Russian Federation: Selected Issues

IMF Staff Country Reports, July 10, 2017

Source details

Publication date: July 10, 2017.
Focus: complications in adjustment of relative prices when driven by a negative terms of trade (ToT) shock.
Two sets of factors explored:
- Disruptiveness of sudden terms-of-trade driven devaluations.
- Issues related to external demand and access to external markets.
Central analytical premise examined: the symmetry assumption that a reduction in commodity prices will unwind Dutch disease—i.e., real depreciation after falling commodity prices should restore resources to the non-commodity tradable sector.

Symmetry assumption challenged:
- The argument assumes the elasticity of non-commodity exports to the real effective exchange rate (REER) is equal regardless of the direction of REER movements and unaffected by the phase of the commodity cycle.
- The paper highlights that this symmetry may not hold.
Deep sectoral linkages:
- Deep linkages between the commodity and non-commodity sectors can prevent the non-commodity tradable sector from benefiting from depreciation caused by a commodity price shock.
- Such depreciation can put stress on the entire economy, undermining the expected rebound of non-commodity exports.
External demand and market access:
- Problems related to external demand and access to external markets are key constraints on the adjustment process following a ToT shock.
Disruptiveness of sudden devaluations:
- Sudden terms-of-trade driven devaluations can be disruptive, complicating adjustment and potentially amplifying adverse effects across sectors.

Reassessment of policy expectations:
- Policymakers should not rely on symmetric responses of non-commodity exports to REER movements when designing adjustment strategies following commodity price shocks.
Addressing structural linkages:
- Policies aimed at facilitating reallocation should account for deep commodity–non-commodity sector linkages that can inhibit recovery of the non-commodity tradable sector.
External market strategies:
- Strengthening access to external markets and supporting demand for non-commodity exports are important complements to exchange-rate adjustment.

Subject: Exports, Fiscal federalism, Fiscal policy, Fiscal rules, Inflation, International trade, Oil prices, Prices
Keywords: commodity exporter, CR, Exports, Fiscal federalism, Fiscal rules, Global, import price inflation, Inflation, inflation expectation, inflation-unemployment trade-off, ISCR, oil price, Oil prices, tot shock

Russian Federation: Selected Issues — IMF Staff Country Reports, July 10, 2017.