## 1. Sanctions and Counter-Sanctions

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### Context and macro backdrop
- Russia’s growth is slowing because of pre-existing structural reasons and the fallout from geopolitical tensions.
- Growth slowdown began in 2011 and continued in 2013 despite accommodative policies as the economy hit capacity constraints.
- Over 2000–2012, Russia’s real GDP per capita almost doubled, contributing to significant declines in poverty rates and unemployment; after almost 15 years of growth based on rising oil prices, macroeconomic stabilization, and increasing use of spare resources, this growth framework has reached its limits.
- Authorities initiated structural reforms since the 2008–09 crisis (fiscal rule, move toward inflation targeting and more flexible exchange rate, procurement and anti-corruption laws, measures to strengthen the judicial system, creation of a Federal Business Ombudsman), but the privatization agenda stalled and other structural bottlenecks continue to hamper growth.
- Geopolitical uncertainties following actions in Crimea have increased uncertainty of doing business in Russia, chilling investment and causing a sharp decline in bond issuance, at a moment when diversification requires new investment and foreign technology.

### Sanctions, counter-sanctions, and policy responses
- Sanctions adoption and scope:
  - The United States, the European Union (EU), Japan, Switzerland, and other countries adopted sanctions against Ukrainian and Russian individuals and entities in response to the unfolding situation in Ukraine.
  - The EU suspended a number of bilateral discussions and imposed travel restrictions and financial sanctions.
  - Canada, Switzerland, and Australia announced their own programs of financial sanctions. A number of non-EU member European countries aligned national policies with EU decisions.
  - Designations differ across jurisdictions: around 45 individuals and 20 companies were designated for financial sanctions by the United States, while the EU named about 70 individuals and fewer than 5 companies.
  - The U.S. Department of Commerce announced it will deny export licenses for any high-technology items that could contribute to Russian military capabilities and revoke any existing export licenses meeting these conditions.
- Russian counter-measures:
  - On March 20 and March 24, Russia imposed retaliatory sanctions on U.S. and Canadian government officials.
  - Russia passed a bill to create a national payment system insulated from foreign companies’ influence, and is considering the creation of a national rating agency.

### Recent macroeconomic developments — key indicators and dynamics
- Growth and demand:
  - Growth slowed to 1.3 percent in 2013, driven by a contraction in investment (destocking of inventories and reduced state-owned enterprises’ capital spending); consumption remained robust due to strong real wage growth and an unsecured consumer credit boom.
  - Net exports contributed to growth in 2013, but the share of non-oil exports in the economy continued to decline.
  - The slowdown appears principally structural and the output gap remained small.
- Inflation and monetary stance:
  - Inflation remained above the CBR target in 2013.
  - Before March, CBR kept policy rates constant since September 2012, eliminated targeted FX interventions, and widened its non-intervention band.
  - Pressures on the ruble intensified in early 2014; CBR sharply increased net intervention which reached US$26 billion for the month of March, compared with US$27 billion in net interventions for 2013.
  - The CBR raised policy rates by 1½ percentage points in early March and a further ½ percentage point in April.
  - The cumulative interventions threshold for shifting the exchange rate corridor was increased to US$1.5 billion in March (from previous USD350mn).
  - The CBR later lowered the amount of interventions involved in each band by US$100 million to US$100 million in the inner intervention band and US$300 million in the outer intervention band.
  - The ruble per basket is defined as 55% USD and 45% EUR.
- Fiscal outcomes:
  - General government balance moved from an overall surplus of 0.4 percent of GDP in 2012 to a deficit of 1.3 percent of GDP in 2013.
  - General government non-oil deficit exceeded 12 percent of GDP.
  - Close to 80 percent of the oil revenues targeted for savings in the Reserve Fund (RF) were used to offset the decline in non-oil revenues and worse-than-expected privatization receipts.
  - The RF remains well below the 7 percent targeted by the authorities despite high oil prices.
- Banking sector and financial stability:
  - Since the 2008 crisis, the banking system moved from a negative to a positive net foreign asset position.
  - Non-performing loans reached 6.4 percent in March (2013) and were almost fully provisioned.
  - Capital adequacy ratios remained above the statutory minimum of 10 percent.
  - Prudential measures in 2013 and early 2014 (tightening risk weights and raising provisioning) significantly reduced unsecured consumer lending growth and coincided with a decline in banking sector profitability.
  - Deposit Insurance Agency (DIA) covers 99 percent of retail deposits by number and 70 percent by value; payouts to insured depositors have proceeded within a period of two weeks.
- External sector:
  - Current account surplus declined to 1½ percent of GDP in 2013 from 3.6 percent of GDP in 2012.
  - Net private capital outflows remained elevated in 2013 at about 3 percent of GDP.
  - Foreign reserves at end of April 2014 were US$472 billion or 143 percent of the IMF’s calculated reserve adequacy metric, near the upper bound of the recommended range of 100–150 percent.
  - External debt edged up due to a major acquisition in the oil sector but remains sustainable under the baseline scenario.

### Capital flows, market impact, and dollarization pressures
- Capital flows Q1 2014:
  - Net private capital outflows increased to US$51 billion in the first quarter of 2014.
  - Net private capital outflows reached US$51 billion in 2014 Q1; comparative figures: 2013 Q1 outturn: US$28 billion; total for 2013: US$60 billion; peak outflow in 2008 Q4: US$132 billion.
  - Seasonality: about half of annual outflows typically occur in the first quarter.
  - Components of 2014 Q1 outflows: US$19.6 billion accumulation of cash foreign currency by non-banks abroad; US$21 billion accumulation of foreign assets by banks; US$9.8 billion accumulation of other foreign assets by non-banks; borrowing from abroad at US$15 billion.
  - Domestic banks’ exceptional FX positions with the CBR: FX swaps increased by US$5 billion; FX correspondent accounts increased by US$8 billion. Had domestic banks put this excess FX liquidity abroad instead of parking it with the CBR, capital flows would have reached US$ 64 billion.
- Financial markets and ratings:
  - Since March, sovereign and private issuances declined very sharply, with borrowing rates increasing by an average of 100–150 basis points.
  - Moody’s and Fitch revised the outlook on Russia’s sovereign BBB rating from stable to negative.
  - S&P downgraded the sovereign rating by one notch to BBB-, Russia’s lowest investment grade category.
  - The sovereign downgrade led to similar ratings cuts on major Russian corporations such as Gazprom, Rosneft, and VTB bank.
- Dollarization pressures:
  - Share of FX deposits in total deposits increased (corporate and retail FX deposits noted).
  - Preference for FX has increased across depositors.

### Outlook, risks, and escalation scenarios
- Projections and baseline expectations:
  - Capital outflows are expected to exceed US$100 billion in 2014, after reaching US$51 billion in the first quarter.
  - Consumption will remain the main growth driver; net exports are expected to support growth as imports weaken.
  - Inflation is expected to remain well above the CBR’s target due to the recent exchange rate depreciation.
  - A slight recovery in growth to 1 percent is projected in 2015, on the back of stronger exports and stabilization of investment.
- Key vulnerabilities and risks:
  - Growth slowdown is mainly structural, with limited output gap.
  - Heavy reliance on oil revenues: non-oil deficit >12 percent of GDP; substantial use (~80 percent) of oil revenues targeted for Reserve Fund savings to cover budget shortfalls.
  - Geopolitical tensions materially increase uncertainty, depress investment, and threaten access to foreign technology and financing.
  - Elevated capital outflows (~3 percent of GDP in 2013) and shrinking current account surplus increase external vulnerabilities despite large gross reserves.
  - Direct exposure to Ukraine: Russian banks’ exposure to Ukraine is less than 2 percent of Russian banks’ assets; exports to Ukraine are less than 5 percent of Russia’s total exports; Russian loans and arrears to Gazprom amount to US$4.3bn (0.3 percent of GDP).
  - About half of Russian gas exports to Europe go through Ukraine, with limited short-run rerouting possibilities.
- Escalation scenarios:
  - Significant escalation could trigger stronger and broader sanctions targeting financial and/or energy sectors.
  - Sanctions on Russian banks would further disrupt commerce, investment, and consumption; energy-sector sanctions could cause significant trade disruptions.
  - Either scenario could severely impact confidence, intensify capital outflows, and in the extreme jeopardize external sustainability.
- Buffers:
  - Russia has sizeable buffers: large international reserves, low public debt, and reduced corporate sector maturity and currency mismatches.
  - At the end of April, gross international reserves covered 190 percent of the 2014 short-term debt outstanding at remaining maturity.

### Policy advice and recommendations (staff views)
- Monetary policy:
  - Staff view that recent cumulative policy rate increase of 2 percentage points is insufficient to bring inflation to the CBR’s target of 5 percent in 2014 given the size of the recent ruble depreciation and transmission lags.
  - Staff recommend the CBR raise further its policy rates over the next year to ensure that its 4.5 percent inflation target in 2015 is met and to anchor inflation expectations.
  - Resume policy towards greater exchange rate flexibility as soon as current uncertainties subside; gradually simplify and eliminate intervention bands; lower the size of cumulative FX interventions required to move the exchange rate corridor; increase the size of corridor shifts.
- Financial stability and supervision:
  - Continue to monitor systemic risk via regular stress testing and increased oversight.
  - Continue strengthening banking supervision, implement remaining FSAP recommendations, and communicate intended goals widely to maintain depositor confidence.
- Fiscal policy:
  - Fiscal stance broadly appropriate for 2014 but flexibility could be considered in case of a more severe cyclical slowdown.
  - Adherence to the fiscal rule is essential to support credibility and rebuild buffers.
  - If financing is inadequate, government could reduce transfers to the Reserve Fund as in 2013; Reserve Fund stands at 4.3 percent of GDP, below the authorities’ target of 7 percent of GDP.
  - Staff estimate: discounting the current benchmark oil price by approximately 15 percent would generate enough savings to rebuild the RF to 7 percent of GDP by 2019; the additional cumulative tightening would be about 1.5 percent of GDP.
- Structural reforms and medium-term priorities:
  - Reinvigorate the reform agenda: continue the fight against corruption; reinvigorate privatization; reduce price distortions; improve competition.
  - Strengthen public investment efficiency using performance-based budgeting and the new procurement law.
  - Further pension reform is necessary; staff highlight increases in the retirement age and measures to improve contribution compliance and formalization of employment.
  - Financial deepening: reduce banking sector fragmentation through consolidation and reduced public bank ownership; enhance competition and develop medium-size banks; strengthen credit bureaus and collateral registries.

