Russian Federation
2007 Article IV Consultation: Staff Report; Staff Statement; and Public Information Notice on the Executive Board Discussion
Author:
International Monetary Fund
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Publication Date:
23 Oct 2007
eISBN:
9781451945881
Language:
English
Keywords:
ISCR; CR; money-market rate; repo operation; headline inflation; rate; Russia; turmoil; oil price; broad money; current account; interest rate; foreign currency; Oil prices; Inflation; Capital inflows; Global
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The staff report for the 2007 Article IV Consultation highlights the Russian Federation’s long-term perspective, economic developments, and macroeconomic policies. Russia’s economic growth remains robust. High oil prices and sound fiscal policy underlie Russia’s long spell of robust growth. Executive Directors noted that Russia continues to face tensions in the policy mix designed to reduce inflation while preserving exchange rate stability. Raising investment levels is particularly important in light of the projected decline in the labor force and the declining prospect for continued high productivity gains over the medium term.

Abstract

The staff report for the 2007 Article IV Consultation highlights the Russian Federation’s long-term perspective, economic developments, and macroeconomic policies. Russia’s economic growth remains robust. High oil prices and sound fiscal policy underlie Russia’s long spell of robust growth. Executive Directors noted that Russia continues to face tensions in the policy mix designed to reduce inflation while preserving exchange rate stability. Raising investment levels is particularly important in light of the projected decline in the labor force and the declining prospect for continued high productivity gains over the medium term.

I. Background

A. The Long-Term Perspective

1. High oil prices, a strong catch-up potential, and sound fiscal policy underlie Russia’s long spell of robust growth. Double-digit terms-of-trade gains annually since 2003, reinforced by rapidly developing financial markets and much-improved access to foreign borrowing, have underpinned strong investment growth, punctured only by a soft spot in late 2004 in the wake of turmoil in the oil and banking sectors. However, this growth notwithstanding, the level of investment has remained low, and capital and labor have accounted for less than half of the increase in GDP since 2003, with the balance due to higher total factor productivity. Robust growth has thus owed much to Russia’s still considerable catch-up potential, as resources are reallocated to more dynamic sectors in the economy. The resulting nexus of strong productivity growth, rising real incomes, and higher consumption has been a key source of self-sustaining growth, especially in recent years as capacity constraints have slowed energy exports. With resource constraints becoming gradually more widespread—2006 was the seventh year of strong growth, despite comparatively low investment—the policy of taxing and saving Russia’s oil revenues has limited overheating and prolonged the recovery. In 2006, the budget would have been balanced at an oil price $30 per barrel.

uA01fig01

Production, Income, and Terms of Trade

(in annual percent changes)

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

Source: Authorities; World Bank; and IMF staff
uA01fig02

Real gross fixed capital formation and terms of trade

(annual percent changes)

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

Source: Goskomstat; and staff calculations
uA01fig03

Annual private sector domestic and foreign borrowing 1/

(flows in percent of GDP)

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

1/ Excludes net foreign borrowing by banks.Source: CBR; and IMF staff calculations
uA01fig04

Contributions to GDP

(log differences)

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

1/ Capital and labor inputs have been adjusted for changes in utilization rates.Source: Staff calculations
uA01fig05

Real wages and real consumption 1/

(annual percent changes)

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

1/ Real wages are based on the CPI index.Source: Staff calculations
uA01fig06

Energy export revenues and government balance

(annual changes in USD billions)

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

Source: Staff calculations

B. Recent Economic Developments

2. GDP growth has strengthened and become better balanced (Table 1). Growth accelerated to 7.9 percent (year-on-year) in the first quarter of 2007, and high-frequency indicators suggest undiminished momentum in the second quarter. The acceleration took place even as oil prices fell from mid-2006 highs; in part because of the strong automatic fiscal stabilizer embedded in the oil stabilization fund, which absorbs about 85 percent of the fluctuations in revenues when oil prices change. Recent output growth reflects a pickup in investment, suggesting that growth is becoming better balanced. Consumption remains, however, the main engine, spurred by annual increases in real incomes of more than 10 percent. Higher growth also reflects further fiscal relaxation.

Table 1.

Russian Federation: Selected Macroeconomic Indicators, 2003–08

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Source: Russian authorities; and IMF staff estimates.

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

uA01fig07

Contributions to GDP growth

(In percent)

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

Source: Authorities; and IMF staff calculations.

3. The acceleration in growth is coming mainly from the nontradable sector. Consistent with the relatively rapid real appreciation, growth in retail trade and construction continues to gain speed, running well above 10 percent (year-on-year), while growth in manufacturing is notably slower although still robust at 6-7 percent. Growth in oil production has not recovered from the precipitous decline in 2004-05, when it plummeted from 12 to 3 percent, reflecting mainly a lack of development of new fields and limited pipeline capacity.

uA01fig08

Five basic sectors

(annual percent changes)

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

Source: Goskomstat.
uA01fig09

Crude Oil Production 1/

(Quarterly, yoy growth rate)

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

Source: Authorities.1/ Including gas condensate.

4. While productivity growth remains high, resource constraints continue to tighten, not least in the labor market. Production capacity is being expanded at a relatively fast pace, reflecting rising investment and continued high TFP growth as the economy is still realizing catch-up gains. Nevertheless, labor markets continue to tighten, with acute shortages in high-growth areas, high and increasing labor utilization rates, and high and accelerating growth in real wages, to 18.5 percent during the year through April 2007. Beyond the labor markets, the rapid real appreciation and the increase in the leakage of domestic demand to imports also point to tightening resource constraints. In line with this, standard output gap analysis—which is subject to notable conceptual and statistical problems in a structurally changing economy like Russia’s—also suggests that GDP is close to potential.

uA01fig10

Real effective exchange rate

(average annual percent changes)

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

uA01fig11

Import Leakage

(Imports in percent of real dom. demand)

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

Source: Authorities; and IMF staff
uA01fig12

Unemployment and labor utilization

(in percent)

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

Source: Goskomstat; and REB
uA01fig13

Total factor productivity

(Annual percent change)

