## _cr10246 — Executive Summary and Selected Excerpts

## Source details

**Canonical URL:** [_cr10246 — Executive Summary and Selected Excerpts](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10246.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10246.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10246.pdf.json)

---

### Mission and consultations
- Discussions for the 2010 Article IV consultation were held in Moscow during June 2–15.
- Mission composition: Mr. Thomsen (head), Mr. Kähkönen, Ms. Kozack, Messrs. Hofman and Tiffin, Ms. Zakharova (all EUR), Mr. Tuya (MCM, external expert), and Mr. Brekk (senior resident representative). Mr. Mozhin, Executive Director, also participated.
- The mission met with Deputy Prime Minister and Minister of Finance Kudrin, Central Bank of Russia (CBR) Governor Ignatiev, other senior officials, and representatives of financial institutions, corporations, and think tanks.

### Summary assessment and key recommendations
- Overall assessment:
  - The Russian economy improved after a deep recession, but the recovery is fragile.
  - Inflation has come down rapidly in the context of a large output gap and should remain in check in the near term.
  - The banking system is still under strain and credit is expected to recover only gradually.
  - With Russia likely to emerge from the crisis with lower potential growth, the key policy challenge is to withdraw the large fiscal stimulus as cyclical conditions normalize to avoid a renewed bout of rapid real appreciation and high inflation.
- Staff recommendations:
  - Response to the recession: Preserve the stabilization fund mechanism; authorities acted forcefully using buffers from pre-crisis taxing and saving of oil revenue and large reserves.
  - Fiscal policy: Consolidation should begin in 2010 and gather pace in 2011–12; reinvigorate public-sector reforms including pensions, health care, and social protection.
  - Monetary policy: Focus on inflation control in the context of a flexible exchange rate; recent greater exchange rate flexibility is welcome but commitment will be tested.
  - Financial sector policies: Improve provisioning standards; enhance CBR authority for consolidated supervision—including over connected lending.
  - Structural reforms: Improve the investment climate.

### Exchange rate regime and IMF obligations
- Exchange rate classification: “other managed arrangement” effective November 1, 2008.
- Article VIII obligations accepted with effect from June 1, 1996 (Sections 2, 3, and 4).
- Exchange system: free of restrictions on payments and transfers for current international transactions.
- Next Article IV consultation proposed on the standard 12-month cycle.

### I. Crisis recovery — A gradually improving economy
- 2009 contraction: The Russian economy contracted by 7.9 percent in 2009.
- Demand dynamics:
  - Domestic demand fell sharply in the first half of 2009 following plunging oil prices and an abrupt reversal of capital flows.
  - Private consumption and fixed investment declined strongly, compounded by a large rundown of inventories.
  - Net exports turned positive as imports contracted.
- Recent recovery:
  - After temporary softness in Q1 2010, short-term indicators point to a strengthening recovery.
  - All components of demand now appear to be expanding; growth increasingly driven by consumption, reflecting a recent 45 percent cumulative increase in pensions and other policy support.
- Inflation and labor market:
  - Headline inflation fell from 14 percent (y-o-y) in early 2009 to 6 percent in May 2010.
  - Core inflation has fallen to around 4¼ percent.
  - Unemployment fell to about 7½ percent in May (from a peak of 9 percent). Real wages and real disposable income strengthened, supporting private consumption.
- External accounts and balance of payments:
  - Current account surplus: 4 percent of GDP in 2009 (from about 6 percent in 2007 and 2008).
  - Export values declined by 36 percent; import values fell by 35 percent.
  - Current account recovered in the second half of 2009 and preliminary data indicate it strengthened appreciably in 2010 thus far.
  - Overall balance of payments remained in surplus; reserves increased by some $60 billion over the past 12 months.
  - The ruble has appreciated by about 20 percent in real effective terms since its trough in February 2009.

### Financial markets and banking system
- Market volatility and indicators:
  - Russia’s stock market index more than doubled in 2009.
  - Sovereign spreads fell from over 850 bps in late 2008 to below 140 bps in mid-April 2010; since then renewed European turmoil and oil price declines increased volatility.
  - Ruble depreciated by 7 percent against the dollar after mid-April 2010 turbulence; sovereign spreads have risen by some 120 bps and the stock market surrendered gains.
- Banking sector liquidity and strain:
  - Overdue loans: 6½ percent of total loans under Russian reporting standards.
  - Credit to the economy remained largely unchanged in nominal terms since January 2009.
  - Signs of deceleration in accumulation of overdue loans; some banks may release provisions to fund new loans later in the year.
  - Pre-provision income was relatively healthy in 2009, but falling interest rates squeezed interest margins.
  - Credit growth picked up modestly in March and April 2010.
- CGER results (2009–10) excerpts:
  - Macro balance approach: -3
  - External stability approach: -84
  - ERER approach: -511
  - Average: -53

### Policy response to the recession — Fiscal policy details
- Fiscal stimulus magnitude and composition:
  - General government nonoil deficit increased from 8¼ percent of GDP in 2008 to 15 percent of GDP in 2009.
  - The expansion of some 9 percent of GDP was largely permanent in form and much of the stimulus targeted low-multiplier areas (strategic sectors, defense and security).
  - Headline deficit swung from a surplus of 4¼ percent of GDP in 2008 to a deficit of 6¼ percent of GDP in 2009.
  - Russia’s public debt ratio is below 11 percent.
  - The deficit was financed by drawing down oil funds held at the CBR without significant risks to external stability.

### Monetary policy stance and interest rates
- CBR policy actions:
  - The CBR cut its refinancing rate by 525 bps to 7¾ percent from its peak in April 2009.
  - Declining inflation turned average real interest rates positive for the first time in many years.
  - Nominal interest rates remained high for most borrowers through much of 2009; deposit and lending rates have only recently begun to fall more quickly.
  - Interbank rates remained within the CBR’s policy corridor.
  - Exchange rate became more flexible: ruble appreciated by around 15 percent against the exchange rate basket since March 2009; short-run movements sometimes exceeded 4 percent in a single week.
  - CBR intervenes to avoid abrupt exchange rate changes while allowing greater day-to-day volatility; interventions are not aimed at further increasing international reserves but have the byproduct of reserve accumulation, involving sterilization and opportunity costs.
- Financial sector policy and withdrawal of crisis support:
  - Authorities are exiting extraordinary liquidity support; repo demand has effectively disappeared as banks repaid debt to the CBR ahead of schedule.
  - Withdrawal of liquidity, issuance of new CBR bonds, and pick-up in money demand largely sterilized the monetary impact of the fiscal expansion in 2009.
  - Regulatory forbearance (easier provisioning requirements) to be gradually brought back in line with pre-crisis norms as of July.
  - Lending limits for uncollateralized loans were reduced in February; interbank market guarantees are being unwound; collateral rules for nontraded assets are being strengthened.
  - An earlier-planned public bank-recapitalization scheme has been scrapped.
  - The CBR stands ready to reactivate facilities if the banking system comes under renewed pressure.
  - Footnote on relaxed loan classification requirements: under relaxed rules, a corporate (retail) loan became overdue if had been delinquent for 30 days (60 days)—up from 5 days (30 days) under the old rules; restructured loans could remain in original classification.

### Near-term outlook and risks
- Baseline growth and inflation projections:
  - GDP growth projected to reach 4¼ percent in 2010.
  - Annual growth expected to fall back to around 4 percent in 2011 absent sustained increases in oil prices.
  - Inflation projected to reach 6 percent (y-o-y) at end-2010 and 5½ percent at end-2011.
- Recovery drivers: consumption-led recovery as bank balance-sheet adjustment runs its course, banks cautiously expand lending, and real wages rise while unemployment falls.
- Risks:
  - Upside: higher oil prices, greater capital inflows, more rapid credit recovery.
  - Downside: external shocks (sovereign vulnerabilities in Europe), abrupt drop in oil prices, retrenchment in risk appetite triggering larger capital outflows given banking-sector liquidity overhang.
  - Few direct financial linkages due to modest role of foreign banks in Russia’s financial system.
  - A worse-than-expected Russian growth outcome would have regional knock-on effects mainly through remittances and trade.

### Regional spillovers (Box 1)
- Remittances:
  - Individual remittances from Russia to the CIS dropped by more than 30 percent in total during the crisis.
  - Armenia, Georgia, Kyrgyz Republic, Tajikistan, and Uzbekistan experienced drops in inflows by up to a third in 2009.
  - Remittances to Moldova declined by almost 40 percent.
- Trade:
  - Exports to Russia from CIS countries started declining in final quarter of 2008 and dropped by more than a third in 2009.
  - Finland saw exports to Russia drop by almost 50 percent in 2009.
- Financial:
  - Armenia, Kazakhstan, Kyrgyz Republic, and Tajikistan devalued currencies by almost 25 percent over 2008–09.
  - Real credit growth declined on average by over 60 percent in CCA countries since end-2007.
- Signs of recovery spillovers in 2010:
  - Remittances rebounding: remittances increased by 15 percent (y-o-y) in Tajikistan and more than 10 percent in Armenia in early 2010.
  - Moldova’s exports to Russia rebounded by over 40 percent in January–April 2010 after a 10 percent decline in 2009.

### Policy discussions — overarching priorities
- Medium-term fiscal consolidation is the overarching policy priority.
- Balanced growth depends on appropriately countercyclical fiscal policy to mitigate pressures for real appreciation and inflation, given limited prospects for continued large oil price increases.
- The oil fund mechanism (Reserve and National Welfare Funds) created room for a forceful crisis response; taxing and saving oil wealth remains important.
- Pre-crisis weaknesses included an increasingly inflationary policy mix: rising nonoil deficit and attempts to resist upward ruble pressure through FX interventions.

### Fiscal policy: consolidation through reform
- Key figures and outlook:
  - Underlying federal nonoil deficit projected to remain some 9 percent of GDP above its pre-crisis level in 2010.
  - Three-quarters of the increase in the nonoil deficit relative to pre-crisis levels reflects higher permanent measures; half attributable to higher pensions alone.
  - Nonstatutory spending is now only 9 percent of GDP—equal to the size of consolidation needed to reverse the stimulus and meet the government’s long-term target for the nonoil deficit of 4.7 percent of GDP by 2015.
- Recent fiscal developments:
  - Original 2010–12 medium-term budget targeted nonoil deficit declining to 9½ percent of GDP in 2012.
  - In June, a supplementary budget was passed leading to a slight increase in the federal nonoil deficit in 2010 compared to the original budget.
  - A second supplementary budget—entailing civil service wage increases—could be passed in the fall.
- Staff recommendations:
  - Begin fiscal consolidation in 2010 and step up in 2011–12.
  - Staff disagreed with the expansion implied by the 2010 supplementary budget and warned against another supplement in the fall.
  - Reducing the nonoil deficit to 9½ percent of GDP by 2012 remains broadly consistent with the outlook; the long-term target of 4.7 percent of GDP for the nonoil deficit remains an appropriate anchor.
- Reform and revenue options under consideration:
  - Gradual increase in retirement age; rationalization of social protection benefits through more rigorous means-testing.
  - Revenue measures considered: further raise excise taxes and the extraction tax on gas; introduce market-based valuation for property tax; streamline tax-breaks and privileges.
  - Staff noted most adjustment will need to be on the expenditure side through reforms and reductions in discretionary spending.
- Supplementary Budget for 2010 (as presented):
  - Total supplementary expenditures: 325.5 Rub bn, 0.7 GDP%
  - Additional transfers to pension fund: 150 Rub bn, 0.3 GDP%
  - Housing for WWII veterans: 82.3 Rub bn, 0.2 GDP%
  - Housing for military: 42.9 Rub bn, 0.1 GDP%
  - Other: 50.3 Rub bn, 0.1 GDP%

### Monetary policy: focusing on inflation and exchange-rate framework
- Staff view: CBR’s greater exchange rate flexibility is welcome and monetary policy should focus firmly on inflation control.
- Authorities and staff agreed the monetary easing cycle should be paused; staff suggested the next move should likely involve initiating a tightening cycle, while authorities judged such a move premature.
- Concerns:
  - Authorities may give priority to exchange-rate considerations if tensions arise between achieving low inflation and limiting appreciation.
  - The CBR is preparing technically for inflation targeting but does not foresee adopting formal inflation targeting in the near future.
- Capital inflows and macroprudential responses:
  - More flexible exchange-rate regime and policy rate cuts helped deter speculative inflows.
  - Authorities might consider differentiated reserve requirements by residence and currency if large-scale inflows resumed.
  - Staff noted exchange-rate flexibility should be first line of defense, alongside strengthened prudential regulations and supervision.

