INTERNATIONAL MONETARY FUNDRUSSIAN FEDERATION
Staff Report for the 2010 Article IV Consultation
Prepared by Staff Representatives for the 2010 Article IV Consultationwith the Russian FederationApproved by Poul M. Thomsen and Aasim HusainJuly 9, 2010
Discussions for the 2010 Article IV consultation were held in Moscow during June 2–15.
Themission comprised Mr. Thomsen (head), Mr. Kähkönen, Ms. Kozack, Messrs. Hofman and Tiffin,Ms. Zakharova (all EUR), Mr. Tuya (MCM, external expert), and Mr. Brekk (senior residentrepresentative). Mr. Mozhin, Executive Director, also participated in the discussions. The missionmet with Deputy Prime Minister and Minister of Finance Kudrin, Central Bank of Russia (CBR)Governor Ignatiev, other senior officials, and representatives of financial institutions, corporations,and think tanks.
. The Russian economy has improved after a deep recession, but the recovery is fragile.Inflation has come down rapidly in the context of a large output gap, and should remain in check inthe near term. The banking system is still under strain and credit is expected to recover onlygradually. With Russia likely to emerge from the crisis with lower potential growth, the key policychallenge facing the authorities will be to withdraw the large fiscal stimulus as cyclical conditionsnormalize to avoid a renewed bout of rapid real appreciation and high inflation. Against this background, staff made the following recommendations:
On the response to the recession, the authorities acted forcefully, taking full advantage of the buffers afforded by the pre-crisis policy of taxing and saving much of the oil revenue and theattendant large reserves. In this regard, the stabilization fund mechanism has served Russia verywell and should be preserved.
On fiscal policy, the expansion of some 9 percent of GDP has almost entirely taken the form of permanent measures, suggesting that fiscal consolidation will require reinvigorating long-stalled public-sector reforms, including in the areas of pensions, health care, and social protection. Staff believes that consolidation should begin in 2010 and gather pace in 2011–12.
On monetary policy, the focus should be on inflation control in the context of a flexibleexchange rate. The recent greater exchange rate flexibility is welcome, but political resolve inthis regard remains to be tested in an environment involving a starker tradeoff between inflationand nominal ruble appreciation.
On financial sector policies, improved provisioning standards are needed to reduce risks to bank balance sheets. In addition, the CBR’s authority to conduct consolidated supervision— including over connected lending—should be enhanced.
On structural reforms, the overarching challenge is to improve the investment climate.
Exchange rate regime
. Russia’s exchange rate is classified as “other managed arrangement”effective November 1, 2008. The Russian Federation accepted the obligations of Article VIII,Sections 2, 3, and 4 of the IMF Articles of Agreement with effect from June 1, 1996. The exchangesystem is free of restrictions on payments and transfers for current international transactions.
It is proposed that the next Article IV consultation be held on the standard 12-month cycle.