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

Source: Staff calculations

5. The decline in inflation has halted. After having halved from almost 14 percent (year-on-year) in April 2005 to 7.4 percent in March 2007, inflation firmed in recent months, to 7.8 percent in May 2007. The decline reflected in part the impact of lower administered-price increases compared to previous years, an effect that accounted for about half of the decline in headline inflation in 2006. The slowdown was also a reflection of lower tradable-price inflation, as a change in exchange rate policy allowed a modest appreciation of the ruble in nominal effective terms—a notable break from the previous policy, which geared the CBR’s foreign exchange interventions toward ensuring a steady depreciation of the ruble. The recent uptick in inflation has followed the return to a less flexible exchange rate policy since mid-2006.

uA01fig14

Headline and Core Inflation

(Annual percent change)

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

Source: Authorities; and IMF staff calculations.
uA01fig15

Inflation and Nominal Effective Exchange rate

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

Source: Authorities; and INS.1/ Increase in index represents a depreciation of the ruble in nominal effective terms.

6. The balance of payments has strengthened further as a lower current account surplus has been more than offset by sharply higher capital inflows (Table 2). Reserves increased by a record $156 billion during the year through May 2007, to $403 billion.

Table 2.

Russian Federation: Balance of Payments, 2003-08

(In billions of U.S. dollars, unless otherwise indicated)

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

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

Excludes arrears.

Net of rescheduling.

  • The current account surplus is declining as a result of continued strong import growth and a notable slowdown in energy export growth. Propelled by robust domestic demand, import growth has accelerated, doubling to about 40 percent in January-April 2007 (year-on-year) compared to the same period last year. Moreover, whereas the increase in the non-energy deficit had until recently been more than offset by large increases in both oil prices and oil-export volumes, lower oil prices and the marked slowdown in oil-output growth are now causing a rapid decline in the overall current account surplus. The surplus relative to GDP in Q4 2006-Q1 2007 was only half that of a year earlier.

  • The ruble is still undervalued in real terms, but competitiveness is eroding. Estimates using the Fund’s standardized CGER approach suggest that the ruble is undervalued by 20 percent according to the external-sustainability approach and by 1 percent according to the macro-balance approach, implying a mid-point undervaluation of about 10 percent. This compares with the degree of undervaluation of 15 percent estimated last year. This weakening of competitiveness is confirmed by indices of relative unit-labor costs, which have increased steadily and are now estimated to be above the level just before the 1998 financial crisis. Nonetheless, staff estimates suggest that wages in Russia are still competitive internationally.1 So, while profit margins are facing increasing pressure, competitiveness is not yet a major concern—non-primary commodity exporters have maintained their market share and annual growth in the manufacturing sector is robust at 5-7 percent.

uA01fig16

Current account balance

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

Source: CBR; and IMF staff calculations.
uA01fig17

Unit labor costs in US dollars1

(Index, 1997=100)

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

Sources: Russian authorities; WEO; IFS; and IMF staff estimates.1 For manufacturing sector, except Russian ULC, which is for industries.
uA01fig18

Russia: Equilibrium US-dollar wages and actual wages, 1993-2006

(Manufacturing sector)

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

Source: Staff estimates.

  • Net private capital inflows are surging across all major categories. The underlying increase is even larger if loans related to ownership transfers in the energy sector are excluded. Russia has become a major FDI recipient among emerging market economies, with gross inflows of 3 percent of GDP. Net FDI and portfolio inflows have been boosted by increased merger and acquisition activity and greenfield investment, reflecting strong investor sentiment buoyed by Russia’s growth potential and rapidly rising incomes. Another important development is the surge in overseas borrowing by banks to fund their domestic loan portfolios, reflecting an arbitrage opportunity created by high domestic lending rates and expectations of continued ruble strength. Large share issuances by two state-owned banks boosted capital inflows in the first quarter of 2007.

Net private capital flows, excluding errors and omissions

(in billions of US$)

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For Q1 2007, excludes FDI and portfolio investment in commercial banks.

For Q1 2007, includes FDI and portfolio investment

uA01fig19

External debt

(in USD billions)

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

Source: CBR

  • Russia’s external vulnerability is low by most measures, but nongovernment indebtedness is rising rapidly. From end-2004 to end-2006, the government’s external indebtedness dropped from $106 billion to $49 billion, while that of the nongovernment sector rose from $109 billion to $261 billion. This reflects, in part, large-scale foreign borrowing by state-controlled firms (Tables 3 and 4).

Table 3.

Russian Federation: Indicators of External Vulnerability, 2003–06

(In percent of GDP, unless otherwise indicated)

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Source: Russian authorities; and IMF staff estimates.

Gross debt of the general government.

RTS index, end of period.

S&P long-term foreign currency debt rating, eop.

JPMorgan EMBIG Russia Sovereign Spread.

Table 4.

Russian Federation: External Debt Sustainability Framework, 2002-12

(In percent of GDP, unless otherwise indicated)

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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 α = 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, p 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.

C. Macroeconomic Policies

Fiscal policy

7. Fiscal policy has become increasingly expansionary (Tables 5 and 6). Since 2005, fiscal policy at the general government level has added a notable impulse, by allowing more of Russia’s oil-revenue windfall to pass through to the economy (last line in accompanying table), contributing to a gradual increase in demand pressures as resource slack has been used up. This relaxation has been reflected in a deterioration in the general government’s non-oil balance, even as higher oil revenues caused the headline surplus to increase through 2006. The non-oil balance is set to decline further under the 2007 budget, by 0.9 percent of GDP. (In addition to this discretionary relaxation, a further impulse is arising from the automatic stabilizers, to the extent that reduced public savings will absorb the bulk of the negative impact on the economy of somewhat lower oil prices.)

Table 5.

Russian Federation: Fiscal Operations, 2004-08

(In percent of GDP)

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Sources: Russian authorities; and IMF staff estimates.
Table 6.

Russian Federation: Federal Government Budget, 2006-10 1/

(In percent of GDP)

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Sources: Russian authorities; and IMF staff estimates.

