{
  "title": "Public Information Notice: IMF Concludes Article IV Consultation with Russia",
  "publication": "IMF News, August 2, 1999",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/pn9967",
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  "summary": "Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies.",
  "publishDate": "1999-08-02",
  "sections": [
    {
      "heading": "Background and crisis origins",
      "content": "- The severe financial crisis that erupted in mid-1998 was due primarily to failure to tackle underlying fiscal problems, in particular to halt the erosion of federal government revenues, and to advance structural reforms.\n- Stabilization from 1995 onwards based on maintaining the exchange rate within a band proved tenuous and unsustainable when:\n  - the external environment deteriorated in 1997-98, and\n  - political turmoil increased doubts about resolve to address fiscal problems.\n- Key pre-crisis fiscal and external conditions:\n  - Large federal fiscal deficits of 7-8½ percent of GDP in 1996-97.\n  - External terms of trade deteriorated by almost 18 percent by mid-1998 compared to a year earlier.\n  - Net financing of the federal government deficit by nonresidents in the form of Eurobonds and ruble-denominated debt declined by 1.8 percent of GDP during July 1997–June 1998, compared with the previous 12-month period.\n  - Domestic interest rates were increased sharply from late 1997; large losses of external reserves followed under the existing policy mix.\n- Policy actions and immediate effects in August–September 1998:\n  - Restructuring of ruble-denominated government debt and widening of the exchange rate band in August 1998; ruble allowed to float in early September.\n  - Servicing of Soviet-era external debt halted and talks for rescheduling 1999–2000 debt initiated.\n  - Financial sector fallout: large number of banks collapsed, domestic payment system impaired, access to international capital markets severed, and trade financing disrupted.\n  - Output and government revenues contracted sharply; monetary policy stance became lax and inflation rose."
    },
    {
      "heading": "Turnaround in 1999 and macroeconomic developments",
      "content": "- Evidence of recovery (1999):\n  - Industrial output during April–June 1999 exceeded levels of one year earlier by over 5 percent on average.\n  - Recovery driven primarily by import substitution following ruble depreciation.\n  - Foreign exchange market pressures eased; the ruble stabilized.\n  - Monthly inflation came down to under 2 percent in June 1999.\n- Fiscal and monetary outcomes:\n  - Federal cash deficit fell to 4.7 percent of quarterly GDP during Q1 1999, compared to 5.4 percent during Q4 1998.\n  - Revenues recovered by 2 percentage points of GDP during the same period; improved revenue performance sustained during Q2 1999.\n  - External current account (cash basis) swung from a deficit of $2.7 billion in Q1 1998 to a surplus of $4.8 billion in Q1 1999.\n- Structural reform status:\n  - Structural reform agenda suffered a setback in 1998 with administrative foreign exchange measures and a standstill in reforms.\n  - Some recent reversals of 1998 exchange measures and adoption of a bank restructuring law in June 1999; licenses of a number of large insolvent banks recently withdrawn.\n- Authorities’ macroeconomic framework for 1999:\n  - Output for 1999 envisaged to decline by 2 percent.\n  - Annual inflation projected to come down to 50 percent in 1999, compared to over 84 percent in 1998.\n  - Government budget projected to generate a primary surplus of 2 percent of GDP in 1999, compared to a deficit of 1.3 percent in 1998.\n  - External position expected to strengthen, enabling a small increase in foreign reserves."