*International Monetary Fund — Russian Federation: Section 1, “Sanctions and Counter-Sanctions.”*

### 1. Sanctions and Counter-Sanctions _______________________________________________________________  5

### 1. Sanctions and Counter-Sanctions

### Context
- Russia’s growth is slowing because of pre-existing structural reasons and the fallout from geopolitical tensions.
- The growth slowdown that started in 2011 continued in 2013 despite accommodative policies as the economy hit capacity constraints.
- The fallout from recent geopolitical tensions relating to Ukraine and, to a lesser extent, the turmoil in emerging markets (EM) following the Fed’s discussion of tapering unconventional monetary policy are bringing the economy to a standstill.
- Over 2000–2012, Russia’s real GDP per capita almost doubled, contributing to significant declines in poverty rates and unemployment; after almost 15 years of growth based on rising oil prices, macroeconomic stabilization, and increasing use of spare resources, this growth framework has reached its limits.
- Authorities initiated some structural reforms since the 2008–09 crisis (fiscal rule, move toward inflation targeting and more flexible exchange rate, procurement and anti-corruption laws, measures to strengthen the judicial system, creation of a Federal Business Ombudsman), but the privatization agenda stalled and other structural bottlenecks continue to hamper growth.
- Geopolitical uncertainties following actions in Crimea have increased uncertainty of doing business in Russia, chilling investment and causing a sharp decline in bond issuance, at a moment when diversification requires new investment and foreign technology.

### Sanctions and Counter-Sanctions (Box 1)
- The United States, the European Union (EU), Japan, Switzerland, and other countries have adopted sanctions against Ukrainian and Russian individuals and entities in response to the unfolding situation in Ukraine.
- The EU suspended a number of bilateral discussions and imposed travel restrictions and financial sanctions.
- Canada, Switzerland, and Australia announced their own programs of financial sanctions. A number of non-EU member European countries aligned national policies with EU decisions.
- Designations differ across jurisdictions: around 45 individuals and 20 companies were designated for financial sanctions by the United States, while the EU named about 70 individuals and fewer than 5 companies.
- The U.S. Department of Commerce announced it will deny export licenses for any high-technology items that could contribute to Russian military capabilities and revoke any existing export licenses meeting these conditions.
- On March 20 and March 24, Russia imposed retaliatory sanctions on U.S. and Canadian government officials.
- Russia passed a bill to create a national payment system insulated from foreign companies’ influence, and is considering the creation of a national rating agency.

### Recent Macroeconomic Developments
- Growth:
  - Growth slowed to 1.3 percent in 2013, driven by a contraction in investment (destocking of inventories and reduced state-owned enterprises’ capital spending); consumption remained robust due to strong real wage growth and an unsecured consumer credit boom.
  - Net exports contributed to growth in 2013, but the share of non-oil exports in the economy continued to decline.
  - The slowdown appears principally structural and the output gap remained small.
- Inflation:
  - Inflation remained above the CBR target in 2013.
- Fiscal:
  - General government balance moved from an overall surplus of 0.4 percent of GDP in 2012 to a deficit of 1.3 percent of GDP in 2013.
  - General government non-oil deficit exceeded 12 percent of GDP.
  - Close to 80 percent of the oil revenues targeted for savings in the Reserve Fund (RF) were used to offset the decline in non-oil revenues and worse-than-expected privatization receipts.
  - The RF remains well below the 7 percent targeted by the authorities despite high oil prices.
- Pension reform (Box 2):
  - The reform introduced in December 2013 did not increase the statutory retirement age (60 for men and 55 for women).
  - Starting in 2015, contributors will earn notional pension points; the value of notional points will be assessed annually based on system revenue (including government transfers to be decided annually) divided by the sum of all notional points earned by pensioners.
  - Other changes: (i) financial incentives to delay retirement; (ii) increasing contribution rate for self-employed and hazardous jobs; (iii) increasing minimum years worked from 6 to 15 before claiming a pension; (iv) introducing a threshold of notional points before claiming benefits.
  - A person earning minimum wage would require 40 years to accumulate the minimum notional points needed to claim benefits.
  - Authorities expect the ratio of average benefit to average wage to decline gradually by about 10 percentage points from its current level of 37 percent.
  - Under the new system, transfers from the federal government are expected to decline by about 1 percent of GDP by 2030.
- Monetary and FX policy:
  - Before March, CBR kept policy rates constant since September 2012, eliminated targeted FX interventions, and widened its non-intervention band.
  - Capital outflows persisted, spurred by expectations of continuing ruble depreciation.
  - Pressures on the ruble intensified in early 2014; a move to increase ruble flexibility facilitated an orderly depreciation before March.
  - In response to exceptional circumstances, the CBR sharply increased net intervention, which reached US$26 billion for the month of March, compared with US$27 billion in net interventions for 2013.
  - The CBR raised policy rates by 1½ percentage points in early March and a further ½ percentage point in April.
  - The cumulative interventions threshold for shifting the exchange rate corridor was increased to US$1.5 billion in March (from previous USD350mn).
  - The CBR later lowered the amount of interventions involved in each band by US$100 million to US$100 million in the inner intervention band and US$300 million in the outer intervention band.
  - The ruble per basket is defined as 55% USD and 45% EUR.
- Banking system:
  - Since the 2008 crisis, the banking system moved from a negative to a positive net foreign asset position.
  - Non-performing loans reached 6.4 percent in March (2013) and were almost fully provisioned.
  - Capital adequacy ratios remained above the statutory minimum of 10 percent.
  - Prudential measures in 2013 and early 2014 (tightening risk weights and raising provisioning) significantly reduced unsecured consumer lending growth and coincided with a decline in banking sector profitability.
  - Increased supervisory powers led to a wave of bank closures, mostly very small banks, and some deposit reallocation toward bigger banks.
  - The Deposit Insurance Agency (DIA) covers 99 percent of retail deposits by number and 70 percent by value; payouts to insured depositors have proceeded within a period of two weeks.
- External sector:
  - Current account surplus declined to 1½ percent of GDP in 2013 from 3.6 percent of GDP in 2012.
  - Net private capital outflows remained elevated in 2013 at about 3 percent of GDP, driven by nonbank private sector shadow capital flight and net portfolio outflows.
  - Authorities are considering measures to promote “de-offshorization” to discourage use of foreign corporate structures that conceal beneficial ownership or obtain undue tax advantages.
  - In May, Russia, Kazakhstan, and Belarus signed a treaty on the creation of the Eurasian Economic Union to become effective starting 2015.
  - Russia’s external position in 2013 was weaker than its medium-term fundamentals (Annex II).
  - Foreign reserves at end of April 2014 were US$472 billion or 143 percent of the IMF’s calculated reserve adequacy metric, near the upper bound of the recommended range of 100–150 percent.
  - External debt edged up due to a major acquisition in the oil sector but remains sustainable under the baseline scenario (Tables 8–11, Figure 5 and 9).

### Key Diagnostics and Risks
- Growth slowdown is mainly structural, with limited output gap.
- Heavy reliance on oil revenues: non-oil deficit >12 percent of GDP; substantial use (~80 percent) of oil revenues targeted for Reserve Fund savings to cover budget shortfalls.
- Geopolitical tensions materially increase uncertainty, depress investment, and threaten access to foreign technology and financing.
- Elevated capital outflows (~3 percent of GDP) and shrinking current account surplus (1½ percent of GDP in 2013) increase external vulnerabilities despite large gross reserves (US$472 billion at end-April 2014).
- Banking system broadly stable with NPLs at 6.4 percent (March 2013), high provisioning, and capital adequacy above 10 percent, but profitability and liquidity have edged down.

*International Monetary Fund — Russian Federation: Section 1, “Sanctions and Counter-Sanctions.”*

### 13. Net private capital outflows increased significantly in the first quarter of 2014 to

### _cr14175 - 13. Net private capital outflows increased significantly in the first quarter of 2014 to

### Capital flows and reserves
- Net private capital outflows increased to US$51 billion in the first quarter of 2014.
- Reserves at the CBR experienced additional downward pressures following the sharp increase in FX intervention in early March.
- The increased level of FX swaps and correspondent accounts between the CBR and domestic banks temporarily cushioned the level of reserves, which have not declined by the total amount of interventions.
- FX swaps were used to access CBR liquidity; correspondent accounts at the CBR rose reflecting increased foreign assets repatriation by domestic banks amid geopolitical uncertainties.

### Financial market impact and dollarization pressures
- Since March, sovereign and private issuances declined very sharply, with borrowing rates increasing by an average of 100–150 basis points.
- The government cancelled a number of domestic auctions.
- Rating actions:
  - Moody’s and Fitch revised the outlook on Russia’s sovereign BBB rating from stable to negative.
  - S&P downgraded the sovereign rating by one notch to BBB-, Russia’s lowest investment grade category.
  - The sovereign downgrade led to similar ratings cuts on major Russian corporations such as Gazprom, Rosneft, and VTB bank, as well as subsidiaries of international banks.
- Geopolitical uncertainty has increased dollarization pressures:
  - Share of FX deposits in total deposits increased (corporate and retail FX deposits noted).
  - Preference for FX has increased across depositors.

### Monetary policy reactions and market indicators
- The CBR reacted by raising its policy rates twice.
- Markets and indicators shown in the source include:
  - Net FX purchases (Billions of U.S. dollars) and EUR-USD Basket exchange rate (Russian rubles).
  - CEMBI Russia Yield and LT Sovereign Bond Yield; MICEX (stock market index).
  - Bond issuances (Billions of U.S. dollars) for corporate and sovereign issuances, which have dried up.
  - Policy and interbank rates: MIACR, Fixed deposit rate, REPO rate, Fixed REPO rate.

