Table 9) — Savings-Investment, Government Accounts, BOP, Growth, Prices
- Overall economy: National savings (percent of GDP): 2005: 31.1; 2006: 30.9; 2007: 30.6; 2008: 33.3; 2009: 31.8; 2010: 30.2; 2011: 29.0; 2012: 27.9; 2013: 26.8
- National savings - investment (current account, percent of GDP): 2005: 11.0; 2006: 9.5; 2007: 6.1; 2008: 8.1; 2009: 4.6; 2010: 1.5; 2011: -0.5; 2012: -2.0; 2013: -3.2
- Government revenues (percent of GDP): 2005: 40.9; 2006: 39.5; 2007: 40.2; 2008: 40.7; 2009: 39.2; 2010: 37.6; 2011: 36.4; 2012: 35.5; 2013: 34.8
- Government overall balance (percent of GDP): 2005: 8.2; 2006: 8.3; 2007: 6.8; 2008: 6.8; 2009: 4.4; 2010: 3.3; 2011: 2.8; 2012: 1.7; 2013: 0.8
- External current account (In billions of U.S. dollars): 2005: 84.4; 2006: 94.4; 2007: 78.3; 2008: 150.1; 2009: 106.4; 2010: 41.2; 2011: -17.5; 2012: -77.8; 2013: -147.7
- Official reserves (In billions of U.S. dollars): 2005: 182.2; 2006: 303.7; 2007: 476.4; 2008: 660.7; 2009: 828.8; 2010: 956.5; 2011: 1,062.4; 2012: 1,159.7; 2013: 1,250.1
- Real GDP growth (percent): 2005: 6.4; 2006: 7.4; 2007: 8.1; 2008: 7.8; 2009: 6.7; 2010: 6.1; 2011: 5.7; 2012: 5.5
- CPI inflation, end of period (percent): 2005: 10.9; 2006: 9.0; 2007: 11.9; 2008: 14.1; 2009: 13.5; 2010: 11.5; 2011: 10.5; 2012: 10.0; 2013: 9.5
- Nominal GDP (billions of U.S. dollars): 2005: 764; 2006: 989; 2007: 1,290; 2008: 1,855; 2009: 2,306; 2010: 2,787; 2011: 3,320; 2012: 3,921; 2013: 4,611
- World oil price (U.S. dollars per barrel, WEO) in baseline: 2008: 116.5; 2009: 125.0; 2010–2013: 123.5; 123.5; 123.5; 123.8
- Net international investment position (percent of GDP): 2005: -6.4; 2006: -6.4; 2007: 1.2; 2008: 8.9; 2009: 11.8; 2010: 11.2; 2011: 8.9; 2012: 5.5; 2013: 1.5

### Macroeconomic Framework under Alternative Scenario, 2005–13 (Table 10)
- External current account (In billions of U.S. dollars): 2005: 84.4; 2006: 94.4; 2007: 78.3; 2008: 150.1; 2009: 106.4; 2010: 28.5; 2011: -61.0; 2012: -168.4; 2013: -294.2
- Official reserves (In billions of U.S. dollars): 2005: 182.2; 2006: 303.7; 2007: 476.4; 2008: 660.7; 2009: 828.8; 2010: 943.3; 2011: 1,004.2; 2012: 1,008.0; 2013: 946.8
- Real GDP growth (percent) under alternative scenario: 2008: 7.3; 2009: 6.3; 2010: 5.6; 2011: 5.1; 2012: 4.7
- CPI inflation, end of period (percent) under alternative scenario: 2008: 14.1; 2009: 13.5; 2010: 13.5; 2011: 13.0; 2012: 12.5
- Nominal GDP (billions of U.S. dollars) under alternative scenario: 2008: 1,855; 2009: 2,306; 2010: 2,806; 2011: 3,401; 2012: 4,108; 2013: 4,946

