Statement by the IMF Staff Representative

Propelled by large terms-of-trade gains, GDP growth has accelerated and is running close to potential. The demand pressures associated with the large terms-of-trade gains are reflected in a fast real appreciation of the ruble, although more of this has come through nominal appreciation during the last year. IMF staff welcomed the greater focus on inflation control, but cautioned that additional exchange rate flexibility would be needed to meet the end-2006 target. The authorities agreed that structural reforms are behind.

Abstract

Propelled by large terms-of-trade gains, GDP growth has accelerated and is running close to potential. The demand pressures associated with the large terms-of-trade gains are reflected in a fast real appreciation of the ruble, although more of this has come through nominal appreciation during the last year. IMF staff welcomed the greater focus on inflation control, but cautioned that additional exchange rate flexibility would be needed to meet the end-2006 target. The authorities agreed that structural reforms are behind.

Since the issuance of the staff report there has been a significant decline in oil prices and the government has changed proposals for the supplementary 2006 budget and the 2007 budget.

1. The new WEO oil price projections imply a decline in the average oil price of 7¼ percent in 2006 and 17 percent in 2007, compared to the assumptions in the staff report. Despite this decline, the average oil price is still projected to be more than 20 percent higher in 2006 than in 2005. Approximately two-thirds of the lower oil revenues will automatically be absorbed by lower savings in the oil stabilization fund. Moreover, as discussed in the staff report, a significant impulse continues to arise from previous years' large terms-of-trade gains as spending plans have not yet fully adjusted to such gains. In this regard, recent high frequency data confirm that the momentum in real GDP growth remains strong. Against this background, staff has maintained its projections of real GDP growth at 6½ percent in both 2006-07, but has lowered its projections of the current account surplus and reserve accumulation (Table 1).

Table 1.

Russian Federation: Selected Macroeconomic Indicators, 2002–07

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Source: Russian authorities; and IMF staff estimates.

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

2. Since the issuance of the staff report, the authorities have changed the proposed supplementary budget for 2006, which is expected to be submitted to the Duma later this year, and the 2007 budget, which has already passed the second reading by the Duma. The changes imply increases in spending of about ¼ percent of GDP in 2006 and ½ percent of GDP in 2007, compared to the projections in the staff report, and an increase in the oil price at which the 2007 budget is balanced to $40 per barrel (Table 2). In addition, as a result of the lower oil price assumptions, government revenues are also projected to be considerably lower than in the staff report. Staff estimates that these changes entail an additional impulse of ½ percent of GDP in 2006 and ¾ percent of GDP in 2007 in terms of the combined effect of changes in the terms-of-trade and in the fiscal stance (Table 3). Thus, the relaxation of the fiscal stance more than compensates for the negative impact of lower oil prices. In view of this, staff has increased its inflation projection by ¼ percentage points for both 2006 and 2007, compared to the staff report.

Table 2.

Russian Federation: Summary of Federal Government Budget, 2005-07

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

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Source: Ministry of Finance; and staff calculations.

Reflects the expected amendment to the 2006 budget as formulated by the authorities.

Reflects the draft 2007 budget as approved by the Duma in the first reading on September 22.

Table 3.

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. See Chapter II of the 2005 Selected Issues paper for a discussion of alternative definitions of the fiscal impulse.

Defined as the fiscal impulse plus the yearly change in oil revenue.

As a percent of current year GDP.

3. The thrust of the staff appraisal has not changed. At the same time, the revisions have reinforced staff's concerns that the relaxation in the non-oil fiscal balance at a time when private sector demand remains very buoyant will add to inflationary pressures, and that there will emerge over the medium term a non-oil deficit and structure of public spending that cannot be sustained.

Russian Federation: Staff Report for the 2006 Article IV Consultation
Author: International Monetary Fund