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IMF Executive Board Concludes 2014 Article IV Consultation with the Russian Federation

Press Release No. 14/322
July 1, 2014

On June 27, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Russian Federation.

The growth slowdown that began in 2011, reflecting structural constraints, continued in 2013 despite accommodative policies. Real GDP growth slowed to 1.3 percent due to a contraction in investment while consumption remained robust owing to strong real wage growth and an unsecured consumer credit boom. The general government balance moved from a modest surplus in 2012 to a deficit of slightly more than 1 percent of GDP in 2013. The Central Bank of the Russian Federation (CBR) kept its policy rates constant until March 2014 despite above-target inflation.

More recently, geopolitical tensions have brought the Russian economy to a standstill. Staff projects real GDP growth at 0.2 percent in 2014 with considerable downside risks. Concerns about sanctions so far, as well as the threat of additional sanctions in the future, following Russia's actions in Crimea, have increased the uncertainty of doing business in Russia and are having a chilling effect on investment. Capital outflows could reach US$100 billion in 2014. Consumption will remain the main growth driver in 2014 while net exports are also expected to support growth as imports weaken. A slight recovery in growth to 1 percent is projected in 2015, on the back of stronger exports and stabilization of investment. Despite the economic slowdown, inflation is expected to remain well above the CBR’s target due to the recent exchange rate depreciation.

Fiscal policy is being tightened. However, the non-oil deficit will remain high, highlighting Russia’s reliance on revenues from exhaustible resources. The Reserve Fund balance has increased but remains well short of the government’s 7 percent of GDP target.

The CBR raised policy rates by 1½ percentage points in early March and a further ½ percentage point in April and reduced exchange rate flexibility in response to the onset of geopolitical tensions. The CBR also increased to US$1.5 billion the cumulative interventions required to move the exchange rate corridor, lowering the flexibility of its FX rule. The discretionary policies followed by the authorities helped contain the heightened currency and liquidity stress. By the end of May, as the exchange rate traded firmly in the non-intervention zone, the CBR took steps to allow more exchange rate flexibility.

The banking system remains broadly stable amid a gradual slowdown of unsecured retail credit growth and a stepping-up of bank oversight. Non-performing loans ratio has remained relatively constant. Capital adequacy ratio has been stable and remains above the statutory minimum. The banking system has moved from a negative to a positive net foreign asset position, limiting aggregate currency mismatch.

Executive Board Assessment2

Executive Directors noted that despite accommodative policies, the Russian economy continues to experience a slowdown, reflecting mainly structural factors. Directors agreed that, with the economy operating close to its full potential, Russia’s growth model based on energy exports with increasing oil prices and use of spare capacity is no longer reliable and that there is need to move to a new model.

Directors observed that the geopolitical tensions are having strong negative consequences for the Russian economy. The related sanctions and the possibility of their escalation have had an impact through capital outflows, exchange rate pressures, and limited access to external financing with higher borrowing costs, and are also raising the uncertainty of doing business in Russia. Directors agreed that, while the immediate policy priority is to preserve macroeconomic stability, enhancing the policy framework and undertaking further structural reforms will be essential to boost investment and raise growth potential in the long term.

Directors concurred that the fiscal stance in 2014 is broadly appropriate but noted that flexibility could be considered in the event of a more severe cyclical downturn. They emphasized that adhering to the fiscal rule should support its credibility and the needed medium-term fiscal consolidation to rebuild buffers and safeguard intergenerational equity. Directors welcomed the changes to the public pension system but stressed that additional measures, such as increasing the mandatory retirement age, would be necessary to ensure long-term viability of the system. They highlighted that resisting spending pressures and increasing efficiency gains would help create space for infrastructure investment.

Directors agreed that a tighter monetary policy stance is required to achieve the 2015 inflation target and anchor expectations. They also welcomed the authorities’ commitment to continue moving to an inflation targeting regime and to a fully-flexible exchange rate once the current uncertainty subsides. In this context, they took note of the recent measures taken to increase exchange rate flexibility.

Directors noted that the banking system remains generally stable and welcomed the regulatory steps taken to slow the growth of unsecured retail lending. They concurred that the Central Bank should continue to monitor the build-up of systemic risks through regular stress testing exercises and increased oversight. Directors underscored that a deeper and more efficient financial system would facilitate access to credit and support long-term growth. They also encouraged implementation of the remaining Financial Sector Assessment Program recommendations, and called for steps to reduce banking sector fragmentation through consolidation and enhancing competition among banks.

Directors considered that deeper structural reforms are critical to enhancing Russia’s growth prospects. They welcomed the authorities’ efforts to fight corruption and improve procurement and the business environment. They encouraged the authorities to curtail state involvement in the economy, reduce price distortions, especially utility prices, and take further measures to increase investment and productivity. Directors also urged the authorities to revive the nearly-stalled privatization program.


Russian Federation: Selected Macroeconomic Indicators, 2011–15
  2011 2012 2013 2014 2015

  (Annual percent change)
Production and prices3          
Real GDP 4.3 3.4 1.3 0.2 1.0
Consumer prices          
Period average 8.4 5.1 6.8 6.6 6.0
End of period 6.1 6.6 6.5 6.5 5.5
GDP deflator 15.9 7.5 5.9 8.5 5.9
Public sector4 (Percent of GDP)
General government          
Net lending/borrowing (overall balance) 1.5 0.4 -1.3 -0.7 -0.8
Revenue 37.3 37.7 36.1 36.4 36.1
Expenditures 35.7 37.2 37.3 37.1 36.9
Primary balance 2.1 1.0 -0.6 0.0 0.0
Nonoil balance -10.0 -11.0 -12.2 -11.9 -11.0
Federal government          
Net lending/borrowing (overall balance) 0.8 -0.1 -0.5 0.4 -0.2
Nonoil balance -9.5 -10.4 -10.4 -9.7 -9.5
  (Annual percent change)
Base money 20.9 11.3 8.0 7.4 7.8
Ruble broad money 22.3 11.9 14.6 13.5 14.0
External sector          
Export volumes 4.2 4.6 1.7 2.9 2.3
Oil -1.9 0.4 2.6 1.8 -1.3
Gas 6.7 4.6 9.7 -2.2 0.2
Non-energy 6.1 5.9 5.0 6.9 8.6
Import volumes 16.6 9.2 3.1 -3.0 2.0
  (Billions of U.S. dollars; unless otherwise indicated)
External sector          
Total merchandise exports, fob 515.4 527.4 523.3 530.7 523.1
Total merchandise imports, fob -318.6 -335.8 -343.0 -330.0 -333.6
External current account 97.3 71.3 32.8 59.1 49.4
External current account (in percent of GDP) 5.1 3.5 1.6 2.9 2.4
Gross international reserves          
Billions of U.S. dollars 498.6 537.6 509.6 470.2 470.2
Months of imports5 14.6 14.5 13.0 12.5 12.4
Percent of short-term debt 331 327 286 252 237
Memorandum items:          
Nominal GDP (billions of U.S.D) 1,905 2,017 2,102 2,006 2,047
Exchange rate (rubles per U.S.D., period average) 29.4 30.8 31.8
World oil price (U.S.D. per barrel)6 104.0 112.0 108.8 108.0 103.0
Real effective exchange rate (average percent change) 4.9 3.7 -0.5

Sources: Russian authorities; and IMF staff estimates.