### Public Sector Debt Sustainability Framework, 2003–13 (Table 11 excerpt)
- Baseline public sector debt (In percent of GDP): 2003: 31.6; 2004: 23.1; 2005: 14.2; 2006: 9.1; 2007: 7.3; 2008: 7.8; 2009: 8.4; 2010: 9.0; 2011: 9.5; 2012: 9.8; 2013: 9.9
- Foreign-currency denominated share (percent of GDP): 2003: 24.6; 2004: 17.8; 2005: 10.7; 2006: 4.9; 2007: 3.6; 2008: 2.0; 2009: 1.4; 2010: 1.1; 2011: 0.7; 2012: 0.5; 2013: 0.4
- Change in public sector debt (percent of GDP): 2003: -10.5; 2004: -8.5; 2005: -8.9; 2006: -5.2; 2007: -1.8; 2008: 0.5; 2009: 0.6; 2010: 0.6; 2011: 0.4; 2012: 0.3; 2013: 0.1
- Identified debt-creating flows (percent of GDP): 2003: -11.0; 2004: -10.1; 2005: -6.1; 2006: -6.5; 2007: -2.9; 2008: 0.4; 2009: 0.6; 2010: 0.6; 2011: 0.4; 2012: 0.3; 2013: 0.1
- Primary deficit (excluding deposits in oil funds from revenue) (percent of GDP): 2003: -3.1; 2004: -3.0; 2005: -2.7; 2006: -3.7; 2007: -1.6; 2008: 1.9; 2009: 1.6; 2010: 1.6; 2011: 1.4; 2012: 1.3; 2013: 1.1
- Revenue (excluding deposits in oil funds) (percent of GDP): 2003: 36.3; 2004: 33.5; 2005: 34.5; 2006: 34.2; 2007: 34.4; 2008: 31.5; 2009: 32.7; 2010: 32.3; 2011: 31.8; 2012: 32.1; 2013: 32.4
- Primary (noninterest) expenditure (percent of GDP): 2003: 33.1; 2004: 30.5; 2005: 31.8; 2006: 30.4; 2007: 32.8; 2008: 33.4; 2009: 34.3; 2010: 33.9; 2011: 33.2; 2012: 33.4; 2013: 33.5
- Automatic debt dynamics (percent of GDP): 2003: -7.9; 2004: -7.0; 2005: -3.4; 2006: -2.8; 2007: -1.4; 2008: -1.5; 2009: -1.0; 2010: -0.9; 2011: -1.0; 2012: -1.0; 2013: -1.0
- Public sector debt-to-revenue ratio (percent): 2003: 87.2; 2004: 69.0; 2005: 41.3; 2006: 26.5; 2007: 21.2; 2008: 24.7; 2009: 25.6; 2010: 27.9; 2011: 29.7; 2012: 30.4; 2013: 30.6
- Gross financing need (In billions of U.S. dollars) series: 6.0; -22.1; -53.0; -74.3; -78.3; -113.4; -95.9; -85.1; -84.9; -57.3; -26.8 (table layout)
- Stress tests: Scenario with key variables at their historical averages and scenario with no policy change (constant primary balance) in 2007–12 shown (numbers listed in table).

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

### ANNEX I. RUSSIAN FEDERATION: FUND RELATIONS

### ANNEX I. RUSSIAN FEDERATION: FUND RELATIONS (As of May 31, 2008)

### Membership and Status
- Membership Status: Joined 06/01/1992; Article VIII.
- The Russian Federation accepted the obligations of Article VIII, Sections 2, 3, and 4 of the IMF Articles of Agreement with effect from June 1, 1996, and maintains an exchange system free of restrictions on the making of payments and transfers for currents international transactions.
- Article IV Consultation: Russia is on the standard 12-month consultation cycle. The last consultation was concluded on September 12, 2007.

### IMF Account Balances and SDR Department
- General Resources Account (SDR Million / Percent of Quota):
  - Quota: 5,945.40 — 100.00
  - Fund holdings of currency: 5,708.69 — 96.02
  - Reserve position: 236.79 — 3.98
- SDR Department:
  - Holdings: 0.50 — n.a.

### Outstanding Operations and Recent Financial Arrangements
- Outstanding Purchases and Loans: None
- Latest Financial Arrangements (Type / Approval Date / Expiration Date / Amount Approved (SDR million) / Amount Drawn (SDR million)):
  - Stand-by — 07/28/99 — 12/27/00 — 3,300.00 — 471.43
  - EFF — 03/26/96 — 03/26/99 — 6,305.57 — 1,443.45
  - Of which SRF — 07/20/98 — 03/26/99 — 3,992.47 — 675.02
  - EFF — 03/26/96 — 03/26/99 — 6,901.00 — 4,336.26
- Projected Obligations to Fund: None
- Implementation of HIPC Initiative: Not Applicable
- Implementation of MDRI Assistance: Not Applicable

### Exchange Arrangements and Operational Details
- De jure arrangement: managed float with no pre-determined path for the exchange rate.
- The Central Bank of the Russian Federation (CBR) sets and announces official exchange rates of foreign currencies against the ruble daily, based on ruble quotes against the dollar on the internal foreign exchange market and quotes of other foreign currencies against the dollar on the global exchange market.
- The CBR intervenes in both interbank currency exchanges and the over-the-counter interbank market to limit fluctuations in the exchange rate of the ruble against a basket of the euro and dollar in the short run. The dollar is the main intervention currency.
- De facto arrangement change: as a result of the stability of the ruble against the euro-dollar basket, the de facto exchange rate arrangement of Russia will be changed, with a starting date of February 1, 2006, from managed floating with no predetermined path for the exchange rate to a conventional fixed peg to a composite.