### Restoring the health of the banking system
- Critical actions required:
  - Improve provisioning standards: strengthen loan classification and make provisioning more forward-looking.
  - Enhance CBR supervisory powers, prioritizing consolidated supervision and oversight of connected lending.
  - Undercapitalized institutions should be recapitalized, restructured, merged, or closed.
- Authorities’ view:
  - Banking situation stabilized: accumulation of overdue loans slowed; bank provisions increased dramatically; capital adequacy levels were high.
  - Authorities decided to unwind regulatory forbearance; grandfathered loans require close monitoring and eventual return to stricter standards.
- Staff concern:
  - Failure to deal decisively with the overhang of nonperforming and restructured loans will deter sustained credit expansion and growth.

### Reinvigorating structural reforms and investment climate
- Overarching reform priority: improve the investment climate to modernize and diversify the economy and raise potential growth.
- Challenges:
  - Heavy dependence on primary commodities; nontradable sector vulnerable to overheating; tradable sector stagnated.
  - Crisis increased state dominance; reducing dependence of inefficient enterprises on state support and undertaking significant restructuring is central and difficult.
  - Potential growth risks from shrinking labor force, adverse demographic trends, unfavorable investment climate, and declining scope for further catch-up productivity gains.
- Policy levers:
  - Civil service and public administration reforms to limit pervasive government influence.
  - Reforms to assure investor property rights and level playing field.
  - Move ahead with privatization program and WTO accession; reverse crisis-related emergency trade measures to make the investment environment more predictable.

### Staff appraisal: fiscal stance, monetary priorities, and reform urgency
- Stabilization fund mechanism and pre-crisis savings of oil windfall enabled forceful crisis response.
- Main challenge forward: fiscal consolidation and full withdrawal of the large fiscal stimulus (some 9 percent of GDP) in coming years; withdrawal should have begun in 2010.
- Priority actions:
  - Avoid further supplementary budgets; focus budgets on the nonoil deficit.
  - Monetary policy should prioritize inflation control; the next move should likely involve initiating a tightening cycle.
  - Strengthen banking supervision, provisioning, and CBR powers for consolidated supervision and connected lending.
  - Reinvigorate structural reforms to address demographic, investment climate, and productivity constraints.
- Staff warned that lack of reform progress before the 2011–12 elections poses major and increasing risks to macroeconomic stability.

### Selected macroeconomic indicators (2007–11; selected)
- Real GDP (Annual percent change): 8.1 (2007), 5.6 (2008), -7.9 (2009), 4.3 (2010), 4.1 (2011 Estimate).
- Consumer prices (period average): 9.0 (2007), 14.1 (2008), 11.7 (2009), 6.2 (2010), 5.7 (2011 Estimate).
- Consumer prices (end of period): 11.9 (2007), 13.3 (2008), 8.8 (2009), 6.0 (2010), 5.4 (2011 Estimate).
- Unemployment rate: 6.1 (2007), 6.4 (2008), 8.4 (2009), 7.8 (2010), 7.5 (2011 Estimate).
- General government overall balance (Percent of GDP): 6.8 (2007), 4.3 (2008), -6.2 (2009), -5.6 (2010), -3.1 (2011).
- Nonoil balance (Percent of GDP): -3.9 (2007), -8.3 (2008), -15.0 (2009), -14.6 (2010), -11.5 (2011).
- Gross international reserves (Billions of U.S. dollars): 478.8 (2007), 427.1 (2008), 439.0 (2009), 478.4 (2010), 516.6 (2011).
- Total merchandise exports, f.o.b (Billions of U.S. dollars): 354.4 (2007), 471.6 (2008), 303.4 (2009), 380.6 (2010), 408.9 (2011).
- Total merchandise imports, f.o.b (Billions of U.S. dollars): -223.5 (2007), -291.9 (2008), -191.8 (2009), -238.0 (2010), -271.9 (2011).
- External current account (Billions of U.S. dollars): 77.0 (2007), 103.7 (2008), 49.0 (2009), 66.9 (2010), 60.5 (2011).
- Russian fob oil price balancing the budget (U.S. dollars per barrel, general government): 26.0 (2007), 52.0 (2008), 94.5 (2009), 110.6 (2010), 97.2 (2011).
- General government debt (percent of GDP): 8.5 (2007), 7.8 (2008), 10.9 (2009), 11.3 (2010), 11.2 (2011).

### Financial soundness and monetary accounts (selected)
- Regulatory capital to risk-weighted assets: 20.9 (2009), 20.5 (2010 as of March).
- Nonperforming loans to total gross loans: 9.6 (2009), 9.6 (2010).
- Return on assets: 0.7 (2009), 0.9 (2010).
- Credit to the economy (billions, monetary survey): 12,973 (Dec 2007), 17,874 (Dec 2008), 18,168 (Dec 2009), 18,489 (Apr 2010), 20,221 (Dec 2010), 22,720 (Dec 2011 Proj.).
- Base money (billions of rubles, selected): 4,269 (Dec 2007), 4,716 (Dec 2009), 4,517 (Mar 2010), 4,761 (Apr 2010), 5,619 (Dec 2010), 6,579 (Dec 2011 Proj.).
- Gross international reserves (GIR, billions of U.S. dollars, selected): 476 (Dec 2007), 436 (Dec 2009), 457 (Mar 2010), 473 (Apr 2010), 480 (Dec 2010), 522 (Dec 2011 Proj.).
- CPI inflation (12-month change, eop): 11.9 (Dec 2007), 8.8 (Dec 2009), 6.5 (Mar 2010), 6.0 (Apr 2010), 6.0 (Dec 2010), 5.4 (Dec 2011 Proj.).

### External vulnerability and debt indicators (selected)
- External debt (percent of GDP): 36.2 (2007), 28.8 (2008), 38.3 (2009), 31.9 (2010), 28.6 (2011).
- External debt-to-exports ratio (percent): 119.6 (2007), 136.7 (2009), 109.8 (2010), 103.8 (2011).
- Gross external financing need (Billions of U.S. dollars): 72.1 (2007), 112.4 (2008), 98.7 (2009), 80.5 (2010), 59.1 (2011).

### ANNEX I. Russia’s experience with capital flows — policy lessons
- Pre-crisis inflows were large and largely loan-based to corporates and banks; gross private capital inflows rose to over $200 billion in 2007.
- Credit growth averaged nearly 50 percent per year until mid-2008; domestic demand growth reached 13½ percent in 2007.
- Distinctive features: role of oil linking inflows to very large current account surpluses; lower foreign ownership in banking (25 percent); significant nonbank borrowing by corporates via syndicated loans and bonds.
- Crisis response: controlled depreciation and provision of ruble liquidity entailed loss of one-third—$200 billion—of central bank reserves.
- Recommended policy mix:
  - Fiscal policy as first-line defense to mitigate real exchange rate pressures.
  - Monetary policy squarely aimed at keeping inflation low in a flexible exchange rate framework.
  - Prudential and supervisory tightening, including countercyclical requirements and restrictions on foreign-currency lending.
  - Capital controls can be part of broader package in surges but have limits and cannot substitute for structural reforms.

*Source: _cr10246 - Executive Summary and selected excerpts*

### Executive Summary

### Executive Summary

### Mission and consultations
- Discussions for the 2010 Article IV consultation were held in Moscow during June 2–15.
- Mission composition: Mr. Thomsen (head), Mr. Kähkönen, Ms. Kozack, Messrs. Hofman and Tiffin, Ms. Zakharova (all EUR), Mr. Tuya (MCM, external expert), and Mr. Brekk (senior resident representative). Mr. Mozhin, Executive Director, also participated.
- The mission met with Deputy Prime Minister and Minister of Finance Kudrin, Central Bank of Russia (CBR) Governor Ignatiev, other senior officials, and representatives of financial institutions, corporations, and think tanks.

### Summary assessment and key recommendations
- Overall assessment: The Russian economy has improved after a deep recession, but the recovery is fragile. Inflation has come down rapidly in the context of a large output gap, and should remain in check in the near term. The banking system is still under strain and credit is expected to recover only gradually. With Russia likely to emerge from the crisis with lower potential growth, the key policy challenge will be to withdraw the large fiscal stimulus as cyclical conditions normalize to avoid a renewed bout of rapid real appreciation and high inflation.
- Staff recommendations:
  - Response to the recession: Authorities acted forcefully, taking full advantage of buffers afforded by pre-crisis policy of taxing and saving much of the oil revenue and the attendant large reserves. The stabilization fund mechanism has served Russia very well and should be preserved.
  - Fiscal policy: The expansion of some 9 percent of GDP has almost entirely taken the form of permanent measures, suggesting fiscal consolidation will require reinvigorating long-stalled public-sector reforms, including in pensions, health care, and social protection. Staff believes that consolidation should begin in 2010 and gather pace in 2011–12.
  - Monetary policy: The focus should be on inflation control in the context of a flexible exchange rate. The recent greater exchange rate flexibility is welcome, but political resolve remains to be tested in an environment involving a starker tradeoff between inflation and nominal ruble appreciation.
  - Financial sector policies: Improved provisioning standards are needed to reduce risks to bank balance sheets. The CBR’s authority to conduct consolidated supervision—including over connected lending—should be enhanced.
  - Structural reforms: The overarching challenge is to improve the investment climate.

### Exchange rate regime and IMF obligations
- Russia’s exchange rate is classified as “other managed arrangement” effective November 1, 2008.
- 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.
- The exchange system is free of restrictions on payments and transfers for current international transactions.
- It is proposed that the next Article IV consultation be held on the standard 12-month cycle.

### I. Crisis recovery — A gradually improving economy
- 2009 contraction: The Russian economy contracted by 7.9 percent in 2009.
- Demand dynamics: Domestic demand fell sharply in the first half of 2009 following plunging oil prices and an abrupt reversal of capital flows. Private consumption and fixed investment declined strongly, compounded by a large rundown of inventories. Net exports turned positive as imports contracted.
- Recent recovery: After some temporary softness in Q1 2010, short-term indicators point to a strengthening recovery. All components of demand now appear to be expanding; growth is increasingly driven by consumption, reflecting to a large extent the recent 45 percent cumulative increase in pensions and other policy support.
- Inflation: Headline inflation fell from 14 percent (y-o-y) in early 2009 to 6 percent in May 2010. Core inflation—which excludes administered prices as well as fruits and vegetables—has fallen to around 4¼ percent.
- Labor market: Unemployment fell to about 7½ percent in May (from a peak of 9 percent). Real wages and real disposable income have strengthened, supporting private consumption.
- External accounts:
  - The current account surplus fell to 4 percent of GDP in 2009, from about 6 percent in 2007 and 2008.
  - Export values declined by 36 percent; import values fell by 35 percent.
  - The current account recovered in the second half of 2009 and preliminary data indicate it strengthened appreciably in 2010 thus far, reflecting high oil prices and a continued recovery in export volumes.
  - The capital account stabilized amid intermittent outflows and inflows.
- Balance of payments and exchange rate:
  - The overall balance of payments has remained in surplus; reserves increased by some $60 billion over the past 12 months.
  - The ruble has appreciated by about 20 percent in real effective terms since its trough in February 2009, bringing it broadly back to its pre-crisis level.
  - Although the appreciation since the Fall 2009 CGER exercise exceeds the rise in long-term oil prices over the same period, CGER estimates and the mission’s assessment suggest the ruble is broadly in line with medium-term fundamentals.

