Russia: Staff Concluding Statement of the 2019 Article IV Mission

IMF News, May 24, 2019

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GDP growth in the past three years averaged 1.4 percent and is projected at a similar rate in 2019.
External support is expected to be limited due to sanctions, global political and trade uncertainty and lower oil prices replacing the favorable external conditions of the 2000s boom.
A credible macroeconomic framework since 2014—comprising inflation targeting, exchange rate flexibility and the fiscal rule—has helped weather external shocks and reduce domestic uncertainty.
Improvements in financial sector soundness and the 2018 pension reform help support growth prospects, but stronger medium-term growth requires accelerated structural reforms.
The 2018 National Projects have potential to reinvigorate activity only if implemented effectively and complemented by efforts to strengthen competition, roll back the state and improve state-owned enterprise efficiency.

The fiscal rule anchors the budget framework and shields the economy from oil price fluctuations; further changes to the rule should be avoided to firmly establish its credibility.
The authorities should refrain from quasi-fiscal activities through the National Welfare Fund (NWF) and should continue to invest NWF funds into high-quality foreign assets even after the liquid part of the fund reaches the 7 percent of GDP threshold, to safeguard resources for future generations and avoid procyclicality.
Monetary policy has been successful in addressing potential shocks to price stability, and easing now appears appropriate.
- The monetary policy stance is estimated to be moderately tight.
- The VAT increase has had a lower-than-expected impact on headline inflation.
- The recent slight appreciation of the ruble and stability of domestic fuel prices reduce inflationary pressures.
- A forecast that incorporates these developments is consistent with inflation reaching the 4 percent target in early 2020, under a declining path for the central bank’s policy rate.
- Delay in reducing rates would increase the likelihood of subsequently undershooting the inflation target next year.

The cleanup of the banking sector needs to be completed.
Authorities should continue strengthening bank supervision and regulation, including:
- reducing lending concentration and related-party loans;
- strengthening the ongoing process of asset quality review analysis;
- fully implementing Basel III regulatory standards as scheduled.
Additional measures to curb unsecured consumer lending may be needed to contain financial stability risks if current measures prove inadequate.
Authorities need to develop a strategy for returning rehabilitated banks to private hands in a way consistent with increasing competition among banks.

Public infrastructure spending quantified under the National Projects is projected to lift potential growth by 0.1-0.5 percentage points, depending on the effectiveness of project identification, planning and implementation.
Initiatives under the projects include targeting demographics, labor productivity and employment support, SMEs and entrepreneurship support, enhancing international cooperation, and increasing non-commodity exports; more specifics are needed to assess potential effects.
To achieve significant growth dividends, reforms must address long-standing problems of lack of competition and the large footprint of the state, including:
- facilitating the entry and exit of firms;
- strengthening SOE governance;
- fully implementing plans for improving the business climate;
- encouraging competition within and across regions, including in public procurement.

Plans for a growth-friendly shift in taxes and spending are welcome but should remain within the confines of the fiscal rule.
Along with planned increases in public investment, additional spending on health and education under the National Projects is welcome provided it is well-targeted to further improve Russia’s relatively strong human capital.
Oil sector taxation should be simplified and made more transparent, including phasing out subsidies for domestic consumption while ensuring protection for vulnerable groups that could be affected.
Improved revenue collection and removal of inefficient tax breaks could finance a reduction in social contributions, helping address informality.
Early retirement provisions remain overly generous despite the recent pension reform.
Social benefits could be better targeted toward reducing poverty by shifting from universal to means-tested benefits.

Since volunteering for an IMF Fiscal Transparency Evaluation in 2014, the government has:
- provided estimates of the value of its natural resources;
- reported in detail on the cost of tax expenditures;
- published a comprehensive fiscal risks report and longer-term fiscal projections;
- adopted a program-based budget classification.
Further progress is needed, including:
- reporting the government’s obligations under PPPs;
- reducing the share of classified expenditure in the budget—which is projected to rise to 20 percent in 2021;
- strengthening governance and enhancing the financial reporting of the over 30,000 state-owned enterprises.

Source: IMF Communications Department, May 24, 2019.