### FSAP Participation, ROSCs, and Resident Representation
- FSAP: Russia participated in the Financial Sector Assessment Program during 2002; the FSSA report was discussed by the Board in May 2003 (IMF Country Report No. 03/147). An FSAP update took place in the fall of 2007. The FSSA report is scheduled for discussion by the Board in August 2008, at the time of the 2008 Article IV discussion.
- ROSCs:
  - Fiscal Transparency ROSC mission visited Moscow in July 2003 (headed by Peter Heller, FAD).
  - Data ROSC module mission in October 2003 (led by Armida San Jose, STA).
- Resident Representatives:
  - Mr. Neven Mates, Senior Resident Representative, since October 1, 2004.

---

### ANNEX II. RUSSIAN FEDERATION: RELATIONS WITH THE WORLD BANK GROUP

### Country Partnership Strategy and General Orientation
- The World Bank Group activities in Russia are guided by the three-year Country Partnership Strategy (FY07–09) endorsed by the Bank’s Board in December 2006.
- CPS orientation:
  - Federal government will limit new borrowing over the CPS period; use of guarantees, sub-national borrowing, and new fee-for-service arrangements for investment and policy advice likely to grow.
  - Focus on select regions: economic analysis, regional development strategies, and related investment projects.
  - IFC and MIGA operations will remain substantial (Russia is IFC’s and MIGA’s largest exposure).
  - Successful transition to new cooperation modalities will involve increased coordination among IBRD, IFC and MIGA.

### CPS Primary Objectives
- The CPS envisions partnership for realization of four primary objectives:
  - (a) sustaining rapid growth,
  - (b) improving public sector management and performance,
  - (c) improving the delivery of social services,
  - (d) enhancing Russia’s global role.

### Major Areas of Bank Group Activities — (a) Sustaining rapid growth
- Macroeconomic policy, fiscal sustainability, and management of large external inflows:
  - Bank contributions via Russian Economic Reports, on-demand policy notes and knowledge sharing; advisory services including training and impact monitoring related to WTO accession.
  - Technical assistance interest on alternative uses for windfall oil revenues and development of institutional framework for managing a growing diversified portfolio of foreign assets.
  - Bank preparing a larger study on long-term fiscal risks and fiscal sustainability.
  - April 2008: Bank of Russia and World Bank Treasury signed a fee-based services agreement whereby Treasury will provide technical support in internal investment management capacity for a period of 3 to 4 years.
- Investment climate monitoring and policy advice:
  - Continuation of BEEPS surveys, regional investment climate assessments, and administrative barriers studies by FIAS for interested regions.
  - Bank and MIGA regional capacity building and investment promotion programs for attracting FDI (example: Rostov Region).
  - WBI to continue capacity-building activities related to investment climate assessments.
- Supporting energy efficiency:
  - World Bank jointly with the IFC preparing a study on energy efficiency to provide senior policymakers with comprehensive analysis and policy recommendations.
- Supporting Government investment and PPPs:
  - On-going projects: land registration and national cadastre development.
  - Possible partial risk guarantees for the power sector to attract investment for modernization and capacity increases.
  - Regular and reimbursable TAs supporting PPP development across sectors.
  - Largest Bank fee-for-service portfolio belongs to the City of St. Petersburg, includes Western High Speed Diameter, Orlovsky tunnel, NADEX and Pulkovo airport.
  - Potential cooperation with VneshEconomBank (VEB) to develop capacity for large-scale PPPs and joint PPP projects.
  - Support for microfinance sector investment program, focusing on financial cooperatives and integration into the financial system.
- Working with regions: engines of growth and barriers removal:
  - Two major knowledge events on regional development strategies in early 2008: discussion of World Development Report on regional disparities and Regional Development Strategies workshop.
  - Finalizing a Country Economic Memorandum focused on barriers to growth at the sub-national level and regional agglomerations.
  - Fee-for-service arrangements with regions to support preparation of regional investment strategies and growth analyses.
- Supporting investments in priority regional areas:
  - IFC/Bank Sub-National Development Program supports priority regional public investments; government interested in further developing this financing mechanism (direct lending to well-performing regions and municipalities without sovereign guarantees).
  - Three such sub-national operations have been completed to date, including two in the Chuvash Republic and one in Petropavlosk municipality (Kamchatka).
  - Infrastructure focus: transport, logistics, and municipal infrastructure.
  - MIGA role: support FDI in infrastructure at sub-sovereign level, including water and solid waste sectors.
  - Potential Bank-IFC-VEB partnerships for regional infrastructure and Subnational Program projects.
- Providing direct support to the private sector (IFC priorities):
  - IFC will finance projects with important spill-over effects, in sectors of comparative advantage, and projects increasing product/service quality outside Moscow.
  - Continued concentration in financial sector with priorities:
    - (i) building long-term relationships with medium-sized independent private regional banks to increase competition and services;
    - (ii) supporting introduction of specialized banking products including mortgage financing, consumer finance and leasing;
    - (iii) supporting privatization of state-owned banks when requested; and
    - (iv) supporting development and use of new financial instruments, such as partial guarantees of local currency bonds and securitization.
- Continuing IFC advisory work through the Private Enterprise Partnership and FIAS:
  - Objectives: (a) increase development impact of investments via local supplier strengthening and community development; (b) build capacity of private banks to deliver new products including mortgage finance and financing for energy efficiency; (c) improve corporate governance and environmental sustainability through work with banks and real sector clients, including IFC investees.
  - FIAS to continue working with select regions to improve the business climate by assisting implementation of policies/instruments to kick-start markets of land and commercial real estate.
- MIGA activities:
  - Continue to support foreign investors through political risk guarantees, especially in infrastructure in coordination with the Bank.
  - Explore opportunities to support capital markets transactions, including asset-backed securitizations.
  - May promote and assist expansion of foreign banks in the Russian banking sector.
  - Potential further involvement in manufacturing, agribusiness and services sectors.

