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Russian Federation

Author(s):
International Monetary Fund
Published Date:
July 2010
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I. Crisis Recovery

A. A Gradually Improving Economy

The Russian economy is improving, but the recovery is fragile. Inflation has come down rapidly. High oil prices and a return of risk appetite have strengthened the balance of payments. Nonetheless, the banking system is still under strain and financial markets remain vulnerable to shifts in investor sentiment and oil price declines.

1. Hit hard by the global financial crisis, the Russian economy contracted by 7.9 percent in 2009. Domestic demand fell sharply in the first half of 2009, following plunging oil prices and an abrupt reversal of capital flows that brought a multi-year credit boom to an end. Private consumption and fixed investment declined strongly, with the effects on growth compounded by a large rundown of inventories. The contribution of net exports, meanwhile, turned positive as imports contracted.

2. The economy has improved, but the recovery remains fragile. After some temporary softness in the first quarter, short-term indicators point to a strengthening of the recovery (Figure 1). While all components of demand now appear to be expanding, growth is becoming increasingly driven by consumption, reflecting to a large extent the recent 45 percent cumulative increase in pensions and other policy support.

Figure 1.Russian Federation: Production Indicators, 2008–10

(Annualized quarter-on-quarter growth rate of seasonally adjusted 3-month moving average, unless otherwise indicated)

Sources: Rosstat; Ministry of Economy; and IMF staff calculations.

Contribution to GDP Growth

(Percent, SA quarter-on-quarter)

3. Inflation has been coming down rapidly. Against the background of a large output gap, falling food prices, and an appreciating ruble, headline inflation has fallen from 14 percent (y-o-y) in early 2009 to 6 percent in May 2010. Core inflation—which excludes administered prices as well as fruits and vegetables—has fallen to around 4¼ percent.

CPI Inflation

(Annualized SA 3-MMA growth rate)

4. Labor market conditions have improved. The unemployment rate, which shot up in the second half of 2008, has recently been coming down rapidly, to about 7½ percent in May from a peak of 9 percent. At the same time, real wages and real disposable income have strengthened, underpinning the recovery in private consumption.

Labor Market Conditions,

(Annualized seasonally adjusted growth)

Sources: State Statistics Office; and IMF staff calculations.

5. Following sharp deteriorations, both the current and capital accounts have strengthened. The current account surplus fell to 4 percent of GDP in 2009, from about 6 percent in 2007 and 2008. On the export side, lower oil prices and weak external demand led to a 36 percent decline in export values. This, however, was partly offset by a 35 percent drop in import values that reflected the fall in domestic demand. The current account recovered in the second half of 2009 and preliminary data indicate that it strengthened appreciably in 2010 thus far, reflecting high oil prices and a continued recovery in export volumes. At the same time, the capital account has stabilized amid periods of intermittent outflows and inflows.

Trade Balance

(Billions of U.S. dollars)

Source: IMF staff calculations

Private Sector Capital Flows

(Billions of U.S. dollars, quarterly)

Sources: CBR; and IMF staff calculations.

6. The overall balance of payments has remained in surplus, and the ruble has appreciated. Reserves increased by some $60 billion over the past 12 months. The ruble has appreciated by about 20 percent in real effective terms since its trough in February 2009, bringing it broadly back to its pre-crisis level. Although the appreciation since the Fall 2009 CGER exercise exceeds the rise in long-term oil prices over the same period, the CGER estimates—as well as the mission’s assessment—still suggest that the ruble is broadly in line with medium-term fundamentals.

CGER Results, 2009-10(Percent deviation from estimated equilbrium)
Fall 2009Spring 2010
Macro balance approach-3-7
External stability approach-84
ERER approach-511
Average-53

7. Financial indicators rebounded in 2009, but the recent turmoil has roiled markets. As global conditions recovered over the course of 2009, financial market indicators in Russia improved markedly. Russia’s stock market index more than doubled last year, making it one of the best performers among emerging markets. Sovereign spreads, which had peaked at over 850 bps in late 2008, fell to below 140 bps in mid-April 2010. Since then, in the wake of the crisis in Europe and the renewed decline in oil prices, markets have been volatile: the ruble has depreciated by 7 percent against the dollar, Russian sovereign spreads have risen by some 120 bps, and the stock market surrendered its gains for the year (Figure 2).

Figure 2.Russian Federation: Financial Market Indicators, 2007–10

Source: Bloomberg.

1/ The MSCI Emerging Markets Index is a commonly used float-adjusted market capitalization index designed to measure equity market performance in global emerging markets. It comprises Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela. Based in U.S. Dollars, 1997=100.

2/ Tracks total returns of external debt instruments of emerging markets with an outstanding face value of at least $500 million.

8. The banking system is highly liquid, but banks have been strained by bad loans and credit has remained stagnant. Overdue loans have continued to rise and now stand at 6½ percent of total loans under Russian reporting standards. Reflecting weak demand for credit and the continuing efforts by banks to restructure their balance sheets, credit to the economy has remained largely unchanged in nominal terms since January 2009. There are signs, however, that the accumulation of overdue loans is now decelerating, and that banks are scaling back efforts to boost provisions and capital. Indeed, some of the larger banks, citing an improvement in asset quality, have signaled that they may release provisions to fund new loans later in the year. Although banks’ pre-provision income was relatively healthy in 2009, falling interest rates have squeezed interest margins and increased pressure on banks to begin lending. In this context, credit growth picked up modestly in March and April, reflecting an improvement in credit demand and moderating credit supply constraints.

B. Policy Response to the Recession

The Russian authorities responded forcefully to the recession. 1 The pre-crisis policy of taxing and saving much of the oil windfall created significant space for fiscal expansion, monetary easing, and extraordinary liquidity support to the banking system.

Fiscal Policy

9. There was a dramatic discretionary fiscal relaxation in 2009. The general government nonoil deficit increased from 8¼ percent of GDP in 2008 to 15 percent of GDP in 2009, almost entirely on account of higher spending. This was one of the largest fiscal stimuli in the G-20. However, much of the expansion was targeted at low-multiplier areas, such as strategic sectors and defense and security. Moreover, most of the stimulus was implemented in the second half of the year—too late to prevent a deep recession (Figure 3). By end-2009, the underlying federal government nonoil balance was some 9 percent of GDP above both its precrisis level and the government’s own medium-term target.

Figure 3.Russian Federation: Selected Fiscal Indicators, 2008-10

Sources: Russian authorities; and IMF staff estimations.

1/ Authorities’ definition. Includes CIT on oil companies in the non-oil revenue. Dotted line is projection.

2/ Cumulative monthly non-oil balance as a share of the actual and projected annual non-oil balance.

Federal Budget Expenditure by Functional Classification, 2008—10
20082009Change201020102010
Est.BudgetSuppl.Proj.
(Percent of GDP)
Total expenditures18.724.75.922.30.723.1
National economy2.54.21.83.00.13.1
Defense and security4.55.61.15.20.05.3
General public issues2.02.10.12.70.02.5
Social policies0.70.80.10.70.00.8
Education0.91.10.20.90.00.9
Health0.70.90.20.70.00.8
Intragovernmental transfers6.49.22.88.40.49.0
Other1.10.6-0.50.60.10.7
Sources: Budget documents; and IMF staff calculations.

10. The headline deficit was easily financed. Russia’s prudent past management of its oil wealth left the country with large international reserves and low public debt. This created room to monetize the deficit—which swung from a surplus of 4¼ percent of GDP in 2008 to a deficit of 6¼ percent of GDP in 2009—by drawing down the oil funds held at the CBR without significant risks to external stability. Russia’s public debt ratio is below 11 percent.

Monetary Policy

11. Against the backdrop of a more stable external outlook and falling inflation, the CBR has steadily reduced interest rates. It cut its refinancing rate by 525 bps to 7¾ percent from its peak in April 2009. However, given the uncertain economic outlook and reflecting increased risk aversion, nominal interest rates remained stubbornly high for most borrowers throughout much of 2009. In this context, the decline in inflation has turned average real interest rates positive for the first time in many years. Only recently have deposit and lending rates begun to fall more quickly. By contrast, interbank rates have remained within the CBR’s policy corridor, reflecting the high liquidity of the banking sector (Figure 4).

Figure 4.Russian Federation: Monetary Policy, 2007 – 10

Sources: CBR; and IMF staff calculations.

12. The exchange rate has become more flexible. This has, however, occurred in the context of a weaker balance of payments and a sizeable output gap, which has reduced the tradeoff between inflation and nominal exchange rate objectives. Since March 2009, the ruble has appreciated by around 15 percent against the exchange rate basket, with short-run movements sometimes exceeding 4 percent in a single week. Nonetheless, the CBR continues to intervene to avoid abrupt changes in the exchange rate, while still allowing a markedly greater degree of day-to-day volatility. While a further increase in international reserves is not the goal of the CBR’s interventions, it is clearly a byproduct of this policy in an environment of high oil prices, involving sterilization and opportunity costs.