### Outlook and risks
- Geopolitical tensions are bringing the Russian economy to a standstill.
- Projections and expectations:
  - Capital outflows are expected to exceed US$100 billion in 2014, after reaching US$51 billion in the first quarter.
  - Consumption will remain the main growth driver; net exports are expected to support growth as imports weaken.
  - Inflation is expected to remain well above the CBR’s target due to the recent exchange rate depreciation.
  - A slight recovery in growth to 1 percent is projected in 2015, on the back of stronger exports and stabilization of investment.
- Medium-term constraints:
  - Growth drivers from 2000–2008 (including oil price increases and utilization of spare capacity) are unlikely to support growth over the projection.
  - Contribution of labor force expected to be negative over the projection period due to adverse demographics and an already-low unemployment rate.
- Risk assessment:
  - Risks are starkly on the downside; baseline assumes gradual resolution of geopolitical tensions.
  - Prolonged uncertainty could lead to lower consumption, weaker investment, greater exchange rate pressure, and larger capital outflows than assumed.
  - Sanctions could derail integration with the world economy and delay reforms, harming long-term growth.
- Direct exposure to Ukraine:
  - Exposure of Russian banks to Ukraine is less than 2 percent of Russian banks’ assets.
  - Exports to Ukraine are less than 5 percent of Russia’s total exports.
  - Russian loans and arrears to Gazprom amount to US$4.3bn (0.3 percent of GDP).
  - About half of Russian gas exports to Europe go through Ukraine, with limited short-run rerouting possibilities.
- Other risks:
  - External risks include fallout from EM turmoil during transition to higher global interest rates and an acceleration of capital outflows.
  - With 2/3 of exports of goods and 1/3 of general government revenues depending on the energy sector, the economy remains very sensitive to oil and gas prices.
  - Domestic risks include a sharper slowdown in investment if the business climate does not improve and financing tightens.
  - Medium-term upside: investment may be stronger than expected, partly due to a recent gas contract with China.
- Buffers and sustainability:
  - Russia has sizeable buffers: large international reserves, low public debt, and reduced corporate sector maturity and currency mismatches.
  - At the end of April, gross international reserves covered 190 percent of the 2014 short-term debt outstanding at remaining maturity.
- Escalation scenarios:
  - Significant escalation could trigger stronger and broader sanctions targeting financial and/or energy sectors.
  - Sanctions on Russian banks would further disrupt commerce, investment, and consumption; energy-sector sanctions could cause significant trade disruptions.
  - Either scenario could severely impact confidence, intensify capital outflows, and in the extreme jeopardize external sustainability.

### Box 3 — Capital Flows in 2014 (details)
- Net private capital outflows reached US$51 billion in 2014 Q1.
- Comparative figures:
  - 2013 Q1 outturn: US$28 billion.
  - Total for 2013: US$60 billion.
  - Peak outflow in 2008 Q4: US$132 billion.
- Seasonality: about half of annual outflows typically occur in the first quarter.
- Components of larger net outflows in 2014 Q1:
  - US$19.6 billion accumulation of cash foreign currency by non-banks abroad.
  - US$21 billion accumulation of foreign assets by banks.
  - US$9.8 billion accumulation of other foreign assets by non-banks.
  - Borrowing from abroad reverted to below average levels at US$15 billion.
- Domestic banks’ exceptional FX positions with the CBR in the period:
  - FX swaps of resident banks with the CBR increased by US$5 billion.
  - FX correspondent accounts with the CBR increased by US$8 billion.
  - Had domestic banks put this excess FX liquidity abroad instead of parking it with the CBR, capital flows would have reached US$ 64 billion.

### Box 4 — Regional spillovers (summary)
- Spillover channels: trade flows, remittances, and financial linkages.
- Trade/remittances vulnerabilities:
  - Exports of goods and services to Russia amount to over 20 percent of GDP in Belarus; substantial shares for several Baltics, Eastern Europe, Caucasus, and Central Asia countries.
  - Several CIS countries receive large remittances from Russia.
- Energy dependencies:
  - Russia supplies about one-third of European oil and gas consumption.
  - Finland, the Baltic countries, Belarus, and Czech Republic rely almost entirely on Russian gas.
  - Dependence in central and southeastern Europe is high at 40-60 percent.
  - About half of gas exports transit through Ukraine; 40 percent could be re-routed via Belarus and Nord Stream at full capacity.
  - Re-routing LNG from Western Europe to central Europe is difficult; rerouting Russia’s gas exports to Asia is constrained by pipeline absence.
- Banking and financial linkages:
  - Cyprus, Austria, and Hungary have total assets of their subsidiaries in Russia about 4-10 percent of national GDP.
  - BIS-reporting country exposures include Austria, Sweden, and the Netherlands at about 2-4 percent of GDP in cross-border lending.
  - Russian banks are major lenders in Armenia, Belarus, Cyprus, and Ukraine.
- FDI and portfolio positions:
  - Russian FDI is important for neighbors, financial centers, and Montenegro real estate.
  - 70 percent of outward and 65 percent of inward FDI positions for Russia in 2012 were with five countries, but net FDI positions with these countries were close to zero (suggesting round tripping).
  - Russian inward and outward portfolio investment is channeled mostly via financial centers.
  - Largest FDI investors in Russia: US, Germany, U.K., France, and Finland, mostly in consumer sectors.

*INTERNATIONAL MONETARY FUND*

### 24. A tighter monetary stance is required to attain the 2015 inflation target and anchor

### 24. A tighter monetary stance is required to attain the 2015 inflation target and anchor

### Monetary policy: current stance and staff assessment
- Inflation increased to 7.3 percent in April 2014 (yoy).
- Inflation is expected to decline to 6.5 percent by year-end given the projected decline in food prices, the limits on utility tariffs’ increases, and the emergence of a small negative output gap.
- The recent cumulative policy rates increase of 2 percentage points signaled CBR’s commitment to contain inflationary pressures.
- Staff view this monetary tightening as insufficient to bring inflation to the CBR’s target of 5 percent in 2014, given the size of the recent ruble depreciation and the lags in the transmission mechanism of monetary policy.
- Despite the cumulative hike, the real policy rate remains around zero, close to the estimated neutral rate; the slowdown is mainly structural in nature.
- Staff recommendation:
  - The CBR should raise further its policy rates over the next year to ensure that its 4.5 percent inflation target in 2015 is met, in order to anchor inflation expectations in the transition to a full-fledged inflation targeting framework.
  - Higher rates would also help reduce capital outflows that have emerged amid geopolitical tensions, global liquidity tightening and rate hikes by major EMs’ central banks.

### Exchange rate policy and transition to inflation targeting
- Staff view: the CBR should resume its policy towards greater exchange rate flexibility as soon as the current uncertainties subside.
- Rationale:
  - Enhancing exchange rate flexibility and using interest rates as the main policy instrument would increase the likelihood of a successful transition to inflation targeting.
  - Exchange rate flexibility provides an important buffer against external shocks—particularly if shocks and associated currency stress are prolonged.
- Specific staff recommendations:
  - Gradually simplify and eliminate intervention bands.
  - Lower the size of cumulative foreign exchange interventions required to move the exchange rate corridor.
  - Increase the size of the corridor shifts.
- Staff noted that pressures on the exchange rate have abated following the increase in policy rates and the reduction in the pace of currency depreciation.
- Authorities’ stance:
  - The CBR expects inflation to come down to below 6 percent provided there are no additional external shocks and announced caps on tariff increases are implemented.
  - Given the uncertain outlook, the CBR has adopted a wait-and-see mode with a tightening bias.
  - The CBR views the current FX intervention rule as appropriate as long as risks to financial stability remain, given the uncertain geopolitical environment and potential confidence impact of further economic sanctions.
  - The CBR viewed capital flow management measures as potentially counterproductive.
  - The CBR indicated the new three-year facility was experimental and would involve only small amounts.

### Steps toward formal inflation targeting
- The CBR has been rationalizing the structure of its instruments and announced that the one-week auction interest rate was to become its main policy rate, with overnight standing facilities forming the upper and lower bounds of the interest rate corridor.
- Strengthening the transmission mechanism requires:
  - Enhancing the signaling role of the policy rate.
  - Deepening the interbank market and reducing its volatility.
  - Establishing a clear timeline for implementing steps towards formal adoption of inflation targeting and enhancing communication.
- In response to lack of bank collateral and increasing reliance on CBR funding, the CBR created a three-year standing facility secured by investment projects with a state guarantee; staff view this mechanism as unlikely to foster lending for investment projects and risk benefiting only large banks.

*Financial sector: containing risks*

### Financial stability assessment and supervisory actions
- Recent financial turbulence requires heightened scrutiny of financial stability.
- Many corporations benefit from foreign exchange receipts and appear to have enough buffers, but close monitoring of systemic risks remains warranted.
- The uncertain geopolitical environment combined with a slowdown could adversely affect:
  - Banks’ profitability and asset quality.
  - Private banks via deterioration in asset quality associated with the economic slowdown.
  - Large state-owned banks via lower profits and higher provisioning.
- Staff advice:
  - Continue to monitor systemic risk build-up via regular stress testing exercises and increased oversight.
- Prudential measures have reduced the growth of unsecured consumer lending, though it remains relatively high.
- The stepping up of banking supervision by the CBR is strengthening stability and supporting consolidation; staff advise continued wide and effective communication to maintain depositors’ confidence.

### Regulatory progress and remaining gaps
- The CBR increased supervisory and regulatory powers; progress is being made in implementing Basel III rules and 2011 FSAP recommendations.
- Enhancements include:
  - Creation of a mega-supervisor via merger of the CBR and the Federal Service for Financial Markets.
  - July amendments to the Banking Law aligned with 2011 FSAP recommendations.
  - Legislation on capital requirements passed; regulation on liquidity standards being finalized.
  - Publication of criteria for designation of systemic banks, which will face stricter supervision and higher capital requirements.
- Pending reforms include:
  - Introducing a unified administration regime for all banks.
  - Restricting open bank assistance by the DIA to systemic situations.
  - Setting limits on concentration of collateral in the repo market.

### Authorities’ view and contingency readiness
- Authorities consider the financial system sound and resilient but share staff concerns about:
  1. Potential risks from high policy rates, low growth, and further economic sanctions.
  2. Declining but still high unsecured consumer credit growth.
- The CBR noted increased resilience since 2008–09 due to deleveraging and decline of FX and maturity mismatches.
- Regular stress tests—including large depreciation, shutdown from international markets, and large negative growth scenarios—suggest the banking sector as a whole would remain stable and resilient, although capitalization in banks representing one-third of banking system assets would drop below regulatory requirements.
- The CBR stands ready to offer support to illiquid but solvent banks should financial stability be threatened.
- The CBR will continue revoking licenses for weak or dubious banks and claims stepping up supervision is reducing money laundering activities.

