IMF Survey : Geopolitical Risks Cloud Future of Russian Economy
IMF News, June 30, 2014
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- Published: June 30, 2014
Growth performance and structural constraints
- Russia’s economy continued its slow pace of growth in 2013, reflecting pre-existing structural problems and the fallout of geopolitical tensions with Ukraine.
- Capacity constraints:
- The entire economy hit capacity constraints in 2011, as evidenced by the beginning of the economic slowdown, while inflation remained elevated.
- Growth model issues:
- Growth is based on energy exports, which were supported by significant oil price increases since 2000, and the use of spare capacity in the economy.
- With oil prices stabilized and spare capacity exhausted, growth has slowed significantly.
Geopolitical uncertainties and sanctions: effects on investment and markets
- Sanctions and investor perception:
- Sanctions were adopted by the United States, European Union, Japan, and other countries in response to the situation in Ukraine.
- Concerns about possible escalation of sanctions increased the perceived risk of doing business in Russia, chilling investment.
- Financial market responses:
- Initially: capital outflows increased significantly; bond issuances by the government and Russian companies declined sharply; borrowing rates increased markedly; the stock market declined; sharp pressures on the ruble.
- Policy responses: Russia’s central bank increased interest rates, reduced the flexibility of the ruble, and used its foreign exchange reserves to support the ruble.
- More recently: as perceived risk of additional sanctions subsided, the stock market and the ruble rebounded and companies considered issuing bonds externally.
- Outlook:
- Uncertainties are expected to linger, hampering growth in the short term and possibly the medium term.
Policy recommendations to boost investment and growth
- Key areas for reform highlighted:
- Address problems of governance, corruption, administrative barriers, and regulation to attract more and better investment.
- Continue efforts at global integration to attract investment and foreign technology.
- Reinvigorate the privatization agenda.
- Improve competition.
- Increase the size and efficiency of the banking sector.
- Reduce price distortions, especially utility prices.
Public pension system: reforms and remaining challenges
- Concerns:
- Growing concern about the viability of the public pension system due to adverse demographic dynamics and statutory retirement ages.
- Statutory retirement ages:
- 60 for men and 55 for women.
- Recent reform assessment:
- Reform was described as timid and incomplete: it did not increase the statutory retirement age but introduced financial incentives to delay retirement and increased the minimum years worked required before claiming a pension.
- Reform linked pension benefits to resources available in the pension fund, including government transfers.
- Authorities expect a gradual reduction in the generosity of benefits over time.
- Risks and further measures needed:
- Reduction in generosity may translate into pressure on the government to allocate more money to the pension fund.
- Suggested additional measures: increase the retirement age, encourage formalization of employment in the underground economy, and improve contribution compliance.
Impact of the Ukraine crisis on Russia and sectoral vulnerabilities
- Direct economic linkages:
- Exposure of Russian banks to Ukraine is less than 2 percent of Russian banks’ assets.
- The share of Ukraine in Russian exports is less than 5 percent.
- Energy transit risk:
- About half of Russian gas exports to Europe go through Ukraine; disruption of gas delivery to Europe could impact Russia given limited possibility of rerouting through other pipelines in the short run.
- Sectoral integration risks:
- Sectors like base metals, transportation equipment, and chemicals are closely integrated; disruption of supply chains could have important impacts within these sectors.
- Confidence channel:
- Lingering uncertainties about Ukraine could undermine consumer and investor confidence in Russia, further affecting domestic consumption and investment.
Spillovers to neighboring and connected countries
- Trade and remittance exposures:
- Countries with large trade exposure to Russia listed: Belarus, Estonia, Lithuania, Lithuania, Turkmenistan, Ukraine, and Uzbekistan.
- Countries receiving large remittances from Russia listed: Armenia, Kyrgyz Republic, Moldova, and Tajikistan.
- Financial center exposures:
- Some financial centers with significant exposure to Russia through foreign direct investment: Cyprus, Luxembourg, The Bahamas, Saint Kitts and Nevis, and Seychelles.
- Energy dependence and risks from gas export disruption:
- Finland, the Baltic countries, Belarus, and Czech Republic rely almost entirely on Russian gas for their domestic consumption.
- Dependence is also high at 40–60 percent in central Europe and southeastern Europe.
- For these countries, disruption of gas exports by Russia could have significant impact on their economies.
IMF Survey: Geopolitical Risks Cloud Future of Russian Economy — June 30, 2014