### Major Areas of Bank Group Activities — (b) Improving public sector management and performance
- Continued deepening of Bank engagement to modernize public sector institutions, improve government administration, judiciary, local self-government, and budgetary management at federal and sub-national levels, with expanded regional engagement.
- Modernizing selected public sector institutions through completion of on-going projects including tax modernization, customs development, cadastre and registration, fiscal federalism, performance-based budgeting, treasury development, and a statistical development project.
- Supporting government administrative reform:
  - Continued engagement at federal and sub-national levels, coordinating and implementing donor funds.
  - Emphasis on encouraging initiatives at sub-national level; sub-national work concentrated in the Southern Federal Okrug and North-West regions.
  - Fee-based advisory service supports Khanti-Mansiysk Okrug-Yugra on administrative streamlining and e-services portal development.
  - DFID Trust Fund (2007–10) provides support for selected regions that cannot afford fee-based services.
- Judicial reform engagement:
  - Recently approved project complements the 2007–11 Federal Targeted Program for judicial modernization; supports judicial reform (FY07) focusing on dispute resolution efficiency and judicial transparency.
  - Complementary grant from the Government of Japan to support Perm Krai and Leningradskaya Oblast on demand-side justice issues such as legal aid to the poor and juvenile justice.
  - Planned partnership with the Supreme Commercial Court and Ministry of Economic Development to support drafting framework legislation on administrative resolution of disputes, complaints handling, and individual bankruptcy law.
- Support for budgetary reforms:
  - Continued assistance in budgetary reform and performance-based budgeting.
  - Partner in scaling up the Fiscal Federalism Project (now financed by the Russian government) and its expansion to the municipal level.
- Reform of local self-government:
  - Ongoing dialogue and international experience sharing.
  - Launched study monitoring and assisting development of local self-government in Perm, Penza, and Adygeya regions.
  - Explore replicating Fiscal Federalism Project model for municipal capacity building.
- Investments in municipal development:
  - Completed Kazan Municipal Development Project; ongoing Saint Petersburg Economic Development Project.
  - Housing and Communal Services project awaiting signature (FY09).
  - Possible regional projects on water and heating system upgrades.
  - Proposed Cultural Heritage II project (FY09) to use cultural heritage and tourism for economic and social development in participating regions.
  - Stavropol pilot Local Initiatives Support project improves settlement-level social infrastructure; Bank working with Ministry of Regional Development on scaling up nationally.
- Supporting anti-corruption initiatives:
  - As a coherent national-level anti-corruption program may emerge, the Bank will explore possible constructive contributions.