*Fiscal policy: gradual consolidation*

### Near-term stance and flexibility
- The fiscal stance is broadly appropriate for 2014 but flexibility could be considered in case of a more severe cyclical slowdown.
- The general government non-oil structural balance is expected to improve by 0.5 percent due to a reduction in VAT refunds and implementation of the federal fiscal rule.
- The government may provide quasi-fiscal stimulus through issuance of guarantees for multi-year projects and finance infrastructure projects through the National Wealth Fund.
- Contingency reserves in the federal budget are about 0.3 percent of GDP in 2014.
- In the event of a more severe and prolonged cyclical downturn, fiscal policy could be loosened; additional fiscal measures, if needed, should be temporary, high quality, and set in a medium-term framework ensuring sustainability.

### Financing risks and Reserve Fund (RF)
- Market financing could be limited given the geopolitical situation; the federal government has canceled some domestic bond auctions recently.
- If financing is inadequate, the government could reduce transfers to the Reserve Fund as in 2013.
- The Reserve Fund stands at 4.3 percent of GDP, below the authorities’ target of 7 percent of GDP (designed to maintain government spending unchanged in the face of a reduction in oil prices to US$60 per barrel for 2 years).
- Under the baseline scenario the RF is not expected to reach its target level over the medium term.
- Staff suggestion:
  - Discounting the current benchmark oil price by approximately 15 percent would generate enough savings to rebuild the RF to 7 percent of GDP by 2019.
  - The resulting additional cumulative tightening (compared to the baseline scenario) of about 1.5 percent of GDP could be achieved with various measures.
- The diversion of resources intended for transfer to the RF to offset shortfalls would further distance authorities from their objective and increase risk of pro-cyclical fiscal adjustments if oil prices decline.

### Baseline projections and debt sustainability
- Under the baseline scenario:
  - General government debt is expected to remain sustainable and low, reaching 18 percent of GDP by the end of the forecasting period.
  - Non-oil revenues are expected to pick up as the economy slowly rebounds; expenditures are expected to be constrained by the federal fiscal rule.
  - Crimea-related spending is not expected to affect the overall balance given contingency reserves and reallocation possibilities.
- Staff view: additional fiscal consolidation in outer years is needed to rebuild buffers.

### Long-term consolidation and intergenerational equity
- With a non-oil primary deficit near 11.5 percent of GDP, staff argued the general government relies too heavily on oil revenues.
- Under the real permanent-oil-income-model approach, an appropriate target for the non-oil primary deficit would be roughly 5.5 percent of GDP.
- Baseline projection shows a gradual improvement in the non-oil fiscal primary deficit to slightly above 7.5 percent of GDP by 2019.
- Reducing the non-oil deficit would offset possible Dutch disease effects and improve external sustainability.

### Pension reform and spending discipline
- Further pension reform is pivotal. Measures suggested include:
  1. Increases in the retirement age.
  2. Encourage formalization of employment in the underground economy.
  3. Improve contribution compliance.
- Achieving consolidation depends on resisting spending pressures:
  - Recent discussions about relaxing the federal fiscal rule could jeopardize consolidation.
  - Promises to increase military spending and public sector wages, increased fiscal pressures from geopolitical tensions, and incomplete pension reform could weigh negatively on future budgets.
  - Local-level consolidation is vulnerable given 2012 electoral wage promises and weak local tax bases.
- Staff welcome the Ministry of Finance proposal to limit tax expenditures.
  - Authorities estimate tax expenditure in 2012 amounted to Rub1.8 trillion or close to 3 percent of GDP.
  - The Prime Minister has instructed the Ministry of Finance to propose a plan to reduce the public work force by 10 percent.

### Public investment and efficiency
- Given infrastructure needs, public investment should be increased despite fiscal consolidation.
- This requires resisting other spending pressures to preserve fiscal space and prioritizing/reallocating expenditures toward investment.
- The recently-introduced performance-based budgeting and the new procurement law are tools to improve public spending efficiency.

*Possible general government fiscal adjustment measures (Percent of GDP)*
- Cut tax expenditures: 1.0
- Reduce wage bill: 0.9
- Better targeted social transfers and subsidies: 1.5-2.0
- Improve pension system: 2.0
- Improve capital budgeting: 0.4
- Improve tax structure: 0.5
- Increase excise taxes: 0.5
- Total: up to 7.3

_Italic: IMF Staff Report excerpt (chapter title: "24. A tighter monetary stance is required to attain the 2015 inflation target and anchor")_

### 40. The coverage of fiscal reports should be extended. While Russia compiles a

### 40. The coverage of fiscal reports should be extended. While Russia compiles a

### Fiscal reporting and public sector coverage
- Russia compiles a comprehensive set of the general government accounts (Informational Annex) that are broadly adequate for surveillance.
- These accounts understate the size of the general government because they exclude government-controlled enterprises that are performing non-market activities.
- Russia does not report statistics on the broader public sector, which would include all government-controlled enterprises (as noted in the recent Fiscal Transparency Evaluation, Box 5).
- A broader definition of the public sector would reveal:
  - a much greater involvement of the state in the economy;
  - larger public debt;
  - a negative overall net worth.
- A large and growing share of budget expenditure is classified as “secret,” reducing the specificity and transparency of the budget.

### Fiscal policy stance and authorities' views
- The authorities reiterated commitment to the fiscal rule.
- They noted structural reforms are needed to stimulate the economy instead of fiscal stimulus, but that in the event of a significant slowdown, changes to the fiscal rule could be considered.
- The authorities agreed further fiscal consolidation is required over the medium and long term because the current level of the non-oil balance is excessive.
- Authorities acknowledged spending pressures and agreed on the need to increase public investment, which could come from re-allocating resources and the use of reserves.
- A sizeable portion of government spending goes to the public pension system; authorities did not rule out increasing the retirement age in the future, if needed.

### Investment and structural bottlenecks
- After 2009, Russia’s investment rate remains low compared to other EMs with a similar level of economic development.
- Investment is weakening while capacity utilization is close to historical highs.
- Russia’s incremental capital-output ratio (ICOR) is very low.
- A significant share of total investment is undertaken by large state-controlled corporations, which may limit the quantity and quality of investment.
- Data points and comparisons referenced:
  - Investment-to-GDP Ratio (2011-13 average) — Russia among peers listed (figure).
  - ICOR (2011-13 average) — Russia compared with peers (figure).
  - Capacity utilization and Investment time series (Feb-02 to Mar-14) — Russia: Investment in Fixed Capital (NSA, yearly percent change in constant prices) and Capacity utilization (Percent).

### State involvement and privatization
- Russia is a large state participant in key firms; selected entries as of September 2013 (state share) and privatization plan targets:
  - Rosselkhozbank: 100.00% state share; Full exit by 2016; No plans for privatisation (2014–16).
  - Sberbank: 50% + 1; 50% + 1 (reduction from 57.6%); No plans for privatisation.
  - VTB: 60,9%; Full exit by 2016; 50% + 1.
  - Rostelecom: 55.60%; Full exit by 2013; Full exit by 2016.
  - Aeroflot: 51.20%; Full exit by 2016; 25% + 1.
  - RZD Russian Railways: 100%; 75% + 1; 75% + 1.
  - Sovkomflot: 100%; 25% + 1; 25% + 1.
  - Sheremetyevo airport: 83.00%; Full exit by 2016; Full exit by 2016.
  - Vnukovo airport: 74.70%; --; Full exit by 2016.
  - Rusgidro: 67%; Full exit by 2016; 50% + 1.
  - Rosneft: 69.50%; Full exit by 2016; 50% + 1.
  - Transneft: 78.30%; 75% + 1; 75% + 1.
  - Zarubezhneft: 100%; Full exit by 2016; 50% + 1 share.
- Accelerating implementation of the government’s revised privatization plan, if market conditions allow, may enhance productivity.
- Direct state involvement in operations of SOEs should be limited.

### Energy subsidies, resource taxation, and labor mobility
- In absolute terms, Russia is the third largest energy subsidizer in the world (US$116 billion).
- Increasing labor mobility of workers in “monocities,” constrained by subsidies and social benefits, could free up resources for more productive use elsewhere.
- Recommendation: Move to a profit-based taxation of natural resources instead of revenues-based taxation, which currently inhibits exploitation of higher-cost resources.

### Banking and financial sector weaknesses
- The banking system is highly concentrated, lacks depth, and is inefficient at channeling savings to productive investment.
- The top three banks (state-owned) accounted for almost 60 percent of total sector assets at year-end 2013.
- Concentration indices point to a moderately concentrated system, but large state-owned banks exert more market power than others.
- Credit-to-GDP is at 55 percent; the depth of the financial system is relatively low compared to other EMs.
- The banking system contributes only 6 percent of funding for business investment while peer comparisons show Russian firms have much less access to bank and external financing.
- Privileged access to bank financing by large SOEs may partly explain limited finance for other firms.
- Financial-sector reforms could reduce capital outflows.

### Governance, corruption, and anti-corruption measures
- International indicators movement (2012–2013):
  - Russia moved up 19 ranks on the World Bank’s Doing Business Indicators between 2012 and 2013.
  - Transparency International Corruption Perceptions Index improved from 132nd to 127th over the same period.
  - Control of Corruption Worldwide Governance Indicator shows Russia has hovered between the 15th and the 30th percentile over 16 years.
- Government initiatives:
  - Bi-annual Anti-Corruption Plans issued since 2008 provide strategic guidance.
  - Public procurement rules were reformed (see Box 6).
  - Federal Business Ombudsman created in 2012.
  - 13 road maps elaborated and being implemented with public-private monitoring for improving the business climate.
- AML/CFT:
  - In October 2013, Russia was removed from the FATF follow-up process after addressing major identified deficiencies.
  - Russia will prepare for its next assessment under revised standards, which are more demanding (including tax crimes and enhanced scrutiny of domestic politically exposed persons).
- Implementation recommendations:
  - Modernize the declaration system for asset, income and expenditure declarations for public officials—make it more unified, transparent, and accessible.
  - Enshrine competitive, even-handed, and flexible procurement procedures in legislation and practice.
  - Ensure firms and investors feel secure in contractual, adjudication, and property rights.

