## _cr14134 ## Source details **Canonical URL:** [_cr14134](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14134.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14134.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14134.pdf.json) --- ### Preface — mission, scope, and summary conclusions - Mission: Fiscal Transparency Evaluation (FTE) requested by the Ministry of Finance of the Russian Federation; mission visited Moscow October 15-30, 2013. - Team: led by Richard Hughes; included Tom Josephs, Gösta Ljungman (FAD), Viera Karolova (STA), Vladimir Krivenkov (FAD expert). - Objective: evaluate Russia’s fiscal reporting, fiscal forecasting and budgeting, and fiscal risk management practices against the July 2013 draft IMF Fiscal Transparency Code (FTC). - Authorities met: Ministry of Finance, Federal Treasury, Ministry of Economic Development, Ministry of Energy, Rosstat, Bank of Russia, Accounts Chamber, Duma Budget and Tax Committee, Economic Experts Group, Gaidar Institute. - Basis/timing: evaluation based on information available at completion in October 2013; findings represent IMF mission team views; unless specified, data are IMF mission team estimates. - Acknowledgements: particular thanks to Deputy Minister Alexei Lavrov, Andrey Blokhin, Anna Belenchuk, Aleksandr Zolotin. ### Executive Summary — strengths and recent improvements - Legal/institutional: - 1998 Budget Code and subsequent amendments provide comprehensive legal framework for fiscal management at all levels. - Reporting/accounting: - Government publishes cash-based in-year and year-end fiscal reports and accrual-based annual financial statements; fiscal statistics consolidate Federal, regional, and municipal governments in line with international standards. - Forecasting/fiscal rule: - Detailed and credible medium-term macroeconomic forecasts prepared since early 2000. - New oil price-based fiscal rule introduced in 2013 to encourage sustainable and counter-cyclical fiscal policymaking. - Budget coverage/format: - Federal budget coverage expanded; three main remaining extra-budgetary funds presented and approved alongside it. - Comprehensive medium-term budget framework introduced in 2008; new program and performance budgeting system introduced in the 2014 Budget. - Fiscal risk controls: - Central controls include annual limits on issuance of debt, credit, and guarantees by the Federal government and on borrowing by sub-national governments. - Transparency progress: - International Budget Partnership Open Budget Index score rose from 47 (2006) to 74 (2012); ranking improved from 28th/59 to 10th/100. ### Executive Summary — key gaps and risks (numeric highlights) - Coverage gaps in fiscal reports: - fiscal reports exclude financial activity of various classes of government-controlled enterprises with net expenditure of at least 29 percent of GDP and liabilities of at least 127 percent of GDP in 2012 (based on 26 largest government-controlled enterprises by liability). - Balance sheet omissions: - excluded sub-soil oil and gas assets of 200 percent of GDP and liabilities accrued to date from public pensions and PPP arrangements of 287 percent of GDP. - Provisions and valuation: - no provisions for assessed but unlikely-to-be-collected taxes or non-repayment of government’s RUB 2.3 trillion (4 percent of GDP) in loans. - budgets overstate likely payouts against the government’s 2 percent of GDP stock of guarantees. - no regular estimates of the estimated 1-2 percent of GDP in annual revenue foregone through tax expenditures. - Secrecy and extra-budgetary plans: - 14 percent of the Federal budget classified as secret for national security reasons. - plans exist for extra-budgetary expenditure and lending via sovereign wealth funds. - Forecast credibility and scrutiny: - scope to enhance credibility, transparency, and scrutiny of official fiscal forecasts. - Risk reporting and horizon: - near-term fiscal risk reporting incomplete and fragmented; longer-term forecasts to be published in 2014 extend only to 2030. - Long-term pressures: - declining oil and gas revenues and rising pension and healthcare costs likely to place considerable pressure on fiscal position over the long run. ### Principal recommendations (nine) - clarify the boundary between general government, public, and private sectors and expand institutional coverage of fiscal reports to encompass the whole public sector; - expand coverage of balance sheets to include subsoil assets as well as pension and public-private partnership liabilities; - enhance consistency between budgets, statistics, and accounts in treatment of non-cash flows and valuation of fixed assets; - improve disclosure and management of revenue foregone from tax expenditures; - improve coverage and detail of the annual budget; - enhance independent scrutiny and transparency of official macroeconomic and fiscal forecasts; - improve disclosure and analysis of fiscal risks; - publish regularly long-term fiscal projections covering at least thirty years; - strengthen financial oversight of government-controlled enterprises. - Implementation planning: a Fiscal Transparency Action Plan with a five-year sequence of actions is appended. --- ### 1. Fiscal reports — purpose, framework, and main findings - Purpose: fiscal reports should provide comprehensive, timely, reliable, comparable, and accessible summary of government financial performance and position; assessment against July 2013 draft IMF FTC across coverage, frequency/timeliness, quality/comparability, reliability/integrity. - Frequency/timeliness/report formats: - uniform budget classification, chart of accounts, and reporting format across government units. - Treasury reports (monthly, quarterly, year-end) include cash revenue, expenditure, financing and debt classified by national budget classification. - Year-end budget execution (cash) and financial statements (accrual) published within five months; GFSM 2001 fiscal statistics (year-end) published within 10 months. - Selected timing/frequency (from Table 1.1): Monthly Budget Execution — Coverage GG, except EBU; Cash basis; Nat Gross; Frequency M; Publication 30 days. Quarterly Budget Execution — Q; Publication 35 days. Fiscal Statistics (monthly) — Publication 60 days. Financial Statements (year-end) — Accrual basis; Annual; Publication 5 months. Fiscal Statistics (year-end, GFSM 2001) — Publication 10 months. SNA 1993-based year-end statistics — Publication 18 months. Main Directions of Budget Policy — Publication Jul. Budget Proposal — Publication Oct. - Public sector register and institutional coverage: - public sector comprised 81,954 separate institutional entities as of October 2013: - 12,402 budgetary central government entities (accounts with Federal Treasury) - 4,389 central extra-budgetary organizations - 87 social security funds and 84 regional governments; these funds depend on transfers from the Federal budget for 47 percent of their revenue - 23,185 sub-national governments (83 state/regional and 23,102 local) - 31,092 public corporations (22,440 unitary enterprises; 308 government corporations (11 financial, 297 nonfinancial); 8,344 joint stock companies) - 10,799 other government-controlled entities in Rosstat register - government maintains but does not publish a comprehensive register; Rosstat and Treasury registers are inconsistent (Rosstat: 41,891 general government entities; Treasury: 40,063). - Coverage of institutions and gaps: - consolidated public sector (including 26 largest public corporations) accounted for at least 68 percent of GDP by expenditure in 2012. - central government net expenditure: 33 percent of consolidated public sector expenditure (22 percent of GDP). - sub-national governments: about 26 percent of consolidated public sector expenditure (18 percent of GDP). - public corporations: at least another 41 percent of consolidated public sector expenditure (28 percent of GDP). - Treasury reports exclude three extra-budgetary entities whose net expenditure accounts for 2.7 percent of GDP; Rosstat’s GFSM 2001-based statistics consolidate these three entities. - consolidating the largest 26 public corporations into fiscal accounts for 2012 would add 27 percent of GDP to both expenditure and revenue and would not materially alter the overall fiscal surplus of 3 percent of GDP in 2012. - Public corporations’ balance sheet: - largest 26 public corporations had liabilities of around 102 percent of GDP in 2012 compared with general government liabilities of 11 percent of GDP. - Reported consolidated general government balance sheet (2012, percent of GDP): - Nonfinancial assets: 43.4 (Fixed assets: 34.3; Inventories: 5.7; Nonproduced assets: 3.4) - Financial assets: 34.2 (Currency and deposits: 15.9; Loans: 3.7; Shares & other equity: 15.7; Other assets: -1.4) - Liabilities: 11.1 (Securities excl. shares: 8.8; Loans: 1.4; Other liabilities: 0.9) - NET WORTH: 66.5 - Staff estimates of not reported/underreported items (2012, bill. Rubles; percent of GDP): - Reported consolidated general government net worth: 41,605; 66.5 percent of GDP. - Subsoil assets (not reported): 125,198; 200.0 percent of GDP. - PPPs assets: 1,252; 2.0 percent of GDP. - PPPs liabilities: 1,252; 2.0 percent of GDP. - Net Worth (excluding PAYGO pensions): 123,348; 197.0 percent of GDP. - Unfunded PAYGO pension liabilities: 176,529; 282.0 percent of GDP. - Net Worth (including PAYGO pensions): -53,181; -85.0 percent of GDP (general government, not reported summary). - Public corporations not reported: Nonfinancial assets: 22,599; 36.1 percent of GDP. Financial assets: 56,820; 90.8 percent of GDP. Liabilities: 79,418; 126.9 percent of GDP. - Public sector consolidated totals (Not Reported): Nonfinancial assets: 176,216; 281.5 percent of GDP. Financial assets: 62,437; 99.7 percent of GDP. Liabilities: 73,700; 117.7 percent of GDP. Net Worth (excluding PAYGO pensions): 164,953; 263.5 percent of GDP. Unfunded PAYGO pension liabilities: 176,529; 282.0 percent of GDP. Net Worth (including PAYGO pensions): -11,577; -18.5 percent of GDP. - Key factors behind differences: - unrecognized subsoil assets around 200 percent of GDP; unreported pension rights accrued around 285 percent of GDP (text) / 282.0 percent of GDP (Table 1.4); growing PPP obligations estimated at 2 percent of GDP; public corporations holdings: 97 percent of GDP in liabilities to the private sector and 127 percent of GDP in fixed and financial assets (text). - Nonfinancial assets reported at historical prices; market values likely at least ten-fold higher than historical values in some cases; shares and other equities not recorded at market prices. - Consequences for net worth and sustainability: - Consolidating sub-soil assets, PPPs, funded pensions, and balance sheets of 26 largest public corporations delivers public sector net worth of positive 264 percent of GDP (staff estimate). - Including 282 percent of GDP in unfunded PAYGO pension obligations delivers overall public sector net worth of minus 19 percent of GDP if these obligations are recognized. - Estimates highly sensitive to assumptions about growth, oil production/prices, demographics, and other risks. --- ### 14. Accrual versus cash reporting, omissions, stock-flow adjustments, and tax expenditures - Budget execution reports: cash-based; annual financial statements: accrual-based for general government. - Omissions/incomplete accrual capture: - reported tax revenue based on assessments/declarations; provisions for amounts unlikely to be paid are not created. - no provision for write-offs related to RUB 2.3 trillion (4 percent of GDP) in government loans in 2012. - pension liabilities from state-funded pension scheme omitted from official fiscal reports. - changes in market prices of fixed assets and equities not reflected as other economic flows affecting net worth. - Accrual vs cash differences (selected Table 1.5 entries, percent of GDP): - General Government Revenue: 2009: 6.5; 2010: 4.1; 2011: 7.4; 2012: 4.9 - Federal Budget Revenue: 2009: 0.7; 2010: 1.7; 2011: 3.7; 2012: 2.3 - Sub-national Govts Revenue: 2009: 6.3; 2010: 3.0; 2011: 3.5; 2012: 3.7 - General Government Expenditure: 2009: 6.3; 2010: 3.0; 2011: 6.7; 2012: 3.7 - Net acquisition of NFA (General Government): 2009: 0.2; 2010: -0.4; 2011: 2.5; 2012: 0.2 - Net lending / borrowing (General Government): 2009: 0.2; 2010: 1.1; 2011: 0.7; 2012: 1.2 - Net impact of other accounts receivable/ payable: 2009: 0.6; 2010: 1.3; 2011: 0.0; 2012: 1.0 - Stock-flow adjustments (SFAs): - SFAs averaged 1.9 percent of GDP over 2009-12 compared with 1.1. percent of GDP in EU countries. - SFAs were 5.2 and 4.3 percent of GDP in 2011 and 2012 respectively. - Selected Table 1.6 entries (percent of GDP): Net borrowing(+)/lending(-): 2009: 4.6; 2010: 1.4; 2011: -3.4; 2012: -3.0. Net acquisition of financial assets: 2009: -3.4; 2010: 0.2; 2011: 5.1; 2012: 4.3. Change in the debt: 2009: 2.3; 2010: 1.9; 2011: 1.8; 2012: 1.3. Stock-Flow Adjustments: 2009: -2.3; 2010: 0.4; 2011: 5.2; 2012: 4.3. - Tax expenditures: - limited disclosure; no official methodology agreed. - three conceptual methodologies: revenue foregone, revenue gain, outlay equivalent. - preliminary unofficial estimates indicate federal tax expenditures in range of 1-2 percent of GDP in 2010 (exclude foregone tax from corporations in 24 Special Economic Zones; may be understated given recent tax exemptions). - Frequency/timeliness/quality: - monthly cash-based budget execution published within 30 days; quarterly within 35 days; monthly GFSM 2001 reports within 60 days. - annual cash-based budget execution and accrual-based financial statement published within five months. - classification differences between national