For differences between the authorities’ and staff’s projections, see footnote 2 of paragraph 18.

uA01fig20

General Government Balance

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

Source: Authorities; and IMF staff calculations.

Fiscal Indicators of the General Government and Energy Exports

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Sources: Russian authorities and Fund staff estimates.

Calculated as (Xt - Xt-1)/GDPt

8. The relaxation reflects higher recurrent expenditures and a decline in social contributions. Federal primary spending increased by 2¾ percentage points of GDP during 2005-07, mostly because of higher recurrent expenditures in the social and security sectors. A substantial part of this increase was due to higher transfers to extrabudgetary social funds, notably to the pension fund, which saw a sharp deterioration in its financial position as a large discretionary tax cut and continued compliance problems caused a decline in revenues by 4 percent of GDP. At the level of the consolidated general government, primary expenditures rose by 0.4 percentage points of GDP while non-oil revenues declined by 2.6 percentage points of GDP during 2005-07.

Monetary policy

9. Monetary policy has become more accommodative with the CBR’s resumption of a fixed nominal exchange rate policy. Against a backdrop of rapid real appreciation and increasing political concerns about competitiveness, the CBR has been resisting further nominal appreciation of the ruble vis-à-vis a EUR-U.S. dollar basket since mid-2006. This represents a reversal of the policy introduced in early 2005, wherein the CBR had been allowing some, albeit limited, appreciation. The return to a fixed exchange rate has been associated with a surge in capital inflows, record-high interventions, and a sharp acceleration in base money growth, to 41 percent through April (year-on-year). Importantly, the perception that the CBR will eventually have to allow renewed appreciation, in order to keep control over inflation, is exacerbating capital inflows, not least through the banking system. In this regard, the CBR has found that its policy of refraining from active sterilization is resulting in much-faster base money growth, as the source of foreign exchange inflows is shifting from oil revenues, which are sterilized automatically through the stabilization fund, to the capital account.

uA01fig21

Monetary aggregates

(Monthly, real, annual percent changes)

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

Source: CBR; and IMF staff calculations.

10. Growth in broad money and bank credits is accelerating sharply. Broad money growth (including foreign currency deposits) reached 48 percent by April (year-on-year)—and growth of ruble broad money was even faster at 57 percent, reflecting continued stagnation in foreign-currency denominated deposits. The rapid de-dollarization is also evident from further large cash sales of foreign exchange by households.

11. Rapid credit growth is fueled by ample liquidity and structural changes in the financial sector. Increased liquidity in the banking system has been reflected in real credit growth of close to 40 percent year-on-year—from a low base. Consumer lending is growing particularly fast, reflected in the rising share of household loans in newly extended credit, from 20 percent in 2003 to 33 percent in 2006. Rapid credit growth is also a result of ongoing structural changes in the financial sector, as discussed in Box 1.

12. Banks’ financial soundness indicators are strong, but weaknesses remain in the banking system and in supervision (Table 8). Bank profits have surged, boosted by wide interest-rate margins and high credit growth; aggregate NPL ratios are low; and liquidity buffers remain relatively high. However, NPL and loan concentration ratios are believed to be underreported as the financial sector continues to be plagued by poor prudential data, limited transparency, and weak governance, as discussed below. In addition, concentration of ownership is high and connected lending is a concern.

Table 7.

Russian Federation: Monetary Accounts, 2004–08

(In billions of rubles, unless otherwise indicated)

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Sources: Russian authorities; and Fund 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.

The increase in the multiplier in 2004 includes a reduction in reserve requirements from 7 to 3.5 percent in July 2004.

Historical data from IFS. A positive number implies real effective appreciation.

Table 8.

Russian Federation: Financial Soundness Indicators, 2002-07 1/

(In percent)

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Source: Central Bank of Russia.

Credit and depository institutions.

Data as of April 2007.

II. The Near-Term Outlook

13. The backdrop to the near-term outlook is stable. According to WEO projections, Russia is facing a small terms-of-trade loss in 2007—following four years of double-digit annual gains—but this loss will be largely absorbed through lower savings in the stabilization fund. The favorable outlook for emerging markets, and widely held expectations of policy continuity after the presidential elections, also suggest a relatively stable environment. It is noteworthy in this regard that investment growth accelerated and capital inflows surged last year; even as oil prices receded significantly from mid-2006 highs, President Putin confirmed his intention to leave office, and the government further expanded its control over the energy sector. This resilience in investment growth suggests that investor sentiments are relatively robust, and that downside risks to the near-term outlook, in particular from lower oil prices, are limited.

14. Real GDP growth is expected to remain strong and resource constraints to tighten further (Table 9). On the strength of buoyant investment growth, and with scope for further TFP gains, potential GDP growth is expected to continue at its recent pace. However, demand is likely to accelerate in 2007. This reflects in part a discretionary relaxation of the non-oil fiscal balance (see below), as well as the automatic stabilizer built into the stabilization fund, which will limit the direct impact of lower oil revenues to no more than 0.3 percent of GDP. In addition, staff expects the development of the financial sector, reinforced by sustained large capital inflows, to add further strength to private demand, not least because the rapidly expanding market for consumer credits provides households with a newfound ability to consume against expected future income gains. In view of this, staff projects GDP growth to continue at 7 percent, above the consensus forecast of 6.6 percent, and demand pressures to increase with an attendant tightening of resource constraints. As to 2008, growth is expected to remain robust on the assumption of additional fiscal stimulus and slightly higher oil prices. Accordingly, staff projects continued real appreciation and rapid import growth in 2007-08. The current account surplus is expected to decline from almost 10 percent of GDP in 2006 to near-balance in 2009. This reflects in part a steady fall in the non-energy balance because of rapid import growth and a low base for non-primary commodity exports. But it also reflects the decline in energy exports relative to GDP, as oil prices are assumed to remain largely unchanged while energy output is not expected to regain its previous buoyancy.

Table 9.

Russian Federation: Macroeconomic Framework, 2004-12

(In percent of GDP, unless otherwise indicated)

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Source: Russian authorities; and IMF staff estimates.

Russian Federation: Key Economic Indicators

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Source: Staff calculations.