Financial Sector Policy

13. The authorities have been exiting from extraordinary liquidity support extended during the crisis. With banks highly liquid, repo demand has effectively disappeared, and banks have used excess funds to repay their debt to the CBR ahead of schedule. This withdrawal of liquidity, together with the issuance of new CBR bonds and a pick-up in money demand, largely sterilized the monetary impact of the fiscal expansion in 2009 (Figure 5). Also, one bank has partially repaid the public capital injection it received during the crisis.

Figure 5.Russian Federation: Liquidity Indicators, 2007 – 2010

Sources: CBR; and IMF staff calculations.

Average Daily Repo Operations

(Billions of Russian rubles, volume)

Source: Haver.

14. Other support mechanisms are also gradually being withdrawn. As of July, regulatory forbearance, in the form of easier provisioning requirements,2 will be gradually brought back in line with pre-crisis norms. Lending limits for uncollateralized loans were reduced in February, and interbank market guarantees are being unwound. Moreover, having expanded the “Lombard list” used for repo transactions during the crisis, the CBR intends to tighten eligibility over time. Collateral rules for nontraded assets used for CBR refinancing are also being strengthened. Finally, an earlier-planned public bank-recapitalization scheme has been scrapped. At the same time, the CBR stands ready to reactivate these facilities should the banking system come under renewed pressure in the face of adverse shocks.

II. Near-Term Outlook And Risks

15. The near-term economic outlook is for a moderate recovery. While the recent rebound is still dependent on policy support, a self-sustained consumption-led recovery is set to gradually take hold, not least because the adjustment of bank balance sheets now appears to have run its course, with banks poised to cautiously expand lending. Gradually rising real wages and lower unemployment should provide additional support to consumption. As a result, GDP growth is projected to reach 4¼ percent in 2010, supported by a boost to consumption and a turn in the inventory cycle (and also reflecting large base effects). However, absent sustained increases in oil prices, underlying growth momentum is expected to recover only gradually, causing annual growth to fall back to around 4 percent in 2011. Reflecting the output gap, still-weak demand, and continued ruble appreciation, inflation is projected to remain subdued, reaching 6 percent (y-o-y) at end-2010 and 5½ percent at end- 2011.

16. Short-term risks are broadly balanced. On the upside, more favorable external developments—particularly higher oil prices and greater capital inflows—or a more rapid recovery in credit could push growth higher. On the downside, external shocks—for example, those emanating from sovereign vulnerabilities in Europe with effects on oil prices or investor sentiment—present the key risk. There are few direct financial linkages, owing to the relatively modest role of foreign banks in Russia’s financial system. However, an abrupt drop in oil prices and a retrenchment in risk appetite could result in larger-than-projected capital outflows given the liquidity overhang in the banking system. A worse-than-expected growth outcome in Russia would have knock-on effects throughout the region, mainly through remittances and trade (Box 1).

Box 1.Regional Spillovers from the Economic Slowdown in Russia*

The deep recession in Russia had a substantial impact on its regional partners.

  • Remittances. The remittance link is especially strong with the countries in the Caucasus and Central Asia (CCA), as well as Moldova, Belarus, and Ukraine. In the boom years preceding the crisis, Russia was an important employer of migrant workers from these countries, primarily in the flourishing construction sector. As Russia’s real estate bubble burst, however, flows to these countries declined considerably. Individual remittances from Russia to the CIS dropped by more than 30 percent in total—Armenia, Georgia, the Kyrgyz Republic, Tajikistan, and Uzbekistan each experienced a drop in inflows, mainly from Russia, by up to a third in 2009, while remittances to Moldova declined by almost 40 percent.
  • Trade. Countries with strong trade links with Russia also saw a significant decline in their exports, owing to subdued demand in Russia. Exports to Russia from CIS countries started declining in the final quarter of 2008 and dropped by more than a third in 2009. Other neighboring countries experienced a similar pattern—Finland, for which Russia is the third-largest export market on account of transit trade, saw its exports to Russia drop by almost 50 percent in 2009
  • Financial. Over the course of 2008-09, facing a significant depreciation of the Russian ruble vis-à-vis the dollar, many of Russia’s trading partners were compelled to follow suit. Armenia, Kazakhstan, the Kyrgyz Republic, and Tajikistan all devalued their currencies by almost 25 percent. However, high dollarization levels in some of these countries left their financial sectors vulnerable to exchange-rate movements—depreciation impacted the balance sheets of local banks with FX exposures to unhedged borrowers, with negative knock-on effects on lending. Real credit growth has declined on average by over 60 percent in CCA countries since end-2007.

Imports from CIS countries, 1994-2009

(Annual, USD billions)

As Russia gradually recovers from the crisis, its regional partners stand to benefit. There are signs that the nascent recovery in the region is being partially supported by positive spillovers from Russia. The decline in remittances appears to be slowing, with some countries experiencing an increase in inflows during the first months of 2010, for example by 15 percent (y-o-y) in Tajikistan, and more than 10 percent in Armenia. Trade channels are also gradually normalizing—after a 10 percent decline in 2009, Moldova’s exports to Russia rebounded by over 40 percent in January-April 2010.

Net individual remittances to CIS countries, 2007-10

(Quarterly, USD billions)
* Prepared by Andrew Tiffin and Daria Zakharova based on the May 2010 REO for Middle East and Central Asia.

III. Policy Discussions

Medium-term fiscal consolidation is the overarching policy priority for Russia. With continued large oil price increases unlikely, achieving balanced growth will depend critically on an appropriately countercyclical fiscal policy aimed at mitigating pressures for real appreciation and inflation.

17. The oil fund mechanism has served Russia well, creating room for a forceful crisis response. The authorities took full advantage of the ample room for maneuver afforded by the prudent pre-crisis policy of taxing and saving much of the oil revenue and the attendant large reserves. Thus, even after a large drawdown of reserves and a sizeable fiscal stimulus, Russia faces no solvency or financing concerns. Still, the years before the crisis also saw important and growing weaknesses that were manifested in an increasingly inflationary policy mix. The steady rise in the nonoil deficit as more of the oil wealth was spent caused fiscal policy to become ever more procyclical, as private demand was very buoyant. Meanwhile, the attempt to resist the resulting upward pressures on the ruble through foreign exchange interventions caused monetary policy to become accommodative.

18. Against this background, the key challenge facing Russia is to withdraw fiscal stimulus as cyclical conditions normalize. There is a concern that, with spending pressures intensifying, fiscal policy could quickly become procyclical once again as the economy recovers, putting renewed pressure on the real exchange rate and inflation. Such concerns are heightened by the fact that most of the fiscal expansion relative to pre-crisis levels has involved permanent measures, notably large pension increases. This suggests that fiscal consolidation cannot be achieved unless urgent progress is made on long-stalled public sector reforms. Moreover, the authorities’ room for maneuver is further constrained by the fact that—with limited prospects for large increases in oil prices over the medium term—the nexus of strong growth in investment, productivity, real wages, and consumption that powered Russia’s pre-crisis growth is unlikely to return. In these circumstances, a return to an unfavorable macroeconomic policy mix of procyclical fiscal policy and monetary accommodation—coupled with continued slow progress on structural reforms—would likely take a larger toll in terms of rapid real appreciation, lower growth, and higher inflation than in the past.

A. Fiscal Policy: Consolidation through Reform

Increased pressures to spend more of the oil wealth, alongside a highly inflexible budget structure, suggest that withdrawing the fiscal stimulus is the key policy challenge facing the authorities. Meeting this challenge will require a reinvigoration of structural reforms.

19. Withdrawing the very large fiscal stimulus will be a formidable task. The underlying nonoil deficit of the federal government is projected to remain some 9 percent of GDP above its pre-crisis level in 2010. At the same time, the budget has become increasingly inflexible—three-quarters of the increase in the nonoil deficit relative to pre-crisis levels reflects higher permanent measures, with half of the increase attributable to higher pensions alone. Nonstatutory spending is now only 9 percent of GDP—equal to the size of the consolidation needed to reverse the stimulus and achieve the government’s own long-term target for the nonoil deficit of 4.7 percent of GDP by 2015.

20. Fiscal policy is likely to be relaxed further. The original 2010–12 medium-term budget appropriately targeted a gradual withdrawal of stimulus—the nonoil deficit was slated to decline to 9½ percent of GDP in 2012. However, in June, the government passed a supplementary budget which—in addition to previously-announced tax expenditure measures—would lead to a slight increase in the federal nonoil deficit in 2010, compared to reduction of some ¾ percent of GDP implied by the original budget. A second supplementary budget—entailing civil service wage increases—could be passed in the fall. Moreover, the authorities appear to be revisiting the planned pace of medium-term consolidation.

Supplementary Budget for 2010
MeasureRub bnGDP%
Total supplementary expenditures325.50.7
Additional transfers to pension fund1500.3
Housing for WWII veterans82.30.2
Housing for military42.90.1
Other50.30.1
Sources: Budget documents; and IMF staff calculations.

