Journal Issue

$4.5 billion arrangement IMF approves Stand-By to support Russia’s fiscal and monetary program

International Monetary Fund. External Relations Dept.
Published Date:
January 1999
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“Directors found that the economic crisis that erupted in 1998 had been due mainly to the failure of the authorities to come to grips with long-standing fiscal problems and to implement structural reform. The deterioration of the external environment as a result of Asia’s economic crisis had been only the immediate cause of the crisis in Russia. In light of this, Directors endorsed the focus in the authorities’ new economic program on fiscal consolidation and the acceleration of structural reforms. In view of Russia’s extremely difficult economic and financial situation, Directors underscored the need for full and timely implementation of the envisaged reform measures. To facilitate effective implementation of the program, Directors urged the authorities to promote broader support for, and understanding of, the program in Russia.

“Stressing the crucial role of fiscal consolidation in the adjustment effort, Directors found that the fiscal targets were appropriately ambitious. A main objective was to reverse the prolonged decline in revenues, which had led to an unsustainable compression of expenditures, including in the area of social spending. However, Directors warned that these targets would not be achieved without strong political support to enforce large enterprises’ compliance with statutory tax obligations. They also urged the authorities to refrain from allowing tax arrears to be offset against current expenditures and emphasized that further cuts in tax rates should be delayed until measures to increase tax compliance had yielded significant results. Directors also urged Russia and the World Bank to work together on a public expenditure review that focused on social and poverty alleviation needs.

Russian Federation: macroeconomic indicators
(annual percent changes)
Real GDP–3.50.8–4.6–2.0
Change in consumer prices
Annual average47.614.627.892.5
(percent of GDP)
Federal government
Overall balance–8.4–7.1–5.9–5.1
Primary balance–2.5–2.5–1.32.0
(monthsof imports of goods and services)
Gross reserves coverage2.
Data: Russian authorities; and IMF staff estimates and projections
Data: Russian authorities; and IMF staff estimates and projections

“Directors emphasized that Russia was best served by a flexible exchange rate policy under current circumstances and welcomed the tightening of monetary policy since early 1999. They urged the government to resist pressures to curtail the independence of the central bank.

“Directors noted that there had been little progress in structural reform since last August, with some reversal in important areas. While there was a need to advance across the full range of structural reforms, Directors argued that tackling the pervasive problems of barter and nonpayments and the acceleration of bank restructuring would be key to the sustainability of macroeconomic stabilization and growth. Directors noted that political resolve to advance bank restructuring would require the authorities to resist what undoubtedly would be fierce opposition from vested interests and would be a key test of the commitment to structural reform in general.

“Directors noted that the de facto default on GKOs and OFZs was a regrettable setback, and that a normalization of relations with domestic and external creditors should be a main objective. They urged the authorities to seek orderly and cooperative rescheduling agreements with creditors.

“Directors expressed strong disapproval of the finding that the channeling by the central bank of domestic transactions through FIMACO and, in 1996, the transfer of assets in the books of the central bank to FIMACO meant that the balance sheet of the central bank had given a misleading impression of the true state of reserves and monetary and exchange rate policies. Without these indirect transactions and the inaccurate reporting of foreign reserves, it is possible that one or more of the disbursements of IMF funds to Russia in 1996 would have been delayed. Directors urged the Russian authorities to take immediate steps to prevent a recurrence of these problems. Directors took note of the findings that the July 1998 tranche from the IMF had not been misappropriated.”

Program summary

Russia’s exchange-rate-based stabilization strategy, which had produced notable gains since 1995, was abandoned in August 1998. The timing owed much to Asia’s economic crisis and the rapid fall in investor confidence; however, the root cause was the failure to tackle underlying fiscal problems that had made the stabilization achieved under the fixed exchange rate policy inherently unstable. Political turmoil from mid-May 1998 had intensified financial market pressures. In mid-July, a new modified economic program supported by the IMF temporarily eased pressures, but confidence weakened anew following the Duma’s refusal to accept key fiscal measures in the government’s program. On August 17,1998, the authorities announced a default on ruble-denominated treasury bills and bonds maturing before end-1999 and widened the exchange rate band. In early September, the ruble was floated. A large depreciation of the ruble, loss of access to international capital markets, and a virtual collapse of the banking sector ensued. Moreover, large external arrears began to accumulate.

In the aftermath of the August crisis, little progress was made in bank restructuring, and there was a standstill in other areas of structural reform. Output contracted, government revenues fell, and inflation accelerated during the fourth quarter of 1998. The situation has, however, turned around recently. Policies have been tightened and inflation has come down to below 2 percent on a monthly basis in June. Industrial output has recovered. With regard to structural policies, some restrictive foreign exchange control measures introduced in the aftermath of the August crisis have been revoked and some progress has recently been made in bank restructuring.

1999–2000 economic program

The main focus is on fiscal adjustment and the acceleration of structural reforms, which are highly interrelated and must be tackled in tandem. The fiscal program targets a primary surplus at the level of the federal government of 2 percent of GDP in 1999. This represents an adjustment of about 3½ percentage points of GDP, compared to 1998. The program targets an inflation rate of 50 percent in 1999 (December to December), compared with 84.5 percent in 1998. Net international reserves are targeted to increase by $2.2 billion in 1999, with an increase in gross reserves of $1.7 billion during the last three quarters of the year. Real GDP is assumed to decline by 2 percent in 1999.

Monetary policy will be conducted in the framework of a flexible exchange rate policy. The authorities will intervene to smooth exchange rate fluctuations but will not resist fundamental changes in the balance of payments. The 1999 program assumes a rescheduling of nearly all obligations on Soviet-era debt falling due in 1999-2000, as well as the provision of additional exceptional balance of payments support from the IMF, the World Bank, and Japan. It assumes that all Russian-era debt will continue to be serviced as scheduled.

The authorities’ strategy to raise revenues involves introducing new taxes and raising other tax rates to capture windfall gains from the large ruble depreciation and increase taxation of consumption. Also, a wide range of measures aim to improve tax compliance. In addition to avoiding recourse to tax offsets, the program calls for cutting the oil pipeline access of tax-delinquent oil companies and increasing compliance of enterprises with respect to their statutory tax obligations. On the expenditure side, the authorities aim to further prioritize spending and control commitments by line ministries, in particular in the context of a planned comprehensive expenditure review.

Structural reforms under the program fall into four broad categories: financial sector reform, including bank restructuring; private sector development, industrial restructuring, and liberalization of foreign direct investment and international trade; enhancement of fiscal management; and improvements in the competitiveness, transparency, and accountability of infrastructure monopolies. Measures within each of these categories will address the problems of nonpayments. Measures to improve transparency of the Central Bank of Russia’s own operations and the relations between the authorities and commercial banks are also an important part of the program.

Russia joined the IMF on June 1, 1992, and its quota is SDR 5.9 billion (about $8 billion). Its outstanding use of IMF financing currently totals SDR 12 billion (about $16 billion).

The full text of Press Release No. 99/35 is available on the IMF’s website (

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