15. Inflationary pressures are set to remain strong. Against a backdrop of robust demand growth and plans to gradually raise domestic energy prices starting next year, upward pressures on prices will remain strong. In staff’s view, achieving even the relatively slow decline in inflation targeted by the authorities during the remainder of 2007 and 2008 will require a change in policies, including additional nominal appreciation.

III. Report on the Discussions

16. Macroeconomic discussions focused on tensions in the policy mix arising from envisaged further relaxations of fiscal policy in the face of tightening resource constraints and the fixed exchange rate policy. The discussions took place amid the preparation of a supplementary 2007 budget that foresee a further large fiscal relaxation and could entail small fiscal and current account deficits within 2-3 years, down from surpluses of 8½–10 percent of GDP only last year, even with broadly unchanged oil prices. The discussions addressed in particular conflicts between short-term cyclical considerations and the medium-term objective of using oil revenues to boost potential growth and ensure a more equitable income distribution. They also coincided with increased concerns within the CBR of the implications for monetary policy of surging capital inflows.

17. The erosion of competitiveness is increasingly bearing on macroeconomic policies. According to staff projections, the real exchange rate appreciation will—in the absence of further fiscal relaxation—slow gradually to 3-5 percent over the medium term, a pace that would be broadly in line with Balassa-Samuelson-type effects. However, the planned fiscal relaxation would mean that the appreciation would continue at a 7-9 percent rate. Thus, staff projections suggest that the further fiscal relaxation will mostly eliminate the remaining undervaluation of the ruble over the next few years, leaving the exchange rate around its equilibrium level by 2009. However, the pace at which the undervaluation is set to unwind and the possibility that the large catch-up gains in productivity might begin to wane faster than expected, even as demand pressures fuel fast appreciation and high wage growth, all point to increasing downside risks. This is especially the case for manufacturing, which although still growing at a satisfactory pace, is already underperforming the nontradable sector. In view of this, much of the discussion of medium-term issues focused on the risk that an even faster fiscal relaxation than discussed with the mission would cause overshooting of the real exchange rate.

A. Fiscal Policy

18. The authorities are considering a fiscal relaxation over the next few years that—under the current outlook for oil prices—would allow most of the remainder of the oil revenue windfall to be passed through to the economy. The approved annual federal 2007 and three-year budgets entail a relaxation of the non-oil deficit of 2½ percent of GDP by 2009, following a cumulative expansion of 1½ percent of GDP during 2005-06. A supplementary 2007 budget discussed with the staff will increase spending authorizations by an additional 2¼ percent of GDP, to be distributed over the next three to four years. With this, the planned expansion in the non-oil deficit over 2007–09 would reach 3.2 percent of GDP if the amounts authorized under the approved 2007 and three-year budgets are fully spent and the borrowing margin under the new fiscal framework is fully exploited. Ministry of Finance officials indicated that they were intending to limit borrowing and to resist pressures to spend the reserves, and thereby aiming to limit the increase in the non-oil deficit to 2¼ percent of GDP.2 Other officials, however, suggested that the non-oil deficit would increase to the full extent of what is permitted within the newly approved framework. This appears realistic in the light of past and present pressures to increase spending. As regards the overall balance, the stabilization of oil prices and oil-sector output will cause oil revenues to decline by 4 percentage points relative to GDP, resulting in a decline in the headline surplus from 7½ percent of GDP in 2006 to near-balance in 2009. On staff estimates, the oil price at which the budget would be balanced is set to increase from less than $30 per barrel (Urals) in 2006 (when the actual price was $61 per barrel) to $55-62 per barrel by 2009 (when the price is projected to be $61 per barrel, according to the WEO).

Russian Federation: Federal Government Budget, including preliminary supplementary 2007 budget

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Source: Authorities; and staff projections

19. Staff cautioned that the planned increase in the non-oil deficit would increase upward pressures on prices and the ruble. Noting that inflationary pressures were already strong, as the economy is growing at close to potential and private demand is strengthening, staff argued that additional fiscal stimulus would likely increase pressures for nominal appreciation if inflation is to be kept on a downward path. It would also increase pressure for real appreciation, as increased demand drives up prices for nontradable goods. In this regard, staff noted that concern about competitiveness appeared to have been the foremost reason for the return to a policy of resisting appreciation, and that this policy change was leading to a rate of growth in money supply that is incompatible with the inflation target. Further fiscal relaxation, therefore, would exacerbate existing tensions in the macroeconomic policy mix and aggravate the inconsistency between inflation and exchange rate targets. With the risk that large capital inflows might significantly exacerbate such pressures, staff felt that a more cautious fiscal approach was warranted. It recommended that the authorities delay increasing spending until the economy could absorb this spending without undue pressure on prices. Under the current outlook, this suggests that there should be no increase in the non-oil deficit in the remainder of 2007 and in 2008, beyond that envisaged in the approved 2007 budget.

20. Ministry of Finance officials felt that the macroeconomic pressures would be manageable, and noted that the government needed to strike a trade-off between cyclical considerations and the need to fund programs fostering long-term growth. They shared staff’s view that the planned additional fiscal stimulus would likely require accelerated ruble appreciation if inflation is to be kept within target. They also stressed, however, that the supplementary 2007 budget would target investments and projects expected to boost long-term growth. They pointed to various infrastructure and housing projects, research programs, and investments in aluminum, petrochemical, nuclear power, and other priority sectors. Responding to concerns that some of these activities lie outside the normal purview of government, and to broader concerns about the efficiency of such spending considering that public sector reforms are not well advanced, the authorities noted that spending efficiency in several areas would be strengthened through extensive use of Public Private Partnerships. While they had advocated a somewhat slower pace of fiscal relaxation, Ministry of Finance officials felt that the compromise embodied in the supplementary budget reflected an acceptable balance between short-term costs and medium-term benefits.

