This 2005 Article IV Consultation highlights that Russia is in its seventh year of robust economic growth. This strong performance was ignited by the sharp depreciation in the wake of the 1998 crisis, and subsequently sustained by large terms-of-trade gains, in combination with increased political and macroeconomic stability. Higher output and investment in the oil sector have been key conduits of the broad-based recovery, which is still running its course. Monetary policy remains relatively lax. The economy is expected to continue to grow robustly, although not at the pace seen before last year’s slowdown.

Abstract

This 2005 Article IV Consultation highlights that Russia is in its seventh year of robust economic growth. This strong performance was ignited by the sharp depreciation in the wake of the 1998 crisis, and subsequently sustained by large terms-of-trade gains, in combination with increased political and macroeconomic stability. Higher output and investment in the oil sector have been key conduits of the broad-based recovery, which is still running its course. Monetary policy remains relatively lax. The economy is expected to continue to grow robustly, although not at the pace seen before last year’s slowdown.

September 7, 2005

The following information on fiscal developments, which has become available since the release of the staff report, does not alter the thrust of the staff appraisal.

1. Since the issuance of the staff report, the Russian authorities have formulated a second supplementary 2005 budget, which will be submitted to the Duma later this year, and have submitted a draft 2006 budget to the Duma. The discussion in the staff report reflects only the first supplementary 2005 budget and key assumptions for 2006 are different from those of the draft budget. The following summarizes the main changes and their implications, based on a preliminary assessment of the information available as of last week.

2. The oil price assumptions for both 2005 and 2006 have been revised upward resulting in higher revenue projections and hence larger headline fiscal surpluses (see Table 1). However, spending plans have also been increased in light of the higher revenues, thereby increasing the deficit on the basis of a constant oil price in both years. As a result, the oil price at which the overall budget would balance has increased to almost $29 per barrel in 2005 and almost $34 per barrel in 2006 (to be compared with the $27 and $31, respectively, shown in the staff report).

Table 1.

Summary of Federal Government Budget, 2004-06 1/

(In billions of rubles and in percent of GDP in italics)

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Source: Ministry of Finance and Staff computations. Billions of rubles and percentage of GDP in italics.

Net of Federal share of Unified Social Tax.

The projection for expenditure includes Rub 348 billion as a result of the June amendment to the budget. The projections for revenues reflects the authorities’ forecasts as of the beginning of June.

The August column reflects the draft 2006 budget presented to the Duma on August 26, and the expected second revision to the 2005 budget as formulated by the authorities.

3. Staff estimates that the second supplementary budget for 2005 entails an additional fiscal impulse (excluding the oil sector) of about ½ percent of GDP (see Table 2).

Table 2.

Russian Federation: Summary Table (revised) 1/

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Sources: Russian authorities; and Fund staff estimates.

Revised text table, paragraph 10 of the staff report.

Defined as the yearly change in the fiscal stance.

Defined as the fiscal impulse plus the yearly change in oil revenue. See Chapter II of the accompanying Selected Issues paper for more details on the calculation of the fiscal impulse.

Reflects general government balance in 2001–2004 and federal government balance in 2005.

4. The revisions do not change the thrust of the staff appraisal, notably the staff’s concern that the policy for taxing and saving oil revenues should not be relaxed at this juncture when supply constraints are emerging and upward pressures on inflation and the ruble are already intensifying.

Russian Federation: Staff Report for the 2005 Article IV Consultation
Author: International Monetary Fund