rules and GFSM 2001 affect comparability (e.g., acquisitions of shares treated "above the line" nationally; GFSM 2001 treats them as financial). - major 2009 revision increased net borrowing by 9.5 percent of GDP due to reclassification of holdings of government shares and equities. - Integrity and audit: - GFSM 2001-based fiscal statistics produced and disseminated by Federal Treasury; Rosstat compiles nonfinancial national accounts with almost two-year delay. - Accounts Chamber audits annual budget execution reports and financial statements but does not provide opinion on true and fair view. - Fiscal statistics meet IMF SDDS; authorities preparing quarterly accrual-based data on general government operations. - Conclusions and priority improvements: - expand coverage to include publicly-controlled corporations; include subsoil assets, pension liabilities, PPP obligations in summary balance sheet; create provisions for non-recoverable taxes and loans; adopt market valuation where appropriate; regular estimation/management of tax expenditure revenue loss. - Chapter IV contains recommendations to consolidate available fiscal information into more comprehensive summary fiscal reports. --- ### Classification, data consistency, historical consistency, and statistical integrity (summary) - Fiscal reporting classifications: - Good: administrative, economic, and functional classifications comparable with international standards. - Medium: inconsistent classifications of some transactions lead to different fiscal balance levels. - Data consistency: - Basic: fiscal reports reconcile cash balance and financing. - High: unexplained stock-flow adjustments of 4-5 percent of GDP in recent years. - Historical consistency: - Basic: material revisions to historical fiscal statistics are reported. - Medium: historical statistics are not revised regularly to reflect new information. - Statistical integrity and audit (section 4.x): - Good: statistics prepared by semi-autonomous government agency; fiscal statistics meet SDDS. - Medium/Low: some reforms required to meet SDDS plus; audit institutions exist but Accounts Chamber audit does not give a true-and-fair opinion. --- ### II. Fiscal forecasting and budgeting — framework, timing, and key findings - Scope: assessment relative to July 2013 draft IMF FTC on comprehensiveness of budget and documentation, timeliness, policy orientation, and credibility of forecasts. - Legal framework: - Budget Code N145-F3 of July 31, 1998 (amended up to July 23, 2013) governs budget preparation, approval, execution, accounting, and audit. - Tax Code N146-F3 of July 2008 (amended up to October 2013) governs taxation. - Medium-term orientation: - Ministry of Economic Development prepares medium-term economic forecasts (two or three per year); budgets cover upcoming year plus two forward years with same level of detail. - Fiscal rule (2013): Federal Budget expenditure should not exceed projected non-petroleum revenue + petroleum revenue calculated using reference oil price + net financing equivalent to 1 percent of GDP. Initial benchmark oil price: average oil price for last five years, horizon expands to ten years by 2018. - Reserve Fund target: build assets to 7 percent of GDP (authorities project in 2019). Once Reserve Fund reaches 7 percent of GDP, law requires 50 percent of any above-projection revenue to be deposited in National Wealth Fund; remaining 50 percent for investments. - Key macro-fiscal documents (select): - Long-term social and economic forecast to 2030: 350 page document; Mar (2013). - Budget for upcoming year and two-year planning period (government submission with annexes): about 4,500 pages; Oct. - Budget unity and coverage: - Federal Budget covers 91 main spending units; three extra-budgetary funds (Pension Fund, Social Insurance Fund, Federal Mandatory Health Insurance Fund) submitted and approved with budget. - Several state corporations perform government functions but are not included in annual budget; announced extra-budgetary investment or lending by National Wealth Fund (NWF) and Investment Fund of the Russian Federation would need classification as government entities if tax-funded. - Gross vs net budgeting: - own-financed expenditure accounts for 4.3 percent of total central government expenditure in 2012. - net budgeting at sub-national level around 3.7 percent of total sub-national expenditure in 2012. - Hidden expenditure and secrecy: - share of budget classified as secret: close to 14 percent of total expenditure in 2013; forecast to increase to close to 25 percent in 2016. - Macroeconomic forecasts: - Ministry of Economic Development issues April, September, and December forecasts; April internal document has multiple scenarios, published documents present key parameters; forecasts for GDP-growth three-years ahead unbiased and relatively accurate compared with other G-20 countries (except 2009). - Medium-term budget framework: - mandated since 2008; outer-year expenditure estimates have tended to be revised up: actual expenditure on average 9 percent higher than initial estimate for second year and more than 12 percent higher for third year. - multi-year expenditure limit introduced in 2013 as part of oil price-based fiscal rule may strengthen discipline. - Timeliness: - annual budget submitted to legislature no later than October 1 (three months before budget year); Duma adopt within 60 days; in practice budgets adopted/published in final days of November or early December (one month before start of financial year). - Citizens’ guide: - Citizen’s Budget material published mid-October 2013: around 230 slides; length/detail limit accessibility. - Fiscal sustainability analysis: - long-term fiscal strategy under preparation; Ministry of Economic Development long-term projections (latest December 2012) not based on comprehensive cost-driver assessment; Ministry of Finance developing report to 2030; 15-year horizon considered insufficient to capture demographic and oil revenue implications. --- ### 2.1 Comprehensiveness and 2.2 Timeliness — notable numeric findings - Budget documentation and risks: - Up to 0.7 % of GDP in extrabudgetary lending planned from NWF. - Share of budget classified as secret will grow to 25 % in 2016. - Medium-term forecast error for GDP is 0%. - Three-year ahead forecast error for expenditure was 13% over the past 4 years. - Average revision of total expenditure in medium-term plans are over 10%. - Supplementary budgets increased total expenditure by more than 5% on average during 2008-12. - Increase in pension expenditure up to 2050 close to 100 % of GDP on a NPV basis. --- ### 3.1 Risk disclosure and analysis — macro and specific fiscal risks (selected numeric detail) - Macroeconomic risks: - Energy sector: around one-fifth of GDP; two-thirds of exports; around one-third of general government revenues. - Sensitivity: a permanent US$10 per barrel lower oil price or a 10 percent appreciation of the rouble estimated to increase the deficit by around 1 percent of GDP in 2015 (note: assumes exchange rate does not respond to oil price changes). Table 3.2 examples (share of GDP): Federal balance, October WEO forecast: 2013 -0.7, 2014 -0.2, 2015 -0.6. Permanent $10 fall in 2014: 2014 -1.3, 2015 -1.6. Permanent US$10 fall and 5% depreciation: 2014 -0.9, 2015 -1.4. Federal revenues, October WEO forecast: 2013 19.1; 2014 18.7; 2015 18.0. Federal expenditures, October WEO forecast: 2013 19.7; 2014 18.9; 2015 18.6. - Specific fiscal risks (Table 3.3, 2012 unless stated): - Non-deposit liabilities of state-controlled financial institutions: 18,000 billion rubles, 30 percent of GDP. - Deposit guarantee scheme: 9,400 billion rubles, 15 percent of GDP. - State guarantees: 1,130 billion rubles, 1.8 percent of GDP. - Public private partnerships: 1,300 billion rubles, 2.1 percent of GDP. - Nuclear decommissioning costs: 940 billion rubles, 1.5 percent of GDP. - Contingent obligations to international organizations: 880 billion rubles, 1.4 percent of GDP. - Natural disasters (average annual cost): 38 billion rubles, 0.06 percent of GDP. - Net present value of projected increase in state pension costs to 2050: 6,100,000 billion rubles, 98 percent of GDP. - NPV of projected increase in state health costs to 2050: 2,400,000 billion rubles, 38 percent of GDP. - Comparability and reporting gaps: - Rosstat (SNA) vs Treasury (GFSM 2001) differences up to 1.8 percent of GDP. - tax revenue recorded on assessed obligations rather than accrued revenues; budgets do not set ex ante provision for RUB 2.3 trillion (4.0 percent of GDP) in policy loans. - Risk management and allowances: - General reserve fund: no more than 3 percent of total budget expenditure (Article 81). - President’s Reserve Fund limited to 1 percent of total budget expenditure (Article 82). - Despite provisions, final federal expenditure exceeded initially approved budgets by more than 5 percent on average over the last twelve years. - Natural resources: - staff estimates of NPV of government revenues from sub-soil oil and gas assets: around 200 percent of GDP (mid-point estimate); using July 2013 release: around 230 percent of GDP; using only proven reserves: around 170 percent of GDP. - illustrative fifty-year projections: constant real price scenario revenues fall from 9 percent of GDP to around 2 percent of GDP over 50 years; constant current prices scenario revenues fall to around 0.5 percent of GDP by 2063. - Guarantees: - PDMR 2012 projections: projected stock of outstanding guarantees to grow from RUB 472 billion (1.0 percent of GDP) in 2010 to RUB 2.7 trillion in 2013 (3.3 percent of GDP). - In 2012, planned guarantee issuance: bulk for foreign export and investment credits, defense industry obligations, and domestic investment projects. - Financial sector exposure: - State-controlled banks: 50.4 percent of total banking assets at start of 2013 (up from around 35 percent in 2000). - State-controlled banks accounted for 53.8 percent of loans to nonfinancial corporations. - Unconsolidated liabilities of five largest state-controlled banks: around 44 percent of GDP. - Deposit insurance official liability end-2012: RUB 9.4 trillion (15 percent of GDP). - Public corporations and quasi-fiscal activity: - over 30,000 public corporations; gross liabilities at least RUB 53 trillion (85 percent of GDP). - three broad categories: 8,000+ joint-stock companies (open joint-stock required to publish audited financial statements), 22,440 unitary enterprises (not explicitly required to disclose financials), ~300 government corporations (not required to publish but some do). - quasi-fiscal costs: Gazprom subsidy to FSU countries estimated US$75 billion between 1992 and 2008; 2011 pre-tax domestic subsidies for gas and electricity estimated 0.99 percent and 1.09 percent of GDP respectively; difference between export-parity valuation and domestic gas revenue estimated 2012 at RUB 1.7 trillion (2.5 percent of GDP). - Health and social security funds: - Pension Fund expenditure around 9 percent of GDP; funded pillar payroll tax 6 percent invested with Vneshekonombank unless opt-out. - IMF NPV estimates: increased pension costs to 2050 NPV 97.6 percent of GDP; healthcare costs NPV 37 percent of GDP. --- ### Chapter IV — recommendations on disclosure and management of fiscal risks (selected numeric summary and core recommendations) - Summary findings (selected numeric): - unreported public sector liabilities around 130% of GDP; - long-term pension liabilities around 280% of GDP not included in government balance sheet; - future revenues from oil and gas reserves estimated at 200% of GDP not included on official balance sheets; - non-deposit liabilities of government-controlled financial institutions: RUB 18 trillion (30 percent of GDP); - exposure to deposit insurance scheme: RUB 94 trillion (15 percent of GDP) [note: source shows Deposit Insurance Agency estimated total insurance liability RUB 9.4 trillion (15 percent of GDP) — consistency maintained with supplied figures]; - nuclear decommissioning costs: RUB 940 billion (1.5 percent of GDP); - state guarantees forecast to rise to RUB 2.7 trillion (3.3 percent of GDP) by 2015. - Core recommendations (nine areas — summary): 1. Clarify institutional boundaries and expand institutional coverage; adopt internationally accepted classification criteria; prepare fiscal statistics for public corporations and consolidated public sector. 2. Expand balance sheet coverage: recognize funded pension obligations, off-balance PAYGO pension liabilities, PPP liabilities, and subsoil assets (future revenues). 3. Enhance consistency between budgets, statistics, and accounts: include provisions for taxes unlikely to be collected; provide for non-repayment of loans (e.g., RUB 2.3 trillion, 4.0 percent of GDP); require market-related guarantee fees; move toward market valuation of nonfinancial assets. 4. Improve disclosure/management of tax expenditures: estimate revenue loss (1.2–2.1 percent of GDP depending on methodology); present revenue loss alongside related expenditures; periodic review. 5. Improve coverage/detail of annual budget: review secret-classified proportion (14 percent in 2013; forecast close to 25 percent in 2016); present NWF/RDIF infrastructure investments alongside the annual budget. 6. Increase transparency/scrutiny of official forecasts: publish comprehensive Fiscal Strategy Report in late spring/early summer; publish reconciliations of forecast changes and formalize independent evaluation with published inputs. 7. Improve disclosure/analysis of fiscal risks: include sensitivity analysis (example: US$10 per barrel fall increases deficit by approximately 1 percent of GDP), alternative scenarios, probabilistic analysis; publish comprehensive statement of fiscal risks with magnitudes, likelihoods, and management strategy. 