21. Ministry of Finance officials also noted that the government remained committed to increase saving of oil revenues over the medium term as set out in their new budgetary framework. The increase in spending under the planned supplementary budget was meant to be temporary; spending would subsequently have to be lowered by about 2 percent of GDP in order to stay within the deficit ceilings for 2010-11, set out by the new framework for saving of oil revenues. Thus, while the swelling of the stabilization fund meant that there was no longer political support for continuing to save current oil revenues on the same scale as before, the approval of this framework was evidence of a continued political determination to prevent spending from increasing to a level where Russia could be forced into a procyclical tightening in the case of a drop in oil prices.

22. Staff welcomed these intentions, but questioned the feasibility of the medium-term spending plans. The depositing of all future oil and gas revenues with a new fund separated from the budget, the fixed annual transfer to the budget, and the cap on the budget’s non-oil deficit would strengthen demand management and allow intergenerational considerations to bear on spending decisions. However, implementation of the new framework was to be back loaded to 2010-11, and spending would be allowed to increase above the level implied by the new framework during the interim period. In this regard, staff found that the assumed spending cut of 2 percent of GDP was ambitious, considering that the federal government’s non-interest expenditures amount to only about 16 percent of GDP. Staff also noted that much of the savings would have to come from socially difficult cuts in education, health, and other social sectors in the run-up to the 2011 elections—and that efficiency-enhancing reforms in these sectors had stalled. Indeed, staff was concerned that the government would find it difficult to resist pressures for spending increases, considering that important groups, notably pensioners, were not sharing in the rapid growth in incomes. For instance, annual transfers to the pension fund would have to be gradually increased to 2-3 percent of GDP merely to stabilize the replacement rate at the already low level. In view of these considerations, staff doubted that the assumed expenditure cuts underlying the new framework could be achieved, unless the new government gave priority to reinvigorating stalled efficiency-enhancing social sector reforms. Similarly, staff stressed that, without strong public-sector and administrative reform, the efficacy of the authorities’ planned public investment would be much reduced. Such reform would also be essential to ensure the full benefits of public-private partnerships.

23. Staff cautioned that, looking forward, failure to contain spending created risks of procyclical tightening over the medium term. While it agreed that there was little risk at this juncture, the speed with which the twin surpluses were set to unwind, in combination with the continued rapid real appreciation, pointed to the risk of a fiscally induced overshooting of the current account and real exchange rate unless the government is able to resist continued expenditure increases. In this regard, while the ruble was still somewhat undervalued, staff projections implied that the proposed fiscal relaxation would mostly eliminate the remaining undervaluation, suggesting that any further relaxation in the face of continued strong growth in private demand could take a serious toll on GDP growth and export diversification. Staff also noted that the virtual stagnation of the oil sector was heightening the risk of such overshooting, as this sector’s contributions to both taxes and foreign exchange earnings are declining fast.

B. Monetary and Exchange Rate Policy

24. CBR officials were confident that they could keep inflation on a downward course. Despite the recent uptick, year-on-year inflation was still running below the 2007 end-year target of 8 percent. The acceleration in money growth in recent months, resulting from surging capital inflows and record-high foreign exchange interventions, was a matter of concern, and this had prompted the increase in reserve requirements. The CBR would consider increasing such requirements further if necessary to reduce money growth. Moreover, it expected capital inflows to decline as the recent surge largely reflected a series of one-off transactions relating to mergers in the energy sector and to share issuances by the two large state-owned banks.

25. The nominal exchange rate was expected to remain broadly unchanged. CBR officials explained that, while the rapid real appreciation had prompted increasing political concerns about competitiveness, their decision last fall to return to a stable ruble had been brought about by the finding that appreciation, by fueling expectations of continued appreciation, was exacerbating capital inflows. Under the current outlook, they expected to be able to keep the currency steady during the remainder of the year.

26. Staff argued that keeping inflation on the targeted path would require returning to a more flexible exchange rate policy. Noting that demand pressures were set to increase, in light of the procyclical relaxation of fiscal policy, staff warned that stabilizing the exchange rate would likely prevent the CBR from adopting an appropriately restrictive monetary stance. Indeed, in staff’s view, the rapid growth in liquidity resulting from interventions would, if unchecked, lead to an overshooting of the authorities’ inflation target, suggesting that monetary policy was already overly accommodating. The staff urged the CBR to swiftly reverse the upturn in inflation, pointing to the added cost of doing so once inflationary expectations begin to rise. It saw no alternative means for reining in money growth other than scaling back interventions and allowing the ruble to appreciate. In this regard, staff argued that successive increases in reserve requirements would not be an effective substitute for a more flexible exchange rate policy, if only because the consequent increased spread between deposit and lending rates would encourage disintermediation. In this context, staff agreed with the CBR on the need to further develop the bank’s market-based instruments, and to deepen the domestic money market. Looking forward, this would strengthen the relative effectiveness of the interest-rate channel and increase the flexibility of lending rates.

27. Staff noted that conflicting inflation and exchange-rate targets had exacerbated capital inflows. Discussions with market participants showed that the surge in medium-term capital inflows, in particular through the banking system, was in large part due to expectations that a strong balance-of-payments position implied further appreciation over the medium term. Thus, while the mission agreed that the slow-but-steady appreciation during 2005-06 had presented markets with a predictable exchange rate path, encouraging speculators to make one-way bets, the current rigidity was likely to exacerbate arbitrage-related inflows, as the inconsistency between inflation and exchange-rate objectives became more apparent. By signaling that monetary policy would remain firmly focused on inflation reduction, with the exchange rate allowed to appreciate as needed to keep inflation on the targeted path, the CBR would eliminate the apparent tension between these two goals, and so reduce the scope for such inflows. Staff reiterated, however, that this tension would persist if, at the same time as the ruble is allowed to appreciate, the planned fiscal relaxation necessitated a tightening of monetary conditions so as not to accommodate attendant inflationary pressures.

28. There was agreement that the CBR is likely to face a gradually more challenging environment in the coming years. This reflects, in part, the pressures associated with the planned fiscal relaxation for 2007-09. Moreover, even if a more-flexible exchange rate policy succeeds in reducing arbitrage-related flows, capital inflows would likely remain substantial, not least through the equity market. For instance, the privatization of the electricity sector and the anticipated consolidation of the banking system are both expected to attract considerable foreign interest. In this regard, capital inflows pose a more difficult challenge for monetary policy than oil-related current account inflows, as the latter are for the most part automatically sterilized via the stabilization fund. Finally, whereas underlying inflation has been masked by slower increases in administered prices over the past two years, the government’s commitment to raise domestic energy prices over 2008-11 suggests that administered prices will add to pressures on headline inflation. The estimated impact on annual inflation ranged from ½ to 1½ percentage points.