### Procurement law reforms (Box 6)
- Procurement system reforms since 2005 included: changes in placing orders; e-procurement (unified website launched in 2011); use of financial guarantee instead of qualification of bidders; third party payment system; administrative appeal procedure.
- New procurement law effective January 1, 2014; main changes:
  - compulsory planning procedure for all procurement types (Jan 1, 2015);
  - procurement needs to be based on state and municipal roadmaps;
  - mandatory disclosure of beneficial owner information by bidding companies;
  - mechanisms for setting the initial contract price;
  - more options for bidders to provide securities and guarantees against non-performance;
  - new contracting options—RFP (as opposed to a request for quote), two-stage tender, closed restricted tender;
  - conduct of all auctions electronically;
  - performance monitoring and auditing functions.

### Staff recommendations on structural reforms and implementation
- Reinvigorate implementation of the reform agenda:
  - continue the fight against corruption;
  - reinvigorate the privatization agenda;
  - reduce price distortions;
  - improve competition.
- Public-Private Partnership (PPP) framework could enhance transparency and accountability if the new PPP law aligns with best practices.
- Financial deepening policies:
  - reduce banking sector fragmentation through consolidation and reduced public bank ownership;
  - enhance competition and encourage development of medium-size banks;
  - greater pricing transparency and consumer protection;
  - further strengthen credit bureaus and collateral registries to reduce information asymmetries.

### Staff appraisal — macroeconomic outlook and policy advice
- Growth and risks:
  - Structural weaknesses and geopolitical uncertainties are taking a heavy toll on the economy.
  - Growth, already slowing because of pre-existing structural bottlenecks, is expected to weaken to 0.2 percent in 2014 with considerable downside risks.
  - Continued conflict could lead to additional sanctions and worse outcomes; geopolitical tensions could slow or reverse integration into the world economy.
- Near-term policy objective:
  - Preserve macroeconomic stability given exceptional circumstances.
  - Strengthen policy anchors: fiscal rule, preparation for inflation targeting, increased exchange rate flexibility.
  - Given uncertainty and limited cyclical slack, authorities should refrain from short-term countercyclical policies.
- Monetary policy:
  - Further monetary tightening will likely be required over the next year to attain the 2015 inflation target.
  - The CBR should stand ready to raise further its policy rates to meet its 4½ percent inflation target in 2015 and anchor inflation expectations.
  - Higher rates would also help reduce capital outflows.
  - The CBR should resume policy towards greater exchange rate flexibility as soon as current uncertainties subside, using interest rates as the main policy instrument to ensure a successful transition to inflation targeting.
- Banking supervision:
  - Continued strengthening of banking supervision is welcome to bolster stability and support consolidation.
  - The CBR should continue to communicate its intended goals widely and effectively to maintain depositors’ confidence.
  - Systemic risk from unsecured retail lending appears limited but continued oversight is warranted.
  - Authorities should continue implementing remaining FSAP recommendations.
- Fiscal stance:
  - The fiscal stance remains appropriate for 2014.
  - Modest fiscal tightening, despite the economic slowdown, is justified as output remains close to potential.
  - Adhering to the fiscal rule is essential to support its credibility given the uncertain environment and the need for medium-term fiscal consolidation.
  - Mounting spending pressures should be resisted to preserve fiscal space for investment.
  - Additional fiscal consolidation in the outer years is needed to rebuild buffers.
  - The current non-oil deficit remains very high and the overall deficit is low only due to high oil prices.
  - Further pension reform is necessary; increasing the retirement age is vital to ensure system viability.
- Structural reform priority:
  - Continue efforts at global integration to attract high-quality investment and boost potential growth.
  - Continue reforms related to the stalled OECD accession negotiations.
  - Address skill mismatches in the labor market, large tax burdens (especially for SMEs), and administrative barriers and corruption.
  - Push ahead with announced privatization plans to enhance economic efficiency.

*Source: IMF staff report excerpt (Russian Federation).*

### 58. It is proposed that the next Article IV consultation be held on the standard 12-month

### _cr14175 - 58. It is proposed that the next Article IV consultation be held on the standard 12-month

### Article IV consultation timing
- It is proposed that the next Article IV consultation be held on the standard 12-month cycle.

### Selected Macroeconomic Indicators (Table 2: 2009–15)
- Real GDP: -7.8; 4.5; 4.3; 3.4; 1.3; 0.2; 1.0
- Real domestic demand: -14.2; 8.5; 9.1; 5.5; 1.0; -1.7; 0.8
- Consumption: -3.9; 3.5; 5.3; 7.0; 3.5; 1.6; 1.0
- Investment: -41.0; 28.5; 21.0; 1.5; -6.1; -12.1; 0.2
- Consumer prices (period average): 11.7; 6.9; 8.4; 5.1; 6.8; 6.6; 6.0
- Consumer prices (end of period): 8.8; 8.8; 6.1; 6.6; 6.5; 6.5; 5.5
- GDP deflator: 2.0; 14.2; 15.9; 7.5; 5.9; 8.5; 5.9
- Unemployment rate: 8.4; 7.3; 6.5; 5.5; 5.5; 6.5; 6.5
- General government net lending/borrowing (overall balance): -6.3; -3.4; 1.5; 0.4; -1.3; -0.7; -0.8
- General government revenue: 35.0; 34.6; 37.3; 37.7; 36.1; 36.4; 36.1
- General government expenditures: 41.4; 38.0; 35.7; 37.2; 37.3; 37.1; 36.9
- Primary balance: -5.7; -2.9; 2.1; 1.0; -0.6; 0.0; 0.0
- Nonoil balance: -15.2; -13.0; -10.0; -11.0; -12.2; -11.9; -11.0
- Base money (12-month change): 7.4; 25.4; 20.9; 11.3; 8.0; 7.4; 7.8
- Ruble broad money (12-month change): 17.7; 31.1; 22.3; 11.9; 14.6; 13.5; 14.0
- Export volumes: -10.4; 5.1; 4.2; 4.6; 1.7; 2.9; 2.3
- Import volumes: -31.4; 26.7; 16.6; 9.2; 3.1; -3.0; 2.0
- Total merchandise exports, f.o.b (billions of U.S. dollars): 297.2; 392.7; 515.4; 527.4; 523.3; 530.7; 523.1
- Total merchandise imports, f.o.b (billions of U.S. dollars): -183.9; -245.7; -318.6; -335.8; -343.0; -330.0; -333.6
- External current account (billions of U.S. dollars): 50.4; 67.5; 97.3; 71.3; 32.8; 59.1; 49.4
- External current account (percent of GDP): 4.1; 4.4; 5.1; 3.5; 1.6; 2.9; 2.4
- Gross international reserves (billions of U.S. dollars): 439.5; 479.4; 498.6; 537.6; 509.6; 470.2; 470.2
- Months of imports (GNFS): 21.3; 17.9; 14.6; 14.5; 13.0; 12.5; 12.4
- Nominal GDP (billions of rubles): 38,807; 46,309; 55,967; 62,218; 66,755; 72,552; 77,649
- Nominal GDP (billions of U.S. dollars): 1,232; 1,523; 1,905; 2,017; 2,102; 2,006; 2,047
- World oil price (U.S. dollars per barrel): 61.8; 79.0; 104.0; 112.0; 108.8; 108.0; 103.0
- Urals crude oil spot price (U.S. dollars per barrel): 61.3; 78.3; 109.3; 110.3; 107.9; 107.1; 102.1

### Balance of Payments (Table 3: 2009–15)
- Current Account (billions of U.S. dollars): 50.4; 67.5; 97.3; 71.3; 32.8; 59.1; 49.4
- Trade Balance (billions of U.S. dollars): 113.2; 147.0; 196.9; 191.7; 180.3; 200.7; 189.6
- Exports (f.o.b, billions of U.S. dollars): 297.2; 392.7; 515.4; 527.4; 523.3; 530.7; 523.1
  - Non-energy exports: 106.4; 138.7; 173.6; 180.6; 173.1; 180.8; 193.0
  - Energy exports: 190.7; 254.0; 341.8; 346.8; 350.2; 349.9; 330.1
    - Oil: 148.7; 206.3; 277.5; 284.6; 283.0; 285.8; 269.0
    - Gas: 42.0; 47.7; 64.3; 62.3; 67.2; 64.0; 61.1
- Imports (billions of U.S. dollars): -183.9; -245.7; -318.6; -335.8; -343.0; -330.0; -333.6
- Services: -17.6; -26.1; -33.5; -46.6; -58.6; -49.0; -47.2
- Income: -39.7; -47.1; -60.4; -67.7; -79.8; -85.4; -86.2
- Current transfers: -5.5; -6.3; -5.7; -6.1; -9.2; -7.2; -6.8
- Capital and financial account: -40.6; -21.6; -76.0; -30.9; -42.9; -98.4; -49.4
- Overall balance (billions of U.S. dollars): 3.4; 36.8; 12.6; 30.0; -22.1; -39.4; 0.0
- Financing: -4.0; -36.3; -12.2; -30.0; 22.1; 39.4; 0.0
- Gross reserves (billions of U.S. dollars): 439.5; 479.4; 498.6; 537.6; 509.6; 470.2; 470.2
- Total external debt (billions of U.S. dollars): 467.2; 488.9; 545.2; 636.4; 714.2; 746.0; 798.6
- Total external debt (percent of GDP): 38.2; 32.1; 28.6; 31.5; 34.0; 37.2; 39.0

### Fiscal Operations and Positions (Tables 4a–4b: 2009–15; 2007–12)
- General government revenue (percent of GDP): 35.0; 34.6; 37.3; 37.7; 36.1; 36.4; 36.1
  - Oil revenue: 8.9; 9.6; 11.5; 11.4; 11.0; 11.1; 10.2
  - Nonoil revenue: 26.1; 25.0; 25.8; 26.3; 25.1; 25.2; 25.9
- General government expenditures (percent of GDP): 41.4; 38.0; 35.7; 37.2; 37.3; 37.1; 36.9
- General government net acquisition of nonfinancial assets: 6.9; 5.9; 5.6; 4.8; 4.5; 4.0; 4.1
- Federal government revenue (percent of GDP): 18.9; 17.9; 20.3; 20.7; 19.5; 19.6; 19.0
- Federal government expenditures (percent of GDP): 24.9; 21.8; 19.5; 20.7; 20.0; 19.2; 19.3
- General government nonoil overall balance: -15.2; -13.0; -10.0; -11.0; -12.2; -11.9; -11.0
- General government debt (percent of GDP): 10.6; 11.3; 11.6; 12.7; 13.9; 15.5; 16.2
- Oil funds (percent of GDP): 11.9; 7.5; 6.4; 7.4; 8.6; 8.1; 7.7
  - Reserve Fund: 4.7; 1.7; 1.4; 3.0; 4.3; 4.5; 4.4
  - NWF: 7.1; 5.8; 5.0; 4.3; 4.3; 4.5; 4.4

