1. This supplement contains information on recent economic developments in Russia that has become available since the circulation of the staff report for the Article IV consultation.
2. The recent rise in oil prices and attendant changes to the WEO oil price projections—to $37 a barrel in 2004 and 2005—have strengthened the balance of payment and fiscal outlook, but are otherwise expected to have only limited macroeconomic implications:
- As to the balance of payments, the current account surplus in 2004 is likely to be higher than previously expected, by perhaps 1½ percent of GDP, but higher private capital outflows over the summer, as a result of recent turmoil in the banking system and uncertainties arising from the legal proceedings against Yukos, suggest that the overall balance of payments position will not be notably affected this year. Looking to next year and beyond, higher current account surpluses (by 2–3 percent of GDP a year) are expected to translate into an accelerated increase in foreign reserves provided the authorities move forcefully to strengthen the banking system and prove even-handed and transparent in enforcing tax legislation and the rule of law more generally, as discussed in the staff report.
- As to the public sector, higher oil revenues will be fully saved in the oil stabilization fund in 2004. Reflecting mainly higher oil prices, but also payment of back-taxes by Yukos, the draft 2005 budget submitted to the Duma on August 26 assumes that revenues will be about ⅔ percentage points of GDP higher than projected at the time of the mission. Half of these additional revenues have been reflected in higher spending, and the 2005 budget deficit on a constant oil price basis will, therefore, be about ⅓ percent of GDP higher than previously projected, raising the total fiscal stimulus to 1⅓–1½ percent of GDP next year. While savings in the oil stabilization fund are supposed to cease once the cap of Rub 500 billion is reached—which under the revised oil price assumption could happen late this year—statements made by the president and the minister of finance at the time of the budget submission suggest that any revenues arising from Urals oil prices above the revised budgetary assumption of $28 per barrel will be saved.
- Recent developments do not suggest any need to change the projections for GDP and inflation in 2004. A recent upward revision by the authorities of their GDP forecast for 2004 has brought this forecast closer to the staff’s. As to 2005, while oil export earnings have been revised up by 1½ percent of GDP, staff has raised its forecast for GDP growth by only ¼ percentage point, reflecting the likelihood that much of the windfall will be saved, especially as about 80 percent of higher oil sector earnings are taxed at the current level of oil prices. Headline inflation rose slightly in July, to 10.4 percent, and the ruble remained broadly stable against the dollar. The authorities have narrowed the target range for end-year inflation in 2005 to its upper half, from 6½–8½ percent to 7½–8½ percent.
3. Regarding other developments, the situation in the banking sector remained calm during August. Amendments to strengthen the bank bankruptcy law, which were approved by the Duma at end-July and by the Federation Council on August 8, were signed into law by the president on August 20. Banks’ balance sheet data for July, needed for a fuller assessment of recent developments, are not yet available.
4. Finance Minister Kudrin indicated last week that Russia would like to replace its Paris Club debts with marketable securities. This issue is likely to be discussed by Paris Club creditors once the Russian authorities have made specific proposals. Staff will be in a position to provide a more detailed assessment once the specifics are known.
5. The additional information available since the circulation of the staff report does not alter the general thrust of the staff appraisal. Staff continues to believe that there should be no fiscal stimulus at this point in the economic cycle, whereas the draft 2005 budget submitted to the Duma entails a somewhat larger fiscal stimulus than projected at the time of the mission. More importantly, with oil prices now well above the assumption underlying the 2005 budget, staff views a policy of fully saving oil revenues over and above what is assumed in the budget as key to the authorities’ ability to manage the macroeconomic challenges associated with very high oil prices.