21. Staff recommended that the fiscal consolidation start now, and be stepped up in 2011–12. With recovery underway, and given the magnitude of the fiscal consolidation needed to reverse the stimulus, striking an appropriate balance between short-term cyclical considerations and medium-term consolidation suggests that the withdrawal of stimulus should begin in 2010. In this context, staff disagreed with the expansion of the federal government’s nonoil balance implied by the 2010 supplementary budget, and warned against another supplement in the fall. In staff’s view, the previously-planned target of reducing the nonoil deficit to 9½ percent of GDP by 2012 remains broadly consistent with the current outlook for economic activity. Looking further into the future, the target of a nonoil deficit of 4.7 percent of GDP implied by the government’s long-term fiscal framework remains an appropriate long-term fiscal anchor.

22. The authorities and staff agreed that fiscal consolidation could only be achieved through a reinvigoration of long-stalled public-sector reforms. However, such reforms had been idle for several years and the authorities acknowledged that there was little momentum for restarting them at this stage. Nonetheless, they were hopeful that progress could be made following the elections in 2012. In this regard, they indicated that a gradual increase in the retirement age and a rationalization of social protection benefits through more rigorous means-testing were being contemplated. The authorities are also considering revenue measures. In particular, they saw scope to: (i) further raise excise taxes and the extraction tax on gas; (ii) introduce market-based valuation for property tax; and (iii) streamline tax-breaks and privileges. Staff expressed concern that delayed implementation of reforms would make it impossible to withdraw the stimulus in a timely manner, noting that the associated macroeconomic risks would increase as cyclical conditions improved. It agreed that an increase in the retirement age was needed to strengthen the viability of the pension system, and indicated that cross-country comparisons suggest that significant savings can be achieved in health and social protection without compromising the quality of service delivery. Staff welcomed the revenue measures under consideration, but noted that most of the adjustment would need to take place on the expenditure side, through reforms and reductions in discretionary spending.

23. Staff and the authorities also concurred on the need to strengthen the fiscal policy framework.

  • Staff underscored that the policy of taxing and saving much of the oil wealth through the Reserve and National Welfare Funds had served Russia well, and created room for a large countercyclical response to the crisis and recession. Preserving this policy would be key to macroeconomic stability.
  • The mission urged the authorities to avoid the use of supplementary budgets. Such budgets have been passed in every year since the 1998 crisis, reflecting persistent spending pressures. Since 2004, with the exception of the recent crisis, the changes implied by the supplementary budgets have invariably increased the procyclicality of fiscal policy.
  • Staff encouraged the authorities to refocus fiscal policy on the nonoil deficit. Use of the nonoil deficit provides an anchor for fiscal policy, given the volatility of commodity prices. Moreover, to ensure an effective countercyclical fiscal response, focusing fiscal policy firmly on the nonoil deficit would help to ensure that spending does not rise and fall with commodity prices. In this regard, staff expressed concern about the use of less conservative oil prices in the 2011–13 medium-term budget.
  • Ministry of Finance officials agreed that the supplementary budgets reflected underlying pressures to spend more of the oil wealth. Nonetheless, while acknowledging that such budgets had increased the procyclicality of fiscal policy, they noted that the Ministry of Finance had had some success in limiting spending pressures. Still, they concurred that it would be preferable to strengthen the fiscal policy framework by avoiding the use of supplementary budgets and focusing on the nonoil deficit. In the area of fiscal risk management, the authorities explained that they intend to develop a methodology for assessing the sustainability of borrowing by quasi-sovereign enterprises, reducing borrowing costs, and introducing limits on the size and profile of external borrowing.

B. Monetary Policy: Focusing on Inflation

The CBR’s policy of allowing greater exchange rate flexibility is a welcome step toward focusing monetary policy more firmly on inflation control. However, the authorities’ commitment to this policy remains to be tested.

24. The authorities and staff agreed that the monetary easing cycle should now be paused. At its June meeting, the CBR kept policy interest rates unchanged. Staff concurred and suggested that the next move should likely involve initiating a tightening cycle. The authorities felt that, as yet, such a move was premature, and expressed concern about the possible impact of higher interest rates on capital inflows. However, they pointed out that monetary conditions were indeed being tightened—given the gradual unwinding of crisis support to the banking system—and that the CBR stood ready to raise reserve requirements, if necessary, in the event of a resurgence of inflation pressures. In this context, staff urged the authorities to aim for a further reduction in inflation from current levels. Finally, the CBR agreed that the continued monetization of the fiscal deficit would pose additional challenges to monetary policy, but considered these to be manageable. In this regard, CBR officials highlighted their recent success in sterilizing excess liquidity through the issuance of central bank bonds (OBRs).

25. Staff reiterated its recommendation that monetary policy be focused on inflation control, in the context of a flexible exchange rate. The mission welcomed the CBR’s more flexible exchange rate policy, and stressed that low inflation would be critical in expanding the availability of long-term ruble financing and reducing dependence on foreign funding. However, with weak cyclical conditions and low capital inflows, the CBR’s commitment to a flexible exchange rate policy still remained to be tested. In this regard, staff felt that the authorities’ monetary policy framework was unclear. It expressed concern that—should pressures on the ruble intensify—the authorities might once again resort to a policy of resisting nominal appreciation, leading to rapid growth of money and credit. These concerns were heightened by the lack of a clearly articulated inflation objective. Indeed, CBR officials conceded that exchange-rate considerations might again be given priority if tensions arose between the objectives of achieving low inflation and limiting appreciation. They felt that—given Russia’s dependence on global commodity prices—the economy was not yet ready to cope with the exchange rate volatility implied by a completely free float.

26. The mission supported the authorities’ technical preparations for an eventual move to formal inflation targeting. Recent enhancements in the CBR’s public communications were playing a key role in preparing the public for such a move. These included regular, preannounced monetary-policy meetings and the issuance of press releases describing the rationale for policy rate decisions. The CBR noted that they were steadily putting in place other key technical prerequisites for a successful transition to inflation targeting. However, in line with the view that the economy was not yet prepared for a flexible exchange rate policy, they did not foresee the adoption of formal inflation targeting in the near future.

27. The authorities and staff agreed that the more flexible exchange-rate regime, alongside cuts in policy interest rates, had helped deter speculative capital inflows. They concurred that a return of capital inflows to pre-crisis levels was unlikely. However, should persistent, large-scale inflows resume, the authorities noted that they might consider the reintroduction of differentiated reserve requirements—by residence and currency—to prevent the accumulation of vulnerabilities in the banking system. They were also taking steps to reduce tax incentives for foreign borrowing, and were discussing ways in which the borrowing plans of state-owned enterprises might be more closely aligned with the authorities’ macroeconomic stabilization goals. Staff agreed that there were circumstances—such as a period of surging inflows caused by persistent and large oil prices increases—where such measures, including capital controls, could be useful, but cautioned that they were likely to lose effectiveness over time and could have undesirable multilateral effects. It noted that exchange-rate flexibility should serve as a first line of defense against a renewed increase in capital inflows, alongside strengthened prudential regulations and supervision aimed at curtailing excessive credit growth (Annex). Both staff and the authorities agreed that reserves were adequate.

C. Restoring the Health of the Banking System

Restoring the banking system to health is critical to ensuring a sustained recovery in credit expansion. This will require decisive action to improve provisioning standards and enhance the CBR’s supervisory powers.

28. Despite improvements in recent years, weaknesses in the regulatory and supervisory framework remain. Generous accounting and provisioning rules, and the lack of comprehensive consolidated supervisory powers, continue to make it difficult to gauge the extent of systemic risks, the severity of the deterioration of the loan portfolio, and the adequacy of capital. In particular, given the sizeable pool of nonperforming and restructured loans, some banks may not have sufficient provisions to deal with unexpected shocks. Indeed, the stock of bad assets is likely to weigh on profitability going forward, making banks vulnerable to an increase in interest rates or a deterioration in economic conditions.

29. Staff urged the authorities to improve provisioning standards. In the mission’s view, strengthening the loan classification and provisioning system is essential to gaining a full understanding of banks’ capital adequacy. In particular, loan risk assessment should be improved and provisioning should be made more forward-looking by taking into account likely future loan losses. Doing so may reduce reported capital adequacy—and in this event, undercapitalized financial institutions should be recapitalized, restructured, merged, or closed. To the extent that better provisioning leads to healthier loan portfolios over time, the risk that increases in interest rates would damage bank earnings and balance sheets will be reduced. While noting the mission’s concerns, the authorities stressed that the situation in the banking system had stabilized—the accumulation of overdue loans had slowed; bank provisions had increased dramatically; and capital adequacy levels were high. Looking forward, therefore, although a few banks might run into problems, the vast majority would be able to handle shocks without much difficulty.

30. Staff welcomed the authorities’ decision to unwind regulatory forbearance. The mission noted, however, that grandfathered loans would require close monitoring and an eventual return to stricter standards. The authorities concurred, but emphasized the importance of avoiding abrupt changes to provisioning or classification requirements. In this regard, they pointed out that most grandfathered loans had a relatively limited maturity, and so would naturally cease to benefit from forbearance in the near future.

31. The authorities and staff agreed that the CBR should be afforded greater supervisory powers. They concurred that priority should be given to enhancing the CBR’s authority to conduct consolidated supervision—including over connected lending. Strengthening regulations on connected lending would be critical to compel appropriate disclosure, ensure that suitable (market) terms are applied to such loans, and enable the imposition of sanctions. The authorities noted that relevant legislation had been drafted or was under preparation in these areas, and that they were proactively analyzing the extent of connected lending in the banking system.