    },
    {
      "heading": "Executive Board assessment and priorities",
      "content": "- General view:\n  - The proposed program represented an appropriate policy response under current circumstances.\n  - Most Directors judged the August 1998 crisis to have been caused mainly by failure to tackle longstanding fiscal problems and to implement agreed structural reforms; Asia’s crisis was an immediate trigger.\n  - Directors warned that recent limited recovery would be unsustainable without strenuous efforts to reduce the fiscal deficit and accelerate structural reforms.\n- Political economy concerns:\n  - Past program implementation had been disappointing; many proposed measures had been presented before but not carried out.\n  - Lack of political support was a factor in previous failures; Directors urged strengthened efforts to build broader support and deeper ownership.\n- Fiscal policy emphasis:\n  - Fiscal consolidation is central to adjustment.\n  - Target of a federal primary surplus of 2 percent of GDP in 1999 was considered warranted; a further increase would be required in 2000.\n  - Main fiscal objective: halt and reverse prolonged decline in federal revenues.\n  - Several Directors cautioned against any reduction in tax rates at present, especially a reduction in the basic value-added tax rate, until tax compliance measures yield significant results.\n  - Some Directors concerned that heavy reliance on expenditure compression could harm social and economic stability; called for a Public Expenditure Review with the World Bank to address social and poverty alleviation needs and improve accountability.\n  - Directors stressed need for strong political support to enforce statutory tax obligations and warned that many large enterprises used political influence to avoid seizure of assets in tax delinquency cases.\n  - Cutting oil pipeline access for tax-delinquent oil companies viewed as potentially very effective; full political support for this measure would be a key test.\n  - Directors urged refraining from offsetting current expenditures against tax arrears in the future.\n  - Importance attached to improving budgetary relations between federal and other levels of government, with an appropriate legal framework to clarify responsibilities.\n- Monetary and exchange rate policy:\n  - A flexible exchange rate policy was endorsed as best for current circumstances.\n  - Directors welcomed monetary tightening since early 1999 and urged resistance to demands for preferential central bank credits to ailing banks and specific sectors.\n  - Government should pay a market-determined interest rate on central bank credits.\n  - Directors expressed concern about pressures to curtail central bank independence and recommended resisting such moves.\n- Structural reform and financial sector:\n  - Little progress since August 1998 with some reversals; Directors urged acceleration of reforms.\n  - Priority structural areas: addressing barter and nonpayments, accelerating bank restructuring.\n  - Recent strengthening of legal framework for bank restructuring, including establishment of ARCO, and the decision to liquidate six large insolvent banks were welcomed.\n  - Authorities should continue to liquidate insolvent banks or refer them to the bank restructuring agency and amend the Bank Bankruptcy Act to deal properly with insolvent banks.\n  - Central Bank of Russia (CBR) should shoulder responsibilities in encouraging bank restructuring.\n  - Political resolve to advance reforms despite vested interest opposition is a key test; external competition and a level playing field for domestic and foreign banks were encouraged.\n- External debt and creditor relations:\n  - De facto default of GKOs and OFZs noted as a regrettable setback.\n  - Normalization of relations with domestic and external creditors should be a main objective.\n  - Under current circumstances, Russia would be unable to service its external debt in full; exceptional balance of payments support in the form of rescheduling payments due in 1999 and 2000 would be unavoidable.\n  - Directors urged authorities to seek orderly and cooperative rescheduling agreements and welcomed discussions under Paris and London Clubs.\n  - Each program review under the Fund arrangement will include an examination of financing assurances until arrears are eliminated.\n- Transparency, reserves reporting, and cooperation with the Fund:\n  - Strong disapproval expressed regarding channeling by the CBR of domestic transactions through FIMACO and a fictitious claim on FIMACO, which gave a misleading impression of reserves and policies in 1996.\n  - Directors viewed these transactions as an episode of fundamental lack of cooperation and a serious violation of Russia's obligations to the Fund.\n  - Directors strongly urged actions to prevent recurrence and welcomed publication of the PricewaterhouseCoopers report as a potential signal of willingness to enhance transparency.\n  - Several Directors felt corrective actions to date were insufficient; willingness of the Fund to continue support under the requested Stand-By Arrangement would hinge on Russia taking more forceful actions.\n  - Several Directors strongly suggested commitment to subscribe to the SDDS, or at least to publish reserves data that fully meet SDDS reporting requirements on reserves.\n  - Directors urged broader enhancement of timely and comprehensive economic data availability."
