Transcript of the Russia 2020 Article IV Consultation Press Briefing

February 9, 2021

Jacques Miniane, Mission Chief for Russia, IMF

Opening Remarks:

The economy has shown more momentum and resilience than we expected. There was a contraction of 3.1% contraction in 2020, which is less than the -3.6 percent we projected. What the data indicated is that in the fourth quarter, the economy continued to grow and did not contract as we had projected. So, again, more momentum and more resilience than we expected. And when you look at the first quarter, so far, things seem to be going OK, which is also positive. Now, looking into 2021, we have forecasted three percent growth. If anything, the fact that the fourth quarter was better, and that the economy has more momentum means that there's upside risk to this forecast. This being said, I think I want to make a few things very clear. Our forecast is conditional on an effective vaccine rollout, and it's conditional on a substantial part of the adult population being vaccinated by the summer in Russia and in many of Russia's trading partners. And as you know, vaccination rollouts are ongoing. The pace is accelerating, but this pace needs to accelerate even more to reach some of those targets.

This brings me to my second message, which is that even though the economy is doing better than expected, it would be a mistake to think that we are out of the woods. We are not out of the woods, as we can see in some of Russia's key trading partners. They're operating under strict lockdown because of high infections. New variants are appearing in various parts of the world. There are questions about vaccine rollouts. So this means that while we understand that the authorities want to withdraw fiscal support if the economy continues to grow, and that would be the right thing to do, we still we need to remain vigilant. They still need to remain vigilant because the economic situation remains fragile and they should stand ready to provide budget support if the economy were to deteriorate again. And unemployment benefits are one example of this. Recently, the government decided to extend the maximum benefit. This is very good, but we would like to see all unemployment benefits kept at their post-March levels for a little while longer.

The third issue is inflation. Again, inflation has been running stronger than we projected, but in our view, much of this is temporary effects. One-off effects from global food prices, and one-off effects from the ruble depreciation. And so when we looked at things, our view as staff was that given the fact that the economy remains weak, inflation was going to start going down after, you know, these one-off effects die off. And because we projected inflation to come down, we saw room for further easing. At the same time, it is true that inflation is running stronger. It is true that there are inflationary risks out there. And so when looking at the totality of the data, our Executive Directors felt or generally felt that the central bank’s wait and see approach, they saw merit in that approach. So Executive Directors generally saw merit in the wait-and-see approach of the central bank. Another aspect that we looked at in the report is the banks. Now, whenever you have a crisis, the health of banks is very important because if the banks would weaken, that could trigger a much worse recession. Well, thankfully, the banks in Russia entered the crisis in a strong position. And when we look at the losses so far, it looks like bank capital for the system is more than sufficient to absorb the losses. That is very important. Because of this, we want the central bank to continue to ask the banks that can set aside capital to cover losses to do so, not wait until April or June because they have given extended time. And we have asked the central bank that when this extended time frame to set aside capital expires, not to renew it, because banks are in a position to set aside capital and they should.

Finally, it's understandable that in the current context, the authorities have prioritized handling and facing the crisis. And let me say that one thing I should have mentioned at the beginning, one of the reasons that the economy has been more resilient than we expected, is because the authorities mounted a strong policy response. A strong fiscal response, a monetary response, a strong banking sector response. In fact, this is the first time in recent history in Russia that the authorities are able to respond with all three instruments, fiscal and monetary banking policy, and that helped a lot. So it's understandable that the authorities focused on that during the course of the crisis, but the crisis should not make us forget that Russia entered the crisis with very weak growth. And it should not make us forget that real incomes, per capita incomes in Russia are growing very slowly and are not converging to the levels of richer countries. So there is a need to accelerate growth. And this means tackling the structural bottlenecks of the Russian economy- weak infrastructure, improving the business environment, improving governance and the rule of law. And all these things are going to be key.

So in this context, we welcome the regulatory guillotine. We think it's a very good initiative, but it remains to be seen what actual difference it is going to make to the business environment. And similarly, we think the 13 national projects are very important. But we have told the authorities, in our view, it's going to be important that these projects catalyze the private sector. They should not be used to expand the footprint of the state, which is already very large in Russia. So let me stop there and let me welcome any questions.

QUESTION: I want to ask a question about growth. I saw in your forecasts that also for last year you have contraction -3.6% and the Russian federal statistics service already reported that it was smaller. So I don't know if you're planning on updating the forecast and how it will affect your forecast for this year, next year.

MR. MINIANE: that's a very good question. So, you know, when we send the reports to the board, we cannot keep modifying it until the very, very last minute. So the report that you see was circulated on January 19, but then we published the supplement, which is included in the bundle, and that acknowledges that even though we had forecasted -3.6, the actual outturn was -3.1. So you will see that -3.1 in the supplement, not in the main report because we produced the report two weeks before, but you will see it in the supplement. Now, the key question is what this means for 2021. Now, all other things being equal, this will boost our 2021 forecasts because we had forecasted in our original forecast, we had forecasted a contraction in the fourth quarter of last year and it looks like the economy grew. So now 2021 is going to start from a higher base and other things being equal, that's going to impact 2021 growth. So if anything, there's upside risk from that for our 2021 forecast. This being said, this is not the only risk. It's true that we have this upside risk from our stronger momentum, but as I said, there's other risks, some of which point to the downside. Did I answer your question?

QUESTION: Yes, but I have a follow up question. So since this report, some parts of it were put together some few weeks ago. I cannot imagine Russian Central Bank cutting rates this Friday, do you imagine them cutting rates by 50 basis points in coming months?

MR. MINIANE: Well, that's a good question. And as you can see, it's very important to look in the press release, at the end you have what is called the summing up of the Executive Board discussion, which summarizes the views of the Directors, and Directors took this into account.

And because inflation is running stronger than projected, and because they see some pro inflationary risks, although they saw room to cut rates, they also saw merit in the central bank’s wait-and-see approach. And so the final position of the Fund, in the words of the Executive Directors, is that they generally see merit in the central bank's approach. Does that answer your question?

QUESTION: I also have a question about your view on Russian rates. If inflation slows down at some point. When do you think it's the best time to cut rates, as your directors suggest? And how would you address concerns that the central bank will rather start raising rates now instead of cutting them this year?

MR. MINIANE: Well, first, let me say that monetary policy is not a scientific discipline where you should say that policy should be eased on this exact date. Whenever, you know, even when we made our original call for easing, we said “in the coming months”, and that is sufficient. Now, regarding your second part of the question, I would say that that's not where we are. I would say that Executive Directors saw merit in the wait-and-see approach, but I think it's fair to say that there was no discussion at the Executive Board of raising rates. And for me, as the mission chief and as staff, discussion of raising rates at this stage seem premature because, as I said, there is significant slack in the economy. We believe, you know, these effects on inflation are transient. And so that's my personal opinion. But I think it's also fair to say that while there was discussion of the Board, significant discussion between loosening or a wait-and-see approach, there was no discussion about entering into tightening.

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