D. Reinvigorating Structural Reforms

Improving the investment climate remains the overarching structural reform priority for Russia. Absent reform, and in an environment of moderate oil price increases, potential growth is likely to be low.

32. Russia’s economy remains heavily dependent on primary commodities. Structural reforms have stalled in recent years, although there are increasing calls to modernize the economy and reduce its dependence on oil. Russia’s nontradable sector is vulnerable to overheating, given its low capacity, while the tradable sector has stagnated in recent years. The crisis has further increased the dominance of the state in Russia’s economy, and reducing inefficient and weak enterprises’ dependence on state support, accompanied by significant restructuring, will be a central, yet difficult, challenge in the years ahead.

33. Staff raised concerns that potential growth could remain low absent structural reforms. Russia’s labor force is shrinking and its demographic trends are not auspicious. Moreover, the unfavorable investment climate—confirmed by Russia’s low ranking on international comparisons in this area—suggests that investment is likely to remain more subdued than in the pre-crisis years. Finally, the scope for further catch-up gains in productivity will inevitably decline over time. These factors point to the need for deep restructuring of the economy, which can only begin once the investment climate is significantly improved.

34. In this context, staff stressed that the key structural reform priority is to improve the investment climate. Civil service and public administration reforms are needed to curtail the pervasive influence of government on economic decision making. Other reforms would help assure investors that property rights will be protected and that the playing field for investing is level. Moreover, moving ahead with the recently announced privatization program would be a useful step toward rolling back the increased state dominance of the past few years. Finally, WTO accession—alongside a reversal of crisis related emergency trade measures—holds the promise of making the investment environment more predictable and rules-based, while reducing dependence on primary commodity sectors.

IV. Staff Appraisal

35. The stabilization fund mechanism allowed a forceful response to the crisis. The pre-crisis policy of taxing and saving much of the oil windfall and the attendant large increase in reserves left significant scope for a vigorous response. Policy-makers took full advantage of the room for maneuver by providing a dramatic countercyclical fiscal stimulus, supported by monetary accommodation as the fiscal deficit was monetized. Moreover, they helped the private sector cover large unhedged foreign exchange exposures by providing massive liquidity injections and easing lending criteria, and above all by allowing a substantial reserve loss, before undertaking a large step-devaluation well into the crisis. This almost certainly averted severe distress in the banking system. Undoubtedly, the crisis has shown that the stabilization fund mechanism is serving Russia very well.

36. Looking forward, the main challenge is fiscal consolidation. With cyclical conditions set to gradually normalize, and with lower potential growth, the authorities should plan on fully withdrawing the large fiscal stimulus in the coming years. Given the scale of this stimulus—some 9 percent of GDP—striking an appropriate balance between short-term cyclical considerations and medium-term consolidation suggests that the withdrawal should have begun already in 2010. The further increase in the federal government’s nonoil balance implied by the supplementary budget is, therefore, regrettable, and another supplement in the fall should be avoided. More worrisome, with most of the stimulus having taken the form of permanent measures—not least higher pensions—advancing long-stalled public sector reforms is now becoming critical to preventing renewed overheating and excessive real appreciation as private demand recovers. The continued lack of support for such reforms and the prospect of only limited, if any, progress before the 2011-12 elections pose major and increasing risks to macroeconomic stability going forward.

37. The fiscal framework needs to be strengthened. Supplementary budgets have been adopted every year since the 1998 crisis—in some years there have been several such budgets. With the exceptions of the recent crisis, the change implied by the supplementary budgets have, since 2004, invariably run counter to what would have been required from a cyclical perspective. Thus, to ensure an effective countercyclical fiscal stance and anchor fiscal policy over the medium term, the authorities should eschew the use of supplementary budgets, and firmly focus annual and medium-term budgets on the nonoil deficit.

38. Monetary policy should give priority to controlling inflation, not the exchange rate. The monetary easing cycle has appropriately been put on hold, and the next move should likely involve initiating a tightening cycle. The increased flexibility of the exchange rate during the past year is much welcome. However, the commitment to a flexible exchange rate policy remains to be tested in an environment that involves a sharper trade-off between inflation and the nominal exchange rate objectives. The mission’s discussions suggest that the CBR is still not ready to commit fully to giving priority to inflation control. Risks in this regard would increase significantly going forward absent decisive action to reduce public expenditures.

39. Strengthening banking supervision is critical. Much progress has been achieved already, but loan risk assessment should be strengthened further and provisioning should be made more forward-looking. Moreover, the CBR should be afforded greater supervisory powers, particularly with respect to consolidated supervision and connected lending, which remains a potentially serious threat. Given the significant stock of international reserves, the authorities are well-positioned to continue to handle emerging threats to financial stability. Staff’s main concern is that failure to decisively deal with the overhang of nonperforming and restructured loans will deter economic growth by hampering banks’ ability to expand credit on a sustained basis and by directing available resources to struggling clients, away from dynamic enterprises seeking to boost investment.

40. A key priority remains reinvigorating structural reforms. With a shrinking labor force, adverse demographic trends, an unfavorable investment climate, and inevitably declining scope for further catch-up gains in productivity, post-crisis potential output growth is likely to be lower than pre-crisis levels. This points to the need for rapid and decisive action to advance structural reforms, with a focus on improving the investment climate and boosting the potential for productivity gains. Progress toward WTO accession is therefore welcome, as it, coupled with a reversal of emergency trade restrictions imposed during the crisis, would help to make the investment environment more predictable and rules-based.

41. The overarching challenge facing Russia is to ensure that consumption of its immense oil wealth does not get ahead of the expansion of its still-limited productive capacity outside the primary commodity sectors. Russia’s record in this regard prior to the recent crisis was somewhat disappointing as the steady increase in the nonoil deficit in the face of buoyant private demand, combined with stalled structural reforms, caused rapid real appreciation and attendant signs of “Dutch Disease.” Encouragingly, the sharp contraction in output as a result of the crisis, and the prospect—absent another prolonged period of rapidly growing oil prices—of Russia’s emerging from the crisis with lower potential growth, are fuelling calls for change. Preventing an overvalued exchange rate by taxing and saving oil revenues, while moving decisively to strengthen the investment climate, remain key to modernization and diversification of the Russian economy.

Table 1.Russian Federation: Selected Macroeconomic Indicators, 2007–11
20072008200920102011
EstimateProjections
(Annual percent change)
Production and prices
Real GDP8.15.6-7.94.34.1
Consumer prices
Period average9.014.111.76.25.7
End of period11.913.38.86.05.4
GDP deflator14.418.02.38.96.6
Unemployment rate6.16.48.47.87.5
(Percent of GDP)
Public sector
General government
Overall balance6.84.3-6.2-5.6-3.1
Revenue39.838.634.434.135.0
Expenditures33.134.340.639.838.0
Primary balance7.34.8-5.6-4.9-2.2
Nonoil balance-3.9-8.3-15.0-14.6-11.5
Nonoil balance excl. one-off receipts 1/-6.2-8.3-15.4-14.6-11.5
Federal government
Overall balance6.13.5-5.9-5.9-3.4
Nonoil balance-3.0-7.6-13.7-13.9-10.9
Nonoil balance excl. one-off receipts 1/-5.3-7.6-14.1-13.9-10.9
(Annual percent change)
Money
Base money33.12.97.419.117.1
Ruble broad money47.51.716.326.918.6
Credit to the economy48.537.81.611.312.4
External sector
Export volumes4.4-2.6-7.98.34.9
Oil5.4-2.63.01.81.6
Gas-5.41.8-13.812.0-0.9
Non-energy6.7-4.4-18.516.411.0
Import volumes25.111.1-30.017.414.2
(Billions of U.S. dollars; unless otherwise indicated)
External sector
Total merchandise exports, f.o.b354.4471.6303.4380.6408.9
Total merchandise imports, f.o.b-223.5-291.9-191.8-238.0-271.9
External current account77.0103.749.066.960.5
External current account (percent of GDP)5.96.24.04.53.6
Gross international reserves
Billions of U.S. dollars478.8427.1439.0478.4516.6
Months of imports 2/20.314.020.818.317.4
Percent of short-term debt221289298400375
Memorandum items:
Nominal GDP (billions of rubles)33,25841,44539,06444,36049,190
Nominal GDP (billions of U.S. dollars)1,3051,6711,2401,4881,690
Exchange rate (rubles per U.S. dollar, period average)25.624.931.7
World oil price (U.S. dollars per barrel, WEO)71.197.061.875.377.5
Urals crude oil spot price (U.S. dollars per barrel)69.394.461.273.175.3
Real effective exchange rate (average percent change)5.66.6-6.6
Sources: Russian authorities; and IMF staff estimates.

Excludes one-off tax receipts from Yukos in 2007 and one-off transfers from Nanotechnology and Housing Funds in 2009.

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

Sources: Russian authorities; and IMF staff estimates.

Excludes one-off tax receipts from Yukos in 2007 and one-off transfers from Nanotechnology and Housing Funds in 2009.

