IMF Survey : Cheaper Oil And Sanctions Weigh On Russia’s Growth Outlook

IMF News, August 3, 2015

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Russia’s economy is expected to contract by 3.4 percent in 2015, although growth should return in 2016.
Medium-term growth prospects are modest due to slow progress in implementing structural reforms.
The IMF’s assessment attributes the near-term downturn primarily to the dual external shock of lower oil prices and geopolitical tensions, including sanctions.

2015: expected contraction of 3.4 percent.
2016: growth expected to return (no numerical growth rate provided for 2016 in the text).
Medium term: IMF staff expect weak GDP growth of around 1.5 percent.

Oil price decline: a major effect on the Russian economy.
Geopolitical tensions and sanctions:
- March 2014: United States, European Union, Japan and other countries began imposing sanctions related to Crimea and Eastern Ukraine.
- August (2014): Russia imposed counter sanctions on agricultural and food imports.
- U.S. and EU sanctions targeted financial services and the energy sector, among other areas.
Impact of sanctions:
- IMF estimates suggest sanctions and counter sanctions might have initially reduced real GDP by 1 to 1½ percent.
- Prolonged sanctions may compound already declining productivity growth.
- The cumulative output loss could amount to 9 percent of GDP over the medium term.
- Authors note these model-driven results are subject to significant uncertainty.
Investment and consumption are likely to remain sluggish; sanctions affect external access to financial markets and new investment technology.

Support for short-term fiscal stimulus applied in the 2015 budget.
Recommendation to follow stimulus with gradual fiscal consolidation over the medium term to:
- adjust to lower oil prices,
- rebuild buffers,
- safeguard intergenerational equity.
Specific fiscal measures suggested:
- Reforming the pension system to deliver significant fiscal savings over time.
- Better targeting social transfers.
- Reducing energy subsidies.
- Reducing tax exemptions.
- Safeguarding public investment, education and health care in spending plans.
Fiscal framework:
- Russia introduced an oil-price based fiscal rule in December 2012.
- Report suggests strengthening the rule to account for oil price volatility to allow fiscal policy to respond more quickly and generate more savings.

Central Bank of Russia actions:
- Appropriately allowed the ruble to float in response to external shocks.
- Set medium-term target for inflation at 4 percent.
- After initial tightening late in 2014, monetary conditions gradually normalized and inflation expectations became more anchored.
- Central Bank gradually eased monetary conditions during the first half of 2015.
Inflation path projected in the report:
- About 12 percent by the end of 2015.
- Close to 8 percent at the end of 2016.
Guidance: monetary policy normalization should continue at a prudent pace, commensurate with declines in inflation and inflation expectations, while assessing upside risks to inflation.

Key constraints on medium-term growth:
- Slow-moving structural reforms.
- Sluggish investment.
- Adverse population dynamics.
- Large state footprint, limited competition, and concentration in several sectors contributing to low productivity growth.
Recommended reforms to boost investment and trade:
- Strengthen governance and protection of property rights.
- Cut regulatory red tape.
- Improve customs administration and reduce trade barriers.
- Increase competition in domestic markets.
- Make public investment more transparent and efficient.

Upside risks to inflation and balance-of-payments pressures if geopolitical tensions escalate.
Possible additional external shocks could produce:
- Additional balance-of-payment pressures.
- Significant deterioration in confidence.
- Ruble depreciation if capital outflows surge, leading to higher inflation.
- Greater uncertainty hurting investment and raising precautionary savings, depressing domestic demand.
- Lower and/or more volatile oil prices could further dampen the outlook.
Benefit limitation caveat: gains from a more competitive exchange rate may be limited if authorities pursue inward-looking policies.

Russian policy actions helped stabilize the economy and mitigate spillovers.
Nonetheless, countries with close links to Russia through trade, remittances or foreign direct investment face sizeable negative consequences.
Most affected: the Commonwealth of Independent States, Ukraine, and Baltic countries.

Source: IMF Survey : Cheaper Oil And Sanctions Weigh On Russia’s Growth Outlook (IMF Survey, August 3, 2015).