Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

IMF Survey: Russia Needs Deep Reforms to Maximize its Growth Potential

August 3, 2012

  • Main short-term challenge for Russia is to manage domestic demand and avoid overheating
  • IMF recommends ambitious fiscal consolidation
  • Investment climate needs improving to boost economic growth and reduce dependency on oil revenues

Russia has recovered from the global economic crisis, growing at more than 4 percent through 2010-11 on the back of high oil prices.

Russia Needs Deep Reforms to Maximize its Growth Potential

Shoppers on Arbat Street in Moscow, where domestic demand has been an important driving force in the economy (photo: Bill Bachmann/Newscom)


Growth is set to continue at about 4 percent in 2012, assuming oil prices of $80 a barrel. This means the economy is running at close to capacity, putting it at risk of overheating in the short term.

There are also significant medium-term challenges that must be dealt with if Russia is to realize its true growth potential. The government should do more to improve macroeconomic stability, which will require reducing inflation. Another key ingredient for future growth is improving the investment climate so that Russia can attract the domestic and foreign investment it needs to diversify its economy and lessen its dependence on natural resources.

In an interview, IMF mission chief for Russia Antonio Spilimbergo outlines the IMF’s policy advice.

IMF Survey: What is the outlook for Russia’s economy?

Spilimbergo: We currently project growth at about 4 percent for 2012 on account of the continued resilience in oil prices. Increases in wages and strong growth in consumption have supported demand, and unemployment continues to decline, reaching levels last seen before the global economic crisis.

So the bottom-line is that the economy continues to do well. Still, the growth outlook represents a slight slowdown compared to last year, when the economy grew by 4.3 percent. Inflation will also be higher―we estimate it will reach 6.5 percent before the end of the year.

IMF Survey: How exposed is Russia to the ongoing crisis in the eurozone?

Spilimbergo: Recent global turmoil heavily impacted Russia’s markets. And given that the global economic outlook remains uncertain with risks mainly tilted to the downside, the country is exposed to further shocks. The main channel for transmitting shocks will be through the oil price, given Russia’s continued dependence on natural resources.

With respect to the eurozone in particular, the exposure of Russia’s financial system is limited, and the increased flexibility of the exchange rate will help the economy weather any turbulence.

To further insulate the economy against shocks, the government should do more to achieve a stable macroeconomic environment. With respect to fiscal policy, it’s important to avoid being procyclical and to gradually bring the nonoil fiscal deficit to about 5 percent of GDP—a level which will help ensure intergenerational equity. It will also be important to contain inflation and to allow the exchange rate to fluctuate in response to any external shocks.

IMF Survey: What changes is the IMF recommending in the conduct of fiscal policy?

Spilimbergo: At nearly 10 percent of GDP in 2011, the nonoil deficit―that’s the fiscal deficit before oil revenues are taken into account―was more than double the government’s previous long-term target of 4.7 percent of GDP.

The 2012 budget implies a further increase in the nonoil deficit of about 1 percent of GDP. At the same time, Russia’s oil fund, the Reserve Fund, stands at a relatively low level compared to before the global economic crisis, even after the government partially replenished it earlier this year.

Cutting the deficit by some 1½ percent of GDP in 2012 and reducing it by a further 1½ percent of GDP per year through 2015, would help prevent overheating and would allow the government to rebuild the Reserve Fund.

The Ministry of Finance has submitted a proposal for an oil price rule that would strengthen the framework for fiscal policy, making it easier to control spending. The rule essentially stipulates that any oil revenues above a “base” oil price would be saved in the Reserve Fund until it reaches 7 percent of GDP.

IMF Survey: Russia remains heavily on oil and gas. How optimistic are you that the government will take significant steps to diversify the economy so that Russia finally can maximize its significant growth potential?

Spilimbergo: Twenty years after the collapse of the Soviet Union, Russia’s per capita income level stands at only about 40 percent of the OECD average. The oil is both a blessing and a curse, and we have to ask how Russia can avoid the boom-bust cycles of the past. It will be important to diversify the economy and to use some of the revenues from the oil and gas sector to encourage other sectors of the economy to develop. But in order for this to happen, the business climate has to improve and corruption must be reduced.

IMF Survey: Is enough being done to address endemic corruption and strengthen the rule of law?

Spilimbergo: Transparency and fighting corruption are key issues in Russia. In order to diversify the economy and build growth potential in other sectors, the country has to attract both domestic and international investment. But this cannot happen if there is a problem with corruption and transparency.

These issues are clear and President Putin himself on his very first day in office issued a decree to fight corruption and increase transparency. We support this approach but are also very aware that it is a difficult issue to tackle.