Press Release No. 17/448

IMF Staff Concludes Visit to Russia

November 17, 2017

An International Monetary Fund (IMF) mission, led by Ernesto Ramirez Rigo, visited Moscow during November 13–17, 2017, to discuss the economic outlook and related policies. At the conclusion of the visit, Mr. Ramirez Rigo made the following statement:

“A cyclical recovery in Russia is gaining pace after a two-year recession, with growth expected to reach around 2 percent this year, supported by higher oil prices and easier domestic financial conditions. Nevertheless, growth is likely to remain low in the medium-term, due to demographics, unaddressed structural bottlenecks as well as enduring sanctions.

Inflation is likely to be just under 3 percent at end-2017, but it is expected to return to around the 4 percent target soon thereafter. The current account surplus is forecasted to improve due to higher oil prices and stronger global demand.

“The deficit reduction planned in the 2018-20 federal budget, underpinned by the new fiscal rule, is welcome. The adjustment is warranted due to permanently lower oil prices and the need to increase savings in the oil fund in the face of potentially volatile oil prices. Measures to improve tax collection and the return on state assets – including dividend payout – could boost non-oil revenues. The adjustment on the expenditure side should rely on more permanent and better targeted measures, such as parametric reform to the pension system, shifts to means-testing of social assistance programs and reductions in subsidies and tax expenditures. Detailed spending reviews could also create fiscal space for infrastructure and human capital investment.

“The Central Bank of Russia (CBR) has met its inflation target earlier than expected with the commendable steadfast implementation of their inflation targeting regime. Conditions are in place for further easing of monetary policy as inflation and inflation expectations have continued to decline since the last Article IV (see Press Release No. 17/270). Further cuts in the policy interest rate should continue as the monetary stance remains tight but with due care to the potential reversal of temporary factors – low food prices and the strong exchange rate – which are partly responsible for the current low inflation. The CBR’s enhanced monetary framework beyond end-2017 is welcome.

“The banking system appears stable, notwithstanding the recent rescue of two prominent banks and endemic weaknesses in many small banks. Lending activity continues to increase, supporting a recovery in bank profitability, while NPLs appear to have stabilized. However, asset quality remains a key weakness and there are risks that provisioning may be low in some banks. Thus, the priority is to strengthen the ongoing asset quality review to ensure banks’ capital basis and support market confidence. A key focus should be on ensuring credibility within the financial system, which requires the adoption and communication of a strategy to address any weaknesses identified by the review and transparency around the cost to taxpayers. The new bank resolution framework should shorten the process of open bank resolution and reduce balance sheet encumbrance, but areas of improvement remain. The CBR’s funding could be replaced with federal government funds, provide for statutory bail-in consistent with international standards and remove the impediments to purchase and assumptions of problem banks by healthy banks.”