8. Publish long-term fiscal projections: 30-50 year projections under alternative assumptions (output growth, oil output/prices, fertility, employment, retirement, mortality); note existing projections cover 2014-2030 only and IMF projections to 2050 show pension and healthcare NPV increases of 100 percent and 37 percent of GDP respectively. 9. Enhance fiscal oversight of government-controlled enterprises: require audited publication of financial statements; require formats that facilitate consolidation; require disclosure/quantification of quasi-fiscal activity; publish annual sectoral overview of financial position, prospects and risks. - Implementation sequencing: - A Fiscal Transparency Action Plan sets specific actions over next five years; selected timeline items for public corporations sector: - 2014–2019 staged requirements to require audited/public financial statements, consolidation-friendly formats, disclosure of quasi-fiscal activity, and annual sector reports. - 2016–2019: publish aggregate statistics for public corporations sector and consolidated public sector. --- ### 9. Enhance financial oversight of public enterprises — issue, required actions, and timeline - Issue: - over 30,000 public corporations with gross liabilities of at least RUB 53 trillion (85 percent of GDP). - fewer than 2,000 required to publish financial statements; no aggregate reporting on financial position and performance. - continued quasi-fiscal activity by large public corporations not transparently presented. - Recommendation 9 — required actions (summary): - a. Require all public corporations to publish financial statements and have them audited. - b. Require financial statements presented in format facilitating consolidation with public sector. - c. Require disclosure and quantification in financial statements of provision of goods/services at below-market prices and other quasi-fiscal activity. - d. Publish an annual report on fiscal performance, prospects, and risks of public corporations sector. - Appendix I timeline highlights for Actions related to public corporations: - Action 1.c (Prepare fiscal statistics for public corporations): 2016 publish aggregate statistics; 2017 statistics for consolidated Federal government and its 100 largest corporations; 2018 public statistics for consolidated Federal government and all its corporations; 2019 publish statistics for consolidated public sector including both Federal and sub-national public corporations. - Action 9 staged requirements: - 2014–2016: phased requirements for publication/audit of financial statements for corporations above thresholds. - 2015–2017: phased requirements for 100 largest then all public corporations to identify transactions and cross‑holdings with government and other public corporations. - 2014–2017: phased requirements to quantify public service undertakings and below-market prices in financial statements for joint-stock companies, then for all public corporations. - 2014–2019: phased publication of annual surveys and overviews culminating in consolidated public sector reports by 2018–2019. --- *Source: IMF Fiscal Transparency Evaluation mission report (completed October 2013) — Preface, Executive Summary, Chapters 1, 2, 3, 9, and IV excerpts of _cr14134 as provided in source PDF.* ### Preface ___________________________________________________________________________________________ 6 ### _cr14134 - Preface ### Preface - Mission: Fiscal Transparency Evaluation (FTE) requested by the Ministry of Finance of the Russian Federation. - Dates: mission visited Moscow during the period October 15-30, 2013. - Leading staff: mission led by Richard Hughes; team included Tom Josephs, Gösta Ljungman (FAD staff), Viera Karolova (STA staff), and Vladimir Krivenkov (FAD expert). - Objective: evaluate Russia’s fiscal reporting, fiscal forecasting and budgeting, and fiscal risk management practices against the standards set by the revised draft of the IMF’s Fiscal Transparency Code (FTC). - Authorities and institutions met: Ministry of Finance, Federal Treasury, Ministry of Economic Development, Ministry of Energy, Federal Statistics Service (Rosstat), Bank of Russia, Accounts Chamber of the Russian Federation, Budget and Tax Committee of the State Assembly (Duma), Economic Experts Group, and Gaidar Institute. - Basis and timing: evaluation is based on information available at the time it was completed in October 2013. - Disclaimer: findings and recommendations represent views and advice of the IMF mission team and do not necessarily reflect those of the government of the Russian Federation; unless otherwise specified, data in the report are estimates made by the IMF mission team and not official estimates of the government. - Acknowledgements: particular thanks to Deputy Minister Alexei Lavrov, Andrey Blokhin, Anna Belenchuk, and Aleksandr Zolotin for their support. ### Executive Summary — Strengths and Recent Improvements - Legal and institutional framework: - the 1998 Budget Code and subsequent amendments established a comprehensive legal framework for fiscal management at all levels of government. - Reporting and accounting: - government publishes cash-based in-year and year-end fiscal reports and accrual-based annual financial statements as well as fiscal statistics consolidating Federal, regional, and municipal governments in line with international standards. - Forecasting and fiscal rule: - detailed and credible medium-term macroeconomic forecasts prepared since early 2000. - a new oil price-based fiscal rule was introduced in 2013 to encourage sustainable and counter-cyclical fiscal policymaking. - Budget coverage and format: - coverage of the Federal government budget has steadily expanded; three main remaining extra-budgetary funds are presented and approved alongside it in a timely manner. - policy-orientation improved via a comprehensive medium-term budget framework introduced in 2008 and a new program and performance budgeting system introduced in the 2014 Budget. - Fiscal risk controls: - firm central controls established, including annual limits on issuance of debt, credit, and guarantees by the Federal government, and on borrowing by sub-national governments. - Transparency progress indicator: - between 2006 and 2012 Russia’s rating under the International Budget Partnership’s Open Budget Index rose from a score of 47 to 74 out of 100 and from a ranking of 28th out of 59 countries to 10th out of 100 countries. ### Executive Summary — Key Gaps and Risks (with numeric highlights) - Coverage gaps in fiscal reports: - fiscal reports exclude financial activity of various classes of government-controlled enterprises with net expenditure of at least 29 percent of GDP and liabilities of at least 127 percent of GDP in 2012 (figures based on the 26 largest government-controlled enterprises by liability). - Balance sheet omissions: - government balance sheets exclude sub-soil oil and gas assets of 200 percent of GDP and liabilities accrued to date from public pensions and PPP arrangements of 287 percent of GDP. - Provisions and valuation issues: - financial statements make no provisions for assessed but unlikely to be collected taxes or non-repayment of the government’s 4 percent of GDP in loans. - budgets overstate likely payouts against the government’s 2 percent of GDP stock of guarantees. - no regular estimates of the estimated 1-2 percent of GDP in annual revenue foregone through tax expenditures. - Secrecy and extra-budgetary plans: - 14 percent of the Federal budget is currently classified as secret for national security reasons. - plans exist for extra-budgetary expenditure and lending via sovereign wealth funds. - Forecast credibility and scrutiny: - scope to enhance credibility, transparency, and scrutiny of official fiscal forecasts. - Incomplete risk reporting and horizon: - reporting and analysis of near-term fiscal risks is incomplete and fragmented. - forecasts of longer-term fiscal pressures to be published in 2014 will extend only to 2030. - Long-term pressures: - over the long-run, declining oil and gas revenues and rising pension and healthcare costs are likely to place considerable pressure on the fiscal position. ### Public Sector Aggregates and Balance Sheet (2012 — summary) - Public sector footprint (based on expanded assessment discussed in the report): - revenues of at least 71 percent of GDP; - expenditures of at least 68 percent of GDP; - an estimated surplus of 3 percent of GDP. - Public sector balance sheet (2012 estimates): - assets amounting to 381 percent of GDP (200 percent in sub-soil assets, 82 percent in other fixed assets, and 100 percent in financial assets); - liabilities amounting to 400 percent of GDP (282 percent in unfunded pension liabilities, 16 percent in other government liabilities, and 102 percent in net liabilities of public corporations). - Sensitivity: current net worth and long-term sustainability projections are highly sensitive to assumptions about future economic growth, oil production and price developments, demographic trends, and other risks. ### Principal Recommendations (nine) - clarify the boundary between general government, public, and private sectors and expand the institutional coverage of fiscal reports to encompass the whole public sector; - expand the coverage of balance sheets to include subsoil assets as well as pension and public-private partnership liabilities; - enhance the consistency between budgets, statistics, and accounts in their treatment of non-cash flows and valuation of fixed assets; - improve disclosure and management of the revenue foregone from tax expenditures; - improve the coverage and detail of the annual budget; - enhance the independent scrutiny and transparency of the official macroeconomic and fiscal forecasts; - improve the disclosure and analysis of fiscal risks; - publish regularly long-term fiscal projections covering at least thirty years; - strengthen the financial oversight of government-controlled enterprises. - Implementation planning: a Fiscal Transparency Action Plan incorporating the sequence of actions required over the next five years is appended to the report. *Source: IMF Fiscal Transparency Evaluation mission report (completed October 2013) provided in the Preface and Executive Summary sections of _cr14134 - Preface.* ### 1. Fiscal reports should provide a comprehensive, timely, reliable, comparable, and ### _cr14134 - 1. Fiscal reports should provide a comprehensive, timely, reliable, comparable, and ### Overview: purpose and assessment framework - Fiscal reports should provide a comprehensive, timely, reliable, comparable, and accessible summary of the government’s financial performance and position. - This chapter assesses fiscal reporting practices against the July 2013 draft of the IMF’s Fiscal Transparency Code across four dimensions: - coverage of public sector institutions, stocks, and flows; - frequency and timeliness of reporting; - quality, accessibility, and comparability of fiscal reports; - reliability and integrity of reported fiscal data. ### Frequency, timeliness, and reporting formats - All government units follow a uniform budget classification, chart of accounts, and reporting format. - Main in-year and annual fiscal reports cover consolidated accounts for central, regional, and municipal governments. - Treasury reports (monthly, quarterly, year-end) include cash revenue, expenditure, financing, and debt classified by the national budget classification. - Year-end budget execution and financial statements present cash and accrued revenues, expenditures, and financing and include a balance sheet of financial and (above ground) nonfinancial assets and liabilities. - Monthly and annual fiscal statistics by the Treasury and Rosstat follow IMF GFSM 2001 standards, though coverage is not complete. - Selected timing and frequency entries (from Table 1.1): - Monthly Budget Execution: Coverage GG, except EBU; Cash basis; Nat Gross; Frequency M; Publication 30 days. - Quarterly Budget Execution: Coverage GG, except EBU; Cash basis; Nat Gross; Frequency Q; Publication 35 days. - Fiscal Statistics (monthly): Coverage GG, except EBU; Cash basis; GFSM 2001; Frequency M; Publication 60 days. - Year-end Budget Execution: Cash basis; Nat Gross; Annual; Publication 5 months. - Financial Statements (year-end): Accrual basis; Nat Gross; Annual; Publication 5 months. - Fiscal Statistics (year-end, GFSM 2001): Accrual basis; Gross; Annual; Publication 10 months. - SNA 1993-based year-end statistics: Cash basis; Gross; Annual; Publication 18 months. - Main Directions of Budget Policy: Annual; Publication Jul. - Budget Proposal: Annual; Publication Oct. ### Public sector structure and register issues - As of October 2013, the public sector comprised 81,954 separate institutional entities. - 12,402 budgetary central government entities (accounts with Federal Treasury). - 4,389 central extra-budgetary organizations (autonomous/semi-autonomous; partly financed by Federal budget). - 87 social security funds and 84 regional governments; these funds depend on transfers from the Federal budget for 47 percent of their revenue. - 23,185 sub-national governments (83 state/regional governments and 23,102 local governments). - 31,092 public corporations (22,440 unitary enterprises, 308 government corporations (11 financial and 297 nonfinancial), and 8,344 joint stock companies). - 10,799 other government-controlled entities in Rosstat register. - The government maintains but does not publish a comprehensive register of all public entities. - Rosstat maintains a statistical