### Financial markets and banking system
- Market volatility: Financial indicators rebounded in 2009 as global conditions recovered. Russia’s stock market index more than doubled in 2009. Sovereign spreads fell from over 850 bps in late 2008 to below 140 bps in mid-April 2010. Since then, renewed European turmoil and oil price declines roiled markets: the ruble depreciated by 7 percent against the dollar, sovereign spreads have risen by some 120 bps, and the stock market surrendered its gains for the year.
- Banking sector liquidity and strain:
  - Overdue loans stand at 6½ percent of total loans under Russian reporting standards.
  - Credit to the economy remained largely unchanged in nominal terms since January 2009, reflecting weak demand and banks’ restructuring efforts.
  - Signs of deceleration in the accumulation of overdue loans and some banks signaling they may release provisions to fund new loans later in the year.
  - Pre-provision income was relatively healthy in 2009, but falling interest rates have squeezed interest margins.
  - Credit growth picked up modestly in March and April 2010, reflecting improved credit demand and moderating supply constraints.
- CGER results (2009–10) excerpts:
  - Macro balance approach: -3
  - External stability approach: -84
  - ERER approach: -511
  - Average: -53

### Policy response to the recession — Fiscal policy details
- Fiscal stimulus magnitude: There was a dramatic discretionary fiscal relaxation in 2009. The general government nonoil deficit increased from 8¼ percent of GDP in 2008 to 15 percent of GDP in 2009, almost entirely on account of higher spending. The expansion of some 9 percent of GDP was largely permanent in form.
- Timing and composition: Much of the stimulus was targeted at low-multiplier areas, such as strategic sectors and defense and security, and most of the stimulus was implemented in the second half of 2009—too late to prevent a deep recession.
- Financing and fiscal space:
  - The headline deficit swung from a surplus of 4¼ percent of GDP in 2008 to a deficit of 6¼ percent of GDP in 2009.
  - Russia’s public debt ratio is below 11 percent.
  - The deficit was easily financed by drawing down the oil funds held at the CBR without significant risks to external stability, reflecting large international reserves and low public debt.

*Source: _cr10246 - Executive Summary*

### 11.      Against the backdrop of a more stable external outlook and falling inflation, the

### _cr10246 - 11.      Against the backdrop of a more stable external outlook and falling inflation,

### Monetary policy stance and interest rates
- The CBR cut its refinancing rate by 525 bps to 7¾ percent from its peak in April 2009.
- Declining inflation turned average real interest rates positive for the first time in many years.
- Nominal interest rates remained stubbornly high for most borrowers throughout much of 2009 due to an uncertain economic outlook and increased risk aversion.
- Deposit and lending rates have only recently begun to fall more quickly.
- Interbank rates have remained within the CBR’s policy corridor, reflecting the high liquidity of the banking sector.
- By contrast with earlier policy, the exchange rate has become more flexible, with the ruble appreciating by around 15 percent against the exchange rate basket since March 2009; short-run movements sometimes exceeded 4 percent in a single week.
- The CBR continues to intervene to avoid abrupt exchange rate changes while allowing a markedly greater degree of day-to-day volatility.
- CBR interventions are not aimed at further increasing international reserves, but have the byproduct of reserve accumulation in an environment of high oil prices, involving sterilization and opportunity costs.

### Financial sector policy and withdrawal of crisis support
- Authorities have been exiting extraordinary liquidity support extended during the crisis.
- With banks highly liquid, repo demand has effectively disappeared; banks used excess funds to repay their debt to the CBR ahead of schedule.
- Withdrawal of liquidity, issuance of new CBR bonds, and a pick-up in money demand largely sterilized the monetary impact of the fiscal expansion in 2009.
- One bank has partially repaid the public capital injection it received during the crisis.
- Other support mechanisms are being gradually withdrawn:
  - Regulatory forbearance (easier provisioning requirements) will be gradually brought back in line with pre-crisis norms as of July.
  - Lending limits for uncollateralized loans were reduced in February.
  - Interbank market guarantees are being unwound.
  - The CBR intends to tighten eligibility for the expanded “Lombard list” used for repo transactions over time.
  - Collateral rules for nontraded assets used for CBR refinancing are being strengthened.
  - An earlier-planned public bank-recapitalization scheme has been scrapped.
- The CBR stands ready to reactivate facilities should the banking system come under renewed pressure in the face of adverse shocks.
- Footnote on relaxed loan classification requirements: under the relaxed rules, a corporate (retail) loan became overdue if had been delinquent for 30 days (60 days)—up from 5 days (30 days) under the old rules; if a loan had been restructured, it could remain in its original classification category.

### Near-term outlook and risks
- Baseline growth projection: GDP growth is projected to reach 4¼ percent in 2010.
- Underlying momentum: absent sustained increases in oil prices, underlying growth momentum is expected to recover only gradually, causing annual growth to fall back to around 4 percent in 2011.
- Inflation projection: inflation is projected to reach 6 percent (y-o-y) at end-2010 and 5½ percent at end-2011, reflecting the output gap, still-weak demand, and continued ruble appreciation.
- Recovery drivers: a self-sustained consumption-led recovery is expected to gradually take hold as bank balance-sheet adjustment appears to have run its course, banks cautiously expand lending, and real wages rise while unemployment falls.
- Short-term risks broadly balanced:
  - Upside risks: higher oil prices, greater capital inflows, or a more rapid recovery in credit.
  - Downside risks: external shocks (e.g., sovereign vulnerabilities in Europe) affecting oil prices or investor sentiment; abrupt drop in oil prices and retrenchment in risk appetite could trigger larger-than-projected capital outflows given banking sector liquidity overhang.
  - Few direct financial linkages due to relatively modest role of foreign banks in Russia’s financial system.
  - A worse-than-expected Russian growth outcome would have regional knock-on effects mainly through remittances and trade.

### Regional spillovers (Box 1) — effects on neighboring countries
- Remittances:
  - Individual remittances from Russia to the CIS dropped by more than 30 percent in total during the crisis.
  - Armenia, Georgia, the Kyrgyz Republic, Tajikistan, and Uzbekistan each experienced a drop in inflows, mainly from Russia, by up to a third in 2009.
  - Remittances to Moldova declined by almost 40 percent.
- Trade:
  - Exports to Russia from CIS countries started declining in final quarter of 2008 and dropped by more than a third in 2009.
  - Finland saw its exports to Russia drop by almost 50 percent in 2009.
- Financial:
  - Armenia, Kazakhstan, the Kyrgyz Republic, and Tajikistan devalued their currencies by almost 25 percent over 2008–09.
  - High dollarization left financial sectors vulnerable to exchange-rate movements; depreciation impacted balance sheets of local banks with FX exposures to unhedged borrowers.
  - Real credit growth has declined on average by over 60 percent in CCA countries since end-2007.
- Signs of recovery spillovers in 2010:
  - Remittances appear to be rebounding—e.g., remittances increased by 15 percent (y-o-y) in Tajikistan and more than 10 percent in Armenia in early 2010.
  - Moldova’s exports to Russia rebounded by over 40 percent in January-April 2010 after a 10 percent decline in 2009.

### Policy discussions — overarching priorities
- Medium-term fiscal consolidation is the overarching policy priority for Russia.
- With limited prospects for continued large oil price increases, balanced growth depends critically on an appropriately countercyclical fiscal policy to mitigate pressures for real appreciation and inflation.
- The oil fund mechanism (Reserve and National Welfare Funds) served Russia well, creating room for a forceful crisis response and leaving no solvency or financing concerns despite large reserve drawdowns and a sizeable fiscal stimulus.
- Pre-crisis weaknesses included an increasingly inflationary policy mix: rising nonoil deficit and attempts to resist upward ruble pressure through FX interventions, which caused monetary policy accommodation.

### Fiscal policy: consolidation through reform
- The underlying federal nonoil deficit is projected to remain some 9 percent of GDP above its pre-crisis level in 2010.
- Budget inflexibility: three-quarters of the increase in the nonoil deficit relative to pre-crisis levels reflects higher permanent measures, with half of the increase attributable to higher pensions alone.
- Nonstatutory spending is now only 9 percent of GDP—equal to the size of the consolidation needed to reverse the stimulus and achieve the government’s long-term target for the nonoil deficit of 4.7 percent of GDP by 2015.
- Recent fiscal developments:
  - The original 2010–12 medium-term budget targeted a gradual withdrawal of stimulus with the nonoil deficit declining to 9½ percent of GDP in 2012.
  - In June, a supplementary budget was passed which would lead to a slight increase in the federal nonoil deficit in 2010 compared to the reduction of some ¾ percent of GDP implied by the original budget.
  - A second supplementary budget—entailing civil service wage increases—could be passed in the fall.
- Staff recommendations:
  - Fiscal consolidation should start in 2010 and be stepped up in 2011–12.
  - Staff disagreed with the expansion of the federal government’s nonoil balance implied by the 2010 supplementary budget and warned against another supplement in the fall.
  - Reducing the nonoil deficit to 9½ percent of GDP by 2012 remains broadly consistent with the outlook; the long-term target of a nonoil deficit of 4.7 percent of GDP remains an appropriate fiscal anchor.
- Reform requirements:
  - Consolidation can only be achieved through reinvigoration of long-stalled public-sector reforms.
  - Authorities indicated possible measures: a gradual increase in the retirement age and rationalization of social protection benefits through more rigorous means-testing.
  - Authorities are considering revenue measures: (i) further raise excise taxes and the extraction tax on gas; (ii) introduce market-based valuation for property tax; and (iii) streamline tax-breaks and privileges.
  - Staff noted that most adjustment would need to take place on the expenditure side through reforms and reductions in discretionary spending.
- Views on fiscal framework:
  - Staff underscored the importance of taxing and saving oil wealth through the Reserve and National Welfare Funds to preserve macroeconomic stability.
  - The mission urged avoiding the use of supplementary budgets, which have increased fiscal procyclicality.
  - Staff encouraged refocusing fiscal policy on the nonoil deficit as an anchor given commodity price volatility and warned about use of less conservative oil prices in the 2011‒13 medium-term budget.
  - Ministry of Finance officials agreed supplementary budgets reflect pressures to spend oil wealth and supported strengthening the fiscal policy framework by avoiding supplementary budgets and focusing on the nonoil deficit.
  - Authorities intend to develop a methodology for assessing sustainability of borrowing by quasi-sovereign enterprises, reducing borrowing costs, and introducing limits on the size and profile of external borrowing.

- Supplementary Budget for 2010 (as presented):
  - Total supplementary expenditures: 325.5 Rub bn, 0.7 GDP%
  - Additional transfers to pension fund: 150 Rub bn, 0.3 GDP%
  - Housing for WWII veterans: 82.3 Rub bn, 0.2 GDP%
  - Housing for military: 42.9 Rub bn, 0.1 GDP%
  - Other: 50.3 Rub bn, 0.1 GDP%

### Monetary policy: focusing on inflation
- The CBR’s policy of allowing greater exchange rate flexibility is a welcome step toward focusing monetary policy more firmly on inflation control.
- The authorities’ commitment to this policy remains to be tested.