C. Financial Sector

29. The rapid development of the financial sector is expected to continue. CBR officials noted that the deepening of financial markets and the introduction of new financial products had improved the efficiency of financial intermediation and spurred economic growth. They believed that the financial sector would continue to expand rapidly and that current institutions, laws, and regulations governing the operation of the sector did not pose major obstacles in this regard. Market participants, however, raised some concerns that inconsistencies among different laws and different regulatory institutions were hampering development in some areas, e.g., in offering hedging instruments, including derivatives. But they agreed that these obstacles would not prevent a continued rapid expansion of the sector.

30. Although CBR officials found the regulatory framework for prudential supervision to be broadly complete, they saw scope for strengthening the effectiveness of supervision. Regulators were confident that banks had generally updated their risk-management systems to keep pace with the expansion of credit, but they felt the loan review practices could be strengthened further. Moreover, they were working to improve the evaluation of capital adequacy and obtain more accurate assessments of the financial soundness of individual banks. They were also exploring steps to clarify the responsibilities of the various agencies charged with overseeing the financial sector, and enhance the skills of banking supervisors to improve the capacity of prudential supervision.

31. Despite some notable risks, CBR officials considered the likelihood of a systemic crisis to be low. According to CBR stress testing, credit risk is significant and remains the most important risk to the system. Under the bank’s less-severe scenario, combining effects of credit, market, and liquidity shocks, capital in the banking system would drop by 38.7 percent or 2.5 percent of GDP, while under the most severe scenario the capital reduction will be equal to 63.1 percent or 4.0 percent of GDP. Even under the more benign scenario, a large number of institutions will lose over 50 percent of their capital, suggesting substantial vulnerabilities in the financial system. However, the authorities stressed that neither scenario is likely to materialize in the near future because of the overall positive macroeconomic conditions. For a more-likely range of shocks, CBR officials found that banks are generally well capitalized and sufficiently provisioned. As profitability in the banking sector has also remained high, they considered the risk of a systemic crisis to be low, although periods of turmoil as in 2004 could not be ruled out.

32. Staff welcomed the rapid development of the financial sector, but warned that the favorable external environment may be masking underlying vulnerabilities. Noting that the rapid credit expansion by the banking system has resulted in declining capital-adequacy ratios and an increase in overdue loans in 2006, especially household loans, staff recommended close monitoring of banks with fast-growing or large household loan portfolios. It also cautioned that potentially significant vulnerabilities arise from the rapid increase in open positions, as banks have increasingly funded their ruble lending through borrowing in foreign currency, as well as from the large increase in banks’ holdings of ruble-denominated corporate bonds. Staff noted that these vulnerabilities are heightened by the lack of access of many banks to either the interbank market or foreign funding, and by weaknesses in Russia’s prudential framework and regulatory practices. While agreeing that there appears to be no major systemic risk, staff stressed that a more in-depth review of vulnerabilities should be a priority. The Financial Sector Assessment Program (FSAP) update that is now underway would provide an early opportunity for such a review.

D. Investment Climate, and Long-Term Growth Prospects

33. There was agreement that the prospect of diminishing catch-up gains in productivity, and of a declining labor force, made the long-term growth potential particularly dependent on raising the low level of investment. The authorities concurred with staff analysis showing that productivity gains have been the key engine of growth, with the combined contribution from labor force growth and capital accumulation accounting for less than half of GDP growth in recent years. It was also agreed that while there was scope for continued high catch-up gains in productivity going forward, as the reform agenda promises to further improve the allocation of existing factors of production, such gains would eventually wane as Russia’s transition process matures. The authorities also noted that relatively adverse demographic factors, notably the comparatively low life expectancy and low birth rate, have caused the labor force to contract since 2006, further weighing on the long-term growth potential. In view of these considerations, there was agreement on the urgency of increasing Russia’s still low level of investment, and on the need for economic policies to reinforce and strengthen the investment climate.

34. The authorities were confident that recent changes in economic policy would boost investments and raise long-term growth. In particular, the increase in government interventions in the economy over the next few years, in the context of the supplementary 2007 budget, would help overcome infrastructure bottlenecks and increase investments through public-private partnerships. Moreover, the funding of the long-dormant development bank and the introduction of the venture capital fund, special economic zones, and an institute for nanotechnology research would further promote economic diversification, not least by encouraging growth in areas where Russia had a potentially strong comparative advantage. The expanded role of government in this regard was needed because important market structures were still relatively weak, including the ability of financial markets to provide competitive, large-scale, long-term financing. In addition to these new initiatives, the government would continue to push ahead with structural reforms across a broad front. In particular, electricity sector reforms—involving separation of generation and transmission, and privatization—are now gaining significant momentum.

35. Staff welcomed the emphasis on raising investments but stressed the importance of complementary reforms. It noted that many important reforms were running behind schedule, and it urged a general reinvigoration of reforms after the forthcoming elections. It also noted that Russia scores low on cross-country comparisons of the business climate, with corruption and bureaucratic meddling the predominant complaint. This suggested that the authorities should give priority to long-delayed reforms of the public administration and the civil service. While acknowledging that investments have continued to increase, staff was concerned that the increased state control over the energy sector could reduce investors’ willingness to undertake large-scale projects with a long gestation period. Noting that the poor performance of the state-controlled portion of the energy sector stands in stark contrast to the long-term performance of the privately controlled part, staff questioned whether the state was the best steward of this important sector. While agreeing that the long-term goal should clearly be to diversify the economy away from natural resources, staff argued that this sector provides Russia with a strong comparative advantage and that its resources can help spur growth if harnessed through the right policies.

