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Russian Federation-Concluding Statement for the January 2013 Staff Visit
January 23, 2013
Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.
Growth has slowed somewhat in the second half of 2012, but the Russian economy remains close to its potential. The economy is expected to expand in line with potential growth this year, with risks tilted to the downside given still significant global uncertainties. The monetary policy stance remains appropriate, but the Central Bank of Russia (CBR) should retain a tightening bias given above target inflation and limited fiscal adjustment thus far, and stand ready to undertake additional prudential measures to contain growth in unsecured lending. The authorities should continue to tighten fiscal policy and rebuild fiscal and external buffers while oil prices remain robust. In this regard, the introduction of the new fiscal rule is an important first step, and its full and transparent implementation is crucial. To achieve higher sustainable growth over the longer term, Russia needs to further strengthen its macroeconomic policy framework and accelerate structural reforms.
1. Growth has moderated, but historically low unemployment and high capacity utilization suggest that economic activity is close to its potential. In 2012, consumption-driven growth momentum slowed beginning in Q2, with economic activity dampened by a dip in oil prices and slowing investment and export growth. Annual growth is estimated at 3.6 percent. Despite decelerating economic activity, headline inflation remains above the medium-term target.
2. Against an improving global backdrop, the economy is expected to grow in line with potential in 2013, though with downside risks. The outlook is for moderate growth of about 3.7 percent this year, reflecting expectations of flat oil prices, still-weak external demand, rising imports, and moderating internal demand. Inflation is expected to ease slightly to around six percent. Current policies are broadly consistent with maintaining growth at its potential level, but inflation will remain above the medium-term target without further policy action. Downside risks are significant. On the external side, a worsening of the global economy would affect Russia primarily through the oil price channel. Domestic risks include further delays in reforms and a negative impact from rapid unsecured retail credit growth on private sector balance sheets.
3. The authorities have strengthened their policy capacity to manage volatility and crises, notably by introducing a new fiscal rule and a more flexible exchange rate policy. These steps will enable the ruble to better absorb external shocks. Reserve buffers have also risen, including an increase in the Reserve Fund to about 4.5 percent of GDP. In the private sector, banks have improved their external positions. The authorities’ stress tests suggest that Russian banks are now better prepared to withstand shocks.
4. Despite progress, important vulnerabilities linger. Fiscal policy space to respond to shocks is still limited, and Russia’s public finances remain vulnerable to a decline in oil prices. The Reserve Fund, despite increases, remains below the target of 7 percent of GDP. The government’s non-oil deficit—the overall deficit excluding oil revenues—has been reduced, but is still significantly elevated compared to the pre-crisis period. The oil reference price under the new fiscal rule implies only a moderate reduction in the federal non-oil balance of about ¾ percent of GDP per year in 2013-4 and of 1 percent of GDP in the outer years. At this slow pace, the non-oil fiscal deficit will stay above the level that is consistent with replenishing fiscal buffers, facilitating balanced economic growth, and adequate saving of the income from the nation's exhaustible oil resources. Due to negative demographics, the pension system is unsustainable, and recent steps to divert pension contributions from the funded Pillar II to the pay-as-you-go Pillar I scheme will further weaken the long-term viability of the pension system and hinder financial market development. Banks’ capital and liquidity ratios have been deteriorating mainly due to strong uncollateralized retail credit growth, with rising loan-to-deposit ratios.
5. The macroeconomic policy framework is moving in the right direction, but structural reforms need to be accelerated to boost sustainable growth. Action is needed in the following areas:
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