*Source: IMF staff report text from _cr10246 - 11.      Against the backdrop of a more stable external outlook and falling inflation,*

### 24.      The authorities and staff agreed that the monetary easing cycle should now be

### 24.      The authorities and staff agreed that the monetary easing cycle should now be paused.

### Monetary policy and exchange-rate framework
- At its June meeting, the CBR kept policy interest rates unchanged.
- Staff concurred and suggested that the next move should likely involve initiating a tightening cycle.
- Authorities judged such a move premature and expressed concern about the possible impact of higher interest rates on capital inflows.
- Authorities noted monetary conditions were being tightened through the gradual unwinding of crisis support to the banking system and stood ready to raise reserve requirements if necessary in the event of a resurgence of inflation pressures.
- Staff urged the authorities to aim for a further reduction in inflation from current levels.
- CBR agreed that continued monetization of the fiscal deficit would pose additional challenges to monetary policy but considered these to be manageable; CBR officials highlighted recent success in sterilizing excess liquidity through issuance of central bank bonds (OBRs).
- Staff reiterated that monetary policy should be focused on inflation control, in the context of a flexible exchange rate.
- The mission welcomed the CBR’s more flexible exchange rate policy and stressed that low inflation would be critical in expanding the availability of long-term ruble financing and reducing dependence on foreign funding.
- Staff expressed concern that the authorities’ monetary policy framework was unclear and that, should pressures on the ruble intensify, the authorities might revert to resisting nominal appreciation, leading to rapid growth of money and credit.
- Concerns were heightened by the lack of a clearly articulated inflation objective; CBR officials conceded exchange-rate considerations might be given priority if tensions arose between achieving low inflation and limiting appreciation.
- CBR officials felt the economy was not yet ready to cope with the exchange rate volatility implied by a completely free float, given Russia’s dependence on global commodity prices.
- The mission supported technical preparations for an eventual move to formal inflation targeting and welcomed recent enhancements in CBR public communications, including regular preannounced monetary-policy meetings and press releases describing policy rate rationale.
- CBR reported they were steadily putting in place other key technical prerequisites for inflation targeting but did not foresee adopting formal inflation targeting in the near future.

### Capital inflows and macroprudential responses
- The authorities and staff agreed the more flexible exchange-rate regime, alongside cuts in policy interest rates, had helped deter speculative capital inflows.
- They concurred that a return of capital inflows to pre-crisis levels was unlikely.
- Authorities noted that, should persistent, large-scale inflows resume, they might consider reintroduction of differentiated reserve requirements—by residence and currency—to prevent accumulation of vulnerabilities in the banking system.
- Authorities were taking steps to reduce tax incentives for foreign borrowing and discussing ways to align borrowing plans of state-owned enterprises with macroeconomic stabilization goals.
- Staff agreed there were circumstances—such as a period of surging inflows caused by persistent and large oil prices increases—where measures including capital controls could be useful, but cautioned they are likely to lose effectiveness over time and could have undesirable multilateral effects.
- Staff noted exchange-rate flexibility should serve as a first line of defense against renewed increases in capital inflows, alongside strengthened prudential regulations and supervision aimed at curtailing excessive credit growth (Annex).
- Both staff and the authorities agreed that reserves were adequate.

### Restoring the health of the banking system
- Restoring the banking system to health is critical to ensuring a sustained recovery in credit expansion; this requires decisive action to improve provisioning standards and enhance the CBR’s supervisory powers.
- Weaknesses remain in the regulatory and supervisory framework: generous accounting and provisioning rules and lack of comprehensive consolidated supervisory powers hinder gauging systemic risks, loan-portfolio deterioration, and adequacy of capital.
- Given sizable pools of nonperforming and restructured loans, some banks may lack sufficient provisions to deal with unexpected shocks; the stock of bad assets is likely to weigh on profitability and make banks vulnerable to interest rate increases or deteriorating economic conditions.
- Staff urged improvement of provisioning standards: strengthen loan classification and provisioning system, make provisioning more forward-looking by accounting for likely future loan losses.
- Better provisioning may reduce reported capital adequacy; undercapitalized institutions should be recapitalized, restructured, merged, or closed.
- Improved provisioning over time would reduce the risk that interest rate increases damage bank earnings and balance sheets.
- Authorities stressed the banking situation had stabilized: accumulation of overdue loans had slowed; bank provisions had increased dramatically; and capital adequacy levels were high—so while a few banks might run into problems, the vast majority could handle shocks without much difficulty.
- Staff welcomed the authorities’ decision to unwind regulatory forbearance but noted grandfathered loans require close monitoring and an eventual return to stricter standards; authorities emphasized avoiding abrupt changes since most grandfathered loans have relatively limited maturity and would naturally cease to benefit from forbearance in the near future.
- Authorities and staff agreed the CBR should be afforded greater supervisory powers, prioritizing enhancement of authority to conduct consolidated supervision—including over connected lending.
- Strengthening regulations on connected lending is critical to compel appropriate disclosure, ensure suitable (market) terms, and enable imposition of sanctions; relevant legislation had been drafted or was under preparation, and authorities were analyzing connected lending in the banking system.

### Reinvigorating structural reforms and investment climate
- Improving the investment climate remains the overarching structural reform priority for Russia; absent reform, and in an environment of moderate oil price increases, potential growth is likely to be low.
- Russia’s economy remains heavily dependent on primary commodities; structural reforms have stalled, though there are increasing calls to modernize and reduce dependence on oil.
- Russia’s nontradable sector is vulnerable to overheating given low capacity, while the tradable sector has stagnated in recent years.
- The crisis increased the dominance of the state in the economy; reducing inefficient and weak enterprises’ dependence on state support, accompanied by significant restructuring, will be a central and difficult challenge.
- Staff warned potential growth could remain low absent structural reforms: shrinking labor force, adverse demographic trends, an unfavorable investment climate (confirmed by Russia’s low ranking on international comparisons), and declining scope for further catch-up productivity gains point to need for deep restructuring.
- Key structural reform priorities: improve the investment climate; civil service and public administration reforms to curtail pervasive government influence on economic decision making; reforms to assure investors property rights protection and level playing field.
- Moving ahead with the recently announced privatization program would help roll back increased state dominance.
- WTO accession—alongside reversal of crisis-related emergency trade measures—could make the investment environment more predictable and rules-based while reducing dependence on primary commodity sectors.

### Staff appraisal: fiscal stance, monetary priorities, and reform urgency
- Stabilization fund mechanism allowed a forceful crisis response; pre-crisis policy of taxing and saving much of the oil windfall and large reserve accumulation provided room for a vigorous response.
- Policy-makers used this room for a dramatic countercyclical fiscal stimulus, supported by monetary accommodation as the fiscal deficit was monetized; they provided liquidity injections, eased lending criteria, and allowed a substantial reserve loss before a large step-devaluation, likely averting severe banking distress.
- Main challenge looking forward is fiscal consolidation: with cyclical conditions set to gradually normalize and with lower potential growth, authorities should plan on fully withdrawing the large fiscal stimulus in the coming years.
- Given the scale of the stimulus—some 9 percent of GDP—striking a balance between short-term cyclical considerations and medium-term consolidation suggests the withdrawal should have begun already in 2010.
- The further increase in the federal government’s nonoil balance implied by the supplementary budget is regrettable; another supplement in the fall should be avoided.
- Much of the stimulus has taken the form of permanent measures—not least higher pensions—so advancing long-stalled public sector reforms is critical to preventing renewed overheating and excessive real appreciation as private demand recovers.
- Lack of support for such reforms and prospect of only limited progress before the 2011-12 elections pose major and increasing risks to macroeconomic stability.
- Fiscal framework needs strengthening: supplementary budgets have been adopted every year since the 1998 crisis and have often run counter to cyclical requirements; authorities should eschew use of supplementary budgets and focus annual and medium-term budgets on the nonoil deficit.
- Monetary policy should prioritize controlling inflation, not the exchange rate: the monetary easing cycle has appropriately been put on hold, and the next move should likely involve initiating a tightening cycle.
- The increased flexibility of the exchange rate during the past year is welcome, but commitment to a flexible exchange rate policy remains to be tested in an environment involving a sharper trade-off between inflation and the nominal exchange rate objectives.
- Mission’s discussions suggest the CBR is still not ready to commit fully to giving priority to inflation control; risks would increase significantly going forward absent decisive action to reduce public expenditures.
- Strengthening banking supervision remains critical: loan risk assessment should be strengthened, provisioning made more forward-looking, and the CBR afforded greater supervisory powers, particularly for consolidated supervision and connected lending.
- Given the significant stock of international reserves, the authorities are well-positioned to continue handling emerging threats to financial stability.
- Staff’s main concern: failure to decisively deal with the overhang of nonperforming and restructured loans will deter economic growth by hampering banks’ ability to expand credit on a sustained basis and by directing available resources to struggling clients away from dynamic enterprises seeking to boost investment.
- A key priority remains reinvigorating structural reforms to address shrinking labor force, adverse demographic trends, unfavorable investment climate, and declining scope for catch-up productivity gains; progress toward WTO accession and reversal of emergency trade restrictions imposed during the crisis is welcome.

*Excerpted from IMF staff report section 24–40.*

### 41.      The overarching challenge facing Russia is to ensure that consumption of its

### _cr10246 - 41.      The overarching challenge facing Russia is to ensure that consumption of its

### Overarching challenge and policy priorities
- The core challenge: ensure that consumption of Russia’s immense oil wealth does not get ahead of the expansion of its still-limited productive capacity outside the primary commodity sectors.
- Past performance: steady increase in the nonoil deficit with buoyant private demand, stalled structural reforms, rapid real appreciation, and signs of “Dutch Disease.”
- Crisis effect: sharp contraction in output and prospect of lower potential growth are fuelling calls for change.
- Policy recommendations emphasized:
  - Prevent an overvalued exchange rate by taxing and saving oil revenues.
  - Move decisively to strengthen the investment climate to modernize and diversify the economy.

### Selected macroeconomic indicators (2007–11)
- Real GDP: 8.1 (2007), 5.6 (2008), -7.9 (2009), 4.3 (2010), 4.1 (2011 Estimate).
- Consumer prices (period average): 9.0 (2007), 14.1 (2008), 11.7 (2009), 6.2 (2010), 5.7 (2011 Estimate).
- Consumer prices (end of period): 11.9 (2007), 13.3 (2008), 8.8 (2009), 6.0 (2010), 5.4 (2011 Estimate).
- GDP deflator: 14.4 (2007), 18.0 (2008), 2.3 (2009), 8.9 (2010), 6.6 (2011 Estimate).
- Unemployment rate: 6.1 (2007), 6.4 (2008), 8.4 (2009), 7.8 (2010), 7.5 (2011 Estimate).

### Public sector (percent of GDP, 2007–11)
- General government overall balance: 6.8 (2007), 4.3 (2008), -6.2 (2009), -5.6 (2010), -3.1 (2011).
- General government revenue: 39.8 (2007), 38.6 (2008), 34.4 (2009), 34.1 (2010), 35.0 (2011).
- General government expenditures: 33.1 (2007), 34.3 (2008), 40.6 (2009), 39.8 (2010), 38.0 (2011).
- Primary balance: 7.3 (2007), 4.8 (2008), -5.6 (2009), -4.9 (2010), -2.2 (2011).
- Nonoil balance: -3.9 (2007), -8.3 (2008), -15.0 (2009), -14.6 (2010), -11.5 (2011).
- Nonoil balance excl. one-off receipts 1/: -6.2 (2007), -8.3 (2008), -15.4 (2009), -14.6 (2010), -11.5 (2011).

### Money and credit (annual percent change)
- Base money: 33.1 (2007), 2.9 (2008), 7.4 (2009), 19.1 (2010), 17.1 (2011).
- Ruble broad money: 47.5 (2007), 1.7 (2008), 16.3 (2009), 26.9 (2010), 18.6 (2011).
- Credit to the economy: 48.5 (2007), 37.8 (2008), 1.6 (2009), 11.3 (2010), 12.4 (2011).

### External sector (volumes and dollar values)
- Export volumes (annual % change): 4.4 (2007), -2.6 (2008), -7.9 (2009), 8.3 (2010), 4.9 (2011).
- Import volumes: 25.1 (2007), 11.1 (2008), -30.0 (2009), 17.4 (2010), 14.2 (2011).
- Total merchandise exports, f.o.b (Billions of U.S. dollars): 354.4 (2007), 471.6 (2008), 303.4 (2009), 380.6 (2010), 408.9 (2011).
- Total merchandise imports, f.o.b (Billions of U.S. dollars): -223.5 (2007), -291.9 (2008), -191.8 (2009), -238.0 (2010), -271.9 (2011).
- External current account (Billions of U.S. dollars): 77.0 (2007), 103.7 (2008), 49.0 (2009), 66.9 (2010), 60.5 (2011).
- External current account (percent of GDP): 5.9 (2007), 6.2 (2008), 4.0 (2009), 4.5 (2010), 3.6 (2011).