register for SNA93 purposes but is under review for sector classification issues. - The Treasury maintains a separate accounting register that does not cover all government-controlled entities and excludes public corporations. - The list of units included in general government is inconsistent between the two registers. - Rosstat’s statistical register reports general government as 41,891 entities; Treasury’s register reports 40,063 entities. ### Coverage of institutions: scope and gaps - Based on data from the 26 largest public corporations, the consolidated public sector accounted for at least 68 percent of GDP by expenditure in 2012. - Central government net expenditure accounts for 33 percent of consolidated public sector expenditure (22 percent of GDP). - Sub-national governments account for about 26 percent of consolidated public sector expenditure (18 percent of GDP). - Public corporations account for at least another 41 percent of consolidated public sector expenditure (28 percent of GDP). - The most comprehensive fiscal reports cover the consolidated general government as defined in national legislation and about 60 percent of public sector expenditure. - Treasury reports cover most non-corporate central and sub-national entities but exclude three extra-budgetary entities whose net expenditure accounts for 2.7 percent of GDP. - Rosstat’s GFSM 2001-based fiscal statistics consolidate these three entities. - The large public corporation sector is not covered by any consolidated fiscal report. - Aggregated information on the financial position and performance of the whole public sector does not exist. - Government committed to publishing fiscal statistics for the consolidated public sector, with preliminary estimates to be published in 2016-18. - A project group (Ministry of Finance, Federal Treasury, Rosstat, Central Bank) has been established to: (i) define scope of the public sector; (ii) establish a database covering all public corporations; (iii) report statistics for the consolidated public sector in national accounts, financial accounts and balance sheets, and government finance statistics. - Consolidating the largest 26 public corporations into fiscal accounts for 2012 would add 27 percent of GDP to both expenditure and revenue and would not materially alter the overall fiscal surplus of 3 percent of GDP in 2012. ### Public corporations: balance sheet and liabilities - The largest 26 public corporations had liabilities of around 102 percent of GDP in 2012 compared with general government liabilities of 11 percent of GDP. - Understanding these entities’ financial positions and their relationship with government is critical for total public sector sustainability. ### Coverage of stocks: reported balance sheet and unreported items - Reported consolidated general government balance sheet (2012) summary (Table 1.3, percent of GDP): - Nonfinancial assets: 43.4 - Fixed assets: 34.3 - Inventories: 5.7 - Nonproduced assets: 3.4 - Financial assets: 34.2 - Currency and deposits: 15.9 - Loans: 3.7 - Shares & other equity: 15.7 - Other assets: -1.4 - Liabilities: 11.1 - Securities excl. shares: 8.8 - Loans: 1.4 - Other liabilities: 0.9 - NET WORTH: 66.5 - Reported figures do not reflect true value of some government assets and liabilities and exclude public corporations. - Staff estimates (Table 1.4) of not reported or underreported items for 2012 (billions of Rubles; percent of GDP): - Reported consolidated general government net worth: 41,605; 66.5 percent of GDP. - Not reported: - Subsoil assets: 125,198; 200.0 percent of GDP. - PPPs assets: 1,252; 2.0 percent of GDP. - Pension liabilities (note: two entries; one listed as 1,850 and 3.0 percent of GDP appears under "Not Reported" but overall unfunded PAYGO pension liabilities presented separately): See consolidated rows below. - PPPs liabilities: 1,252; 2.0 percent of GDP. - Net Worth (excluding PAYGO pensions): 123,348; 197.0 percent of GDP. - Unfunded PAYGO pension liabilities: 176,529; 282.0 percent of GDP. - Net Worth (including PAYGO pensions): -53,181; -85.0 percent of GDP (general government, not reported summary). - Public corporations not reported: - Nonfinancial assets: 22,599; 36.1 percent of GDP. - Financial assets: 56,820; 90.8 percent of GDP. - Liabilities: 79,418; 126.9 percent of GDP. - Public sector consolidated totals (Not Reported): - Nonfinancial assets: 176,216; 281.5 percent of GDP. - Financial assets: 62,437; 99.7 percent of GDP. - Liabilities: 73,700; 117.7 percent of GDP. - Net Worth (excluding PAYGO pensions): 164,953; 263.5 percent of GDP. - Unfunded PAYGO pension liabilities: 176,529; 282.0 percent of GDP. - Net Worth (including PAYGO pensions): -11,577; -18.5 percent of GDP. - Key factors behind differences between reported and broader estimates: - Unrecognized subsoil assets of around 200 percent of GDP. - Unreported pension rights accrued to date around 285 percent of GDP (text notes 285 percent; Table 1.4 shows unfunded PAYGO pension liabilities 282.0 percent of GDP). - Growing PPP obligations estimated at 2 percent of GDP. - Public corporations holdings: 97 percent of GDP in liabilities to the private sector and 127 percent of GDP in fixed and financial assets (text). - Nonfinancial assets reported at historical prices; market values likely at least ten-fold higher than historical values in some cases. - Shares and other equities are not recorded at market prices. ### Consequences for net worth and fiscal transparency - Consolidating sub-soil assets, PPPs, funded pensions, and balance sheets of the 26 largest public corporations delivers an overall net worth for the public sector of positive 264 percent of GDP (staff estimate). - Including 282 percent of GDP in unfunded pay-as-you-go pension obligations delivers an overall public sector net worth of minus 19 percent of GDP if these long-term obligations are recognized as liabilities. - Estimates of overall public sector net worth are highly sensitive to underlying assumptions about unreported assets and liabilities. *Source: _cr14134 - 1. Fiscal reports should provide a comprehensive, timely, reliable, comparable, and (IMF staff chapter provided).* ### 14. Budget execution reports are cash-based, but annual financial statements provide ### _cr14134 - 14. Budget execution reports are cash-based, but annual financial statements provide ### Accrual versus cash reporting: scope and practice - Budget execution reports are cash-based and provide a detailed breakdown of revenue receipts, expenditure payments, and financing. - Annual financial statements provide accrual data for the general government, recording individual revenue, expenditure, and outstanding amounts of assets and liabilities on an accrual basis (e.g., expenses and related payables are recorded when goods and services are delivered and not when government makes cash payment). - National accounting rules take into account international standards such as GFSM 2001 and IPSAS. ### Omissions and incomplete accrual capture - Not all accrued flows are fully or appropriately captured in financial statements: - Reported tax revenue is based on assessments and declarations, and provisions for amounts unlikely to be paid are not created. - No provision was made for write-offs related to the 4 percent of GDP in government loans in 2012. - Pension liabilities from the state-funded pension scheme and the related flows are omitted from official fiscal reports. - Changes in market prices of stocks of fixed assets and shares and other equities are not reflected as other economic flows that affect net worth. ### Inconsistencies across fiscal reports and notable differences - Government budgets include provision for nearly the full amount of guarantees issued each year (RUB 115 billion or 0.2 percent of GDP in 2012), while only 5 percent of the total value of guarantees were called over 2012-13. - Large accrued rents to Federal and sub-national governments in fiscal statistics have no identifiable cash counterpart. - Accrual vs cash differences (highlights from the text and Table 1.5): - Accrued revenues consistently exceed cash receipts by 4-7 percent of GDP. - The accrual balance consistently exceeds the cash balance by 0.2 to 1.4 percent of GDP between 2009 and 2012. - Other (unspecified) accounts receivable/payable in the balance sheet reflect much of the difference between accrual and cash revenue and expenditure. - Selected entries from Table 1.5 (Difference between Accrued and Cash Revenue and Expenditure, Percent of GDP): - General Government Revenue: 2009: 6.5; 2010: 4.1; 2011: 7.4; 2012: 4.9 - Federal Budget Revenue: 2009: 0.7; 2010: 1.7; 2011: 3.7; 2012: 2.3 - Sub-national Govts Revenue: 2009: 6.3; 2010: 3.0; 2011: 3.5; 2012: 3.7 - General Government Expenditure: 2009: 6.3; 2010: 3.0; 2011: 6.7; 2012: 3.7 - Net acquisition of NFA (General Government): 2009: 0.2; 2010: -0.4; 2011: 2.5; 2012: 0.2 - Net lending / borrowing (General Government): 2009: 0.2; 2010: 1.1; 2011: 0.7; 2012: 1.2 - Net impact of other accounts receivable/ payable: 2009: 0.6; 2010: 1.3; 2011: 0.0; 2012: 1.0 - Stock-flow adjustments (SFAs) are significant: - SFAs averaged 1.9 percent of GDP over 2009-12 compared with 1.1. percent of GDP in EU countries. - SFAs were particularly large in 2011 and 2012 (5.2 and 4.3 percent of GDP respectively). - Selected entries from Table 1.6 (Sources of Stock-Flow Adjustments, percent of GDP): - Net borrowing(+)/lending(-): 2009: 4.6; 2010: 1.4; 2011: -3.4; 2012: -3.0 - Net acquisition of financial assets: 2009: -3.4; 2010: 0.2; 2011: 5.1; 2012: 4.3 - Change in the debt: 2009: 2.3; 2010: 1.9; 2011: 1.8; 2012: 1.3 - Stock-Flow Adjustments: 2009: -2.3; 2010: 0.4; 2011: 5.2; 2012: 4.3 ### Tax expenditures: disclosure, measurement, and estimates - Limited disclosure of revenue loss due to tax reliefs and tax subsidies; tax expenditures should be disclosed to capture redistribution through the budget. - The government does not have an official methodology for calculating tax expenditures. - Three estimation methodologies exist conceptually: revenue foregone, revenue gain, or outlay equivalent; no official approach is agreed. - Preliminary unofficial estimates indicate federal tax expenditures in the range of 1-2 percent of GDP in 2010. - These estimates exclude foregone tax from corporations operating in the 24 Special Economic Zones and may be understated given recent tax exemptions to stimulate innovation. - Estimates are sensitive to the definition of the benchmark tax (e.g., inclusion/exclusion of VAT on certain services). ### Frequency, timeliness, and quality of fiscal reporting - Frequency and timeliness: - Cash-based budget execution reports are produced monthly and published within 30 days of the end of each month. - Quarterly reports are available 35 days after the end of the quarter. - Monthly cash-based GFSM 2001 statistical format reports are published within two months. - Annual accounts covering the Federal government budget and consolidated budgets are published within five months of the end of the financial year. - Both a cash-based annual budget execution report and an accrual-based financial statement are published within five months of the end of the year. - Classification and consistency: - Fiscal reports include administrative, economic and functional classification, and a uniform chart of accounts allows consolidated reports generally following GFSM 2001 economic and functional classifications. - Differences between national and GFSM 2001 classification rules include: - National rules treat acquisitions of shares and other equities as “above the line” transactions (budget) whereas GFSM 2001 treats them as financial (“below the line”) transactions. - Holding gains from sales of nonfinancial assets are treated as revenue in budget execution reports but as other economic flows in GFSM 2001. - External debt is defined by the Budget Code as debt in foreign currency, while international standards define it as holdings of debt by non-residents. - The government produces an above/below-the-line reconciliation but does not publish consistency checks for stock-flow adjustments or differences in debt figures compiled by the Treasury versus the Central Bank. - Historical consistency: - A major revision for 2009 increased net borrowing by 9.5 percent of GDP due to reclassification of holdings of government shares and equities. - Historical statistics are not reviewed on a regular basis to incorporate new information; apart from 2009, there have been no revisions to historical fiscal data. - Integrity and audit: - Comprehensive GFSM 2001-based fiscal statistics are produced and disseminated by the Federal Treasury; Rosstat compiles annual government nonfinancial national accounts with a delay of almost two years. - Annual budget execution reports and financial statements are audited by the Chamber of Accounts; the audit report does not provide an opinion as to whether the financial statements present a true and fair view. - Fiscal statistics meet the IMF’s Special Data Dissemination Standard (SDDS); authorities are preparing quarterly accrual-based data on general government operations. - Annual accounts meet national accounting standards; an ongoing project aims to introduce IPSAS, though not all IPSAS standards have been issued and the new standard is not envisaged to require recognition of accrued pension liabilities. ### Conclusions and priority areas for improvement - Fiscal reports meet good or advanced practices in most areas, but scope for improvement exists. Priority issues identified include: - Accounts and fiscal statistics limit their coverage to general government units and do not reflect the significant financial activity of