### Monetary Accounts (Table 5)
- Base money (billions of rubles, selected years): 4,716; 5,913; 7,150; 7,960; 8,598; 9,233; 9,954
- Currency issued (billions of rubles): 4,623; 5,785; 6,896; 7,668; 8,307; 8,901; 9,570
- Net international reserves (NIR, billions of rubles): 12,755; 14,304; 15,701; 15,767; 16,112; 17,082; 17,843
- Gross international reserves (GIR, billions of U.S. dollars): 436; 478; 496; 537; 549; 475; 475
- Ruble broad money (billions of rubles): 15,268; 20,012; 24,483; 27,405; 31,405; 35,647; 40,629
- Credit to the economy (billions of rubles): 18,416; 20,787; 26,620; 31,782; 36,708; 41,613; 47,359
- Nominal ruble broad money (12-month change): 17.7; 31.1; 22.3; 11.9; 14.6; 13.5; 14.0
- CPI inflation (12-month change, eop): 8.8; 8.8; 6.1; 6.6; 6.5; 6.5; 5.5
- Ruble broad money velocity (eop): 2.5; 2.3; 2.3; 2.3; 2.1; 2.0; 1.9

### Financial Soundness Indicators (Table 6: 2007–14)
- Capital to risk-weighted assets: 15.5; 16.8; 20.9; 18.1; 14.7; 13.7; 13.5; 13.2
- Core capital to risk-weighted assets: 11.6; 10.6; 13.2; 11.4; 9.3; 8.5; 9.1; 9.4
- NPLs to total loans: 2.5; 3.8; 9.6; 8.2; 6.6; 6.0; 6.0; 6.4
- Loan loss provisions to total loans: 3.6; 4.5; 9.1; 8.5; 6.9; 6.1; 5.9; 6.2
- Ratio of client's funds to total loans: 94.8; 84.6; 99.9; 109.5; 105.3; 101.2; 98.7; 97.8
- Return on assets: 3.0; 1.8; 0.7; 1.9; 2.4; 2.3; 1.9; 1.8
- Return on equity: 22.7; 13.3; 4.9; 12.5; 17.6; 18.2; 15.2; 14.5
- Individuals (share of loans): 24.8; 25.1; 23.0; 23.7; 25.3; 29.2; 32.0; 31.7
  - Mortgage loans (percent of assets): 5.1; 6.6; 6.5; 6.6; 6.7; 7.5; 8.5; 8.7

### Medium-Term Framework and Balance of Payments (Table 7: 2010–19 projections)
- GDP growth at constant prices (percent): 4.5; 4.3; 4.3; 3.4; 1.3; 0.2; 1.8; 2.0; 2.2; 2.2
- Consumer prices (percent change, eop): 8.8; 6.1; 6.6; 6.6; 6.5; 5.5; 5.0; 4.0; 4.0; 4.0
- Gross domestic investment (percent of GDP): 22.6; 25.0; 24.5; 22.6; 21.3; 21.6; 21.6; 21.6; 21.5; 21.6
- Gross national savings (percent of GDP): 27.0; 30.1; 28.0; 24.1; 24.3; 24.0; 23.3; 23.2; 23.1; 23.0
- External current account balance (percent of GDP): 4.4; 5.1; 3.5; 1.6; 2.9; 2.4; 1.7; 1.6; 1.6; 1.4
- General government revenue (percent of GDP, projections): 34.6; 37.3; 37.7; 36.1; 36.4; 36.1; 35.9; 35.3; 34.9; 34.6
- General government expenditure (percent of GDP, projections): 38.0; 35.7; 37.2; 37.3; 37.1; 36.9; 36.7; 36.5; 36.3; 35.9
- Gross reserves (end of period, billions of U.S. dollars projection): 479.4; 498.6; 537.6; 509.6; 470.2; 470.2; 470.2; 470.2; 470.2; 470.2
- World oil price (U.S. dollars per barrel, projections 2014–19): 108.8; 108.0; 103.0; 98.2; 94.9; 92.8; 92.8; 91.3

### Public Sector Debt Sustainability Analysis (Tables 8–10: Baseline, Composition, Stress Tests)
- Nominal gross public debt (percent of GDP): 14.4 (2012); 12.7 (2013); 13.9 (2014); 15.5 (2015); 16.2 (2016); 16.4 (2017); 16.9 (2018); 18.1 (2019)
- Public gross financing needs (percent of GDP): -0.4 (2012); 0.7 (2013); 2.4 (2014); 2.0 (2015); 2.3 (2016); 2.0 (2017); 2.4 (2018); 2.4 (2019)
- Real GDP growth (percent, baseline projections): 4.9; 3.4; 1.3; 0.2; 1.0; 1.8; 2.0; 2.2; 2.2
- Inflation (GDP deflator, percent): 14.7; 7.5; 5.9; 8.5; 5.9; 5.6; 5.2; 4.7; 4.7
- Effective interest rate (percent): 6.2; 6.6; 6.8; 7.3; 7.6; 7.8; 8.1; 8.3; 8.3
- Change in gross public sector debt (cumulative 2012–19): -3.2; 1.0; 1.3; 1.6; 0.7; 0.1; 0.5; 0.6; 0.5; 4.2 (cumulative)
- Identified debt-creating flows (percent of GDP, selected): Primary deficit: -3.5; -0.8; 0.8; 0.2; 0.2; 0.2; 0.5; 0.6; 0.5; 2.0 (cumulative)
- Residual, including asset changes: 3.2; 2.5; 0.5; 1.6; 0.5; -0.1; -0.1; -0.1; -0.1; 1.6 (cumulative)
- Stress test scenarios and underlying assumptions are presented (Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock) with scenario-specific projected impacts on real GDP growth, inflation, primary balance, and effective interest rate for 2014–19 as listed in the source tables.

### External Debt Sustainability Framework (Table 11; Figures)
- External debt (percent of GDP): 38.2 (2009); 32.1 (2010); 28.6 (2011); 31.5 (2012); 34.0 (2013); 37.2 (2014); 39.0 (2015); 39.8 (2016); 41.2 (2017); 42.4 (2018); 43.3 (2019)
- Change in external debt (percent of GDP): 9.3; -6.2; -3.4; 2.9; 2.4; 3.2; 1.8; 0.7; 1.4; 1.2; 0.9
- Identified external debt-creating flows (percent of GDP): 8.1; -8.0; -7.9; -3.4; -0.4; -0.7; -0.4; 0.1; 1.1; 2.1; 2.9
- Current account deficit, excluding interest payments (percent of GDP): -2.4; -3.0; -3.8; -2.6; -0.7; -2.0; -1.4; -0.6; 0.1; 0.7; 1.3
- Automatic debt dynamics contribution (percent of GDP): 10.2; -5.9; -5.0; -0.9; -0.6; 0.9; 0.6; 0.5; 0.9; 1.4; 1.8
- External debt-to-exports ratio (percent): 136.2; 110.7; 95.1; 107.9; 120.4; 123.6; 133.7; 142.6; 149.8; 155.4; 160.9
- Gross external financing need (billions of U.S. dollars): 139.1; 120.7; 92.7; 115.8; 167.8; 159.0; 177.9; 211.0; 251.3; 294.5; 334.2
- Key macroeconomic assumptions underlying baseline (selected):
  - Real GDP growth (historical to projected): -7.8; 4.5; 4.3; 3.4; 1.3; 4.1; 4.7; 0.2; 1.0; 1.8; 2.0; 2.2; 2.2
  - Nominal external interest rate (percent): 4.3; 4.6; 5.0; 3.3; 2.8; 4.9; 1.2; 2.8; 2.8; 3.1; 4.4; 5.7; 6.6
  - Growth of exports (U.S. dollar terms, percent): -34.5; 28.8; 29.8; 2.8; 0.6; 16.9; 21.8; 1.7; -1.0; 0.1; 1.7; 2.8; 3.1
  - Current account balance, excluding interest payments (percent of GDP): 2.4; 3.0; 3.8; 2.6; 0.7; 4.7; 2.9; 2.0; 1.4; 0.6; -0.1; -0.7; -1.3

*Sources: Russian authorities; Central Bank of Russia; IMF staff estimates.*

### Annex I. Implementation of Past IMF Recommendations

### Annex I. Implementation of Past IMF Recommendations

### Fiscal Policy
- Recommendation: Resist pressure for higher spending.
  - Implemented policies: The budget for 2014–16 is consistent with the adopted fiscal rule. However, quasi-fiscal spending via NWF and issuance of guarantees is increasing.
- Recommendation: Medium-term fiscal consolidation to rebuild fiscal buffers.
  - Implemented policies: Non-oil fiscal deficit remains high; while the Reserve Fund has increased, it remains below the government target. In 2013, transfers to the Reserve Fund were additionally limited by the need to compensate for the under-execution of privatization proceeds.
- Recommendation: Rebalance expenditure to increase efficiency.
  - Implemented policies: Discussion ongoing.
- Recommendation: Advance pension reform.
  - Implemented policies: Some changes adopted (see main text); increase in statutory retirement age not considered, while replacement rate is expected to decline in the medium term despite the reform.

### Monetary Policy
- Recommendation: Keep monetary policy on hold with a tightening bias.
  - Implemented policies: Policy rate held at 5 ½ percent (with tightening bias made explicit in February 2014) until Spring 2014 when it was cumulatively increased by 200 basis points.
- Recommendation: Take further actions to strengthen the transmission mechanism.
  - Implemented policies: Under discussion, including in the context of the President’s mandate to the central bank to find ways to reduce lending rates.
  - Implemented technical change: In September 2013, CBR reduced the number of policy rates, formally announcing the one-week repo rate to be the key policy rate and establishing a symmetric two percentage point-wide interest rate corridor around the key rate.
- Recommendation: Complete transition to a flexible exchange rate and inflation targeting by end-2014.
  - Implemented policies: Preparation ongoing, including with technical advice from the IMF. In response to market pressures, a temporary change to the intervention rule was introduced on March 3.