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

Table 2.Russian Federation: Balance of Payments, 2007-11(Billions of U.S. dollars, unless otherwise indicated)
20072008200920102011
EstimateProjections
Current Account77.0103.749.066.960.5
Trade Balance130.9179.7111.6142.6137.0
Exports354.4471.6303.4380.6408.9
Non-energy135.8161.5112.7149.6167.9
Energy218.6310.1190.7231.0241.0
Oil173.7241.0148.7186.7195.7
Gas44.869.142.044.245.3
Imports-223.5-291.9-191.8-238.0-271.9
Services-19.6-24.3-19.9-23.8-28.8
Income-30.8-48.9-40.2-47.7-36.6
Public sector interest (net)16.117.46.35.37.9
Other sectors-46.8-66.3-46.6-53.0-44.5
Current transfers-3.5-2.8-2.5-3.9-4.2
Capital and financial account85.7-131.0-43.6-27.6-22.3
Capital transfers-10.20.7-11.4-11.4-11.4
Financial accounts
Federal government0.2-9.124.83.12.9
Portfolio investment-3.9-6.53.84.74.3
Loans-5.2-2.3-3.4-1.7-1.4
Other investment9.3-0.324.40.00.0
Local governments-0.1-0.10.4-0.1-0.1
Private sector capital95.9-122.6-57.5-19.1-13.7
Direct investment9.219.4-7.30.07.5
Portfolio investment10.9-28.6-7.0-3.60.0
Other investment, commercial banks29.4-55.3-29.05.05.2
Assets-19.9-57.721.85.05.2
Liabilities (loans, deposits, etc.)49.32.4-50.80.00.0
Loans, corporations90.348.81.60.00.0
Disbursements171.5170.881.889.466.6
Amortizations-81.2-122.0-80.2-89.4-66.6
Other private sector capital flows-43.8-106.9-15.8-20.6-26.5
Errors and omissions, net-13.9-11.6-1.50.00.0
Overall balance148.9-38.93.939.338.2
Financing-148.938.9-3.9-39.3-38.2
Net international reserves-148.938.9-3.4-39.3-38.2
Arrears and rescheduling0.0-0.1-0.60.00.0
Memorandum items:
Current account (percent of GDP)5.96.24.04.53.6
Non-energy current account (percent of GDP)-10.8-12.4-11.4-11.0-10.7
Gross reserves 1/478.8427.1439.0478.4516.6
(in months of imports of GNFS)20.314.020.818.317.4
(percent of short-term debt) 2/221.5289.2297.8399.8374.8
Net private capital flows (percent of exports of GNFS)24.4-23.4-16.6-4.4-3.0
Net private capital flows, banks45.8-56.9-36.72.42.7
Public external debt service payments 3/10.58.46.05.35.9
(percent of exports of goods and services)2.71.61.71.21.3
Public external debt 4/46.432.845.948.951.7
(percent of GDP)3.62.03.73.33.1
Private external debt424.7447.7425.7425.7431.2
(percent of GDP)32.726.834.628.625.5
Total external debt471.0480.5471.6474.6482.9
(percent of GDP)36.228.838.331.928.6
World oil price (U.S. dollars per barrel, WEO)71.197.061.875.377.5
Urals oil price (U.S. dollars per barrel)69.394.461.273.175.3
Sources: Central Bank of Russia; and IMF staff estimates.

Excluding repos with non-residents to avoid double counting of reserves. Including valuation effects.

Excludes arrears.

Net of rescheduling.

Includes indebtness of repos by the monetary authorities.

Sources: Central Bank of Russia; and IMF staff estimates.

Excluding repos with non-residents to avoid double counting of reserves. Including valuation effects.

Excludes arrears.

Net of rescheduling.

Includes indebtness of repos by the monetary authorities.

Table 3.Russian Federation: Fiscal Operations, 2007–11(Percent of GDP)
2007200820092010 1/2011
Projeictions
General government
Total revenue; of which:39.838.634.434.135.0
Oil revenue10.612.68.88.98.4
Non-oil revenue29.226.125.525.226.6
Corporate profit tax6.56.13.23.63.4
Personal income tax3.84.04.34.34.3
VAT6.85.15.25.15.2
Excises0.90.80.91.11.1
Custom tariffs7.28.66.97.06.8
Resource extraction tax4.04.53.03.02.8
Social security taxes5.65.15.45.66.9
Other revenue5.04.35.44.54.5
Total expenditure33.134.340.639.838.0
Interest0.60.50.60.80.9
Non-interest32.533.840.039.037.2
Primary balance7.34.8-5.6-4.9-2.2
Overall balance6.84.3-6.2-5.6-3.1
Non-oil primary balance-3.3-7.8-14.4-13.8-10.6
Non-oil overall balance-3.9-8.3-15.0-14.6-11.5
Non-oil balance excl. one-off receipts 2/-6.2-8.3-15.4-14.6-11.5
Federal government
Total revenue; of which:23.422.418.817.116.8
Oil revenue9.211.17.88.07.6
Nonoil revenue14.211.311.09.29.2
VAT6.85.15.25.15.2
Excises0.40.40.30.30.3
Corporate profit tax1.91.80.50.40.3
Custom tariffs7.28.66.97.06.8
Other revenue7.06.45.94.34.2
Total expenditure17.318.824.723.120.1
Interest0.40.40.50.60.7
Non-interest16.818.524.222.419.4
Primary balance6.63.9-5.4-5.3-2.7
Overall balance6.13.5-5.9-5.9-3.4
Non-oil primary balance-2.6-7.2-13.2-13.3-10.2
Non-oil overall balance-3.0-7.6-13.7-13.9-10.9
Non-oil balance excl. one-off receipts 2/-5.3-7.6-14.1-13.9-10.9
Financing-6.1-3.55.95.93.4
Net external-0.6-0.4-0.30.20.0
Net domestic-5.5-3.26.25.83.4
of which:
Monetary authorities-5.2-3.45.13.92.0
Other0.00.21.11.81.3
Memorandum items:
World oil price (U.S.dollars per barrel)71.197.061.875.377.5
Urals prices (U.S. dollars per barrel)69.394.461.273.175.3
Russian fob oil price balancing the budget:
General government26.052.094.5110.697.2
Federal government23.049.091.5107.694.2
Oil fund(s)11.616.011.86.53.8
Reserve Fund11.69.74.70.60.0
NWF0.06.27.15.93.8
General government debt8.57.810.911.311.2
GDP (billions of rubles)3325841445390644436049190
Sources: Russian authorities; and IMF staff estimates.

Based on the staff’s revenue projections and nominal expenditures in the 2010 budget, inclduing the June supplementary budget.

Excludes a one-off receipt of tax arrears from Yukos in 2007 and one-off transfers from Nanotechnology and Housing Funds in 2009.

Sources: Russian authorities; and IMF staff estimates.

Based on the staff’s revenue projections and nominal expenditures in the 2010 budget, inclduing the June supplementary budget.

Excludes a one-off receipt of tax arrears from Yukos in 2007 and one-off transfers from Nanotechnology and Housing Funds in 2009.