publicly-controlled corporations. - Summary balance sheet data does not include the government’s significant subsoil assets, pension liabilities, and PPP obligations. - Fiscal reports do not include provisions for non-recoverable taxes and loans; assets are recognized at historical cost rather than market value. - There is no regular estimation or active management of the revenue loss from tax expenditures. - Chapter IV contains recommendations for enhancing fiscal reporting by consolidating available fiscal information into a new set of more comprehensive summary fiscal reports. *Source: _cr14134 - 14. Budget execution reports are cash-based, but annual financial statements provide* ### 3.1 Classification ### 3.1 Classification ### Fiscal reporting classifications and quality - Good: Fiscal reports include an administrative, economic and functional, classifications comparable with international standards. - Medium: Inconsistent classifications of some transactions lead to different levels of the fiscal balances. ### Data consistency - Basic: Fiscal reports reconcile cash balance and financing. - High: Unexplained stock-flow adjustment of 4-5% of GDP in recent years. ### Historical consistency - Basic: Material revisions to historical fiscal statistics are reported. - Medium: Historical statistics are not revised on regular basis to reflect new information. ### Statistical integrity and audit - 4.1 Statistical Integrity - Good: Statistics are prepared by semi-autonomous government agency. - Medium: Statistical integrity is supported by a government order. - 4.2 External Audit - Good: Government accounts are audited by an independent supreme audit institution. - Low: Accounts Chamber independence is protected by the Constitution. - 4.3 Statistical dissemination - Good: Fiscal statistics meet SDDS. - Low: Reforms required to meet SDDS plus are underway. - 4.4 Reliability - Good: The annual financial statements meet national accounting standards and their reliability is validated. - Low: No significant qualifications to recent accounts. *Table note: See Glossary and Legend on page 4 for color coding. All figures refer to 2012 unless otherwise indicated.* --- ### II. FISCAL FORECASTING AND BUDGETING — Key findings and framework ### Chapter scope and focus - The chapter assesses fiscal forecasting and budgeting practices relative to the July 2013 draft of the IMF’s Fiscal Transparency Code, focusing on: - the comprehensiveness of the budget and associated documentation; - the timeliness of the budget and its passage; - the policy orientation of budget documentation; - the credibility of the fiscal forecasts and budget proposals. ### Legal framework and coverage - The Budget Code of the Russian Federation sets rules and procedures for preparation, approval, and execution of federal, regional, and municipal budgets. - Budgets at all levels are generally comprehensive, excluding some extra-budgetary social funds which collect social contributions but also receive transfers from the budget. - Federal, sub-national, and extra-budgetary funds are consolidated and presented to Parliament in October of each year. ### Medium-term orientation - Medium-term economic forecasts are prepared by the Ministry of Economic Development, are comprehensive, updated regularly, and discussed with independent forecasting bodies (while not a legal requirement). - Budgets cover the upcoming year and a two-year forward planning period; revenue, expenditure, financing, and debt are presented for all three years at the same level of detail. - A parliamentary decision on the outer years of the planning period is taken each year. - A fiscal rule links aggregate federal expenditure to revenue calculated using a historically based oil-price. - Longer-term forecasts up to 2030 have been prepared; a more thorough fiscal sustainability analysis is being developed. ### Key macro-fiscal documents (select details) - Long-term social and economic forecast of RF for the period until 2030: 350 page document; Mar (2013). - Medium-term scenario analysis of social and economic parameters: 35 page document; Apr-May. - President’s budget address: 10 page document; June. - Main directions of tax policy for upcoming year and two-year planning period: 50-60 page document; June. - Main directions of budget policy for upcoming year and two-year planning period: 100 page document; July. - Medium-term forecast of social and economic parameters: 15 page document; Sept, Dec. - Budget for upcoming year and two year planning period: government’s budget submission to parliament with annexes (about 4,500 pages); Oct. - Possible supplementary budgets for current year: June, Sept, Dec. --- ### 2.1 Comprehensiveness of Budget Documentation ### 2.1.1 Budget unity (Good) - The Federal Budget covers all federally-funded ministries, agencies and other entities defined as budgetary in national legislation. - The annual budget law includes revenue and expenditures of all 91 main spending units (ministries and agencies) that receive funding from the Federal Treasury. - Budgets for the three federal extra budgetary funds – Pension Fund, Social Insurance Fund, and the Federal Mandatory Health Insurance Fund – are submitted together with the budget (Budget Code Article 192, Paragraph 5) and approved by the legislature. - The budget documentation includes a consolidated forecast of general government revenue and expenditure (Budget Code Article 192, Paragraph 44). - Several public entities carrying out government functions are not presented as part of the budget documentation: - Of six state corporations (Deposit Insurance Agency, Vneshekonombank, Fund for Assisting in Housing and Utility Reform, Russian Roads, Olympstroi, and Rosatom), only the first three are classified as part of central government statistics and none are included in the annual budget. - Activities include road infrastructure PPPs (Russian Roads), construction of public infrastructure (Olympstroi), depositors guarantee scheme (Deposit Insurance Agency), supporting diversification (Vneshekonombank), and nuclear energy regulation (Rosatom). - Announced plans for extra-budgetary investment or lending by two sovereign wealth funds, the National Wealth Fund and the Investment Fund of the Russian Federation, would need classification as government entities if tax-funded activity occurs. ### 2.1.2 Gross budgeting (Basic) - Most central government revenue and expenditure is authorized via the annual budget (Budget Code Article 41). - Revenue from certain non-statutory and demand-driven goods and services—primarily in health and education—is allowed to offset expenditure; only net expenditure is drawn against appropriations. - Own-financed expenditure accounts for 4.3 percent of total central government expenditure in 2012. - Net budgeting at sub-national level is around 3.7 percent of total sub-national expenditure in 2012. - Retained revenues of predominantly fee-financed Federal and sub-national agencies are not reflected in budget documentation; actual fees collected and gross expenditure are disclosed in annual accounts. ### 2.1.3 Hidden (unspecified) expenditure and secrecy - The specificity and transparency of the budget has been reduced by a growing share of expenditure classified as secret for national security reasons. - Share of budget classified as secret rose over the past five years and stood at close to 14 percent of total expenditure in 2013. - It is forecast to increase to close to 25 percent in 2016 as more agencies and activities are classified as national security and spending on armaments increases. - Russia has a relatively high proportion of budget expenditure classified as secret relative to other G-20 countries; many of which classify less than 1 percent of total budget expenditure as secret. ### 2.1.3 Macroeconomic forecasts (Advanced) - The government produces regular, detailed, and credible medium-term macroeconomic forecasts as part of annual budget preparation (Budget Code Article 192.4). - The Ministry of Economic Development issues two or three medium-term macroeconomic forecasts per year: - April forecast presents three to five macroeconomic scenarios for internal budget preparation; the published document contains only a few key parameters. - Forecast updated in September for the draft Budget presented to Parliament and again in December for the final budget approved by Parliament; both updates are published with comprehensive discussion of assumptions for inflation, growth and exchange rates. - Russia has a strong macroeconomic forecasting record despite relative volatility in output growth; except for 2009, forecasts for GDP-growth three-years ahead are unbiased and relatively accurate compared with other G-20 countries publishing multi-year forecasts. ### 2.1.4 Medium-term budget framework (Advanced) - Russia has a comprehensive and detailed medium-term budget framework mandated by the Budget Code since 2008. - Budgets at Federal, sub-national, and municipal level cover the upcoming year and two-year forward planning years with information on forward plans at the same level of detail for all years. - Expenditure is classified by organizational unit, function, economic category, and, where specified, program; revenue is classified by collecting entity and revenue type. - Large revisions to outer years’ expenditure estimates call into question the plan’s ability to discipline expenditure: - Since 2008, actual expenditure has, on average, been 9 percent higher than the initial estimate for the second year and more than 12 percent higher than the initial estimate for the third year. - A legally-mandated multi-year expenditure limit introduced in 2013, part of the new oil price-based fiscal rule, may help strengthen multi-year expenditure discipline. --- ### 2.2 Timeliness of Budget Submission and Approval ### 2.2.1 Fiscal strategy report (Good) - The government publishes four documents outlining fiscal strategy ahead of the budget: - President’s Budget Address (Article 170 of the Budget Code), normally issued in June, outlines key issues and main directions of budget policy in qualitative terms. - In July, preliminary Main Directions for Budget Policy and Main Directions for Tax Policy contain fiscal projections for general government, federal budget, extra-budgetary funds, and sub-national budgets, and allocation of the federal budget to about 40 government programs. - Mid-Year Performance Report—normally issued in July—reviews economic developments and fiscal performance mid-year and prospects for remainder of the year. - Taken together, these documents compare favorably with other countries’ pre-budget statements, though accessibility would be improved if combined into a single document. ### 2.2.2 Budget submission (Advanced) - The annual budget is submitted to the legislature no later than October 1 (Budget Code Article 192, Paragraph 1), i.e., three months before the start of the budget year. - Russia’s timeline for budget submission compares favorably with other G-20 countries. ### 2.2.3 Budget approval (Advanced) - The Duma should adopt the budget in three readings within 60 days of its submission (Article 196 of the Budget Code), i.e., by late November. - After Duma adoption, the budget is sent to the Council of Federation within five days; the Council of Federation should adopt it within 14 days (Article 208, Paragraph 1), and send it to the President for signature within five days (Article 208, Paragraph 2). - If the budget is not adopted by the start of the financial year, monthly expenditure not exceeding 1/12 of the previous year’s budget can be executed (Article 190). - For the past four years, the budget has been adopted and published in the final days of November or the first days of December, i.e., one month before the start of the financial year. *Source: _cr14134 - 3.1 Classification (excerpts) — IMF staff assessment as provided in the source PDF.