36. The authorities hope to complete WTO accession by early next year. However, they explained that Russia has concluded most bilateral negotiations, but that a number of bilateral issues still remained to be resolved before multilateral discussions on accession can commence. Moreover, such discussions would have to cover issues like the level of agricultural support and enforcement of intellectual property rights. Staff urged early conclusion of the discussions, noting that Russia’s increased integration into the global economy would spur further enterprise restructuring.

IV. Staff Appraisal

37. Russia’s macroeconomic performance continues to impress. Much is owed to high oil prices and large capital inflows, but also to good economic management. Most important in view of the dependence on oil prices, the stabilization fund is providing a notable measure of stability, helping self-sustaining growth in the form of rising investments and a positive nexus of high growth in productivity, real wages, and consumption to take hold. The acceleration in investments, even with receding oil prices and uncertainty relating to political transition, points to the robustness of investor sentiments at this time.

38. Private demand is gathering additional momentum. Restructuring, consolidation and privatization are gaining pace, powering a further acceleration in investment growth. This process is getting significant added impetus from the rapid development of the financial sector and the strong foreign appetite for Russian assets. Private consumption is also set to strengthen going forward, as the rapid development of markets for consumer credits and mortgages now provides households a newfound ability to consume against future income gains. With such a buoyancy in private demand, resource constraints are set to become more binding even with robust investment growth and impressive catch-up gains in productivity.

39. Against this background, the planned fiscal relaxation risks causing overheating. Raising the non-oil deficit by up to 3.2 percent of GDP in the next few years will provide an unhelpful fiscal stimulus considering that private demand is gaining further strength and that the economy is already growing at potential. This will increase inflationary pressures, entailing rapid, possibly excessive, nominal appreciation. In staff’s view, increased spending of oil revenues should be delayed until demand pressures ease. Under the current outlook, this means that the non-oil deficit should not increase further during the remainder of 2007 and in 2008.

40. The planned fiscal relaxation will also entail continued rapid real appreciation. Faster real appreciation is the means through which buoyant private demand, not least investments in the tradable sector, will be forced to make room for the public sector’s larger claim on scarce resources, if the government goes ahead with the plan to pass-through most of the remaining terms-of-trade gains in the form of higher government spending. Such a dampening of the private sector recovery would run counter to the objective of boosting growth that underlies the case for interventions in the economy.

41. Margins of competitiveness are set to narrow further. As yet, competitiveness is not a major concern, as the ruble is still undervalued and Russia enjoys a notable if narrowing degree of competitiveness. However, the authorities’ fiscal plans, in combination with strong private demand, will largely eliminate the remaining undervaluation of the ruble. Downside risks in this regard arise from the possibility that catch-up gains in productivity—which have so far limited the loss of competitiveness in tradable sectors as surging demand for labor by nontradable sectors have pushed up wages—will begin to wane as demand-induced pressures continue to fuel appreciation and rapid wage growth. This points to the urgency of reinvigorating structural reforms in order to unlock further productivity gains. It also suggests that demand pressures over and above what is currently projected could begin to take a considerable toll on manufacturing growth and export diversification.

42. In the context of narrowing freedom of action, additional fiscal relaxation would significantly increase risks of procyclical tightening and of the real exchange rate overshooting its long-term path. There is little risk of a procyclical tightening now—large reserves and low indebtedness leave considerable scope for deficit financing. However, the rise in the balanced-budget oil price, from about $30 per barrel last year to $55-60 per barrel by 2009, illustrates the speed at which margins for maneuver are narrowing. The very fast unwinding of the twin surpluses that is in store points to the risk of fiscally induced overshooting of the real exchange rate if above-trend oil prices make it difficult for the government to resist pressures for further relaxation over and above what was discussed with the mission.

43. This points to the urgency of controlling expenditures. The new framework for spending oil revenues is close to best practice for management of natural resource wealth. But its credibility is undermined by the large back-loaded spending cuts it assumes, not least considering that large transfers to the pension fund are needed to avoid a socially unacceptable drop in the replacement rate. In view of this, realizing significant expenditure savings in socially sensitive areas in 2010-11, the run-up to elections, will be difficult without a reinvigoration of efficiency-enhancing social sector reforms.

44. Besides the risks of overheating, the planned interventions in the economy also raise questions about the efficiency of spending. In some areas, the interventions go outside the normal purview of government. More generally, the limited progress with regard to public-administration and civil-service reforms, and Russia’s low score in international comparisons of corruption and rent seeking, raise questions about the efficiency of large interventions. While there certainly is a case for government support of infrastructure and basic research, and while the authorities are seeking safeguards against waste, a more cautious approach to interventions in the economy has served Russia well in the past. The increasing dynamism of the private sector suggests that priority should be given to unlocking this sector’s full potential by reducing government interference in the economy. Any scope for higher spending should primarily be directed toward improving infrastructure, overcoming problems in providing basic public services, and alleviating social problems associated with rapid economic transformation.

45. Turning to monetary policy, the renewed policy of maintaining a stable exchange rate threatens to undo gains in reducing inflation. The sharp increase in money growth in recent months as a result of record-high foreign exchange intervention is inconsistent with keeping inflation on track. Staff believes that the CBR should return to a policy of giving priority to inflation reduction, standing ready to allow appreciation as needed to keep inflation on target. In this regard, frequent changes in reserve requirements are not an effective substitute for a flexible exchange rate policy, as it tends to encourage disintermediation and discourage savings. To avoid entrenching inflation expectations, adopting a more flexible exchange rate policy is a matter of some urgency.

46. Inconsistent exchange rate and inflation targets are fueling capital inflows. Markets expect that the policy of resisting appreciation will eventually have to give way in order to keep control of inflation. This exacerbates capital inflows, further undermining control over money growth and inflation. By signaling that it will give priority to inflation reduction and allow appreciation if needed, the CBR would discourage speculative capital flows. However, much of the capital inflows are strategic in nature and so are relatively insensitive to monetary conditions. These flows are likely to increase in the coming years. To the extent that such inflows add to demand pressures, they are best offset through fiscal policy.