*Source: _cr08309 - ANNEX I. RUSSIAN FEDERATION: FUND RELATIONS (As of May 31, 2008) and ANNEX II. RUSSIAN FEDERATION: RELATIONS WITH THE WORLD BANK GROUP*

### 5. In addition to continued general cooperation with the federal government, the Bank

### 5. In addition to continued general cooperation with the federal government, the Bank

### Sub-national focus on social service delivery
- Bank will concentrate much of its support for improving social service delivery at the sub-national (regional) level, in line with the Government's prioritization of the social sector in its medium-term program.
- Main activities: continuation of work in poverty, education, and health in cooperation with regions; monitoring of social trends and service delivery quality (joint with USAID); special employment-related activities in the Southern Federal Okrug (development of decentralized employment services, and labor integration of youth).
- Housing and communal services (HCS) identified as a critical area for improving living standards; government places high importance on improving HCS performance and delivery by communal enterprises.

- Continuation of the poverty work:
  - Emphasis moved to the regional level; continued cooperation with Rosstat and federal ministries and cooperation with DFID.
  - Bank working directly with regions on monitoring poverty and improving social assistance targeting.
  - Regional social protection strategies for Tver and some other regions will be developed with Bank assistance; successful cooperation models can be scaled up.

- Improving the health of the population:
  - Bank engagement on adult health and development of a national strategy to reverse strongly negative trends in premature mortality and morbidity.
  - Follow-up to earlier child welfare efforts: assist design and implementation of mechanisms for family support, preventive social welfare, and child care at federal and regional level (jointly with international donors).
  - Advocacy, public awareness, and information sharing with government leaders, public figures, private sector and NGOs to support needed government policies.
  - Advise on risk pooling, insurance, and sustainable health financing for federal and regional authorities.
  - IFC to continue working with private companies on occupational health programs, including HIV-AIDS issues.
  - Bank to implement on-going health projects and offer to scale up or modify existing models at the sub-national level; support development of public-private partnerships in health via TA from the Bank and direct financing by IFC to PPPs and/or purely private providers.
  - Lessons from the TB/AIDS project could be applied through more focused sub-national projects and TA.
  - Support for a few regional projects to remove environmental hotspots and address other environmental concerns posing major health risks.

- Modernization and improvement of education and vocational training:
  - Completion of current education projects to modernize the system and improve vocational training.
  - Bank to meet regional demands for sub-national education reform support.
  - Regional TA and possible projects: improve professional and vocational education systems, parallel local labor market assessments to improve local professional labor supply quality.
  - Possible focus on pre-school and early childhood education.
  - Bank's recently completed Youth Strategy provides recommendations for youth policy improvements with possible applications to Russia.

- Improvement in provision of housing and communal services:
  - Infrastructure support to focus on improving utility services and housing.
  - Large portfolio addressing heating, water, electricity, and other municipal services in selected regions: recently completed Kazan Municipal Development Project and electricity sector reform support project; on-going Saint Petersburg Economic Development, Municipal Heating, Municipal Water and Wastewater projects.
  - Bank preparing a program to support HCS reforms and investments on a grant basis allocated to regions competitively.
  - Large share of sub-national lending expected to focus on improving these services.

- Housing finance and energy efficiency through IFC's PEP program:
  - PEP focusing on housing finance and energy efficiency, complemented by IFC investments.
  - Primary Mortgage Development Project working to streamline mortgage lending process in Russia.
  - IFC's Sustainable Energy Efficiency Program: combines advisory and investment capacity; makes credit lines available to banks for on-lending for energy efficiency projects; provides TA to banks and private companies to raise lending volumes for energy-saving projects.
  - Program has disbursed its first credit line to Center Invest Bank in Rostov and currently has a US$60 million pipeline of potential deals across all regions of Russia.
  - IFC also runs programs supporting corporate governance in banking, improvement of forestry management practices in the Northwest, and development of local suppliers to the mining sector in Magadan.

### Enhancing Russia’s global role
- Bank committed to supporting Russia’s increasing global role and assisting in fulfilling global commitments (Climate Change and Biodiversity Conventions, pandemic disease initiatives).
- Bank to share analysis and advocacy directed towards traditional DAC donors with Russian experts during the CPS period.