### Reserves and liquidity
- Gross international reserves (Billions of U.S. dollars): 478.8 (2007), 427.1 (2008), 439.0 (2009), 478.4 (2010), 516.6 (2011).
- Months of imports 2/: 20.3 (2007), 14.0 (2008), 20.8 (2009), 18.3 (2010), 17.4 (2011).
- Percent of short-term debt: 221 (2007), 289 (2008), 298 (2009), 400 (2010), 375 (2011).

### Balance of Payments highlights (Table 2, 2007–11)
- Current Account (Billions of U.S. dollars): 77.0 (2007), 103.7 (2008), 49.0 (2009), 66.9 (2010), 60.5 (2011).
- Trade Balance: 130.9 (2007), 179.7 (2008), 111.6 (2009), 142.6 (2010), 137.0 (2011).
- Exports: 354.4 (2007), 471.6 (2008), 303.4 (2009), 380.6 (2010), 408.9 (2011).
  - Non-energy exports: 135.8 (2007), 161.5 (2008), 112.7 (2009), 149.6 (2010), 167.9 (2011).
  - Energy exports: 218.6 (2007), 310.1 (2008), 190.7 (2009), 231.0 (2010), 241.0 (2011).
    - Oil: 173.7 (2007), 241.0 (2008), 148.7 (2009), 186.7 (2010), 195.7 (2011).
    - Gas: 44.8 (2007), 69.1 (2008), 42.0 (2009), 44.2 (2010), 45.3 (2011).
- Imports: -223.5 (2007), -291.9 (2008), -191.8 (2009), -238.0 (2010), -271.9 (2011).
- Income (net): -30.8 (2007), -48.9 (2008), -40.2 (2009), -47.7 (2010), -36.6 (2011).
- Capital and financial account: 85.7 (2007), -131.0 (2008), -43.6 (2009), -27.6 (2010), -22.3 (2011).
- Overall balance (Billions of U.S. dollars): 148.9 (2007), -38.9 (2008), 3.9 (2009), 39.3 (2010), 38.2 (2011).
- Financing: -148.9 (2007), 38.9 (2008), -3.9 (2009), -39.3 (2010), -38.2 (2011).
  - Net international reserves: -148.9 (2007), 38.9 (2008), -3.4 (2009), -39.3 (2010), -38.2 (2011).

### Fiscal operations (Table 3, 2007–11 projections)
- General government total revenue (percent of GDP): 39.8 (2007), 38.6 (2008), 34.4 (2009), 34.1 (2010), 35.0 (2011).
  - Oil revenue: 10.6 (2007), 12.6 (2008), 8.8 (2009), 8.9 (2010), 8.4 (2011).
  - Non-oil revenue: 29.2 (2007), 26.1 (2008), 25.5 (2009), 25.2 (2010), 26.6 (2011).
- Total expenditure: 33.1 (2007), 34.3 (2008), 40.6 (2009), 39.8 (2010), 38.0 (2011).
- Primary balance: 7.3 (2007), 4.8 (2008), -5.6 (2009), -4.9 (2010), -2.2 (2011).
- Overall balance: 6.8 (2007), 4.3 (2008), -6.2 (2009), -5.6 (2010), -3.1 (2011).
- Non-oil primary balance: -3.3 (2007), -7.8 (2008), -14.4 (2009), -13.8 (2010), -10.6 (2011).
- Federal government total revenue: 23.4 (2007), 22.4 (2008), 18.8 (2009), 17.1 (2010), 16.8 (2011).
  - Federal oil revenue: 9.2 (2007), 11.1 (2008), 7.8 (2009), 8.0 (2010), 7.6 (2011).
- Financing of federal government: -6.1 (2007), -3.5 (2008), 5.9 (2009), 5.9 (2010), 3.4 (2011).
  - Net external: -0.6 (2007), -0.4 (2008), -0.3 (2009), 0.2 (2010), 0.0 (2011).
  - Net domestic: -5.5 (2007), -3.2 (2008), 6.2 (2009), 5.8 (2010), 3.4 (2011).
- Russian fob oil price balancing the budget (U.S. dollars per barrel, general government): 26.0 (2007), 52.0 (2008), 94.5 (2009), 110.6 (2010), 97.2 (2011).
- Oil fund(s): 11.6 (2007), 16.0 (2008), 11.8 (2009), 6.5 (2010), 3.8 (2011).
  - Reserve Fund: 11.6 (2007), 9.7 (2008), 4.7 (2009), 0.6 (2010), 0.0 (2011).
  - NWF: 0.0 (2007), 6.2 (2008), 7.1 (2009), 5.9 (2010), 3.8 (2011).
- General government debt (percent of GDP): 8.5 (2007), 7.8 (2008), 10.9 (2009), 11.3 (2010), 11.2 (2011).

### Monetary accounts highlights (Table 4)
- Base money (billions of rubles, selected): 4,269 (Dec 2007), 4,392 (Dec 2008), 3,674 (Mar 2009), 3,941 (June 2009), 3,955 (Sept 2009), 4,716 (Dec 2009), 4,517 (Mar 2010), 4,761 (Apr 2010), 5,619 (Dec 2010), 6,579 (Dec 2011 Proj.).
- Gross international reserves (GIR, billions of U.S. dollars): 476 (Dec 2007), 416 (Dec 2008), 390 (Mar 2009), 405 (June 2009), 398 (Sept 2009), 436 (Dec 2009), 457 (Mar 2010), 473 (Apr 2010), 480 (Dec 2010), 522 (Dec 2011 Proj.).
- Broad money (billions of rubles): 14,638 (Dec 2007), 16,775 (Dec 2008), 15,737 (Mar 2009), 16,818 (June 2009), 17,432 (Sept 2009), 19,521 (Dec 2009), 19,676 (Mar 2010), 20,135 (Apr 2010), 24,482 (Dec 2010), 29,069 (Dec 2011 Proj.).
- Ruble broad money (billions of rubles): 13,272 (Dec 2007), 13,493 (Dec 2008), 12,112 (Mar 2009), 13,161 (June 2009), 13,650 (Sept 2009), 15,698 (Dec 2009), 15,997 (Mar 2010), 16,435 (Apr 2010), 19,914 (Dec 2010), 23,622 (Dec 2011 Proj.).
- CPI inflation (12-month change, eop): 11.9 (Dec 2007), 13.3 (Dec 2008), 14.0 (Mar 2009), 11.9 (June 2009), 10.7 (Sept 2009), 8.8 (Dec 2009), 6.5 (Mar 2010), 6.0 (Apr 2010), 6.0 (Dec 2010), 5.4 (Dec 2011 Proj.).
- Accounting exchange rate (ruble per U.S. dollar, eop): 24.5 (2007), 29.4 (2008), 29.4 (2009), 29.4 (2010), 29.4 (2011 Proj.).

### Medium-Term Framework and projections (Tables 5–6 excerpts)
- GDP growth at constant prices (percent) projections: 5.6 (2008), -7.9 (2009), 4.3 (2010), 4.1–4.3 (2011–2015 varying by table).
- Consumer prices (y-o-y, end of period) projections: 13.3 (2008), 8.8 (2009), 6.0 (2010), 5.0 (2011 onward in baseline).
- Gross domestic investment (percent of GDP): 25.4 (2008), 18.8 (2009), 21.0 (2010), rising toward 26.5 (2015) in one projection set.
- Gross national savings (percent of GDP): 31.6 (2008), 22.7 (2009), 25.5 (2010), ~26.4 (2015).
- External current account balance (percent of GDP) projections vary across scenarios: 6.2 (2008), 4.0 (2009), 4.5 (2010), declining to negative in later years in some projections (e.g., -0.2 in 2014 in one table).

### Low Growth Scenario under unchanged policies (Table 6 summary)
- Alternative medium-term projections show lower growth and different balances; selected baseline vs. low-growth differences reflected in:
  - GDP growth ranges and consumer price projections as in Tables 5–6.
  - Trade and capital account dynamics shift with lower export growth and changing reserves.

### Financial soundness indicators (Table 7 and FSIs)
- Regulatory capital to risk-weighted assets: 19.1 (2002), 19.1 (2003), 17.0 (2004), 16.0 (2005), 14.9 (2006), 15.5 (2007), 16.8 (2008), 20.9 (2009), 20.5 (2010 as of March).
- Nonperforming loans to total gross loans: 5.6 (2002), 5.0 (2003), 3.3 (2004), 2.6 (2005), 2.4 (2006), 2.5 (2007), 3.8 (2008), 9.6 (2009), 9.6 (2010).
- Return on assets: 2.6 (2002), 2.6 (2003), 2.9 (2004), 3.2 (2005), 3.3 (2006), 3.0 (2007), 1.8 (2008), 0.7 (2009), 0.9 (2010).
- Credit to the economy (billions, monetary survey): 12,973 (Dec 2007), 17,874 (Dec 2008), 17,764 (Mar 2009), 17,813 (June 2009), 18,094 (Sept 2009), 18,168 (Dec 2009), 18,178 (Mar 2010), 18,489 (Apr 2010), 20,221 (Dec 2010), 22,720 (Dec 2011 Proj.).

### External vulnerability and public/external debt sustainability (Tables 8–10)
- Public sector debt (percent of GDP): 8.5 (2007), 7.8 (2008), 10.9 (2009), 11.3 (2010), 11.2 (2011), projected to decline to 9.9 (2015) in one baseline.
- Identified debt-creating flows and primary deficits: primary deficit (excluding deposits in oil funds from revenue) shows variability; example: -1.6 (2007), -0.4 (2008), -1.2 (2009), 1.0 (2010), 0.2 (2011).
- Gross financing need (percent of GDP): -6.1 (2007), -3.7 (2008), 7.0 (2009), 6.0 (2010), 3.4 (2011).
- External debt (percent of GDP): 36.2 (2007), 28.8 (2008), 38.3 (2009), 31.9 (2010), 28.6 (2011).
- External debt-to-exports ratio (percent): 119.6 (2007), 91.9 (2008), 136.7 (2009), 109.8 (2010), 103.8 (2011).
- Gross external financing need (Billions of U.S. dollars): 72.1 (2007), 112.4 (2008), 98.7 (2009), 80.5 (2010), 59.1 (2011) with projections rising in later years in some scenarios.

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

### ANNEX I. RUSSIA’S EXPERIENCE WITH CAPITAL FLOWS

### ANNEX I. RUSSIA’S EXPERIENCE WITH CAPITAL FLOWS

### Overview
- Russia experienced large capital inflows in the run-up to the global financial crisis, driven by steadily increasing oil prices and policies taxing and saving most oil revenue.
- By August 2008, international reserves had increased to almost US$600 billion and were the third highest in the world.
- The combination of strong external metrics and a favorable oil outlook made Russia an attractive destination for foreign capital.

### The boom years: composition and macroeconomic outcomes
- Composition of inflows:
  - Private capital inflows were largely loans to corporates and commercial banks, with a much smaller portion as portfolio and direct investment.
  - Gross private capital inflows rose from around $70 billion in 2005 to $100 billion in 2006 to over $200 billion in 2007.
- Credit and domestic demand:
  - Credit growth averaged nearly 50 percent per year from 2006 until mid-2008.
  - Domestic demand growth reached 13½ percent in 2007.
  - Real wages rose by close to 20 percent in 2007.
- Inflation and monetary effects:
  - Unsterilized central bank interventions and controlled appreciation pressures contributed to negative real interest rates and high inflation, which reached 15 percent in mid-2008.

### Structural and policy drivers of overheating
- Procyclical fiscal policy:
  - The general government nonoil deficit deteriorated from 2.9 percent of GDP in 2004 to 8.3 percent of GDP in 2008.
  - Headline fiscal balances still showed large surpluses due to surging oil revenues.
- Exchange rate management and monetary policy:
  - Monetary policy increasingly geared toward managing the exchange rate; central bank interventions resisted appreciation pressures.
  - The policy of controlled and predictable ruble appreciation encouraged one-way currency bets and speculative inflows.
- Financial supervision weaknesses:
  - Long-standing weaknesses in banking supervision and regulation allowed rapid credit expansion and large unhedged foreign exchange exposures.

