Transcript of a Conference Call on the 2014 Article IV Consultation with Russia

July 1, 2014

Washington, D.C.
Tuesday, July 1, 2014

Antonio Spilimbergo, Mission Chief, Russia, European Department
Dezhi Ma, Senior Communications, Officer, Communications Department

MR. MA: Welcome to today's conference call on the release of the 2014 Article IV Consultation Report with the Russian Federation. We have today on the phone Mr. Antonio Spilimbergo, Mission Chief of Russia. Antonio will give some short opening remarks and we will then take your questions.

MR. SPILIMBERGO: I am giving you some main themes about the report. And I also want to update a little bit about some recent developments. The first part, that is, the central topic/theme of the Report is that Russia had already experienced a structural slowdown which existed before the crisis with Ukraine. This is the reason why growth was falling even before 2014 and was 1.3 percent in 2013 and as of this year was on the way to slowdown further. What is interesting about the slowdown is that despite the downturn you had the typical kind of economy running at full capacity. So inflation was high, above the target, unemployment was low, and capacity utilization was high. The crisis that happened, the geopolitical tensions that happened in the first part of 2014 simply worsened the situation which was already there. This is the reason why we reduced the growth forecast to 0.2 percent for this year.

Now about the recent developments. We keep growth forecast at 0.2 percent, the same as we predicted at the beginning of May because we think that despite some positive developments and recent policy announcements, the underlying problems are still persistent. The structural bottlenecks already there and the growing of the big uncertainty is already in train (inaudible). It continues to exist. In this situation we don't see a way to change our numbers for the moment. At the same time inflation is persistently high and concerns that we already highlighted two months ago are materializing. The latest number for inflation is 7.6 percent, showing that inflation is still quite high and that the pass-through from the ruble depreciation is still very important. We completely agree with the position of the Central Bank of Russia that the interest rate should be increased in case of inflation staying simply high (inaudible) in the remaining of the year. This is important to anchor inflation expectation to meet inflation target for the end of 2015.

So these are my introductory remarks and I'm happy to answer any further questions.

MR. MA: Thank you.

QUESTIONER: I've looked at the report and they paint a generally bleak picture which it feels to me like it may be somewhat deliberately done so in this particular case. My question is do you see anything that Russia has done right over the period of the review? The successes so to speak of the Russian economic growth and development?

MR. SPILIMBERGO: Russia has done many good things and let me highlight two. The Central Bank has focused on inflation and this is very important. And the last statement they clearly stated that this is their goal and we endorse this position. And so this is one thing. The other thing is to recognize, and this is being recognized in Russia among stakeholders that this (growth slowdown) is a structural problem and not just a cyclical problem. And so we should address this growth problem with structural measures. There is a widespread agreement on this. And this is -- I cannot put how important it needs to be because once you diagnose what is the problem you are halfway in also devising the right policies.

QUESTIONER: Could you please tell us what capital outflows does the IMF expects for the next year? The Central Bank of Russia expects that outflows would slow down a bit next year and what about the IMF? The report mentions the figure for this year 2014 at $100 billion. What about 2015?

MR. SPILIMBERGO: We project it to be $50 billion for capital outflows.

To also clarify that we forecast that the private sector capital outflows at $62 billion for next year, but the overall capital outflows is $50 billion. And this could be found in the Report in Table 7.

QUESTIONER: How do you project the influence of this geopolitical tension on the economy of Russia? Do you see it will have a more severe impact in the future??

MR. SPILIMBERGO: This is a good question and possibly one of the main concerns around. We feel that the uncertainty is a channel through which the situation is affected (inaudible) in Russia. And in particular in investment. Investment in Russia is usually of a long term horizon and especially the investment that Russia needs now has a longer term horizon. And the situation that creates more uncertainty will have a negative impact on investment. So when we would think about how the geopolitical uncertainty influences the Russian economy we go to the investment channel.

MR. MA: Okay. Thank you very much. And just before we wrap up let me remind you again that today's call and the bundle which includes the staff report and press release are embargoed until 10:00 a.m. eastern time, which is 1400 GMT. Thank you very much for joining the call and thank you very much, Antonio.


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