IMF Executive Board Concludes 2016 Article IV Consultation with the Russian Federation
July 13, 2016
On June 29, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Russian Federation.
The Russian economy contracted by 3.7 percent in 2015 due to falling oil prices and the quasi closure of international financial markets to Russian entities. The economic contraction is nonetheless shallower than previous recessions as a stronger external position and the authorities’ economic package—a flexible exchange rate regime, banking sector capital and liquidity injections, limited fiscal stimulus, and regulatory forbearance—cushioned the shocks, helped restore confidence and stabilized the financial system.
Lower oil prices and needed fiscal adjustment will keep the economy in recession in 2016 with an expected decline in real GDP of 1.2 percent. The negative output gap and the lack of aggregate demand pressures are expected to lower CPI inflation to 6.6 percent at end–2016. Growth is expected to resume in 2017 and reach 1 percent, as domestic demand slowly recovers on the back of easing financial conditions and pent up demand. With adverse demographics, and barring significant structural reforms that increase productivity growth, potential growth is likely to be at around 1½ percent over the medium term. A fall in oil prices is the main risk to the outlook.
Executive Board Assessment2
Directors observed that the authorities’ flexible and effective policy response has cushioned the economy from the dual shocks of lower oil prices and sanctions. At the same time, the Russian economy will need to adjust to the challenge of persistently lower oil prices by reducing its dependence on oil and energy exports over the medium term. They stressed that structural reforms will be essential to leverage the current competitive exchange rate to boost long‑term potential growth.
Directors encouraged the authorities to undertake the necessary fiscal adjustment anchored on a credible medium‑term plan. In this context, they noted the authorities’ large fiscal adjustment effort planned for 2016, and considered that an adjustment based on quality and permanent measures that safeguard growth‑enhancing expenditure would have been preferable. They agreed that reintroducing the three‑year budgeting framework in the 2017 budget would be critical to reduce policy uncertainty and provide greater clarity over future fiscal measures. Directors also emphasized that a credible fiscal rule would support medium‑term sustainability. They also noted that a parametric pension reform has become urgent to reap the fiscal benefits in a timely manner.
Directors commended the authorities for implementing policies that were helpful in bringing down inflation. Given the negative output gap and little evidence of demand‑side pressures, they considered that monetary policy normalization would be appropriate. However, they cautioned that the pace of easing should be gradual, given past strong links between volatile oil prices, the exchange rate, and inflation.
Directors welcomed the authorities’ success in stabilizing the financial system. They also welcomed the completion of the government’s capital support program and the lifting of most regulatory forbearance measures. Directors encouraged the authorities to implement the main findings of the Financial Sector Assessment Program by improving the resolution framework to minimize the use of public funds, conducting a review of banks’ asset quality and using its findings to strengthen banks’ capital, and further improving supervision and regulation. They stressed the need to deepen and diversify the financial sector by continuing the privatization program, pursuing the closure of weak banks, and encouraging the involvement of the private sector in bank resolution.
Directors noted that Russia has the opportunity to diversify its economy as a result of a more competitive exchange rate. They emphasized the importance of reforms to facilitate the reallocation of resources to the non‑energy tradable sector. In this regard, trade integration initiatives to widen the scope of market access for non‑energy exporters would be important. Directors also saw scope for accelerating institutional reforms and further enhancing the business climate. They highlighted the need to strengthen contract enforcement and the protection of property rights, improve labor market policies, and invest in innovation and infrastructure.
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Russian Federation: Selected Macroeconomic Indicators, 2013–17 |
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2013 |
2014 |
2015 |
2016 |
2017 |
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Projections |
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|
(Annual percent change) |
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|
Production and prices |
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|
Real GDP |
1.3 |
0.7 |
-3.7 |
-1.2 |
1.0 |
|
Consumer prices |
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|
Period average |
6.8 |
7.8 |
15.5 |
7.5 |
5.7 |
|
End of period |
6.5 |
11.4 |
12.9 |
6.6 |
5.2 |
|
GDP deflator |
4.8 |
9.0 |
7.7 |
7.4 |
5.5 |
|
Public sector1 |
(Percent of GDP) |
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|
General government |
|||||
|
Net lending/borrowing (overall balance) |
-1.2 |
-1.1 |
-3.5 |
-3.7 |
-1.6 |
|
Revenue |
34.4 |
34.3 |
32.8 |
31.2 |
32.2 |
|
Expenditures |
35.6 |
35.4 |
36.3 |
34.9 |
33.8 |
|
Primary balance |
-0.6 |
-0.4 |
-2.7 |
-2.7 |
-0.4 |
|
Nonoil balance |
-11.1 |
-11.5 |
-11.7 |
-10.0 |
-8.3 |
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Federal government |
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|
Net lending/borrowing (overall balance) |
-0.5 |
-0.4 |
-2.4 |
-3.2 |
-1.5 |
|
Nonoil balance |
-9.8 |
-10.1 |
-9.8 |
-9.0 |
-7.5 |
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(Annual percent change) |
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Money |
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|
Base money |
8.0 |
6.3 |
-4.3 |
4.6 |
5.4 |
|
Ruble broad money |
14.6 |
2.2 |
11.5 |
6.8 |
7.7 |
|
External sector |
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|
Export volumes |
1.9 |
0.1 |
2.6 |
1.1 |
2.3 |
|
Oil |
2.7 |
0.1 |
10.9 |
-1.3 |
-1.6 |
|
Gas |
9.9 |
-11.3 |
13.8 |
6.0 |
2.7 |
|
Non-energy |
5.8 |
7.9 |
-5.5 |
2.2 |
6.4 |
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Import volumes |
3.2 |
-6.9 |
-28.4 |
-3.6 |
2.7 |
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(Billions of U.S. dollars; unless otherwise indicated) |
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External sector |
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Total merchandise exports, fob |
523.3 |
497.8 |
339.6 |
299.0 |
332.2 |
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Total merchandise imports, fob |
-341.3 |
-308.0 |
-194.0 |
-180.1 |
-185.9 |
|
External current account |
34.1 |
59.5 |
65.8 |
51.3 |
69.3 |
|
External current account (in percent of GDP) |
1.5 |
2.9 |
5.0 |
4.0 |
4.9 |
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Gross international reserves |
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|
Billions of U.S. dollars |
509.6 |
385.5 |
368.4 |
373.1 |
387.8 |
|
Months of imports2 |
13.0 |
10.8 |
15.7 |
17.2 |
17.3 |
|
Percent of short-term debt |
251 |
302 |
478 |
257 |
274 |
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Memorandum items: |
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|
Nominal GDP (billions of U.S.D) |
2,231 |
2,031 |
1,326 |
1,270 |
1,410 |
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Exchange rate (rubles per U.S.D., period average) |
31.8 |
38.4 |
60.9 |
… |
… |
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World oil price (U.S.D. per barrel) |
104.1 |
96.2 |
50.8 |
42.2 |
48.8 |
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Real effective exchange rate (average percent change) |
1.8 |
-8.5 |
-17.4 |
… |
… |
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Sources: Russian authorities; and IMF staff estimates. 1/ Cash basis. 2/ In months of imports of goods and non-factor services. |
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1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm
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