### Distinctive features of Russia’s capital inflow experience
- Role of oil:
  - As an oil exporter, Russia’s capital inflows were coupled with very large current account surpluses, making Russia especially vulnerable to an oil price shock plus reversal of capital flows.
- Lower foreign ownership in banking:
  - Foreign ownership in the Russian banking system was 25 percent, lower than in some other emerging European economies.
  - Nearly all foreign borrowing by banks and nonfinancial corporates was wholesale financing (syndicated loans and bonds) rather than intra-group transactions.
- Significant nonbank borrowing:
  - Direct flows to corporates were more important than flows to the banking system.
  - Large nonfinancial corporates accessed foreign financing via the syndicated loan market and the bond market.
  - Low spreads, a heavily managed exchange rate, and implicit government guarantees encouraged foreign-currency borrowing by corporates and quasi-sovereign borrowing.
  - The corporate sector—rather than the household sector—became heavily indebted.

### The crisis and immediate aftermath
- Dual shock and exchange rate pressure:
  - The crisis combined collapsing oil prices and a reversal of capital flows, placing extreme pressure on the heavily managed exchange rate.
- Policy response and reserve loss:
  - Authorities allowed a controlled depreciation of the ruble while providing significant ruble liquidity.
  - The strategy entailed the loss of one-third—$200 billion—of the central bank’s reserves.
- Economic outcome and recovery signals:
  - The economy sank into a deep recession.
  - One year later, oil prices were roughly double their trough levels, the economy had begun to grow again, the ruble was appreciating, and capital started to trickle back to Russia.

### Policy challenges and recommended policy mix
- First-line macroeconomic defense:
  - Fiscal policy should be the main tool to mitigate pressures on the real exchange rate in the face of rising oil prices and must be sufficiently countercyclical.
  - Monetary policy should be squarely aimed at keeping inflation low in the context of a flexible exchange rate.
  - Greater exchange rate flexibility (and, by extension, volatility) should help discourage speculative inflows.
- Prudential and supervisory measures:
  - Shore up prudential regulations to limit credit boom risks, including possible counter-cyclical regulatory requirements, restrictions on foreign currency lending, and differentiated reserve requirements to reduce currency and maturity risks.
  - Improve supervision, including greater powers for the central bank to supervise banks and their affiliates.
  - The Russian authorities are considering a number of these measures.
- Role and limits of reserve accumulation and fiscal strength:
  - Reserve accumulation can be costly and, if not sufficiently sterilized, can stoke inflation.
  - A strong fiscal position, low public debt, and robust international reserves can perversely attract even greater inflows.
- Use of capital controls:
  - Capital controls may be a legitimate component of a broader package responding to surges in capital inflows.
  - Limits of controls: difficult to enforce (especially outside the banking system), can be circumvented, and their effectiveness is unclear.
  - Controls cannot substitute for reforms that allow the economy to respond more flexibly to macroeconomic impacts of sustained capital inflows.

*Source: _cr10246 - ANNEX I. RUSSIA’S EXPERIENCE WITH CAPITAL FLOWS*

### 1. The World Bank Group is assisting Russia in various ways in meeting the

### _cr10246 - 1. The World Bank Group is assisting Russia in various ways in meeting the

### World Bank Group assistance to sustain rapid growth, diversification, and crisis response
- Macroeconomic policy, long-term fiscal sustainability, and management of large external inflows:
  - Periodic Russian Economic Reports, on-demand policy notes, and knowledge sharing contribute to macro-policy debate.
  - Technical assistance on fiscal and broader economic implications of oil price volatility.
  - Completed study on long-term fiscal risks and fiscal sustainability for the Ministry of Finance highlighting alternative fiscal scenarios, associated risks and strategies for achieving long-term fiscal sustainability.
  - In April 2008, the 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.
- Financial sector strengthening:
  - Lending and TA for securities market regulation, development of the Government’s financial sector strategy, new institutional arrangements for management of government assets and liabilities (including reserves and stabilization funds), insurance and banking sector supervision, assessment of the sustainability of the 2nd pillar pension system, management of increasing share of nonperforming loans (NPLs), strengthening of banking supervision, and assessment of resolution framework (insolvency and creditors’ rights system).
  - Fee-based TA to the Central Bank to support payments system development and monitoring.
  - Two new investment operations under development: Financial Literacy and Education Project; Microfinance Project.
  - IFC crisis response: short term liquidity (particularly trade finance), risk management instruments, guarantees, quasi-equity and subordinated debt to strengthen client banks’ capital bases and mobilize private investment.
  - IFC Russia Banking Advisory Program and Housing Advisory Program refocused on NPLs, risk management, mortgage portfolio management and analytics; regional investments in factoring and distressed asset management for corporate restructurings and single asset recovery.
  - IFC longer-term priorities: increase access to finance for SMEs (particularly regions), promote financial sector stability and environmental sustainability, leverage IFC capital through mobilization and cooperation with partners.
  - In May 2010, IFC’s board approved IFC’s investment alongside the Government of Russia in the Russia Bank Capitalization Fund (RBCF) to make equity and/or equity related investments to support private, mainly second-tier banks, with an emphasis on regional banks.
- Investment climate monitoring and policy advice:
  - Periodic BEEPS surveys, regional investment climate assessments (sub-national Doing Business assessments), and administrative barriers studies by FIAS for interested regions.
  - Regional capacity building and investment promotion programs (example: Rostov Region).
  - WBI to continue capacity-building activities related to investment climate assessments.
- Contributing to climate change mitigation and energy efficiency:
  - Discussion of an energy efficiency investment project with the Ministry of Energy, Russian Energy Agency and systemic banks: capacity building and funding to energy efficiency credit lines at banks.
  - IFC and IBRD worked with policymakers to calculate Russia’s energy efficiency potential and develop federal law On Energy Efficiency Improvement and Energy Saving, signed in December 2009.
  - IFC and IBRD advising government on secondary legislation and related by-laws and institutions (including sub-national level).
  - IFC implementing four integrated advisory and investment projects to develop markets for energy efficiency, renewable energy and cleaner production.
  - Russia Sustainable Energy Finance Program: advisory services and financing to partner banks for energy efficiency and renewable energy investment.
  - Russia Cleaner Production Program: stimulate investments in cleaner technologies to increase resource efficiency and reduce environmental and social impacts.
  - Cooperation with IBRD and EBRD on Russia Residential Energy Efficiency Program to stimulate renovation of multi-family residential buildings.
  - April 2010 launch (with IBRD) of Russia Renewable Energy Program with a $10 million advisory component funded by the GEF; IFC expects to facilitate at least $360 million in renewable energy investment over five years.
- Supporting Government investment and PPPs for growth and diversification:
  - Ongoing investment projects: land registration and development of a national cadastre to secure property rights and develop land markets.
  - Technical assistance on PPPs (reimbursable), transaction and strategic advice in St. Petersburg: Western High Speed Diameter, Orlovsky tunnel, and Pulkovo airport.
  - Pulkovo reached financial close in April 2010, with IFC committing over $94 million to the overall financing package for its own account.
  - IFC and EBRD arranging an additional $220 million in syndicated loans for Pulkovo.
  - Cooperation with VneshEconomBank (VEB) on PPP joint activities and developing a partial credit guarantee of the Bank to VEB to raise funding for infrastructure investments.
  - Support to Higher School of Economics of Moscow for e-learning program on PPPs for federal and regional decision makers.
- Working with regions on growth strategies and labor mobility:
  - Two major knowledge events on regional development strategies in early 2008: discussion of World Development Report on regional disparities; Regional Development Strategies workshop for regional governments and stakeholders.
  - Country Economic Memorandum finalized focusing on barriers to growth at sub-national level and regional agglomerations.
  - Development of fee-for-service arrangements with regions for regional investment strategies and growth analyses.
  - Intensified anti-crisis policy advice on labor market monitoring and active labor market policies to support mobility.
  - New analytical work on internal migration in Russia as part of broader CIS-wide engagement on migration issues and policies.
- Supporting investments in priority areas at the regional level:
  - IFC/Bank Sub-National Development Program supporting priority public investments at regional and municipal level: eight sub-national operations completed (three in Chuvash Republic, two in Republic of Mariy El, and projects in Petropavlovsk municipality (Kamchatka), city of Mytischi, and city of Ufa).
  - IFC and IBRD working with several Oblasts to develop three to five year regional energy savings programs.
  - MIGA can support FDI in sub-sovereign infrastructure (transportation, water, solid waste).
  - Regional infrastructure projects as areas for Bank/IFC partnership with VEB.
- Providing direct support to the private sector (IFC strategy and operations):
  - IFC selective medium to long-term strategy:
    - (i) Contribute to climate change mitigation and develop sustainable energy market via Russia Sustainable Energy Finance Program, Russia Cleaner Production program, Russia Renewable Energy Program, Russia Residential Energy Efficiency Program and direct investments.
    - (ii) Invest in infrastructure, especially transport and logistics and sub-national infrastructure (poorer regions) including via joint IFC/IBRD Sub-National Development Program.
    - (iii) Support financial sector: increase access to finance for SMEs, promote financial sector stability and environmental sustainability, develop insurance, pension and risk management industries.
    - (iv) Invest in less-developed regions and support economic diversification including value-added manufacturing and hi-tech sectors; leverage IFC capital through mobilization and cooperation with partners and jointly financed facilities.
  - IFC advisory services focus on crisis recovery and climate change mitigation with objectives:
    - (a) improve energy efficiency and reduce greenhouse gas emissions;
    - (b) build capacity of private banks to deliver new product lines (energy efficiency, residential energy efficiency, renewable energy finance);
    - (c) respond to crisis-related needs of banking and real sectors including risk and NPL/distressed asset management and managing exposure to real estate and mortgage markets.
- MIGA role:
  - Continue to support foreign investors through political risk guarantees, particularly in infrastructure in coordination with the Bank.
  - Explore opportunities to support capital markets transactions including asset-backed securitizations and promote expansion of foreign banks in the Russian banking sector.
  - Potential further involvement areas: manufacturing, agribusiness and services sectors.