    },
    {
      "heading": "Selected economic indicators (as presented)",
      "content": "- Production and prices (annual percentage changes)\n  - Real GDP: 1996: -3.5; 1997: 0.8; 1998 Est.: -4.6; 1999 Prog.: -2.0\n  - Change in consumer prices — Annual average: 1996: 47.6; 1997: 14.6; 1998 Est.: 27.8; 1999 Prog.: 92.5\n  - Change in consumer prices — 12-month: 1996: 21.8; 1997: 11.0; 1998 Est.: 84.4; 1999 Prog.: 50.0\n  - Change in GDP deflator: 1996: 43.9; 1997: 16.6; 1998 Est.: 11.4; 1999 Prog.: 74.9\n- Public sector (in percent of GDP; primary balance and overall balance are on a commitments basis)\n  - Federal government overall balance: 1996: -8.4; 1997: -7.1; 1998 Est.: -5.9; 1999 Prog.: -5.1\n  - Federal government primary balance: 1996: -2.5; 1997: -1.3; 1998 Est.: 2.0; 1999 Prog.: 2.0\n  - Federal government revenue: 1996: 12.5; 1997: 12.3; 1998 Est.: 10.7; 1999 Prog.: 11.6\n    - of which: cash: 1996: 9.2; 1997: 10.0; 1998 Est.: 9.0\n  - Federal government expenditure: 1996: 20.9; 1997: 19.0; 1998 Est.: 15.6; 1999 Prog.: 13.9\n  - Federal government interest: 1996: 5.9; 1997: 4.7; 1998 Est.: 4.0; 1999 Prog.: 4.3\n  - Federal government noninterest: 1996: 15.0; 1997: 14.3; 1998 Est.: 9.6\n- External sector (in billions of U.S. dollars unless otherwise indicated)\n  - Total exports, fob: 1996: 90.6; 1997: 89.0; 1998 Est.: 74.8; 1999 Prog.: 72.1\n  - Total imports, fob: 1996: 72.8; 1997: 77.4; 1998 Est.: 56.8; 1999 Prog.: 46.1\n  - External current account (deficit -): 1996: 3.9; 1997: -3.0; 1998 Est.: 2.3\n  - Federal government external debt service due: 1996: 17.5; 1997: 15.9; 1998 Est.: 17.4; 1999 Prog.: 18.5\n    - As percent of exports of goods and services: 1996: 17.0; 1997: 15.4; 1998 Est.: 19.8; 1999 Prog.: 22.3\n  - Stock of federal government external debt: 1996: 136.1; 1997: 134.6; 1998 Est.: 152.4; 1999 Prog.: 157.0\n    - As percent of GDP: 1996: 32.6; 1997: 30.9; 1998 Est.: 48.7; 1999 Prog.: 93.1\n  - Gross reserves coverage (months of imports of goods and services): 1996: 2.2; 1997: 2.6; 1998 Est.: (blank)\n- Memorandum items:\n  - Nominal GDP (billions of rubles): 1996: 2,146; 1997: 2,522; 1998 Est.: 2,685; 1999 Prog.: 4,600\n  - Exchange rate (rubles per US$ period average): 1996: 5.1; 1997: 5.8; 1998 Est.: 9.7; 1999 Prog.: ...\n\nPublic Information Notice: IMF Concludes Article IV Consultation with Russia — August 2, 1999.\n\n---\n\n\n References\n\n- Russian Federation and the IMF\n- Public Information Notices\n- Article IV\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/pn9967"
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    "Published: August 2, 1999",
    "The severe financial crisis that erupted in mid-1998 was due primarily to failure to tackle underlying fiscal problems, in particular to halt the erosion of federal government revenues, and to advance structural reforms.",
    "Stabilization from 1995 onwards based on maintaining the exchange rate within a band proved tenuous and unsustainable when:",
    "Key pre-crisis fiscal and external conditions:",
    "Policy actions and immediate effects in August–September 1998:",
    "Evidence of recovery (1999):",
    "Fiscal and monetary outcomes:",
    "Structural reform status:",
    "Authorities’ macroeconomic framework for 1999:",
    "General view:",
    "Political economy concerns:",
    "Fiscal policy emphasis:",
    "Monetary and exchange rate policy:",
    "Structural reform and financial sector:",
    "External debt and creditor relations:",
    "Transparency, reserves reporting, and cooperation with the Fund:",
    "Production and prices (annual percentage changes)",
    "Public sector (in percent of GDP; primary balance and overall balance are on a commitments basis)",
    "External sector (in billions of U.S. dollars unless otherwise indicated)",
    "Memorandum items:",
    "[Russian Federation and the IMF](http://www.imf.org/external/country/RUS/index.htm)",
    "[Public Information Notices](https://www.imf.org/en/news/searchnews)",
    "[Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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