### Financial Sector
- Recommendation: Monitor growth in unsecured consumer lending.
  - Implemented policies: CBR increased risk coefficients for capital adequacy calculations and provisioning requirements for high-margin consumer credits, and limited deposit rates for banks with risky and aggressive policies. Federal law adopted in December 2013 set limits on deviations of individual bank credit rates to no more than one-third higher than the average market rate for similar credits.
- Recommendation: Implement 2011 FSAP recommendations to address weaknesses in the supervisory framework.
  - Implemented policies: Legislations approved to empower CBR to (i) use professional judgment in some situations; (ii) expand supervisory authority over bank holding companies and related parties; and (iii) sanction individual directors and managers, raise capital requirements on individual institutions, and impose restrictions on transactions between affiliates. Implementation guidelines pending.
- Recommendation: Further strengthen corporate governance, creditor rights, and competition.
  - Implemented policies: Legislation on credit bureaus approved, to ensure full information about borrowers of consumer credit.

### Structural Policies
- Recommendation: Implement supply-side reforms to raise the growth potential, with policies to boost productivity, and improve the investment climate, governance, transparency, and property rights protection.
  - Implemented policies: Action Plan to boost growth approved by the Prime Minister. OECD accession talks stalled. Bill to introduce public private partnership framework being discussed in Duma. Privatization has stalled.

*Source: _cr14175 - Annex I. Implementation of Past IMF Recommendations*

### Annex V. Why Does Russia Have a Low NFA Position Given

### Annex V. Why Does Russia Have a Low NFA Position Given Years of CA Surpluses?

### Key findings on NIIP, current account surpluses, and gaps
- Cumulated CA surpluses since 2000 imply the Russian net IIP should have been over US$700 billion or 38 percent of GDP by 2011.
- The 2011 NIIP stood at about US$140 billion or 7 percent of GDP.
- There was about 30 percent of GDP "missing" from the net IIP relative to cumulated CA surpluses.
- Isolating changes in the NIIP from valuation changes and other adjustments (i.e., focusing purely on transactions in financial assets) implies the NIIP has increased in line with CA surpluses.

### Factors explaining the low reported NIIP
- Two principal factors brought down the NIIP relative to transaction-based accumulation:
  - Unfavorable valuation changes (particularly increasing the value of liabilities).
  - Other adjustments (assets recorded lower than the accumulation of transactions and valuation changes).

- Valuation changes:
  - Valuation changes in the liabilities position were primarily in the portfolio and FDI equity positions.
  - Russia’s stock market boom increased the value of liabilities: as oil prices more than quadrupled since 2000, stock market valuation rose by nine times.
  - About half of the RTS index is composed of oil and gas companies.
  - This valuation factor is not expected to be a drag on the net IIP position in the future as oil price growth is expected to moderate and the Russian stock market boom will slow down.

- "Fictitious" transactions and CBR adjustments:
  - The CBR’s BOP statistics department identifies and adjusts for so-called “fictitious” transactions, representing capital outflows not backed by real economic activity (examples include non-repatriation of export proceeds, non-supply of goods and services against import contracts, securities trading, lending to nonresidents, and fictitious transfers to residents’ accounts abroad).
  - Examples of identified cases: (i) repeated large transfers abroad that deviate from standard remittances behavior; (ii) selling securities at a loss to your agent; and (iii) non-receipt of export earnings.
  - CBR identifies these flows using detailed bank account data, client information, and reputation of clients abroad; calculations are approved by the Department of Financial Monitoring and Control.
  - Historically, “fictitious” transactions account for over 50 percent of net private sector capital outflows.
  - Treatment in statistics:
    - In BOP statistics they are reported by the CBR in the financial account as accumulation of foreign assets.
    - In IIP statistics they are recorded as purchases of financial assets abroad but CBR then adjusts the foreign assets position downwards by the amount of these transactions in "other adjustments" because CBR considers them money leaving the country to never come back.
  - If the CBR adjustment for “fictitious” transactions were not made, the NIIP in 2011 would be 270 US dollar billions higher, standing at 21 instead of 7 percent of GDP.
  - According to CBR, the CA itself is accurately measured as it reflects actual economic transactions based on goods crossing the border; without separately identifying these transactions in the financial account, net errors and omissions would be much higher.

### Implications for external sustainability and projections
- The NIIP projected trajectory does not seem to be a concern from an external sustainability perspective because:
  - Much of the divergence is due to valuation changes (expected to moderate) and the CBR’s treatment of “fictitious” transactions (which reduces reported foreign assets).
  - The second factor implies the true NFA position could be higher than the reported level.

### Data and indicators discussed (as presented)
- Cumulated CA surpluses implication: over US$700 billion or 38 percent of GDP by 2011.
- Reported 2011 NIIP: about US$140 billion or 7 percent of GDP.
- Implied adjustment if fictitious excluded: NIIP would be 270 US dollar billions higher; NIIP at 21 percent of GDP instead of 7 percent.
- Historical share: “Fictitious” transactions account for over 50 percent of net private sector capital outflows.
- Oil and stock market relations: oil prices more than quadrupled since 2000; stock market valuation rose by nine times; about half of the RTS index is composed of oil and gas companies.

*Sources: CBR; and IMF staff calculations.*

### 1.   Bank Work

### 1.   Bank Work

### Program: Country Partnership Strategy (CPS) and Related Deliverables
- Delivered: Dec. 2011
- CPS Progress Report: July 2013; Due in 2014
- Board discussion: December 2013

### Russian Economic Reports (RER)
- Ongoing, latest editions: October 2013 and Mach 2014
- Next editions: October 2014, March 2015

### Social Mobility, Poverty and Opportunity Study
- Ongoing
- Delivery in FY14

### Corporate Governance ROSC
- Ongoing
- Delivery in FY14

### Microfinance Development Project
- Status: cancelled, follow up RAS being prepared
- Ongoing
- Approved January 2013 - cancelled

### Public Financial Management Project
- Ongoing
- Approved September 2013

### Financial Market Development Project
- Status: dropped; follow up RAS being prepared
- Ongoing
- Dropped

### Other analytical work and technical assistance
- Topics listed: diversification, the economic impact of aging, poverty and inequality, social mobility, gender assessment, post WTO developments, financial sector analysis (pensions, banking, capital markets and insurance) and technical assistance on diversification and innovation, investment climate, public procurement, customs, tax administration, statistical system building, judicial reform, health financing, social services modernization, smart cities, agriculture and growth, urban transport and open data, etc.
- Ongoing
- FY14–15

---

### 2.  Fund Work

### Program items and timing
- Modernization of the Federal Tax Service
  - September 2013
  - November 2013

- Fiscal Transparency Assessment
  - October 2013
  - May 2014

- 2014 Article IV Mission
  - April 2014
  - June 2014

- 2015 Article IV Mission
  - April 2015
  - By September 2015

*Source: _cr14175 - 1.   Bank Work*

### 3.   Joint

### 3.   Joint

### A. Statistical Issues — Assessment of Data Adequacy for Surveillance
- General: Data provision is broadly adequate for surveillance; scope exists for further data improvements for assessing external vulnerabilities. Russia is an SDDS subscriber and reports data for the Fund’s statistical publications.
- National Accounts:
  - Data are broadly adequate for surveillance, but concerns exist about the reliability and consistency of quarterly GDP estimates.
  - Rebasing GDP estimates to a recent year would close the gap between GDP estimate and its components.
  - Rosstat started a national account development plan for 2011–17 to expedite compilation of quarterly GDP estimates consistent with annual GDP estimates.
  - Rosstat follows the 1993 SNA in general; methodological improvements are possible for volume measures of production-based GDP, including FISIM.
  - Imputed rental services of owner-occupied dwellings are undervalued.
  - Coverage constrained by inadequate response to business surveys.
  - Unavailability of balance sheet data impedes balance sheet vulnerability analysis; work is underway to disseminate the first quarterly sectoral accounts and balance sheets for 2012–14 by 2016.
- Price statistics:
  - Monthly CPI and PPI compiled using the Two-Stage (Modified) Laspeyres (2000=100) cover all regions.
  - Weights reflect expenditures in the 12 months ended the previous September.
  - Aggregate price indices compiled for 89 regions, seven federal regions, and the Russian Federation as a whole.
  - Population weights (rather than expenditure shares) are applied to individual regional indices, possibly biasing the CPI downwards if price increases are higher in regions with higher per capita expenditures.
  - Detailed PPI weight data published for 2006–2013; detailed weights available only on the Russian version of the website.
  - Further efforts recommended: improve treatment of seasonal items in the core inflation index; implement a new household budget survey.
- Government finance statistics:
  - Russia participates in the G-20 Data Gap Initiative.
  - Authorities compile comprehensive general government accounts based on GFSM 2001 on an annual basis, including statement of sources and uses of cash, accrual-based government operations, complete balance sheet (non-financial assets), holding gains and losses, and COFOG outlays.
  - Monthly GFSM 2001-based statement of sources and uses of cash is compiled for the whole general government sector.
  - Main data gaps: unavailability of quarterly primary data to compile general government operation statement, financial balance sheet, and gross debt (by instrument, maturity, residency, and currency).
  - Annual debt split into foreign and domestic refers to domestic/foreign currency rather than residency.
  - Additional gaps: lack of historical quarterly data; unexplained data breaks (example: reclassification of some wage expenses following 2011 reforms); unavailability of monthly data on ruble guarantees prior to 2011; no integrated debt monitoring and reporting system; lack of reconciliation between fiscal datasets (budget execution, cash flow statement, economic versus functional classification, fiscal statistics).
- Monetary statistics:
  - Analysis of balance sheet effects hindered by lack of comparable data on currency and maturity breakdown of banking-sector assets and liabilities.
  - Adoption of full-detail SRFs (recommended by STA mission in 2007 and re-affirmed 2010) would provide comprehensive currency and instrument breakdowns for central bank, credit institutions, and other financial corporations.
  - Since March 2011, the Banking System Survey published by the CBR includes breakdown by national and foreign currency.
  - Publication of similar currency breakdowns in central bank and credit institution surveys would be useful.
- External sector statistics:
  - Balance of payments data are broadly adequate for surveillance; significant improvements made.
  - CBR recently published gross capital flow data for the private sector.
  - Since 2012, balance of payments compiled according to BPM6; historical data (2005–11) revised consistent with BPM6.
  - CBR adjusts merchandise import data from Federal Customs Service to account for “shuttle trade,” smuggling, and undervaluation.
  - Statistical techniques used to estimate transactions and positions of foreign-owned enterprises with production sharing agreements; techniques being improved.
  - Improvements made in coverage and quality of direct investment surveys; CBR participates in the Fund’s Coordinated Direct Investment Survey.
- Energy sector statistics:
  - Data on the impact of oil production and exports on economic activity are inadequate for surveillance.
  - Increased demand to measure share of oil and gas sector in GDP, preferably on an annual basis.
  - Russia team working with authorities to explore options to overcome this deficiency during 2014.