### (b) Improving public sector management and performance
- Overall engagement and priorities:
  - Public sector management is a particular area of World Bank strength in Russia and will be further deepened.
  - Support for modernizing selected public sector institutions, improving government administration, the judiciary, local self-government, and budgetary management at federal and sub-national levels.
  - Expand engagement in regions aligned with federal priority for improving public sector performance at the sub-national level.
- Modernizing selected public sector institutions:
  - Completion of on-going projects will contribute to modernization and improved public services: tax modernization, customs development, cadastre and registration, fiscal federalism, performance-based budgeting, treasury development, and a statistical development project.
- Supporting government program in administrative reform:
  - Continued engagement on administrative reform at federal and sub-national levels, including coordination and implementation of substantial donor funds.
  - Emphasis on bringing Bank and international expertise to implementation of government’s administrative reform program, with strong emphasis on initiatives at sub-national level.
  - Sub-national work concentrated in the Southern Federal Okrug and regions in the North-West.
  - Fee-based advisory service supported Khanti-Mansiysk Okrug-Yugra on administrative streamlining and functional reviews; similar fee-based advisory services may be developed with other regions.
  - Support for regions unable to afford fee-based services provided through a DFID Trust Fund which runs from 2007–10.
- Analytical support on public expenditure effectiveness, transparency and accountability:
  - At Ministry of Finance request, advanced work on a Public Expenditure Review (PER) focusing on overall structure and efficiency of public expenditures with particular focus on the wage bill and transportation expenditures.
  - Advisory assistance to Ministry of Finance on strategy for increasing efficiency of public expenditures.
  - Advising Ministry of Economic Development on improvements in public procurement legislation.
  - Pursuing a Social Expenditures Review (SER) focusing on efficiency in health, education and social assistance, with focus on sub-national level.
- Supporting budgetary reforms:
  - Continued assistance to federal and some regional governments on budgetary reform and development of performance-based budgeting.
  - Regional Fiscal Technical Assistance Project providing support to MOF in transition towards program budgeting principles, transformation of budgetary institutions into autonomous entities, and reform of internal control and external audit systems.
- Promoting reform of local self-government:
  - Continued international experience and technical assistance on local self-government reform.
  - Completed study for monitoring and assisting local-self government in rural areas in Perm, Penza, and Adygeya regions.
  - Engagement with three regions on practical expansion of community-based development schemes via fee-based technical assistance.
  - Federal-level project under preparation to support and strengthen local self government in weak regions of the Northern Caucasus and improve settlement-level social infrastructure.
- Investing in municipal development:
  - Ongoing and future regional projects significant for municipal development and quality of municipal services: Saint Petersburg Economic Development Project and Housing and Communal Services project (became effective in February 2010).
  - Cultural Heritage II slated for negotiations in June 2010 to develop cultural heritage tourism for socio-economic development.
  - Possible regional and municipal subnational projects under discussion on energy efficiency and water and heating system upgrades.
- Stepping up engagement on judicial reform:
  - Judicial reform assistance involves coordination of donor funds and regional cooperation.
  - Judicial reform project complements the 2007–11 Federal Targeted Program for judicial modernization by improving dispute resolution efficiency and transparency.
  - Complementary grant from Government of Japan will support Perm Krai and Leningradskaya Oblast on demand-side justice sector issues such as legal aid to the poor and juvenile justice.
  - At request of Chairman of the Supreme Commercial Court, Bank plans to partner with it and Ministry of Economic Development to support drafting of framework legislation to strengthen administrative resolution of disputes and complaints handling, and individual bankruptcy law.
- Supporting anti-corruption initiatives:
  - As a coherent national-level anti-corruption program may begin to take shape, the Bank may explore avenues for constructive contributions to such initiatives.

*Source: _cr10246 - 1. The World Bank Group is assisting Russia in various ways in meeting the (PDF).*

### 3. The Government has prioritized the social sector and social services in its medium-

### _cr10246 - 3. The Government has prioritized the social sector and social services in its medium-

### Medium-term program focus and Bank regional concentration
- The Government has prioritized the social sector and social services in its medium-term program.
- Primary responsibilities and initiatives for reform in these services will be at the sub-national level; the Bank will concentrate its focus on the regions.
- Main Bank activities: continuation of work in poverty, education, and health.
- Recent additional Bank activities: monitoring of labor market developments (at the federal and regional levels), technical assistance for design and monitoring of active labor market programs, monitoring of social trends, and project design for improvement of quality of social services at the local level (continued in the Southern Federal Okrug and other regions under fee-based services arrangements).
- Housing and communal services (HCS) identified as a critical area for improving living standards; government places high importance on improving HCS sector performance and delivery of high quality services by communal enterprises, linking service provision with improving quality of life.

### Continuation of poverty work
- Bank emphasis moved to the regional level (in cooperation with DFID) in addition to continued cooperation with Rosstat and federal ministries.
- Bank activities:
  - Working directly with regions on monitoring poverty and improving social assistance programs aimed at better targeting.
  - Regional social protection strategies elaborated for several regions.
  - Program for modernization of Moscow city social protection is under preparation.
  - Successful models of cooperation can be scaled up to similar regions.

### Improving the health of the population
- Bank will continue engagement with government on adult health and development of a national strategy to improve population health, aiming to reverse strongly negative trends in premature mortality and morbidity and to improve efficiency and quality of service delivery.
- Engagement areas: health financing, health system organization and restructuring, knowledge transfer on risk pooling, insurance, and sustainable health financing.
- Bank advocacy areas: public health agenda including alcohol and tobacco taxation and promotion of healthy life styles; advice on road safety to reduce fatality and injury rates on roads.
- Child welfare follow-up: assist in design and implementation of mechanisms for family support, preventive social welfare and child care at federal and regional level (jointly with international donors).
- Additional advocacy, public awareness and information sharing with government leaders, public figures, private sector and NGOs to support government policies in this area.
- Bank and IFC financed the first subnational health sector project in 2009 in the Chuvash Republic.
- Support for public-private partnerships in health via TA from the Bank and direct financing by IFC; IFC will continue to explore opportunities to finance private sector solutions to health sector challenges.

### Modernization and improvement of education and vocational training
- Bank engagement continues advising federal and regional authorities on education policies and efficiency after several federal-level operations.
- Main focus: early childhood development and all levels of professional education and training.
- Bank activities:
  - Demand-driven knowledge services to federal authorities.
  - Advice to regions on early childhood development policies and vocational education development.
  - Support to leading national universities in Tatarstan and Moscow on modernization strategies and expansion of international research linkages.
  - Regional TA and university work focus on improving quality of local professional labor supply to meet needs of economic diversification and increased productivity.
- FY11 initiative: Financial Literacy and Financial Education project ($110mln) to strengthen population ability to take responsible financial decisions and reduce financial risks for individual households.

### Improvement in housing and communal services (HCS) provision
- Bank support in infrastructure sector focuses on improving quality of utility services and housing; large portfolio improving heating, water, wastewater, and other municipal services in selected regions.
- Main Bank intervention: Housing and Communal Services project promoting reforms and providing financing in HCS on grant basis allocated to regions competitively.
  - Project supported by a $200 million loan that became effective in February 2010.
- Additional projects: Bank and IFC financed two utility sector projects through sub-national lending (wastewater treatment in Ufa and heating system modernization in Mytischi); several similar projects in pipeline.
- IFC contributions:
  - Helped develop the mortgage market in Russia, providing advisory services and facilitating $6.8 billion worth of mortgage loans from 2005-2008.
  - Will continue to provide products and services with developmental impact, including sustainable housing finance and mortgage finance, focusing on underserved regions.

### Residential Energy Efficiency (REE) and Sustainable Energy Finance through IFC
- IFC’s REE Program works with partner financial institutions to stimulate investment in energy-efficient renovation of multi-family residential buildings.
  - Little investment in REE in Russia to date due to regulatory barriers, lack of financial institution experience, and lack of awareness of economic benefits.
  - IFC cooperating actively with IBRD and EBRD to maximize market development impact.
- IFC's Sustainable Energy Efficiency Program:
  - Makes credit lines available to banks for on-lending for energy efficiency projects.
  - Provides technical assistance to banks and private companies to raise lending volumes for energy-saving projects.

### Enhancing Russia’s global role — Bank commitment and specific engagement areas
- Bank committed to support Russia’s increasing global role and assist in fulfilling global commitments.
- Continued cooperation to support Russia’s emergence as an international donor and active multilateral organization member.
- Bank assistance areas include mechanisms and implementation of actions from Russia’s global engagements (Climate Change and Biodiversity Conventions, pandemic diseases initiatives).

Key Bank engagement areas:
- Assistance in formulation of an ODA system for Russia as an emerging donor:
  - Bank to assist Russia on establishment of a national ODA system through training/capacity events, information sharing, and advisory services.
  - With support from the Russia as a Donor Initiative DFID TF, Bank is helping strengthen statistics of development aid, strategic communications and development aid training programs.
  - An “externally funded staff development program” will build Russian Government capacity for aid policy development and aid management.
  - After supporting an Emerging Donor Meeting hosted by Russia in April 2006, the Bank and OECD contributed to preparation and delivery of a February 2010 international conference in Moscow on “New Partners in International Development Finance” attended by thirty-two countries and twelve international organizations.

- Providing access to the Bank’s instruments for channeling Russian developmental assistance:
  - Bank engagement on international policy initiatives developed under Russia’s G-8 presidency, including priorities: quality of education, improved access to energy by vulnerable groups, and controlling spread of infectious diseases.
  - Assistance in preparation of Russian contributions to multilateral TFs such as the Global Emergency Food Facility, the Education-For-All/Fast Track Initiative, Rapid Social Response TF, South-South Experience Exchange TF.
  - Strengthen cooperation on joint Russia-Bank aid initiatives in Central Asia covering labor migrants, agriculture, water and energy.
  - Russia increased its contributions markedly to IDA15.

- Fulfilling international obligations related to global goods (Climate/Emissions projects):
  - Bank and IFC committed to help implement Russia’s Climate Doctrine (adopted in May 2009) which includes a commitment by President Medvedev to cut up to 25% of greenhouse gas emissions from the 1990 level by 2020, including through increasing energy efficiency.
  - Bank and IFC submitted applications to Sberbank as the Designated National Authority for implementation of the Kyoto Protocol mechanisms.
  - World Bank’s Rosneft Gas Flaring Reduction Project (the largest Bank JI project in ECA) expected to produce 6.8 million tons of Emission Reduction Units (ERU) for 3 years for an estimated US$75 million purchase contract with Bank carbon funds.
  - Joint IFC and Core Carbon Group GHG reduction project under the Netherlands European Carbon Facility would produce 2 to 3 million ERUs.
  - Bank will continue participation and support for the Ministerial Conference on Forest Law Enforcement and Governance in Europe and North Asia.

- Linking Russian companies to global markets:
  - IFC and MIGA facilitate trade and investment linkages between Russian firms and global markets.
  - IFC will continue to actively support strong, reputable Russian clients investing in emerging markets (South-South investment).
  - MIGA will continue to proactively engage Russian companies planning to invest in emerging markets through guarantees.

### Statistical issues — assessment of data adequacy for surveillance
- General assessment: Data provision is broadly adequate for surveillance, but scope exists for further improvements to meet emerging data demands for assessing external vulnerabilities.
- Russia is an SDDS subscriber, has a range of statistical dissemination formats, and reports data for the Fund’s statistical publications; these sources inform surveillance.
- National Accounts: Data broadly adequate for surveillance, but reliability concerns exist for recent quarterly GDP estimates (particularly for 2009 and the first quarter of 2010) and inconsistencies between published headline GDP growth rates, level series, and seasonally adjusted data.
  - These inconsistencies are a concern among a wide range of users, including Fund staff, and may point inter alia to lags in the revision schedule of the various data formats.

*Source: _cr10246 - 3. The Government has prioritized the social sector and social services in its medium-*

### introduction of methodological changes in the compilation of important indicators, like the

### _cr10246 - introduction of methodological changes in the compilation of important indicators, like the

### Methodological changes and data revisions
- Historical revision of the industrial production index is due to be released in July 2010.
- Consistent with the new industrial production series, a historical revision of the annual and quarterly GDP series—incorporating results of the 2006 agriculture census and methodological improvements—is planned for release during the third quarter of 2010.
- Rosstat generally follows the 1993 SNA, but scope exists for methodological improvements in volume measures of production-based GDP estimates, including estimates of the output of financial intermediation services indirectly measured (FISIM).
- Imputed rental services of owner-occupied dwellings are undervalued.
- Improvements in coverage of source data are constrained by inadequate response to business surveys.
- The unavailability of balance sheet data remains an obstacle for analyzing balance sheet vulnerabilities.

### Price statistics
- Monthly CPI and PPI compiled using the Two-State (Modified) Laspeyres (2000=100) cover all regions of the Russian Federation.
- Rosstat publishes: general CPI index and indices for foodstuffs, non-food products, and services.
- Detailed CPI weight data:
  - Made available on Rosstat website beginning in 2006.
  - Published in the publication Prices in Russia beginning in 1995.
  - Since 2009, detailed consumer expenditure data used to develop CPI weights are posted annually on Rosstat’s website.
  - Earlier detailed household expenditure data published in Prices in Russia 2004 and Prices in Russia 2006.
- Detailed PPI weight data are not published; detailed data on total annual sales used to develop PPI weights are published by economic activity on Rosstat website under Entrepreneurship → industrial subsection.
- Recommendation: Detailed PPI weights should be published and easily accessible.
- Further recommended improvements: better treatment of seasonal items in the core inflation index and implementation of a new household budget survey (under consideration).