* ### 2.3 Legal Framework for Budgeting ### 2.3 Legal Framework for Budgeting ### Legal framework and budget legislation - A comprehensive legal framework covers public financial management at all levels of government. - Budget Code of the Russian Federation N145-F3 from July 31, 1998 (with amendments up until July 23, 2013) governs fiscal policy making, budget preparation and execution and accounting and audit. - Section IV: Budget preparation; Section VI: budget preparation (as noted in source); Section VII: budget execution; Section VIII: accounting, reporting and external control. - Separate legislation regulates government accounting and reporting and financial control, including a law on the Accounts Chambers (supreme audit institution). ### Legal basis for revenue collection - Tax Code N146-F3 from July 2008 (with amendments up until October 2013) provides a comprehensive legal framework for taxation in the Russian Federation. - No official tax-payer’s guide to the tax system is published by government; available guides come from non-government organizations or companies. - Ministry of Finance produces Main Tax Policy Guidelines each spring summarizing anticipated tax policy and administration changes over the coming three years. - Article 100 of the Tax Code: a decision by the Tax Authorities can be questioned within 15 days by the tax payer. ### Fiscal policy objectives and fiscal rule - A new oil price-based fiscal rule came into effect in 2013 setting clear and measurable objectives for Federal Government fiscal performance. - Under the rule, Federal Budget expenditure should not exceed the sum of: - projected non-petroleum revenue; plus - petroleum revenue calculated using a reference oil price; plus - net financing equivalent to 1 percent of GDP. - Initial benchmark oil price: average oil price for the last five years; the backward-looking horizon increases by one year every year until a ten-year average is reached by 2018. - When actual oil price is above benchmark, additional revenue is deposited in an oil Reserve Fund; when below, the Reserve Fund can finance the federal budget. - Government objective: build Reserve Fund assets to 7 percent of GDP (authorities project this to occur in 2019). - Once Reserve Fund reaches 7 percent of GDP, law requires 50 percent of any above-projection revenue to be deposited in the National Wealth Fund; remaining 50 percent may be used for investments in domestic infrastructure or other national projects. - Fiscal rule includes mechanism for sudden oil price drops to ensure accelerated expenditure adjustment; ministerial budgets cannot be reduced below the ceilings established in the previous three-year budget to prevent sudden and discontinuous cuts. ### Performance information and program budgeting - A comprehensive program budgeting framework introduced in the budget for 2014-16, reorienting the existing performance budget model. - Some 40 expenditure programs have been approved covering the majority of federal budget expenditure. - Programs are assigned to a lead ministry, but other ministries can contribute. Example: Program 13: “Developing Physical Culture and Sport” — lead: Ministry of Sport; participating: Ministries of Health, Communication, Education, Interior, and Regional Development. - Program 13 has four sub-programs: - (i) “Developing Physical Culture and Sport for the Entire Population”; - (ii) “Developing High-Results Sports”; - (iii) “Organization of the FIFA Football World Championships in 2018 and the FIFA Confederations Cup in 2017”; - (iv) “Managing the Development of Areas of Physical Culture and Sports.” - Programs are linked to largely outcome-based performance objectives and include Tasks, Indicators, and outcome-based Expected Results for the medium term. - Examples of indicators for Program 13: - the share of the population engaging in physical culture and sports on a regular basis; - the share of Russian Olympic athletes who receive medals; - the share of sports facilities in used following the organization of the FIFA World Championships in 2018 and the FIFA Confederations Cup in 2017. - Ministries responsible for a program must submit annual reports on achievements to the Ministry of Finance and the Ministry of Economic Development, which consolidates into a single government performance report. Performance reports are not formally approved by the Duma. ### Citizens’ guide to the budget - Government committed to publication of a Citizen’s Budget starting in 2013. - Federal level publication in mid-October 2013: around 230 slides containing information on main fiscal policy directions, general government finances, key federal budget figures, and detailed budget expenditure composition. - The published material’s length and detail mean it does not provide an accessible and concise summary for citizens. - Government recommends regional and municipal Citizen’s Budgets include: - general characteristics of revenue and expenditure; - detail on composition of revenue and expenditure; - intergovernmental fiscal relations; - any other information of interest to local citizens. ### Fiscal sustainability analysis - A long-term fiscal strategy for the Russian Federation is under preparation but not yet published. - Ministry of Economic Development issues long-term projections; latest noted in source: December 2012, which includes a section on development of main fiscal parameters but is not based on comprehensive assessment of cost drivers of key programs. - Ministry of Finance is developing a report on fiscal developments up to 2030 with more detailed assessment of expenditure pressures beyond the budget cycle and sensitivity analysis to macroeconomic assumptions. - A 15-year time frame is considered not long enough to capture implications of demographic change and likely long-run decline in oil and gas revenues. - Long-run fiscal risks discussed further in Sections 3.2.3 and 3.3.4 (as referenced in source). ### Credibility of forecasts and budgets — independent scrutiny and forecasts - Accounts Chambers charged with assessing the government’s Budget Proposal and issues its opinion in early October each year, evaluating macroeconomic assumptions including oil price, GDP, inflation and exchange rate, with comparisons to forecasts of commercial banks and international finance institutes. - Ministry of Economic Development engages think tanks and research institutes (e.g., Economic Expert Group and the Academy of Science) during macroeconomic forecast preparation. ### Supplementary budgets and in-year changes - Articles 212 and 213 of the Budget Code: changes in the legislated budget that increase expenditure level or substantially alter composition require parliamentary and presidential approval, following same steps as annual budget approval. - Article 217: if insufficient appropriations to fulfill social benefit commitments, government is allowed to increase the budget by 5 percent without presenting a supplementary budget. - Article 217 also allows for redistribution between expenditure categories of up to 10 percent of expenditure during budget execution. - Typically two or three supplementary budgets per year (in line with G-20 practice); historically, sizes of in-year expenditure increases have been higher than other G-20 countries. - Since 2009, supplementary budgets have been considerably smaller and all in-year spending increases have been authorized by parliament. ### Forecast reconciliation and medium-term revisions - Budget documentation provides relatively limited information on sources of substantial revisions to successive vintages of medium-term expenditure estimates. - Government updates expenditure projections annually based on new policy commitments, updated macroeconomic and demographic projections, and changes in budget structure. - Average revisions: second year (t+2) expenditure revised up by 9 percent; third year (t+3) revised up by 12 percent compared with original budget. - Explanatory Note contains qualitative discussion of new policies but lacks comprehensive reconciliation decomposing changes into macroeconomic factors, volumes and case-loads, new discretionary policies, and classification changes. ### Conclusions — areas for improvement (summary points) - Identified risks and improvement areas include: - Comprehensiveness and specificity of the annual budget is at risk from planned extra-budgetary expenditure and a growing proportion of expenditure classed as secret. - No unified fiscal strategy report setting the framework for budget preparation; no published independent evaluation of the credibility of government macro-fiscal forecasts; no detailed reconciliation of substantial changes to medium-term expenditure plans. - Long-term fiscal projections under preparation have only a 16-year forecast horizon and do not explore fiscal implications of alternative demographic or oil production scenarios. - Table 2.5 (summary assessment) highlights specific numeric findings (as reported in source): - Up to 0.7 % of GDP in extrabudgetary lending planned from NWF. - Share of budget classified as secret will grow to 25 % in 2016. - Medium-term forecast error for GDP is 0%. - Three-year ahead forecast error for expenditure was 13% over the past 4 years. - Average revision of total expenditure in medium-term plans are over 10%. - Supplementary budgets increased total expenditure by more than 5% on average during 2008-12. - Increase in pension expenditure up to 2050 close to 100 % of GDP on a NPV basis. - Assessment importance ratings and REC values are provided in Table 2.5 (as presented in source). *Source: _cr14134 - 2.3 Legal Framework for Budgeting* ### 3.1 Risk Disclosure and Analysis ### 3.1 Risk Disclosure and Analysis ### Macroeconomic risks (Basic) - The volatility of oil and gas prices and exports is a significant source of fiscal risk. - Energy sector shares: - around one-fifth of GDP - two-thirds of exports - around one-third of general government revenues - Russia’s nominal GDP growth and government revenue growth have been among the most volatile in the G-20 over the past decade (Figure 3.1a and 3.1b). - Sensitivity examples (Table 3.2): - A permanent US$10 per barrel lower oil price or a 10 percent appreciation of the rouble are estimated to increase the deficit by around 1 percent of GDP in 2015. - Note: Based on the assumption that the exchange rate does not respond to changes in the global oil price. Table 3.2 illustrates the estimated impact of a US$10 fall in the oil price accompanied by a 5 percent depreciation. The reduction in revenues is partially offset and the deficit is estimated to increase by around 0.8 percent of GDP. - Ministry of Economic Development publishes central, optimistic and pessimistic macroeconomic scenarios based on oil price, exchange rate, and global developments, but: - there is no analysis of the implications of these alternative economic scenarios for government finances. - Ministry of Finance’s Public Debt Management Report includes qualitative discussion and some illustrative quantification of lower global oil prices on revenues, balance and debt, but: - it does not provide a fully quantified set of alternative fiscal outcomes or forecasts. Key numeric entries from Table 3.2 (share of GDP): - Federal balance, October WEO forecast: 2013 -0.7, 2014 -0.2, 2015 -0.6 - Exchange rate scenarios: - 10% appreciation in 2014: 2014 -1.2, 2015 -1.5 - 10% depreciation in 2014: 2014 0.3, 2015 -0.5 - Oil and gas price scenarios: - Permanent $10 fall in 2014: 2014 -1.3, 2015 -1.6 - Permanent $10 increase in 2014: 2014 1.0, 2015 0.3 - Permanent US$10 fall and 5% depreciation: 2014 -0.9, 2015 -1.4 - Federal revenues, October WEO forecast: 2013 19.1, 2014 18.7, 2015 18.0 - Federal expenditures, October WEO forecast: 2013 19.7, 2014 18.9, 2015 18.6 ### Specific fiscal risks (Not met) - Categories of specific (discrete) fiscal risks identified (Table 3.3): - Non-macroeconomic factors affecting revenue (example: tax exemptions worth up to 2 percent of GDP) - Asset and liability risks, including refinancing and market risks; balance sheets of large state-controlled corporations add risk layers - Contingent liabilities (government exposure uncertain in size and timing); examples: - state guarantees worth 1.8 percent of GDP in 2012 - deposit insurance scheme with total insured liabilities of 15 percent of GDP - Long-term or open-ended risks (difficult to quantify): nuclear decommissioning, pensions, healthcare for an aging population - Reporting limitations: - Ministry of Finance reports explicit state guarantees included within Budget Law ceilings for general government debt. - No requirement for ministries/agencies to report contingent liabilities in their accounts or to provide analysis of risks around public corporations they control. - No official analysis of long-term risks to public finances from macroeconomic and demographic trends extending beyond the next 15 years. Selected specific fiscal risks (Table 3.3, 2012 unless stated): - CURRENT FISCAL RISKS: - Non-deposit liabilities of state-controlled financial institutions: 18,000 billion rubles, 30 percent of GDP - Deposit guarantee scheme: 9,400 billion rubles, 15 percent of GDP - State guarantees: 1,130 billion rubles, 1.8 percent of GDP - Public private partnerships: 1,300 billion rubles, 2.1 percent of GDP - Nuclear decommissioning costs: 940 billion rubles, 1.5 percent of GDP - Contingent obligations to international organizations: 880 billion rubles, 1.4 percent of GDP - Natural disasters (total average annual cost of damages): 38 billion rubles, 0.06 percent of GDP - LONGER-TERM FISCAL RISKS: - Net present value of projected increase in state pension costs (estimate to 2050): 6,100,000 billion rubles, 98 percent of GDP - Net present value of projected increase in state health costs (estimate to 2050): 2,400,000 billion rubles, 38 percent of GDP ### Comparability of fiscal reports (Basic) - Rosstat compiles national accounts for general government using SNA methodology; Federal Treasury uses GFSM 2001. - Differences between national accounts and Treasury statistics: - recent differences of up to 1.8 percent of GDP in recent years due to different accounting bases, inconsistent sector coverage, and other unidentified reasons. - Data reliability weakened by lack of publicly available metadata explaining sources, methods, and reconciliations. - Specific inconsistencies: - Tax revenue is recorded on assessed obligations rather than accrued revenues, reducing comparability between budgeted and actual tax collection. - Budgets do not make ex ante provision for likely non-payment of estimated RUB 2.3 trillion (4.0 percent of GDP) in policy loans to corporations and households. ### Risk Management - Overall: mix of advanced, good, and basic practices across areas. - Allowance for budgetary contingencies (Advanced) - General reserve fund can be set at no more than 3 percent of total budget expenditure (Article 81 in Budget Code). - Most allocated to an Emergency Reserve Fund for natural disasters; smaller general reserve for unplanned expenditures. - President’s Reserve Fund limited to 1 percent of total budget expenditure (Article 82 in Budget Code). - Access criteria set in regulation; utilization requires agreement of the Minister of Finance. - Expenditures reported quarterly in-year to Parliament; audited annually by the Accounts Chamber. - Despite provisions, final federal expenditure exceeded initially approved budgets by more than 5 