Table 4.Russian Federation: Monetary Accounts, 2007–11(Billions of rubles, unless otherwise indicated)
20072008200920102011
DecDecMarJuneSeptDecMarApr.DecDec
Proj.Proj.
Monetary authorities
Base money4,2694,3923,6743,9413,9554,7164,5174,7615,6196,579
Currency issued4,1194,3723,6583,9083,8694,6234,4114,6445,4896,424
Required reserves on ruble deposits1512016338593105117130155
NIR 1/11,69411,19910,37611,28311,27512,74313,51614,03414,07215,335
Gross reserves11,69412,22511,47011,88611,68813,18213,81614,31514,51215,775
Gross liabilities0951,094437464440301281440440
GIR (billions of U.S. dollars)476416390405398436457473480522
NDA-7,425-6,808-6,702-7,343-7,320-8,027-8,999-9,273-8,453-8,756
Net credit to enlarged government-5,613-7,152-7,265-6,039-5,872-5,515-5,492-5,543-3,777-2,776
Net credit to federal government 2/-5,085-6,343-6,175-5,151-4,744-4,614-4,297-4,221-2,876-1,874
CBR net ruble credit to the federal government-1,027-615-795-833-996-595-458-607-369-313
Foreign exchange credit118168168184152147142142147147
Ruble counterpart 2/-4,176-5,897-5,548-4,502-3,899-4,166-3,981-3,757-2,654-1,708
CBR net credit to local government and EBFs-528-809-1,090-888-1,128-902-1,194-1,322-902-902
CBR net credit to local government-324-397-576-544-675-385-614-743-385-385
CBR net credit to extrabudgetary funds-204-412-514-344-453-517-580-579-517-517
Net credit to banks-1,1242,5152,8941,1841,025-53-877-1,097-2,168-3,430
Gross credit to banks493,6923,5012,1811,8051,6409028615000
Gross liabilities to banks and deposits-1,173-1,177-606-996-780-1,693-1,779-1,958-2,668-3,430
Of which: correspondent account balances-802-1,028-431-470-545-900-579-554-792-864
Other items (net) 3/-688-2,170-2,332-2,488-2,473-2,458-2,631-2,633-2,507-2,550
Monetary survey
Broad money14,63816,77515,73716,81817,43219,52119,67620,13524,48229,069
Ruble broad money13,27213,49312,11213,16113,65015,69815,99716,43519,91423,622
Currency in circulation3,7023,7953,2783,5233,4864,0383,9864,1815,0435,892
Ruble deposits9,5709,6988,8339,63910,16411,66012,01012,25414,87117,730
Forex deposits 1/1,3663,2813,6253,6573,7833,8233,6803,7004,5685,447
Net foreign assets 1/9,91910,71710,17411,42712,36413,70114,37414,78014,95816,139
NIR of monetary authorities11,69411,19910,37611,28311,27512,74313,51614,03414,07215,335
NFA of commercial banks-1,774-482-2031431,089959858746886804
NFA of commercial banks (billions of U.S. dollars)-72-16-75373228252927
NDA4,7196,0575,5635,3915,0695,8195,3035,3559,52412,930
Domestic credit7,91711,43810,74111,65612,27213,27113,19413,33717,74521,748
Net credit to general government-5,055-6,436-7,024-6,157-5,822-4,897-4,984-5,153-2,476-972
Credit to the economy12,97317,87417,76417,81318,09418,16818,17818,48920,22122,720
Other items (net)-3,199-5,380-5,177-6,265-7,203-7,452-7,892-7,982-8,221-8,818
Memorandum items:
Accounting exchange rate (ruble per U.S. dollar, eop)24.529.429.429.429.430.230.230.230.230.2
Nominal GDP (billions of rubles)32,98741,78939,06444,36049,190
CPI inflation (12-month change, eop)11.913.314.011.910.78.86.56.06.05.4
Ruble broad money velocity2.93.32.82.83.12.82.42.62.52.3
Ruble broad money velocity (s.a.)3.03.33.13.02.92.82.62.52.52.3
Annual change in velocity-11.412.34.2-2.1-4.5-15.3-14.9-10.2-10.5-6.5
Real ruble broad money (rel. to CPI, 12-month change31.8-10.3-20.6-17.4-14.26.924.626.419.712.5
Nominal ruble broad money (12-month change)47.51.7-9.5-7.6-5.016.332.133.226.918.6
Base money (12-month change)33.12.9-8.6-8.8-9.87.422.924.619.117.1
Real credit to the economy (12-month change)33.421.69.41.1-2.4-6.6-3.5-1.75.06.6
Ruble broad money multiplier3.13.13.33.33.53.33.53.53.53.6
Sources: Russian authorities; and IMF staff estimates.

Data calculated at accounting exchange rates.

Represents the government’s use of NIR resources and calculated in flow ruble terms.

Inclusive of valuation gains and losses on holdings of government securities.

Sources: Russian authorities; and IMF staff estimates.

Data calculated at accounting exchange rates.

Represents the government’s use of NIR resources and calculated in flow ruble terms.

Inclusive of valuation gains and losses on holdings of government securities.

Table 5.Russian Federation: Medium-Term Framework and Balance of Payments, 2008-15(Percent of GDP, unless otherwise noted)
20082009201020112012201320142015
Projections
Macroeconomic framework
GDP growth at constant prices (percent)5.6-7.94.34.14.34.54.75.0
Consumer prices (y-o-y, end of period)13.38.86.05.45.05.05.05.0
Gross domestic investment25.418.821.022.023.024.225.426.5
Gross national savings31.622.725.525.625.726.326.426.4
External current account balance6.24.04.53.62.62.11.0-0.2
Fiscal Operations
Federal government
Overall balance3.5-5.9-5.9-3.4-2.4-1.3-0.30.8
Nonoil balance-7.6-13.7-13.9-10.9-9.5-7.9-6.3-4.7
General government
Overall balance4.3-6.2-5.6-3.1-2.1-1.00.01.1
Revenues38.634.434.135.034.634.033.432.9
Expenditures34.340.639.838.036.835.033.431.8
Nonoil balance-8.3-15.0-14.6-11.5-10.1-8.3-6.6-4.9
Primary balance4.8-5.6-4.9-2.2-1.20.00.92.0
Gross debt7.810.911.311.211.010.610.29.9
(Billions of U.S. dollars)
Balance of payments
Current account103.749.066.960.550.145.924.9-4.2
Trade balance179.7111.6142.6137.0128.4111.991.767.3
Exports (f.o.b)471.6303.4380.6408.9437.3462.9490.0517.8
Of which: energy310.1190.7231.0241.0254.3262.5270.0279.7
Imports (f.o.b)-291.9-191.8-238.0-271.9-308.9-351.0-398.3-450.6
Services and transfers, net-27.1-22.4-27.7-32.9-38.6-45.6-53.5-63.9
Capital and financial account-131.0-43.6-27.6-22.3-10.7-2.815.434.5
Capital account0.7-11.4-11.4-11.4-11.4-11.4-11.4-11.4
Financial account-131.7-32.2-16.2-10.90.78.626.845.9
Private sector capital-122.6-57.5-19.1-13.7-3.69.828.047.1
Errors and omissions-11.6-1.50.00.00.00.00.00.0
Overall balance-38.93.939.338.239.443.140.330.3
Memorandum items:
Gross reserves (end of period)
Billions of U.S. dollars427.1439.0478.4516.6556.0599.1639.4669.7
Percent of short-term debt (residual maturity)289.2297.8399.8374.8394.5411.1415.8404.7
Months of prospective GNFS imports14.020.818.317.416.515.714.813.7
Trade balance (percent of GDP)10.89.09.68.16.75.23.72.4
Terms of trade (y-o-y change, percent)16.2-25.69.62.42.50.70.30.3
Excluding fuel5.7-10.07.91.1-0.6-0.9-1.0-2.1
Export volume, goods (y-o-y change, percent)-2.6-7.98.34.94.74.85.15.2
Import volume, goods (y-o-y change, percent)11.1-30.017.414.213.913.212.912.9
Sources: Russian authorities; and IMF staff estimates.
Table 6.Russian Federation: Low Growth Scenario Under Unchanged Policies, 2008-15(Percent of GDP, unless otherwise noted)
20082009201020112012201320142015
Projections
Macroeconomic framework
GDP growth at constant prices (percent)5.6-7.94.34.04.23.73.33.3
Consumer prices (y-o-y, end of period)13.38.86.06.48.09.010.59.5
Gross domestic investment25.418.820.921.021.121.421.621.9
Gross national savings31.622.725.424.323.122.521.420.3
External current account balance6.24.04.53.42.01.2-0.3-1.6
Fiscal Operations
Federal government
Overall balance3.5-5.9-5.9-6.4-6.9-7.6-8.3-8.9
Nonoil balance-7.6-13.7-13.9-13.9-13.9-13.9-13.9-13.9
General government
Overall balance4.3-6.2-5.6-6.1-6.7-7.3-8.1-8.7
Revenues38.634.434.135.034.533.733.032.3
Expenditures34.340.639.841.141.241.041.041.0
Nonoil balance-8.3-15.0-14.6-14.5-14.4-14.2-14.1-14.0
Primary balance4.8-5.6-4.9-5.2-5.8-6.4-7.1-7.8
Gross debt7.810.911.311.216.021.527.032.2
(Billions of U.S. dollars)
Balance of payments
Current account103.749.066.857.340.126.5-7.2-50.6
Trade balance179.7111.6142.5134.6121.298.369.634.8
Exports (f.o.b)471.6303.4380.6408.9438.0463.9490.4516.6
Of which: energy310.1190.7231.0241.0254.3262.5270.1279.8
Imports (f.o.b)-291.9-191.8-238.1-274.3-316.8-365.6-420.8-481.9
Services and transfers, net-27.1-22.4-27.7-33.8-41.3-50.6-61.6-73.8
Capital and financial account-131.0-43.6-23.5-22.5-11.2-5.412.631.4
Capital account0.7-11.4-11.4-11.4-11.4-11.4-11.4-11.4
Financial account-131.7-32.2-12.1-11.10.26.024.042.8
Private sector capital-122.6-57.5-19.1-16.2-6.07.225.244.0
Errors and omissions-11.6-1.50.00.00.00.00.00.0
Overall balance-38.93.943.334.928.921.05.4-19.2
Memorandum items:
Gross reserves (end of period)
Billions of U.S. dollars427.1439.0482.4517.2546.1567.1572.5553.4
Percent of short-term debt (residual maturity)289.2297.8403.1375.2387.5389.2372.4334.5
Months of prospective GNFS imports14.020.818.517.215.814.312.610.6
Trade balance (percent of GDP)10.89.09.67.96.24.32.61.1
Terms of trade (y-o-y change, percent)16.2-25.69.62.42.50.60.30.3
Excluding fuel5.7-10.07.91.1-0.6-0.9-1.0-2.1
Export volume, goods (y-o-y change, percent)-2.6-7.98.34.94.84.94.94.8
Import volume, goods (y-o-y change, percent)11.1-30.017.415.215.915.014.614.3
Sources: Russian authorities; and IMF staff estimates.
Table 7.Russian Federation: Financial Soundness Indicators, 2002-10 1/(Percent)
200220032004200520062007200820092010 2/
Capital
Regulatory capital to risk-weighted assets19.119.117.016.014.915.516.820.920.5
Regulatory capital to risk-weighted assets (Top 30)19.716.815.915.1
Asset quality
Nonperforming loans to total gross loans5.65.03.32.62.42.53.89.69.6
Sectoral exposures
Sectoral distribution of loans to total loans
Industry36.733.328.022.120.518.319.622.022.2
Manufacturing16.314.613.514.415.716.0
Extraction3.53.93.13.33.93.8
Utilities2.32.01.71.92.42.4
Agriculture2.22.42.73.03.63.84.24.95.1
Construction4.44.44.54.64.96.06.16.26.5
Trade and restaurants21.620.618.823.919.618.017.418.418.0
Transport and communication4.65.14.84.03.73.74.33.43.5
Others22.422.724.922.821.323.323.321.921.7
Individuals8.011.516.219.623.924.825.123.022.9
Including house mortgages0.51.03.05.16.66.56.6
Geographical distribution of interbank loans and deposits
Russia41.154.254.047.435.940.027.129.532.0
U.K.23.49.06.613.021.523.329.121.721.1
U.S.6.28.26.79.07.74.17.14.12.9
Germany5.92.47.29.57.96.87.54.75.5
Austria5.76.86.15.27.06.15.78.29.4
France1.51.63.13.03.83.54.05.73.9
Italy1.61.01.81.21.21.71.51.82.1
Others14.516.814.511.715.014.418.024.223.1
Profitability
Return on assets2.62.62.93.23.33.01.80.70.9
Return on equity18.017.820.324.226.322.713.34.96.0
Liquidity
Liquid assets to total assets39.136.130.427.426.824.825.928.029.2
Liquid assets to short-term liabilities90.690.478.073.776.872.992.1102.4109.9
Market risk
Net open position in foreign exchange to capital18.58.45.85.85.33.63.43.53.4
Other FSIs
Loan loss reserves to total gross loans6.35.94.94.64.13.64.59.19.5
Interest rate risk to capital6.99.913.313.319.324.316.437.542.2
Net open position in equities to capital11.712.412.614.420.410.83.48.78.5
Individual deposits to total liabilities24.827.227.928.527.325.621.125.426.6
Assets to GDP38.342.141.744.851.960.867.375.4
Regulatory capital to assets14.014.613.312.812.113.313.615.715.7
Source: Central Bank of Russia