### B. Data Standards and Quality
- Subscriber to SDDS since January 31, 2005. SDDS flexibility option used for timeliness of central government operations data.
- A data ROSC prepared in October 2003 (published May 14, 2004). A data ROSC reassessment in June–July 2010 (published February 28, 2011) concluded Russia’s macroeconomic statistics are generally of high quality and compiling agencies have made significant progress in adopting international methodologies and best practices.

### C. Reporting to STA (Optional)
- Data reported for publication in International Financial Statistics (IFS), Government Finance Statistics Yearbook, Direction of Trade Statistics, and Balance of Payments Statistics Yearbook.
- The CBR reports summarized data in MFSM-recommended format for:
  - Central Bank Survey
  - Other Depository Corporations Survey (credit institutions)
  - Depository Corporations Survey
  - Other Financial Corporation Survey (insurance companies and private pension funds)
  - Financial Corporations Survey (banking system, insurance companies, and private pension funds)
- For general government: cash flow statement published in IFS; operation statement (economic and functional classifications) and financial balance sheet published in annual Government Finance Statistics Yearbook.
- Headline reserves data reported weekly with a four-business day lag.
- Comprehensive information reported in the Reserves Template with a lag of 20 days (exceeding SDDS timeliness requirement of one month).

*Date of common indicators table: As of June 11, 2014; table lists dates of latest observations (e.g., Exchange Rates: May 2014 5/28/14; International Reserve Assets and Reserve Liabilities: Apr. 2014 5/30/14; Reserve/Base Money: Mar. 2014 5/20/14; Broad Money: Mar. 2014 5/20/14; Consumer Price Index: Apr. 2014 5/28/14; Revenue, Expenditure, Balance and Composition of Financing – General Government: Mar. 2014 5/30/14; External Current Account Balance: 2013Q4 4/10/14; Exports and Imports of Goods and Services: 2013:Q4 5/28/14; GDP/GNP: 2013: Q4 5/28/14; Gross External Debt: 2013:Q3 1/14/14; International Investment Position: 2012 6/29/13).*

### Press Release (IMF Executive Board Concludes 2014 Article IV Consultation) — Key Findings and Projections
- Context and recent developments:
  - Growth slowdown began in 2011 and continued in 2013 despite accommodative policies.
  - Real GDP growth slowed to 1.3 percent in 2013 due to a contraction in investment; consumption remained robust.
  - General government balance moved from a modest surplus in 2012 to a deficit of slightly more than 1 percent of GDP in 2013.
  - CBR kept policy rates constant until March 2014 despite above-target inflation.
  - Geopolitical tensions following actions in Crimea brought the economy to a standstill and increased uncertainty; concerns about sanctions have had a chilling effect on investment.
  - Staff projects real GDP growth at 0.2 percent in 2014 with considerable downside risks.
  - Capital outflows could reach US$100 billion in 2014.
  - Consumption expected to remain main growth driver in 2014; net exports expected to support growth as imports weaken.
  - Slight recovery projected: real GDP growth of 1 percent in 2015, driven by stronger exports and stabilization of investment.
  - Inflation expected to remain well above the CBR’s target due to recent exchange rate depreciation.
- Policy responses:
  - Fiscal policy being tightened; non-oil deficit will remain high.
  - Reserve Fund balance increased but remains short of the government’s 7 percent of GDP target.
  - The CBR raised policy rates by 1½ percentage points in early March and a further ½ percentage point in April; reduced exchange rate flexibility; increased cumulative interventions to US$1.5 billion to move the exchange rate corridor.
  - By end-May, with exchange rate trading in non-intervention zone, CBR took steps to allow more exchange rate flexibility.
- Banking sector:
  - Banking system remains broadly stable amid slowdown of unsecured retail credit growth and stepped-up bank oversight.
  - Non-performing loans ratio relatively constant; capital adequacy ratio stable and above statutory minimum.
  - Banking system moved from a negative to a positive net foreign asset position.
- Executive Board Assessment — main points:
  - Directors noted slowdown reflects mainly structural factors; Russia’s growth model based on energy exports and spare capacity is no longer reliable; need to move to a new model.
  - Geopolitical tensions have strong negative consequences: capital outflows, exchange rate pressures, limited access to external financing, higher borrowing costs, and increased business uncertainty.
  - Immediate policy priority: preserve macroeconomic stability; medium-term: enhance policy framework and undertake structural reforms to boost investment and raise growth potential.
  - Fiscal stance in 2014 broadly appropriate; flexibility could be considered if downturn worsens. Adherence to fiscal rule important to rebuild buffers and safeguard intergenerational equity.
  - Pension reforms welcomed; additional measures (such as increasing mandatory retirement age) necessary for long-term viability.
  - Importance of resisting spending pressures and increasing efficiency to create space for infrastructure investment.
  - Tighter monetary policy required to achieve 2015 inflation target and anchor expectations; welcome move toward inflation targeting and a fully-flexible exchange rate once uncertainty subsides.
  - Banking oversight: continue monitoring systemic risks via stress testing; implement remaining FSAP recommendations; reduce banking sector fragmentation through consolidation and enhanced competition.
  - Structural reforms critical: fight corruption, improve procurement and business environment, curtail state involvement in the economy, reduce price distortions (especially utility prices), increase investment and productivity, and revive the nearly-stalled privatization program.

### Selected Macroeconomic Indicators, 2011–15 (Key figures)
- Real GDP (annual percent change): 2011: 4.3; 2012: 3.4; 2013: 1.3; 2014: 0.2; 2015: 1.0.
- Consumer prices (period average, annual percent change): 2011: 8.4; 2012: 5.1; 2013: 6.8; 2014: 6.6; 2015: 6.0.
- Consumer prices (end of period): 2011: 6.1; 2012: 6.6; 2013: 6.5; 2014: 6.5; 2015: 5.5.
- GDP deflator (annual percent change): 2011: 15.9; 2012: 7.5; 2013: 5.9; 2014: 8.5; 2015: 5.9.
- General government net lending/borrowing (percent of GDP): 2011: 1.5; 2012: 0.4; 2013: -1.3; 2014: -0.7; 2015: -0.8.
- General government revenue (percent of GDP): 2011: 37.3; 2012: 37.7; 2013: 36.1; 2014: 36.4; 2015: 36.1.
- General government expenditures (percent of GDP): 2011: 35.7; 2012: 37.2; 2013: 37.3; 2014: 37.1; 2015: 36.9.
- Primary balance (percent of GDP): 2011: 2.1; 2012: 1.0; 2013: -0.6; 2014: 0.0; 2015: 0.0.
- Nonoil balance (percent of GDP): 2011: -10.0; 2012: -11.0; 2013: -12.2; 2014: -11.9; 2015: -11.0.
- Federal government net lending/borrowing (percent of GDP): 2011: 0.8; 2012: -0.1; 2013: -0.5; 2014: 0.4; 2015: -0.2.
- Federal government nonoil balance (percent of GDP): 2011: -9.5; 2012: -10.4; 2013: -10.4; 2014: -9.7; 2015: -9.5.
- Money (annual percent change): Base money: 2011: 20.9; 2012: 11.3; 2013: 8.0; 2014: 7.4; 2015: 7.8. Ruble broad money: 2011: 22.3; 2012: 11.9; 2013: 14.6; 2014: 13.5; 2015: 14.0.
- External sector (annual percent change): Export volumes: 2011: 4.2; 2012: 4.6; 2013: 1.7; 2014: 2.9; 2015: 2.3. Oil: 2011: -1.9; 2012: 0.4; 2013: 2.6; 2014: 1.8; 2015: -1.3. Gas: 2011: 6.7; 2012: 4.6; 2013: 9.7; 2014: -2.2; 2015: 0.2. Non-energy: 2011: 6.1; 2012: 5.9; 2013: 5.0; 2014: 6.9; 2015: 8.6. Import volumes: 2011: 16.6; 2012: 9.2; 2013: 3.1; 2014: -3.0; 2015: 2.0.
- External sector (billions of U.S. dollars): Total merchandise exports, fob: 2011: 515.4; 2012: 527.4; 2013: 523.3; 2014: 530.7; 2015: 523.1. Total merchandise imports, fob: 2011: -318.6; 2012: -335.8; 2013: -343.0; 2014: -330.0; 2015: -333.6. External current account: 2011: 97.3; 2012: 71.3; 2013: 32.8; 2014: 59.1; 2015: 49.4.
- External current account (percent of GDP): 2011: 5.1; 2012: 3.5; 2013: 1.6; 2014: 2.9; 2015: 2.4.
- Gross international reserves (billions of U.S. dollars): 2011: 498.6; 2012: 537.6; 2013: 509.6; 2014: 470.2; 2015: 470.2.
- Months of imports (goods and non-factor services): 2011: 14.6; 2012: 14.5; 2013: 13.0; 2014: 12.5; 2015: 12.4.
- Percent of short-term debt (reserves as percent of short-term debt): 2011: 331; 2012: 327; 2013: 286; 2014: 252; 2015: 237.
- Memorandum items: Nominal GDP (billions of U.S.D): 2011: 1,905; 2012: 2,017; 2013: 2,102; 2014: 2,006; 2015: 2,047. Exchange rate (rubles per U.S.D., period average): 2011: 29.4; 2012: 30.8; 2013: 31.8. World oil price (U.S.D. per barrel): 2011: 104.0; 2012: 112.0; 2013: 108.8; 2014: 108.0; 2015: 103.0.
- Sources noted in table: Russian authorities; and IMF staff estimates. Notes: Real GDP growth and prices for 2013-14 reflect updated staff projections; fiscal data on cash basis; months of imports refer to goods and non-factor services; oil price sources: WEO through 2013, and Brent crude oil spot and futures prices for 2014-15.

*Italic: IMF — content unit “3.   Joint” (extracted from the IMF document). *

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14175.pdf_