- Assistance in formulating an ODA strategy for Russia as an emerging donor:
  - Continue assistance on design of Russia’s development aid strategy and establishment of a national ODA system.
  - Support includes training/capacity events, information sharing, and advisory services.
  - Remain engaged with Russia on international policy initiatives developed under Russia’s G-8 presidency, including Russia’s priority themes for international assistance—quality of education, energy poverty, and controlling the spread of infectious diseases.
  - Government counterparts to be involved in policy dialogue on global food crisis and climate change.
  - Beginning with a high-level Emerging Donor Meeting in April 2006, Bank assisting Russia in organizing development aid seminars and international events.

- Providing access to Bank instruments for channeling Russian developmental assistance:
  - Bank to help prepare Africa debt-for-development swap and facilitate Russia contributions in multilateral trust funds such as Avian Flu Trust Fund, Education-For-All/Fast Track Initiatives.
  - Support design of Russia-supported programs like Malaria control in Africa, Global Village Energy Partnership, Quality of Basic Education.
  - Following increased Russia’s contributions to IDA15, Bank will work on developing ownership of IDA among Russian policy makers.
  - Seek increased engagement of Russian experts in development policy debates, participation in Bank’s work in other countries, and staff secondments to build capacity for aid allocation and management.

- Fulfilling international obligations related to global goods:
  - Assist Russia in developing procedures and mechanisms for activities under Climate Change and Biodiversity Conventions.
  - TA currently provided on introduction of low-carbon technologies and climate change mitigation.
  - If government introduces financial instruments for low-carbon technologies, Bank ready to support preparation and implementation of carbon-finance projects.
  - There are three GEF projects in the Bank’s pipeline awaiting establishment of a legal and institutional framework for regional-level introduction with federal oversight.
  - Additional projects on biodiversity and climate change could be prepared.
  - Continue participation in Ministerial Conference on Forest Law Enforcement and Governance in Europe and North Asia.

- Linking Russian companies to global markets:
  - IFC and MIGA to support expansion of Russia’s global role through South-South investment facilitation.
  - IFC to support reputable Russian clients investing in emerging markets.
  - MIGA to engage Russian companies planning investments in emerging markets through guarantees.

### Focus on Russian regions
- Bank working with federal government to identify a small subset of 6–10 regions for concentrated programs; selection to include wealthier, middle income, and poorer areas.
- Selection criteria:
  - (i) willingness and commitment of regional administration to work with the Bank;
  - (ii) past history of successful cooperation;
  - (iii) reform-orientation and competence of regional administration;
  - (iv) strategic importance and existence of similar regions for scaling up;
  - (v) region’s creditworthiness and potential interest in Bank operations (for wealthier or middle income regions).
- Following initial engagement, strategic directions and modalities of cooperation will be included in joint Memoranda of Understanding with leaders of focus regions.
- Bank involvement at regional level: targeted AAA diagnostics of local economy and investment climate, development of regional strategies, and selected lending operations.
- Bank to concentrate some work in poorer regions; priority list will include poorer regions.
  - IBRD engagement in poorer regions lacking creditworthiness will depend on participation in federal programs or donor coordination.
  - IFC will make special efforts to support private sector activities in poorer areas.
  - For poorer regions that have achieved creditworthiness, opportunities exist for fee-for-service activities or sub-national lending without sovereign guarantees.
  - Discussions on new instruments will pay particular attention to facilitating Bank work in poorer areas.

### ANNEX III — Statistical issues: summary of assessments and needs
- Overall assessment:
  - Economic and financial data provided to the Fund are broadly adequate for surveillance purposes.
  - Russian Federation has a comprehensive and timely statistical database with a wide range of regular publications, but difficulties remain in data accuracy and frequent revisions.
  - Russian Federation subscribed to the Special Data Dissemination Standard on January 31, 2005.
  - Authorities report data for IFS, GFSY, Direction of Trade Statistics, and Balance of Payments Statistics Yearbook.

- Data ROSC and legislation:
  - A draft data ROSC prepared in 1999–2000 was not published; a new data ROSC prepared in October 2003 was published on the IMF website in April 2004.
  - Federal legislation regulating the statistical system became effective on December 17, 2007.

- National accounts:
  - Rosstat compiles quarterly and annual national accounts using the 1993 System of National Accounts.
  - Chain-linking introduced into quarterly and annual national accounts in 2006; chain-linked data published for 2003 onwards.
  - Source data: surveys of businesses and households, supplemented by administrative data; efforts underway to improve coverage of small and medium enterprises.
  - GDP estimates compiled by type of economic activity and expenditure category; production approach considered more accurate.
  - Statistical discrepancy between production and expenditure approaches generally no more than two percent.
  - Data presented by income category; institutional sector accounts compiled, though financial account by institutional sector is not compiled.
  - Inadequate reporting by firms constrains national accounts improvement; revisions often not flagged when disseminated.

