IMF Executive Board Concludes 2017 Article IV Consultation with the Russian Federation

IMF News, July 10, 2017

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The Russian economy stabilized in 2016, contracting by just 0.2 percent of GDP, after being hit in 2014 by the dual shocks of lower oil prices and sanctions. (IMF Article IV consultation conclusion)
Growth projections:
- Real GDP: 1.4 percent in 2017 (projection).
- Real GDP: 1.4 percent in 2018 (projection).
Inflation and prices:
- Consumer prices, period average: 7.0 in 2016; 4.2 in 2017 (projection); 4.0 in 2018 (projection).
- Consumer prices, end of period: 5.4 in 2016; 4.0 in 2017 (projection); 4.0 in 2018 (projection).
- GDP deflator: 3.6 in 2016; 5.7 in 2017 (projection); 3.8 in 2018 (projection).
IMF noted that more stable oil prices and improved financial conditions will support the return to growth in 2017.
The main risk to the outlook identified by the IMF is a fall in oil prices.
Medium‑term potential growth: likely to stay at around 1½ percent over the medium term absent significant structural reforms that lift productivity.

The Executive Board concluded the Article IV consultation on June 30, 2017.
Directors agreed with the thrust of the staff appraisal and commended the authorities for an effective policy response that, drawing on robust buffers, helped the Russian Federation exit a two‑year recession.
Policy priorities and recommendations from Executive Directors:
- Reduce the economy’s dependence on oil and rekindle structural reforms to support new sources of growth and accelerate per capita income convergence to advanced economies.
- Strengthen property rights, advance privatization, improve governance, and invest in innovation and infrastructure to build foundations for higher potential growth.
- Broaden trade relations to promote a diversified export mix.
- Implement a credible fiscal rule to anchor adjustment, allow a smoother response to oil price changes, and build adequate savings.
- Consider a parametric reform of the pension system to deliver fiscal savings over time.

General government (percent of GDP):
- Net lending/borrowing (overall balance): -1.1 in 2014; -3.4 in 2015; -3.7 in 2016; -1.9 in 2017 (projection); -1.2 in 2018 (projection).
- Revenue: 33.8 in 2014; 31.8 in 2015; 32.8 in 2016; 32.6 in 2017 (projection); 31.9 in 2018 (projection).
- Expenditures: 34.9 in 2014; 35.2 in 2015; 36.4 in 2016; 34.5 in 2017 (projection); 33.1 in 2018 (projection).
- Primary balance: -0.4 in 2014; -2.6 in 2015; -2.6 in 2016; -1.0 in 2017 (projection); -0.2 in 2018 (projection).
- Nonoil balance: -11.4 in 2014; -11.4 in 2015; -9.8 in 2016; -8.4 in 2017 (projection); -7.6 in 2018 (projection).
Federal government (percent of GDP):
- Net lending/borrowing (overall balance): -0.4 in 2014; -2.3 in 2015; -3.4 in 2016; -1.7 in 2017 (projection); -1.0 in 2018 (projection).
- Nonoil balance: -9.9 in 2014; -9.5 in 2015; -9.0 in 2016; -7.5 in 2017 (projection); -6.8 in 2018 (projection).
Directors commended reinstatement of the three‑year fiscal framework in the 2017 budget and emphasized fiscal adjustment should be underpinned by durable, well‑targeted measures and growth‑enhancing spending.

Directors welcomed progress toward achieving the inflation objective and recommended that monetary policy easing continue, but at a gradual pace given:
- The uncertain size of the output gap.
- The potential for disinflation reversal.
Communication: Directors encouraged shifting the focus of monetary authorities’ communication strategy to cover a longer horizon and clarify acceptable departures from the inflation target.

Directors welcomed steps to increase financial system resilience, including an improved bank resolution mechanism.
Policy recommendations for the banking sector:
- Remove obstacles that discourage investors from effectively acquiring assets and liabilities in bank resolutions.
- Replace central bank funding with federal funds and increase recourse to banking industry capital.
- Revamp statutory bail‑in legislation while considering financial stability implications.
- Further tighten the limit on related‑party lending and accelerate the introduction of explicit early bank intervention procedures.

Selected external sector figures (billions of U.S. dollars unless otherwise indicated):
- Total merchandise exports, fob: 496.8 in 2014; 341.5 in 2015; 281.7 in 2016; 330.4 in 2017 (projection); 339.1 in 2018 (projection).
- Total merchandise imports, fob: -307.9 in 2014; -193.0 in 2015; -191.7 in 2016; -203.1 in 2017 (projection); -213.7 in 2018 (projection).
- External current account: 57.5 in 2014; 68.9 in 2015; 25.0 in 2016; 44.0 in 2017 (projection); 48.9 in 2018 (projection).
- External current account (in percent of GDP): 2.8 in 2014; 5.0 in 2015; 1.9 in 2016; 2.9 in 2017 (projection); 3.2 in 2018 (projection).
- Gross international reserves: 496.8 in 2014; 341.5 in 2015; 281.7 in 2016; 330.4 in 2017 (projection); 339.1 in 2018 (projection).
- Months of imports: 10.8 in 2014; 15.7 in 2015; 17.0 in 2016; 16.8 in 2017 (projection); 16.7 in 2018 (projection).
Directors underscored that accelerated structural reforms and broader trade relations can help promote a diversified export mix.

Key structural reform recommendations from Executive Directors:
- Strengthen property rights.
- Advance privatization.
- Improve governance.
- Invest in innovation and infrastructure.
Demographics: IMF highlighted adverse demographics as a constraint; without significant structural reforms to lift productivity, potential growth is likely to remain low.
Pension reform: A parametric reform of the pension system would deliver fiscal savings over time.