### Government finance statistics
- Timeliness and level of detail of disseminated fiscal data can be improved for surveillance purposes.
- Data on economic classification of expenditures are available with a considerable lag.
- Data on functional classification of expenditure and financing differ from international standards.
- Historical data on maturity structure of domestic and external federal debt are not published, except the most recent observation available through SDDS.
- Monthly data on the size and composition of ruble guarantees are not available prior to 2010.
- Historical monthly data on foreign currency debt are not available prior to 2009.
- No integrated debt monitoring and reporting system exists.
- Reconciliation of different fiscal datasets (budget execution, cash flow statement, GFSM 2001 format, SDDS) is difficult.
- Recommendation: Consolidate fiscal statistics links in a dedicated data dissemination page (Russian and English) and supplement with definitions, compilation methodology, and analytical materials to make the website more user friendly.

### Monetary statistics
- Since July 2008, the Central Bank of Russia (CBR) provides to the IMF, in the MFSM-recommended format, summarized data on:
  - (i) the Central Bank Survey,
  - (ii) the Other Depository Corporations Survey,
  - (iii) the Depository Corporations Survey,
  - (iv) the Other Financial Corporation Survey,
  - (v) the Financial Corporations Survey.
- Analysis of balance sheet effects has been hindered by lack of comparable data on currency and maturity breakdown of banking-sector assets and liabilities.
- Adoption of data reporting in full detail of the Standardized Report Forms (SRFs), as recommended by an STA mission in 2007, would provide currency and instrument breakdowns of banking-sector assets and liabilities.
- Starting in July 2010, the CBR plans to include breakdown of positions by currency in the Surveys.

### External sector statistics
- Balance of payments data are broadly adequate for surveillance; significant improvements have been made, but scope remains to improve coverage of certain components of the current, capital, and financial accounts.
- Improving detail of supplemental data on the financial account would facilitate analysis of complex flows.
- Supplemental data on gross flows of long-term external debt (drawings and repayments) are published for non-financial enterprises and government, but similar data for banks are not available—hampering analysis of vulnerabilities from external debt.
- Balance of payments compiled according to BPM5; CBR is actively implementing BPM6 recommendations.
- Partial data from various sources are supplemented by estimates and adjustments to improve data coverage.
  - CBR adjusts merchandise import data from the Federal Customs Service to account for “shuttle trade,” smuggling, and undervaluation.
  - Statistical techniques estimate transactions and positions of foreign-owned enterprises with production sharing agreements; techniques are continuously improved.
- Improvements made in coverage and quality of direct investment surveys; CBR participates in the Fund’s Coordinated Direct Investment Survey.
- Headline data on reserves are reported to the Fund and markets on a weekly basis with a four-business day lag.
- Comprehensive information is reported in the Reserves Template with a lag of 20 days (exceeding SDDS timeliness requirement of one month).

### Data standards, quality, and reporting
- Subscriber to the Special Data Dissemination Standard (SDDS) since January 31, 2005.
- SDDS flexibility option used for timeliness of data on central government operations.
- A data ROSC prepared in October 2003 was published on the IMF website on May 14, 2004.
- A data ROSC reassessment in June–July 2010 concluded that Russia’s macroeconomic statistics are generally of high quality and that compiling agencies have made significant progress in adopting international statistical methodologies and best practices.
- Data are reported for publication in:
  - International Financial Statistics (IFS),
  - Government Finance Statistics Yearbook,
  - Direction of Trade Statistics,
  - Balance of Payments Statistics Yearbook.
- Monetary data reported for IFS are in the format of summarized surveys rather than the full-detail SRFs that disaggregate positions by financial instrument, currency, and counterparty sector.

### Executive Board assessment, outlook, and policy recommendations
- Background assessment:
  - 2009 GDP fell by 7.9 percent.
  - Recovery began in second half of 2009; short-term indicators point to strengthening after temporary softness in Q1 2010.
  - Recovery increasingly driven by consumption, reflecting a recent 45 percent cumulative increase in pensions and other policy support.
  - Inflation has come down rapidly in context of a large output gap.
  - Labor market improved: unemployment declined and real wages strengthened modestly.
  - Overall balance of payments remained in surplus; ruble appreciated considerably since its trough in February 2009.
- Banking system: still under strain; credit recovery likely gradual. Signs of deceleration in accumulation of overdue loans; credit growth picked up modestly in March and April (year not specified in excerpt).
- Fiscal stance:
  - Significant fiscal stimulus in 2009; general government nonoil deficit increased from 8¼ percent of GDP in 2008 to 15 percent of GDP in 2009.
  - Much expansion targeted at low-multiplier areas (strategic sectors, defense and security).
  - Underlying federal government nonoil balance by end-2009 was some 9 percent of GDP above both its pre-crisis level and the government’s medium-term target.
  - In June (year not specified in excerpt) government passed a supplementary budget, entailing a further slight increase in the federal nonoil deficit in 2010.
- Monetary policy:
  - CBR cut its refinancing rate by 525 bps to 7¾ percent from its peak in April 2009.
  - Deposit and lending rates remained relatively high until recently given uncertain outlook and risk aversion.
  - Exchange rate became more flexible; weaker balance of payments and sizeable output gap reduced tradeoff between inflation and exchange rate objectives.
- Near-term outlook (staff projections):
  - GDP growth projected to reach 4¼ percent in 2010 (reflecting inventory cycle turn, boost to consumption from rising real wages, and gradual resumption of bank lending).
  - Annual growth expected to fall back to around 4 percent in 2011 absent sustained increases in oil prices.
  - Inflation projected to reach 6 percent (y-o-y) at end-2010 and 5½ percent at end-2011.
  - Current account expected to improve in 2010 before deteriorating modestly in 2011 as import growth picks up.
- Executive Directors’ views and policy recommendations:
  - Commended authorities’ forceful response to recession and the fiscal/monetary space created by pre-crisis policy of taxing and saving oil windfall.
  - Main challenges: implement medium-term fiscal consolidation, mitigate pressures for real appreciation and inflation, restore banking system health, and improve investment climate via ambitious structural reforms.
  - Most Directors: begin gradual withdrawal of stimulus now and step up adjustment in 2011–12; cautioned against further supplementary budgets.
  - Recommended advancing public sector reforms to prevent renewed overheating and rapid real appreciation; strengthen fiscal framework; avoid use of supplementary budgets; focus budgets on nonoil deficit.
  - Most Directors: monetary policy should focus on controlling inflation and next move should begin a tightening cycle; a few Directors cautioned tightening could be premature and increase exchange rate volatility.
  - Directors welcomed greater exchange rate flexibility to limit speculative capital flows and strengthen incentives for domestic borrowing; a few noted risks from increased volatility given reliance on commodity prices and FX exposure of financial sector.
  - On banking supervision: welcomed progress; recommended strengthening loan risk assessment and forward-looking provisioning; recommended greater supervisory powers for the CBR—especially consolidated supervision and connected lending oversight.
  - Stressed importance of decisively addressing overhang of nonperforming and restructured loans to support sustained credit expansion.
  - Emphasized reinvigoration of structural reforms to improve investment climate, boost productivity, and modernize/diversify the economy; welcomed progress toward WTO accession.
  - Reiterated that taxing and saving oil revenues remains key to modernization and diversification.

### Key selected macroeconomic indicators (2007–11; as presented)
- Real GDP (Annual percent change): 8.1 (2007); 5.6 (2008); -7.9 (2009); 4.3 (2010 Proj.); 4.1 (2011 Proj.).
- Consumer prices:
  - Period average (Annual percent change): 9.0 (2007); 14.1 (2008); 11.7 (2009); 6.2 (2010 Proj.); 5.7 (2011 Proj.).
  - End of period (Annual percent change): 11.9 (2007); 13.3 (2008); 8.8 (2009); 6.0 (2010 Proj.); 5.4 (2011 Proj.).
- GDP deflator (Annual percent change): 14.4 (2007); 18.0 (2008); 2.3 (2009); 8.9 (2010 Proj.); 6.6 (2011 Proj.).
- General government overall balance (Percent of GDP): 6.8 (2007); 4.3 (2008); -6.2 (2009); -5.6 (2010 Proj.); -3.1 (2011 Proj.).
- General government revenue (Percent of GDP): 39.8 (2007); 38.6 (2008); 34.4 (2009); 34.1 (2010 Proj.); 35.0 (2011 Proj.).
- General government expenditures (Percent of GDP): 33.1 (2007); 34.3 (2008); 40.6 (2009); 39.8 (2010 Proj.); 38.0 (2011 Proj.).
- General government primary balance (Percent of GDP): 7.3 (2007); 4.8 (2008); -5.6 (2009); -4.9 (2010 Proj.); -2.2 (2011 Proj.).
- Nonoil balance (Percent of GDP): -3.9 (2007); -8.3 (2008); -15.0 (2009); -14.6 (2010 Proj.); -11.5 (2011 Proj.).
- Base money (Annual percent change): 33.1 (2007); 2.9 (2008); 7.4 (2009); 19.1 (2010 Proj.); 17.1 (2011 Proj.).
- Ruble broad money (Annual percent change): 47.5 (2007); 1.7 (2008); 16.3 (2009); 26.9 (2010 Proj.); 18.6 (2011 Proj.).
- Export volumes (Annual percent change): 4.4 (2007); -2.6 (2008); -7.9 (2009); 8.3 (2010 Proj.); 4.9 (2011 Proj.).
  - Oil: 5.4 (2007); -2.6 (2008); 3.0 (2009); 1.8 (2010 Proj.); 1.6 (2011 Proj.).
  - Gas: -5.4 (2007); 1.8 (2008); -13.8 (2009); 12.0 (2010 Proj.); -0.9 (2011 Proj.).
  - Non-energy: 6.7 (2007); -4.4 (2008); -18.5 (2009); 16.4 (2010 Proj.); 11.0 (2011 Proj.).
- Import volumes (Annual percent change): 25.1 (2007); 11.1 (2008); -30.0 (2009); 17.4 (2010 Proj.); 14.2 (2011 Proj.).
- Total merchandise exports, fob (Billions of U.S. dollars): 354.4 (2007); 471.6 (2008); 303.4 (2009); 380.6 (2010 Proj.); 408.9 (2011 Proj.).
- Total merchandise imports, fob (Billions of U.S. dollars): -223.5 (2007); -291.9 (2008); -191.8 (2009); -238.0 (2010 Proj.); -271.9 (2011 Proj.).
- External current account (Billions of U.S. dollars): 77.0 (2007); 103.7 (2008); 49.0 (2009); 66.9 (2010 Proj.); 60.5 (2011 Proj.).
- External current account (Percent of GDP): 5.9 (2007); 6.2 (2008); 4.0 (2009); 4.5 (2010 Proj.); 3.6 (2011 Proj.).
- Gross international reserves (Billions of U.S. dollars): 478.8 (2007); 427.1 (2008); 439.0 (2009); 478.4 (2010 Proj.); 516.6 (2011 Proj.).
- Months of imports (of goods and non-factor services): 20.3 (2007); 14.0 (2008); 20.8 (2009); 18.3 (2010 Proj.); 17.4 (2011 Proj.).
- Percent of short-term debt: 221 (2007); 289 (2008); 298 (2009); 400 (2010 Proj.); 375 (2011 Proj.).
- Nominal GDP (Billions of U.S. dollars): 1,305 (2007); 1,671 (2008); 1,240 (2009); 1,488 (2010 Proj.); 1,690 (2011 Proj.).
- Exchange rate (rubles per U.S. dollar, period average): 25.6 (2007); 24.9 (2008); 31.7 (2009).
- World oil price (U.S. dollars per barrel, WEO): 71.1 (2007); 97.0 (2008); 61.8 (2009); 75.3 (2010 Proj.); 77.5 (2011 Proj.).

*Source: IMF staff report and Public Information Notice (PIN) for the 2010 Article IV Consultation with Russian Federation (as presented in the provided content).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10246.pdf_