- Prices:
  - Rosstat compiles a national CPI of good quality (developed with Fund TA).
  - After inflation moderation, Rosstat stopped weekly publication of headline inflation in January 2003, retaining monthly reports; began publication of monthly core inflation.
  - Further improvements could follow a new household budget survey and improved treatment of seasonal items; World Bank and European Commission TACIS assistance available.
  - Rosstat also publishes a producer price index; State Customs Committee initiated development of foreign trade price indexes.
  - Monthly CPI and PPI, both Laspeyres indices (2000=100), cover all regions.
  - Rosstat publishes CPI indices for foodstuffs, non-food products, and services.
  - Weights of CPI components made available since 2006 while PPI components are not disclosed, complicating time series analysis.

- Government finance statistics:
  - Staff receives monthly information on federal revenues, expenditures, and financing; annual information for local governments and extrabudgetary funds.
  - Published functional classification of expenditure differs slightly from international standards; expenditure data by economic type need improvement and annual data are compiled with a long delay.
  - Domestic and external federal debt compiled monthly but made public only in summary form quarterly; no unified debt monitoring and reporting system.
  - Ongoing improvements under STA work program; scope remains for improved expenditure data.
  - Reform of budgetary accounting well advanced, including introduction of accrual accounting for whole of government.
  - In 2007 GFSY, data for central, local and general government reported through 2006 on both accrual and cash basis per GFS Manual 2001 methodology.
  - Beginning in 2007, the Treasury began reporting detailed government finance statistics for IFS publication on a cash basis.

- Monetary and financial statistics:
  - Monetary and financial statistics reasonably comprehensive and generally in accordance with international standards; classification and sectorization broadly in line with guidelines, except financial derivatives data not included.
  - Since 2006, monetary gold valued at current quotations set by the Central Bank of Russia (CBR).
  - Following 2003 data ROSC recommendations, authorities included all non-operational credit institutions in monetary statistics coverage and reclassified their deposits as restricted deposits.
  - CBR intends further compilation revisions to fully conform with Monetary and Financial Statistics Manual 2000.
  - Analytical accounts for monetary authorities and commercial banks reported for IFS publication 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 SRF completion.

- External sector statistics:
  - Balance of payments statistics compiled on the basis of BPM5.
  - Significant improvements achieved, but scope remains to improve coverage of components of current and capital and financial accounts.
  - Improving detail of financial account data would facilitate analysis of relatively complex flows.

*Source: _cr08309 - 5. In addition to continued general cooperation with the federal government, the Bank*

### 11.      Merchandise import data published by the State Customs Service tends to under-

### _cr08309 - 11.      Merchandise import data published by the State Customs Service tends to under-

### Statistical coverage and data quality
- Merchandise import data published by the State Customs Service tends to under-record transactions due to “shuttle trade,” smuggling, and undervaluation, as evidenced by large differences with partner country export data.
- The statistical agencies are seeking to reconcile their data with those of partner countries.
- The CBR has developed a methodology for calculating export and import transactions that are unrecorded by the customs authorities for use in balance of payments statistics.
- There is a need to improve the coverage and quality of surveys on direct investment and trade in services.
- Authorities plan to harmonize statistical methodologies for trade in services with those prescribed in the Manual on Statistics of International Trade in Services.

### International reserves, reserve reporting, and external debt
- 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 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 information 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.
- The CBR has started publishing quarterly debt service projections by sector and instruments.

### International investment position and banking-sector data
- The CBR publishes 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.

### Recent macroeconomic developments and outlook
- GDP growth has slowed somewhat but is set to remain well above potential; GDP growth has accelerated to an annual rate of more than 8 percent.
- Both private consumption and fixed investment have softened in recent months; construction activity also appears to be slowing.
- Staff project GDP growth to ease slightly in 2008 to 7¾ percent.
- Domestic demand growth has risen to an annual rate of 15 percent in real terms, significantly above estimates of potential growth.
- Headline CPI inflation was 15.1 percent (year-on-year) in June, the same level as in May.
- Core inflation rose from 14.5 percent in May to 15 percent in June.
- Staff’s end-year inflation projection: 14.1 percent.
- Staff note inflationary pressures remain strong and are broadening beyond food and energy.
- Real wage growth accelerated to about 16 percent annually, well above growth in labor productivity.
- The real effective exchange rate is moving close to staff’s estimate of its equilibrium.
- The procyclical fiscal stance: primary expenditures by the federal government rose by 15 percent in real terms in 2007; the non-oil deficit—excluding a one-off collection of tax arrears from Yukos—rose by 0.8 percent of GDP in 2007.
- The 2008 budget is set to increase the non-oil deficit of the federal government by 0.9 percent of GDP (fourth consecutive year of increase).