Credit and depository institutions

As of March, 2010

Source: Central Bank of Russia

Credit and depository institutions

As of March, 2010

Table 8.Russian Federation: Indicators of External Vulnerability, 2005–09(Percent of GDP, unless otherwise indicated)
20052006200720082009
Financial indicators
Public sector debt 1/14.29.18.57.810.9
Broad money (12-month basis, percent change)38.648.847.51.716.3
Private sector credit (12-month basis, percent change)34.248.548.537.81.6
InterBank Prime Rate (3-month average, percent)4.85.15.99.714.1
InterBank Prime Rate (3-month average, percent, real)-7.9-4.6-3.2-4.42.4
External Indicators
Exports (percent change, U.S. dollars)33.124.516.833.1-35.7
Imports (percent change, U.S. dollars)28.831.036.030.6-34.3
Terms of trade (percent change, 12 month basis)16.711.42.816.2-25.4
Current account balance (billions of U.S. dollars)84.494.377.0103.749.0
Capital and financial account balance (billions of U.S. dollars)-12.54.685.7-131.0-43.6
Inward portfolio investment (debt securities etc.)-0.89.516.9-27.48.2
Other investment (loans, trade credits etc.)1.1-5.079.1-104.3-40.4
Gross official reserves (billions of U.S. dollars)182.2303.7478.8427.1439.0
Short-term foreign assets of the financial sector (billions of U.S. dollars) 2/20.933.442.7
Short-term foreign liabilities of the financial sector (billions of U.S. dollars) 2/9.820.730.5
Foreign currency exposure of the financial sector (billions of U.S. dollars) 2/1.9-12.1-18.9
Official reserves (in months of imports goods and services)13.317.420.314.020.8
Ruble broad money to gross reserves1.21.11.11.31.1
Total short-term external debt to reserves81.471.230.818.718.6
Total external debt (billions of U.S. dollars)257.2313.2471.0480.5471.6
Of which: public sector debt (billions of U.S. dollars)82.148.646.432.845.9
Total external debt to exports of goods and services (percent)95.793.6119.691.9136.7
External interest payments to exports of goods and services4.64.85.55.06.4
External amortization payments to exports of goods and services21.723.222.824.524.4
Exchange rate (per U. S. dollar, period average)28.327.225.624.931.7
REER depreciation (-) (12-month basis)9.19.65.66.6-6.6
Financial Market Indicators
Stock market index 3/1125.61921.922290.51631.91444.61
Foreign currency debt rating 4/BBBBBB+BBB+BBBBBB
Spread of benchmark bonds (basis points, end of period) 5/11899157805203
Sources: Russian authorities; and IMF staff estimates.

Gross debt of the general government.

Series discontinued in 2008.

RTS index, end of period.

S&P long-term foreign currency debt rating, end of period.

JPMorgan EMBIG Russia Sovereign Spread.

Sources: Russian authorities; and IMF staff estimates.

Gross debt of the general government.

Series discontinued in 2008.

RTS index, end of period.

S&P long-term foreign currency debt rating, end of period.

JPMorgan EMBIG Russia Sovereign Spread.

Table 9.Russian Federation: Indicators of External Vulnerability, 2005–09(Percent of GDP, unless otherwise indicated)
ActualEst.ProjectionDebt-stabilizing
primary
200720082009201020112012201320142015balance
Baseline: public sector debt 1/8.57.810.911.311.211.010.610.29.9-0.1
Of which: foreign-currency denominated3.52.43.73.33.13.02.62.21.9
Change in public sector debt-0.5-0.73.00.4-0.1-0.2-0.4-0.4-0.3
Identified debt-creating flows-3.1-1.00.01.6-0.2-0.3-0.5-0.5-0.4
Primary deficit (excluding deposits in oil funds from revenue)-1.6-0.4-1.21.00.20.0-0.4-0.3-0.3
Revenue (excluding deposits in oil funds)34.134.341.238.037.035.934.432.831.2
Primary (noninterest) expenditure32.533.840.039.037.235.934.132.530.9
Automatic debt dynamics 2/-1.4-0.61.2-0.6-0.3-0.2-0.1-0.1-0.1
Contribution from interest rate/growth differential3/-1.2-1.21.1-0.5-0.3-0.2-0.1-0.1-0.1
Of which: contribution from real interest rate-0.6-0.80.4-0.10.20.30.40.40.4
Of which: contribution from real GDP growth-0.6-0.40.7-0.4-0.4-0.4-0.5-0.5-0.5
Contribution from exchange rate depreciation 4/-0.30.60.1-0.1-0.1-0.1-0.1-0.1-0.1
Other identified debt-creating flows0.00.00.01.30.00.00.00.00.0
Residual, including asset changes 5/2.50.43.1-1.20.10.10.10.10.1
Public sector debt-to-revenue ratio 1/24.922.926.529.830.330.730.831.131.6
Gross financing need 6/-6.1-3.77.06.03.42.41.30.3-0.9
Billions of U.S. dollars-79.1-61.686.610-Year10-Year89.256.946.827.66.6-23.9
Stress tests for public sector debt
Scenario with key variables at their historical averages 7/8.97.05.33.82.41.0-0.4
Scenario with no policy change (constant primary balance) in 2009-1510.28.87.56.35.13.4-0.2
Key macroeconomic and fiscal assumptions underlying baselineAverageDeviation
Real GDP growth (percent)8.15.6-7.95.44.94.34.14.34.54.75.0
Average nominal interest rate on public debt (percent) 8/7.87.57.36.21.08.18.48.79.39.79.8
Nominal appreciation (increase in U.S. dollar value of local currency, percent)7.3-16.5-3.111.6
Inflation rate (GDP deflator, percent)14.418.02.317.38.78.96.65.75.15.25.2
Growth of real primary spending (deflated by GDP deflator, percent)15.59.88.86.98.71.7-0.70.6-0.8-0.2-0.2
Primary deficit-1.6-0.4-1.2-3.42.41.00.20.0-0.4-0.3-0.3
Sources: Russian authorities; and IMF staff estimates.

General government and government-guaranteed gross debt.

Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Sources: Russian authorities; and IMF staff estimates.

General government and government-guaranteed gross debt.

Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Table 10.Russian Federation: Indicators of External Vulnerability, 2005–09(Percent of GDP, unless otherwise indicated)
ActualProjections
200720082009201020112012201320142015Debt-stabilizing
non-interest
current account 6/
Baseline: External debt36.228.838.331.928.626.224.122.521.5-1.4
Change in external debt4.6-7.49.5-6.4-3.3-2.4-2.1-1.6-1.0
Identified external debt-creating flows-14.9-13.96.2-5.1-4.5-3.5-3.0-1.9-0.7
Current account deficit, excluding interest payments-7.6-7.8-5.8-5.7-4.3-3.5-3.4-2.2-1.0
Deficit in balance of goods and services-8.6-9.3-7.5-8.0-6.4-4.9-3.3-1.7-0.3
Exports30.331.328.029.127.526.024.422.821.2
Imports21.722.020.621.121.121.121.221.120.9
Net non-debt creating capital inflows (negative)-1.80.21.50.70.20.20.10.10.1
Automatic debt dynamics 1/-5.6-6.210.5-0.2-0.4-0.20.20.20.2
Contribution from nominal interest rate1.71.61.81.20.80.91.21.21.2
Contribution from real GDP growth-1.9-1.63.1-1.4-1.1-1.1-1.0-1.0-1.0
Contribution from price and exchange rate changes 2/-5.3-6.25.6
Residual, incl. change in gross foreign assets 3/19.56.43.3-1.31.21.00.90.3-0.3
External debt-to-exports ratio (in percent)119.691.9136.7109.8103.8100.598.698.6101.2
Gross external financing need (in billions of US dollars) 4/72.1112.498.780.559.187.795.0120.8158.0
in percent of GDP5.56.78.010-Year10-Year5.43.54.64.44.95.6
Scenario with key variables at their historical averages 5/31.920.19.1-1.1-10.7-19.72.5
HistoricalStandard
Key Macroeconomic Assumptions Underlying BaselineAverageDeviation
Real GDP growth (in percent)8.15.6-7.95.44.94.34.14.34.54.75.0
GDP deflator in US dollars (change in percent)21.621.5-19.915.013.515.99.18.78.28.48.4
Nominal external interest rate (in percent)6.95.54.65.90.63.82.73.65.45.76.0
Growth of exports (US dollar terms, in percent)17.732.7-34.017.421.825.27.67.16.16.15.8
Growth of imports (US dollar terms, in percent)35.130.0-31.018.718.623.713.913.313.313.113.0
Current account balance, excluding interest payments7.67.85.811.44.65.74.33.53.42.21.0
Net non-debt creating capital inflows1.8-0.2-1.5-0.10.9-0.7-0.2-0.2-0.1-0.1-0.1
Sources: Russian authorities; and IMF staff estimates.

Derived as [r - g - ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, ε = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-ρ(1+g)+εα(1+r)]/)1+g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ε > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Sources: Russian authorities; and IMF staff estimates.

Derived as [r - g - ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, ε = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-ρ(1+g)+εα(1+r)]/)1+g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ε > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Annex I. Russia’s Experience With Capital Flows

Russia experienced large capital inflows in the run-up to the global financial crisis. Steadily increasing oil prices, combined with a prudent policy of taxing and saving most of the oil revenue, had significantly strengthened Russia’s external position. By August 2008, international reserves had increased to almost US$600 billion and were the third highest in the world. This apparent stellar performance—combined with a very favorable outlook for oil prices—made Russia an attractive destination for foreign capital.

The boom years. Private capital inflows came largely in the form of loans to corporates and commercial banks, with a much smaller portion in the form of portfolio and direct investment. Buoyed by ever increasing oil prices, gross private capital inflows increased from around $70 billion in 2005 to $100 billion in 2006 to over $200 billion in 2007.

Russia: Private Capital Inflows

(Billions of U.S. dollars)

Like many other emerging European economies, Russia experienced a credit boom as foreign capital poured into the country.

  • Credit growth averaged nearly 50 percent per year from 2006 until mid-2008, as the banking system—flush with liquidity from capital inflows and deposit growth—lent generously to Russian households and corporates.
  • Domestic demand growth reached 13½ percent in 2007, driven by booming consumption and investment. With the economy at full capacity, real wages rose by close to 20 percent that year.

Russia: Credit Growth and Real Interest Rates

(Percent)

Procyclical macroeconomic policies and structural weaknesses contributed to excessive capital inflows and overheating.

  • Fiscal policy was expansionary. The general government nonoil deficit deteriorated from 2.9 percent of GDP in 2004 to 8.3 percent of GDP in 2008. However, the headline balance continued to show large surpluses as a result of surging oil revenues.
  • Monetary policy became increasingly geared toward managing the exchange rate. Rising oil prices and capital inflows put pressure on the ruble to appreciate.

Concerned with the impact of exchange rate appreciation on competitiveness, the central bank intervened to resist these pressures. The resulting policy of controlled and predictable ruble appreciation encouraged one-way currency bets and speculative inflows. As oil prices approached record highs and capital inflows surged, the unsterilized interventions contributed to negative real interest rates and high, entrenched inflation—which reached 15 percent in mid-2008.

  • Finally, long-standing weaknesses in banking supervision and regulation allowed rapid credit expansion and the build-up of large unhedged foreign exchange exposures in the run-up to the crisis.

Despite these similarities with the rest of emerging Europe, Russia is distinct in three key areas: (i) the role of oil; (ii) the lower share of foreign ownership; and (iii) the significant borrowing outside the banking system.

  • First, as an oil exporter, Russia’s capital inflows came on top of very large current account surpluses. This made Russia especially vulnerable to an oil price shock, coupled with a reversal of capital flows.
  • Second, nearly all of the foreign borrowing by banks and nonfinancial corporates was in the form of wholesale financing (syndicated loans and bonds) rather than transactions between parent banks and their subsidiaries. This is explained by the relatively low share of foreign ownership in the Russian banking system (25 percent) compared with some other emerging European economies.
  • Third, capital did not just flow into Russia through the banking system. In fact, flows to the banking system were relatively low in Russia, compared to other emerging European countries. Direct flows to the corporate sector were much more important in Russia. Large nonfinancial corporates had access to plentiful foreign financing through both the syndicated loan market and the bond market. Low spreads—possibly as a result of excess global liquidity and high sovereign ratings—alongside a heavily managed exchange rate, encouraged corporates to borrow in foreign currency rather than rubles. In addition, implicit government guarantees made it easy for state-owned companies to engage in large-scale quasi-sovereign borrowing. As a result, in Russia, it is the corporate sector—rather than the household sector—that has become heavily indebted.

Russia: Private Sector External Debt

(Billions of U.S. dollars)

The crisis. The crisis hit Russia with particular virulence. The dual shock of collapsing oil prices and a reversal of capital flows put the heavily managed exchange rate under extreme pressure. Given large bank and corporate exposures in foreign currency, the authorities allowed a controlled depreciation of the ruble, while providing significant ruble liquidity. The strategy entailed the loss of one-third—$200 billion—of the central bank’s reserves. The economy sank into a deep recession. One year later, oil prices are roughly double their trough levels, the economy has begun to grow again, and the ruble is appreciating. And capital is starting to trickle back to Russia.

Russia: Oil Prices Index, Reserves Index, and Exchange Rate

(2005=100)

Policy challenges. Over the past year, greater exchange rate flexibility and low policy interest rates have helped keep speculative private capital inflows to Russia in check. In the current circumstances of moderately rising oil prices, these measures should be sufficient to allow Russia to manage its capital inflows.

  • The first line of defense against renewed capital inflows should be an appropriate macroeconomic policy mix geared to containing domestic demand once the economy recovers. Fiscal policy should be the main tool for mitigating pressures on the real exchange rate in the face of rising oil prices—it will need to be sufficiently countercyclical to do so. Monetary policy should be squarely aimed at keeping inflation low in the context of a flexible exchange rate. Greater exchange rate flexibility (and, by extension, volatility) should help to discourage speculative inflows.
  • Complementary policies will also be needed. Prudential regulations should be shored up to limit the risks of credit booms. This could include counter-cyclical regulatory requirements, restrictions on foreign currency lending, and differentiated reserve requirements to reduce currency and maturity risks. Improved supervision will also be key—this implies the need for greater powers for the central bank to supervise not only banks, but also their affiliates. The Russian authorities are considering a number of these measures.

In an environment of surging capital inflows, standard macroeconomic and prudential tools may not be sufficient or appropriate. For example, an excessive appreciation of the exchange rate could damage competitiveness. Reserve accumulation can be costly, and—if not sufficiently sterilized—can stoke inflation. And a strong fiscal position, particularly if accompanied by low public debt and robust international reserves, can perversely end up attracting even greater inflows.

In such an environment, capital controls may be a legitimate component of a broader package of policies responding to surges in capital inflows. However, controls are not a panacea—they can be difficult to enforce (especially outside the banking system), they can be circumvented, and their effectiveness is unclear. Moreover, they cannot serve as a substitute for reforms that allow the economy to respond more flexibly to the macroeconomic impacts of sustained capital inflows.

1For additional detail on the authorities’ immediate crisis response, see Russian Federation: 2009 Article IV Consultation - Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion (http://www.imf.org/external/pubs/cat/longres.cfm?sk=23176.0).
2Under the relaxed loan classification requirements, a corporate (retail) loan became overdue if had been delinquent for 30 days (60 days)—up from 5 days (30 days) under the old rules. In addition, if a loan had been restructured, it could remain in its original classification category.

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