percent on average over the last twelve years. - Asset and liability management (Basic) - Government produces estimate of general government balance sheet: - reports liabilities of around 11 percent of GDP in 2012 - financial and nonfinancial assets of around 80 percent of GDP (Figure 3.2) - Official balance sheet omissions: - long-term liabilities associated with government-managed pension funds - growing liabilities under PPPs - assets or liabilities of large public corporations sector - sub-soil oil and gas reserves (Table 3.4) - Federal and sub-national borrowing: - authorized by law; debt management strategy in Public Debt Management Report (PDMR) - budget law sets ceilings on domestic and foreign debts and borrowing programs - PDMR provides mainly qualitative risk analysis around liabilities; MoF releases monthly and quarterly debt and guarantee data and aggregated regional debt - Limited published information on financial assets and their risks: - Federal Agency for State Property Management producing an online register of government-owned or controlled enterprises (not yet publicly available) - MoF publishes size and holdings of Reserve Fund and National Wealth Fund but not risk analysis of investment strategy - Natural resources (Basic) - Oil and gas production: - accounts for around one-third of general government revenues - creates significant fiscal and longer-term sustainability risks as reserves deplete - Information and projections: - Ministry of Finance publishes outturn data and medium-term forecast of tax revenue from oil and gas sector - Ministry of Natural Resources and Environment released estimates of volume of recoverable reserves in 2013 and plans annual releases - No official estimate of fiscal value of reserves - Ministry of Economic Development projections of oil and gas revenue under alternative price scenarios extend only to 2020 - Staff estimates of net present value (NPV) of government revenues from sub-soil oil and gas assets: - around 200 percent of GDP (based on mid-point between alternative reserve volume measures) - using July 2013 government release of total explored, estimated and inferred reserves: around 230 percent of GDP - using only proven reserves: around 170 percent of GDP - Fifty-year illustrative projections of oil and gas revenues (% of GDP) (Figure 3.3): - Constant real price scenario: revenues fall from 9 percent of GDP to around 2 percent of GDP over 50 years - Constant current prices scenario: revenues fall to around 0.5 percent of GDP by 2063 - Production growth scenario: revenue higher for next 10 years before declining more sharply - Importance: long-term demographic trends likely to increase demand for pensions and healthcare, compounding fiscal pressures. - Financial derivatives (Advanced) - Government does not use financial derivatives directly. - Government controls several large banks and energy companies which typically make extensive use of derivatives. - Guarantees (Good) - Government reports annual flow and outstanding stock of government guarantees in PDMR. - PDMR 2012 projections: - projected stock of outstanding guarantees to grow from RUB 472 billion (1.0 percent of GDP) in 2010 to RUB 2.7 trillion in 2013 (3.3 percent of GDP) (Figure 3.4a). - 2012 planned issuance composition: bulk for foreign export and investment credits, defense industry obligations, and domestic investment projects (Figure 3.4b). - PDMR provides mainly qualitative discussion of risks and likelihood guarantees will be called. - Controls: - Under Budget Code (Article 116) only the Minister of Finance can enter into guarantees on behalf of the Russian Federation. - Value of guarantees included in government estimate of public debt; total value cannot exceed legal maximum. - Gaps: - Some guarantees fall outside controls, including: - financial guarantees (e.g., 15 percent of GDP in official deposit insurance) - minimum revenue guarantees under PPP contracts - guarantees provided by public corporations not monitored or controlled by federal government - Financial sector exposure (Basic) - [Content truncated at the end of provided excerpt; no further details supplied in this unit.] *Source: _cr14134 - 3.1 Risk Disclosure and Analysis* ### 81. The government has significant direct exposure to the financial sector through its ### The government has significant direct exposure to the financial sector through its ### Financial sector ownership and risks - State-controlled banks accounted for 50.4 percent of total banking assets at the start of 2013, up from around 35 percent in 2000. - State-controlled banks accounted for 53.8 percent of loans to nonfinancial corporations in Russia. - The unconsolidated liabilities of the five largest state-controlled banks amounted to around 44 percent of GDP in total (Figure 3.5). - Russian banks have low capital-to-asset ratios by comparison with other G-20 countries (Figure 3.6), indicating relatively greater vulnerability to macroeconomic or financial sector shocks. - Around one-third of the liabilities of the five largest state-controlled banks is household deposits. ### Deposit insurance and contingent liabilities - The official deposit insurance scheme insures deposits in eligible banks up to RUB 700,000. - At the end of 2012 the Deposit Insurance Agency estimated its total insurance liability was RUB 9.4 trillion (15 percent of GDP), representing a contingent liability for the government. - The Deposit Insurance Agency provides detailed financial information in its Annual Report and sets out any funds received from the federal budget. ### Government assessment of financial-sector exposure - The Central Bank produces bi-annual Banking Supervision Reports and Financial Stability Assessments with comprehensive assessments of banking and financial sector risks and information on the state-controlled sector. - These reports focus on the financial sector as a whole and do not isolate risks facing state-controlled banks individually or as a group. - The Central Bank undertakes bank stress-tests and has the power to mandate capital adequacy increases in line with the Basel III framework. - The government does not produce any regular analysis of its total fiscal exposure to the financial sector and the risks around this. ### Major and multi-annual contracts (PPP) — reporting shortfall - The government does not provide a comprehensive report of obligations under public-private-partnerships (PPP) and other major and multi-annual contracts. - The Investment Fund of Russia had funded projects worth a total of RUB 1.3 trillion (2 percent of GDP) by 2012; this total does not include many projects funded at sub-national level. - The number and value of PPP projects is expected to grow rapidly, underscoring the need to improve reporting and analysis of fiscal exposure. ### Environmental risks and contingency arrangements - The government sets aside an Emergency Reserve of up to 3 percent of the budget for financial assistance following natural disasters. - The average annual cost of damages from natural disasters between 1993 and 2012 was 0.06 percent of GDP in Russia, compared with an average of 0.19 percent of GDP for the G-20 (Figure 3.7). - The Emergency Reserve was used to provide assistance of around RUB 8 bn (0.01 percent of GDP) following floods in the south of Russia. - The government announced it will provide RUB 12 bn (0.02 percent of GDP) for floods affecting the east of the country. - The government does not provide a forward-looking analysis of potential scale of environmental and natural disaster risks. ### Sub-national governments — aggregate position and limits - Sub-national government debt was relatively low at around 2 percent of GDP in 2012 (Figure 3.8). - In 2012 intra-government lending accounted for 37 percent of total sub-national debt. - Debt ceiling for sub-national governments is equal to the sub-national government’s annual budget revenue net of federal grants. - Annual borrowing is limited to 15 percent of revenue net of federal grants for regions and 10 percent for municipalities (Article 91 in Budget Code). - Debt servicing costs must not exceed 15 percent of expenditures net of grants. - If federal grants have exceeded 60 percent of a region’s own revenue in two of the last three years, the debt ceiling is reduced to 50 percent of revenues and annual borrowing is limited to 10 percent of revenue net of federal grants. - Compliance is monitored by the Ministry of Finance; breaches can result in financial sanctions (Article 168 in Budget Code) and imposed reforms. - The Ministry of Finance publishes monthly aggregated data on regional debt (Figure 3.9). The Federal Treasury publishes monthly consolidated receipts and expenditure by sub-national government. Individual regional and municipal governments are required to publish annual financial information following national standards. ### Public corporations — size, transparency, and fiscal risks - Over 30,000 public corporations exist, in three broad categories: - Government holdings in over 8,000 joint-stock companies. Open joint-stock companies are required to publish audited financial statements. The total unconsolidated liabilities of the six largest state-controlled joint-stock financial corporations are around 45 percent of GDP. The 18 largest state-controlled nonfinancial joint-stock corporations have total liabilities of around 17 percent of GDP (Figure 3.10). - Over 22,000 unitary or Treasury enterprises (commercial entities wholly owned by the government) are not explicitly required to publicly disclose financial information. These enterprises received subsidies from the budget totaling RUB 27.8 bn or 0.2 percent of expenditure in 2012. - Around 300 government corporations established under specific legislation; these are legally non-profit and not required to publish financial statements, though several have begun to do so. Examples include the Deposit Insurance Agency, Vneshekonombank, Russian Roads, and Olympstroi. - The budget includes information on direct transfers between the government and public corporations; the Federal Agency for State Property Management is producing a public register of public corporations; a three-year privatization strategy provides financial information on enterprises being prepared for sale or divestiture. - There is currently no comprehensive information or analysis of the overall size and composition of the public corporations sector, its financial performance, levels of indirect government support, or the risks these corporations create for the government. - Subsidies to public corporations and equity purchases in public and private corporations have grown as a share of general government expenditure in recent years, particularly equity purchases (Figure 3.11). ### Quasi-fiscal activity — disclosure gaps - The government does not publish information on quasi-fiscal activity of public corporations, which typically takes three forms: - charging lower than market prices for goods and services; - provision of non-commercial services that would otherwise be provided by the state; - toleration of arrears by consumers or firms. - Gazprom’s supply of energy to domestic consumers and FSU countries at below long-run marginal cost has been a significant quasi-fiscal activity: - The subsidy to FSU countries was estimated at US$75 billion between 1992 and 2008. - In 2011, pre-tax domestic subsidies for gas and electricity were estimated by the International Energy Agency at 0.99 percent of GDP and 1.09 percent of GDP, respectively. - Domestic gas prices were increased by 15 percent in 2013, closing the gap with marginal costs. - The difference between the value of domestically-sold gas valued at export parity prices and actual revenue from domestic sales was estimated in 2012 at around RUB 1.7 trillion (2.5 percent of GDP). - Limited disclosure in financial statements of joint-stock companies provides some information on non-commercial service provision; estimated costs of such social activity for the largest public joint-stock companies were at least RUB 39 billion (0.1 percent of GDP) in 2012, with the actual total likely significantly higher. ### Health and social security funds — current reporting and long-term risks - The three federal extra-budgetary funds (Pension Fund, Social Insurance Fund, Federal Mandatory Health Insurance Fund) present current financial position and three-year forecasts alongside the budget. - There are no longer-term projections or a published strategy to address future spending pressures. - The Pension Fund of Russia (PFR) expenditure is around 9 percent of GDP and operates the pay-as-you-go pillar. - A 6 percent payroll tax is compulsorily invested in a funded pension operated by Vneshekonombank unless individuals opt out to a private sector fund. - Government reforms announced to move the funded pillar to voluntary basis: - From 2015, unless individuals explicitly choose to opt into a funded pension, payroll tax contribution will be paid into the PFR’s pay-as-you-go system. - The government will temporarily divert contributions made to private sector funds from 2014 into the PFR while these funds are audited ahead of potentially giving them a government guarantee. - These reforms may increase long-term government pension expenditure and granting guarantees to private pension funds will increase government long-term contingent liabilities. - IMF estimates of net present value (NPV) of increased age-related costs under current policy: - NPV of increased pension costs to 2050 is 97.6 percent of GDP. - NPV of increase in healthcare costs is 37 percent of GDP. ### Conclusions and priority areas for improvement - Fiscal risk analysis and management practices generally meet basic requirements, but important improvements are needed. - Key areas highlighted for enhanced fiscal risk reporting and management: - Analysis of macroeconomic risks to the government’s fiscal forecasts to improve understanding and risk planning. - Consistency of fiscal reporting across budgets, statistics, and accounts. - Disclosure and management of specific fiscal risks from government assets and liabilities, contingent liabilities, long-term contracts, financial sector exposures, and risks from public corporations. - Analysis of risks from longer-term expenditure and revenue pressures, including demographic trends and the long-term outlook for oil and gas revenues. - Reporting and oversight of state-controlled enterprises, including disclosure of their quasi-fiscal activity and the risks they pose to government finances. *Source: IMF staff report content (sections 81–98) from the supplied document.