### Capital flows, reserves, and monetary policy
- Capital inflows recovered strongly; net capital inflows in the second quarter were about US$37 billion.
- Higher oil prices and capital inflows helped boost Russia’s international reserves by over US$56 billion over the same period.
- The CBR increased interest rates in mid July by 25 bps—the fourth such hike since the beginning of 2008.
- Compared to an estimated inflation rate of about 15 percent, the one-day repo rate is 7 percent, and the official refinancing rate is 11 percent.
- The CBR allowed somewhat greater day-to-day flexibility in the exchange rate; the currency basket has appreciated by only 0.9 percent since mid May.
- The CBR’s policy actions to date have had little impact on liquidity, which remains high due to fiscal relaxation and continued large unsterilized intervention.
- The CBR raised interest rates four times in 2008, for a combined increase of 100 bps, and increased reserve requirements twice.
- The CBR has allowed greater exchange rate volatility against the euro-dollar basket since June—the basket appreciated by 0.9 percent over June-July, 2008.
- Overnight interbank rates remain at the lower end of the usual trading range despite heavy FX intervention.

### Financial sector and risks
- The Russian banking system has proven relatively resilient to worldwide turmoil: many banks remain profitable, non-performing loan ratios are still relatively low, and depositor confidence is robust.
- Some banks that relied heavily on external borrowing had to curtail credit growth and restructure balance sheets.
- IMF/World Bank FSAP update recommended further strengthening of provisioning standards and implementation of consolidated supervision.
- Directors noted the risk that a significant policy-induced increase in real interest rates might have an adverse impact on the banking system after years of negative real interest rates and rapid lending growth.

### Executive Board assessment and policy recommendations
- Directors welcomed strong performance: higher and more broad-based economic growth supported by robust investment and productivity increases.
- Directors expressed concern about rising inflationary pressures and considered the current macroeconomic policy mix as contributing to overheating.
- Key Director recommendations:
  - Carefully reconsider the authorities’ policy stance to prevent price developments from being driven primarily by uncertain external developments.
  - Tighten monetary policy further and refocus monetary policy towards inflation reduction accompanied by greater exchange rate flexibility.
  - Consider that greater exchange rate flexibility would pave the way for an eventual move to inflation targeting, while acknowledging some Directors were cautious about early nominal exchange rate adjustment due to risks of speculative capital inflows.
  - Adhere to the medium-term fiscal strategy calling for a reduction in the non-oil deficit and avoid further fiscal stimulus until demand pressures ease.
  - Reconsider the pending supplementary budget in 2008 and avoid additional fiscal stimulus.
  - Continue to improve the regulatory and prudential framework in line with FSAP update recommendations.
  - Press ahead with structural reforms to improve the investment climate, eliminate infrastructure bottlenecks, strengthen the judiciary, tackle corruption, and reform the civil service and public administration.
  - Use plans to join the World Trade Organization as a catalyst to strengthen reform momentum.

### Selected key statistics (as reported)
- Headline CPI inflation: 15.1 percent (year-on-year) in June.
- Core inflation: 15 percent in June (up from 14.5 percent in May).
- Staff end-year inflation projection: 14.1 percent.
- Real wage growth: about 16 percent annually.
- Domestic demand growth: 15 percent (annual rate in real terms).
- GDP growth: accelerated to more than 8 percent; staff project 7¾ percent for 2008.
- Net capital inflows in Q2 2008: about US$37 billion.
- International reserves boosted by over US$56 billion over the same period.
- One-day repo rate: 7 percent.
- Official refinancing rate: 11 percent.
- CBR interest rate hikes in 2008: four hikes (including a 25 bps hike in mid July); combined increase of 100 bps.
- Currency basket appreciation: 0.9 percent since mid May; 0.9 percent over June-July, 2008.
- Federal government primary expenditures rise in 2007: 15 percent in real terms.
- Non-oil deficit change in 2007: +0.8 percent of GDP (excluding Yukos one-off).
- Projected increase in non-oil deficit in 2008 budget: +0.9 percent of GDP.

*Source: _cr08309 - 11.      Merchandise import data published by the State Customs Service tends to under-*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08309.pdf_