Press Release No. 15/368

Press Release: IMF Executive Board Concludes 2015 Article IV Consultation with the Russian Federation

August 3, 2015

On July 29, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with the Russian Federation.

Russia entered 2014 with declining potential growth owing to the stabilization of oil prices, stalled structural reforms, weak investment, declining total factor productivity and adverse population dynamics. In addition, the ongoing slowdown was exacerbated by the dual external shocks from the sharp decline in oil prices and sanctions.

The authorities took measures to stabilize the economy and the financial system. The sharp decline in oil prices and sanctions led to severe pressure on the ruble, a surge in inflation, market turbulence, and concerns over financial stability. In response, the authorities (i) accelerated the move to a floating exchange rate, raised policy rates and increased FX liquidity; (ii) introduced temporary regulatory forbearance and a capital support program; and (iii) provided some fiscal stimulus and limited wage indexation to support the disinflationary process.

Russia is expected to be in recession in 2015 due to the sharp drop in oil prices and sanctions. GDP is expected to decline by 3.4 percent driven by a contraction in domestic demand weighed down by falling real wages, higher cost of capital, and weakened confidence. The external position will remain challenging due to deleveraging in the face of limited market access. Inflation is expected to come down due to the dissipating impact of the ruble depreciation, the limited wage indexation in the budget and the recession. Growth should resume in 2016 while inflation continues to decline. However, the recovery is unlikely to be strong as the limiting factors behind decelerating potential growth will take time to be addressed, leading to medium-term growth of 1.5 percent per year. An increase in geopolitical tensions is the main risk to the outlook.

Executive Board Assessment²

Executive Directors commended the policy actions taken by the authorities to stabilize the economy in light of the significant stress created by lower oil prices and sanctions. Pre-existing structural weaknesses also contributed to this difficult situation. Directors concurred that continued prudent policies and reforms will be necessary to ensure macroeconomic stability and boost potential growth.

Directors agreed that a supportive fiscal stance is appropriate at present, given cyclical considerations and available fiscal space. However, they highlighted that quasi-fiscal operations should be limited and coordinated to avoid an overly stimulative impulse. For the medium term, Directors called for a gradual fiscal tightening to adjust to lower oil prices and rebuild buffers. In this context, they welcomed the authorities’ intention to revisit the fiscal rule so that the oil price benchmark better reflects market developments. Directors also underscored the need for permanent and credible fiscal measures, including pension reform, reduction of energy subsidies, and better targeting of social transfers.

Directors concurred that monetary easing should continue at a pace commensurate with the decline in underlying inflation and inflation expectations as external and financial stability risks abate. Noting the foreign exchange purchase program to rebuild precautionary buffers, they encouraged the authorities to ensure that it is consistent with inflation targeting.

Directors noted that policies have been successful in stabilizing the banking system. They highlighted the need to support individual banks according to their specific capital needs while adjusting the parameters of the capital support program to strengthen incentives and minimize cost to the public sector. Directors encouraged the authorities to phase-out regulatory forbearance along with the implementation of the capital support program and better align Russia’s resolution framework to best international practices. They also saw a need for reducing banking sector fragmentation and encouraging competition among banks, by stepping up supervision and moving toward the adoption of Basel III capital standards.

Directors emphasized that accelerating the pace of structural reforms is key to raising Russia’s potential growth. In this context, they noted that priority should be given to further measures aimed at strengthening governance and property rights and streamlining regulation. Directors also emphasized the need to reduce trade barriers, improve the transparency and efficiency of public investment, and increase competition in domestic markets. They noted that reinvigorating the privatization agenda, as soon as market conditions permit, would enhance economic efficiency. In addition, Directors highlighted that a deeper and more efficient financial system would improve the allocation of capital and boost potential growth.

Sources: Russian authorities; and IMF staff estimates.

³ Real GDP growth and prices for 2013-14 reflect updated staff projections.

⁴ Cash basis. Expenditures based on 2013-15 budget and the fiscal rule.

⁵ In months of imports of goods and non-factor services.

⁶ WEO through 2013, and Brent crude oil spot and futures prices for 2014-15.