* ### Chapter IV includes as series of recommendations for how disclosure and management of these ### _cr14134 - Chapter IV includes as series of recommendations for how disclosure and management of these ### Summary findings on fiscal risk disclosure and management - Fiscal risks in Russia include large contingent liabilities and off‑balance‑sheet items such as: - unreported public sector liabilities of around 130% of GDP; - long-term pension liabilities around 280% of GDP not included in government balance sheet; - future revenues from oil and gas reserves estimated at 200% of GDP not included on official balance sheets; - non-deposit liabilities of government-controlled financial institutions of RUB 18 trillion (30 percent of GDP); - exposure to the deposit insurance scheme of RUB 94 trillion (15 percent of GDP); - nuclear decommissioning costs estimated RUB 940 billion (1.5 percent of GDP); - state guarantees forecast to rise to RUB 2.7 trillion (3.3 percent of GDP) by 2015. - Fiscal forecasting and valuation issues: - fiscal forecasts have tended to underestimate future expenditure levels by 13 percent over the three-year forecast horizon (last five years); - accrued tax revenue recording overestimates revenue because it does not reflect amounts unlikely to be collected; - policy loans stock of RUB 2.3 trillion (4.0 percent of GDP) lacks ex ante budget provision for non-repayment; - guarantees are budgeted nearly in full (RUB 115 billion, 0.2 percent of GDP annually) despite only 5 percent of guarantees called over past 2 years; - fixed assets valued at book value in accounts vs. SNA 2003 proxy market valuations, with at least a ten-fold difference. - Sector exposures and concentrations: - oil and gas revenues account for one-third of total general government revenue; - state-controlled banks account for more than 50% of total financial sector assets; - state-controlled corporations have liabilities of at least 95% of GDP; - sub-national debt is relatively low at 2% of GDP. - Fiscal reporting coverage and consistency gaps: - general government definition does not follow international standards; over 30,000 government-owned or controlled enterprises with aggregate liabilities of at least 85 percent of GDP are not captured in summary fiscal reports; - government balance sheet coverage (2012): financial assets RUB 21.4 trillion (34.2 percent of GDP), liabilities RUB 7.0 trillion (11.1 percent of GDP), nonfinancial assets RUB 27.2 trillion (43.4 percent of GDP); - tax expenditure revenue loss estimated between 1.2 percent and 2.1 percent of GDP depending on methodology; - average annual cost of natural disasters is 0.06% of GDP; - final expenditure exceeded initial plan by 5% of the budget on average in past 12 years. ### Core recommendations (nine areas) - 1. Clarify institutional boundaries and expand institutional coverage - Adopt internationally accepted criteria for classification of institutional units. - Consolidate institutional units judged by Rosstat to be primarily non‑market into general government in statistics. - Prepare fiscal statistics for the aggregate public corporations sector and the consolidated public sector. - 2. Expand balance sheet coverage - Value and recognize obligations from funded pension schemes managed by the government. - Value and disclose off‑balance sheet government pension liabilities from the pay‑as‑you‑go scheme. - Value and recognize government liabilities under public‑private partnership arrangements. - Value and recognize subsoil assets, including future government revenue from commercially‑exploitable oil and gas reserves. - 3. Enhance consistency between budgets, statistics, and accounts - Include in budgets and accounts provisions for taxes unlikely to be collected and reflect them in statistics. - Include in budgets and balance sheets provision for non‑repayment of loans (e.g., policy loans of RUB 2.3 trillion, 4.0 percent of GDP). - Make budgetary provisions only for guarantees that are more than 50 percent likely to be called and charge a market‑related guarantee fee. - Move toward greater market valuation of nonfinancial assets in accounts. - 4. Improve disclosure and management of tax expenditures - Estimate the revenue loss from tax expenditures (estimated between 1.2 percent and 2.1 percent of GDP). - Present revenue loss from tax expenditures alongside associated expenditure in budget documentation. - Improve scrutiny and management of tax expenditures, including periodic reviews and options to reduce or reclassify them. - 5. Improve the coverage and detail of the annual budget - Review the proportion of the budget classified as secret to ensure it covers only expenditures associated with national security. - Present any infrastructure investments from the National Wealth Fund (NWF) and Russia Direct Investment Fund (RDIF) alongside the annual budget. - 6. Increase the transparency and scrutiny of official forecasts - Publish a comprehensive Fiscal Strategy Report in late spring/early summer setting out macroeconomic and fiscal developments to date, the official macroeconomic and fiscal forecast for the medium‑term, and the framework for preparation of the upcoming budget. - Publish a comprehensive reconciliation of changes to the government’s fiscal forecast, separately identifying effects of (i) macroeconomic variables; (ii) sector‑specific parameters; (iii) policy measures; (iv) classification changes; and (v) other factors. - Formalize independent evaluation of official macroeconomic and fiscal forecasts by seeking published input from independent experts to which the government must respond when it presents the annual budget. - 7. Improve disclosure and analysis of fiscal risks - Include in budget documentation: (i) analysis of sensitivity of fiscal forecast to different macroeconomic assumptions, (ii) alternative macro‑fiscal scenarios, and (iii) probabilistic analysis of the range of potential forecast outcomes (example sensitivity: US$10 per barrel fall in oil price increases government deficit by approximately 1 percent of GDP). - Publish a comprehensive statement of fiscal risks setting out the government’s largest contingent liabilities, estimates of magnitude and likelihood, and the government’s strategy for managing them. - 8. Publish long‑term fiscal projections - Publish long‑term fiscal projections for the next 30-50 years using a range of macroeconomic, oil market, and demographic assumptions. - Use alternative assumptions regarding output growth, oil output and prices, fertility, employment, retirement, and mortality rates to illustrate sensitivity and long‑term sustainability (noting existing projections cover 2014-2030 only and that projected additional pension and healthcare costs to 2050 are 100 percent of GDP and 37 percent of GDP respectively, on a net present value basis). - 9. Enhance fiscal oversight of government‑controlled enterprises - Strengthen oversight arrangements to bring government‑controlled enterprises within robust fiscal scrutiny given their sizable liabilities and fiscal implications (noting over 30,000 government‑owned or controlled enterprises with aggregate liabilities of at least 85 percent of GDP). ### Implementation context and sequencing - A Fiscal Transparency Action Plan setting out specific actions required to implement these reforms over the next five years was developed in consultation with the Russian authorities and appended to the report. - Recommended sequencing and key steps are provided for each reform area to: - improve the information base for fiscal decision‑making; - bring Russia’s fiscal transparency practices into line with evolving international standards; - support more effective fiscal risk management and long‑term sustainability assessment. *Source: Chapter IV, _cr14134 (IMF staff report).* ### 9. Enhance the Financial Oversight of Public Enterprises ### 9. Enhance the Financial Oversight of Public Enterprises ### Issue - Russia has over 30,000 public corporations with gross liabilities of at least RUB 53 trillion (85 percent of GDP). - While all of these corporations prepare financial statements, less than 2,000 are required to publish them. - There is no aggregate reporting on the financial position and performance of the sector. - Quasi-fiscal subsidies associated with the sale of energy at below market prices by Gazprom and Rosneft have been substantially reduced in recent years, but Russia’s largest public corporations continue to engage in quasi-fiscal activity which is not always transparently presented in their accounts. ### Recommendation 9 — Summary of Required Actions Facilitate the financial oversight of public enterprises by: - a. Requiring all the public corporation to publish financial statements and have them audited. - Expected governance effects: improve transparency, accountability, and governance of these enterprises. - b. Requiring all public corporations to present their financial statements in a format which facilitates consolidation of the public sector. - Expected effect: clarify their financial relationship with government and allow for the preparation of whole of government accounts and public sector fiscal statistics. - c. Requiring public corporations to disclose and quantify in their financial statements the cost of any provision of goods or services at below market prices, public service undertakings, or other quasi-fiscal activity. - Expected effect: improve understanding of the full extent and cost of fiscal activity in the economy. - d. Publishing an annual report on the fiscal performance, prospects, and risks of the public corporations sector. - Expected effect: improve the surveillance of the sector and inform the development and implementation of the strategy. ### Appendix I — Relevant Actions and Timeline (selected items related to public corporations) - Action 1.c (Prepare fiscal statistics for the public corporations sector) - 2016: Publish aggregate statistics for public corporations sector - 2017: Publish statistics for the consolidated Federal government and its 100 largest corporations - 2018: Public statistics for the consolidated Federal government and all its corporation - 2019: Publish statistics for the consolidated public sector including both Federal and sub-national public corporations - Action 9 (Enhance the Financial Oversight of Public Enterprises) — staged requirements: - a. Require all public corporations to publish audited financial statement - 2014: Require all public corporations with liabilities above a threshold to publish financial statements - 2015: Require all public corporations with liabilities above a threshold to publish financial statements - 2016: Require all public corporations to publish financial statements and audit those with liabilities above a threshold - 2017–2019: Require all public corporations to publish financial statements and have them audited - b. Require all public corporations to present their financial statements in a format which facilitates public sector consolidation - 2015: Require 100 largest public corporations to identify all transactions and cross-holding with government - 2016: Require 100 largest public corporations to identify all transactions and cross-holding with government and other public corporations - 2017: Require all public corporations to identify all transactions and cross-holding with government - 2018–2019: Require all public corporations to identify all transactions and cross-holding with government and other public corporations - c. Require public corporations to disclose and quantify all quasi-fiscal activity - 2014: Require joint stock companies to quantify all public service undertakings in financial statements - 2015: Require joint stock companies to quantify all public service undertakings, and provision of goods/services at below-market prices in financial statements - 2016: Require all public corporations to disclose all quasi fiscal activity in financial statements - 2017–2019: Require all public corporations to disclose and quantify all quasi fiscal activity in financial statements - d. Publish annual report on the public corporations sector - 2014: Publish survey of numbers and activities of public corporations by economic sector - 2015: Publish overview of aggregate financial position of public corporations sector - 2016: Publish overview of aggregate financial position and prospects of public corporations sector - 2017: Publish overview of aggregate financial position, prospects, and risks of public corporations sector - 2018–2019: Publish overview of consolidated financial position, prospects, and risks of public corporations sector *Source: _cr14134 - 9. Enhance the Financial Oversight of Public Enterprises* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14134.pdf_