47. The rapid development of the financial sector is much welcomed, but financial sector vulnerabilities are rising. Competitive forces unleashed by access to international capital markets and entrance of foreign players are causing rapid deepening and broadening of financial markets. But the associated pace of credit growth will place a premium on effective supervision and prudential regulation. The rapid increase in banks’ consumer lending, holding of ruble-denominated corporate bonds, and open foreign exchange positions should be kept under close review. Vulnerabilities continue to be heightened by the lack of access of many banks to the interbank market, and add urgency to the need to further strengthen Russia’s prudential framework and regulatory practices. The Financial Sector Assessment Program update now underway with a joint Fund-Bank expert team will provide an opportunity for an early in-depth review of vulnerabilities and regulatory practices.

48. Improving the investment climate is the main long-term challenge. Despite the increases in recent years, the level of investments remains relatively low. Moreover, Russia scores poorly in international comparisons of the investment climate. The limited progress with regard to important reforms—not least, civil service, public administration, and legal reforms—has been of limited consequence so far because high oil prices and the still strong catch-up potential have entailed robust growth. To maintain such growth as the scope for catch-up gains begins to wane, it should be a priority for the new government coming into the office after the elections to reinvigorate such reforms.

49. It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

The Increasing Role of Financial Markets in Economic Growth

Russia’s financial sector is expanding at a rapid clip. Measured by assets, the sector as a whole has increased to more than 150 percent of GDP as of end 2006.

The growing economic importance of the sector is reflected in the rising share of investment that is being financed with debt.

Russian Financial Markets 1/

(in percent of GDP, unless noted otherwise)

article image
Source: CBR, Finam, MICEX, RTS

In percent of household income

  • The share of bank loans in investment grew steadily from 5 percent in 2003 to almost 9 percent in 2006, although the bulk of bank lending remains short-term (less than three years).

  • The corporate bond market is expanding rapidly and financed 6-9 percent of investments in 2006, up from virtually nil in 2003. The supply of funds in the corporate bond market is driven by ample liquidity in the banking system, an expanding base of domestic institutional investors, and increasing foreign participation after the removal of all remaining capital controls in July 2006 and the acceptance of the ruble as a full settlement currency by the two major clearing and settlement systems. Demand is driven by competitive financing conditions. High-rated companies can generally issue bonds at interest rates and maturities that are more favorable than on commercial bank loans, while for lower rated companies that do not have access to bank financing the bond market is often their only source of external financing. The success of the corporate bond market is also reflected in the diversity of issuers, with retail trade, power generation, and metals and mining as the fastest growing sectors at present.

uA01bx01fig01

Corporate bonds by sector, 2007

Citation: IMF Staff Country Reports 2007, 351; 10.5089/9781451945881.002.A001

Rapidly-growing household credit has supported the consumption boom.

  • Household credit grew at an average rate of more than 100 percent a year, during the past three years, as banks rapidly increased their exposure to retail lending. Consumer credit expanded especially fast, reaching almost 12 percent of household income (16 percent of consumption) in 2006. Although growth in consumer credit has moderated somewhat recently, it is still growing at 75 percent year-on-year. Besides saturation in some market segments, the slowdown reflects in part that concerns about loan quality have caused a tightening of lending standards.

  • The mortgage market remains small, financing only about 5 percent of all real estate transactions, and is mostly serving relatively high-income households. Nevertheless, the market is expanding steadily, supported by increasing competition among banks and recently introduced refinancing instruments.

The Budget Framework—Issues and Recent Developments

The new budget framework entails the creation of a second oil fund, the introduction of three-year budgets, and steps towards performance budgeting. From 2008, the existing oil stabilization fund (OSF) will be capped at 10 percent of GDP. It will continue to be invested in highly liquid securities and serve as a buffer for the budget against a drop in the oil price. Once the OSF reaches 10 percent of GDP, additional oil revenues will be accumulated in a new National Welfare Fund which will invest in higher-yielding securities. The institutional arrangements for the management of these funds are currently being discussed. Another important innovation is the introduction of three-year rolling budgets for the federal government and the federal extrabudgetary funds, the first of which have already been adopted for 2008–10. Moreover, in a gradual move towards performance budgeting, the government has started to include performance indicators in the federal budget covering 70 percent of expenditure.

The changes could substantially improve demand management. A key innovation in this regard is the introduction of the concept of the non-oil balance, which will be capped at a deficit of 4.7 percent of GDP starting in 2011. Of this deficit, up to 3.7 percent of GDP may be financed from oil and gas revenues, which under the new framework will also encompass the extraction and export taxes on natural gas and oil products, while the cutoff price will be abolished. A remaining deficiency in the new framework is that the corporate income tax and dividend revenues from oil, as well as the extraction tax revenues accruing to the regional governments, will remain excluded from the stabilization fund mechanism and accrue to the budget as non-oil revenue. The envisaged transfer of oil revenue of 3.7 percent of GDP to the budget is consistent with the calculations of the optimal level of spending of oil and gas revenues based on an intergenerational framework discussed in Chapter I of the 2006 Selected Issues Paper.

Table 10.

Russian Federation: Public Sector Debt Sustainability Framework, 2002-12

(In percent of GDP, unless otherwise indicated)

article image

General government 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.

1

Staff estimates of the international competitiveness of Russian wages are based on a cross-country panel framework, including 85 countries, which models manufacturing wages denominated in U.S. dollars. The equilibrium wage is estimated as a function of various measures of productivity and income, including per capita GDP, human capital, share of agriculture, and institutional indicators.

2

The staff’s estimate assumes that the unallocated reserve appropriation equal to 5 percent of total spending is actually spent and that the government makes full use of the annual borrowing of up to 1 percent of GDP permitted under the new fiscal framework (see Box 2). The Ministry assumes that not all of the reserve allocation would be spent and that no additional spending would be approved that would require borrowing above the currently envisaged 0.6 percent of GDP.

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Cover IMF Staff Country Reports
Russian Federation: 2007 Article IV Consultation: Staff Report; Staff Statement; and Public Information Notice on the Executive Board Discussion
Author:
International Monetary Fund
Volume/Issue:
Volume 2007: Issue 351
Publisher:
International Monetary Fund
ISBN:
9781451945881
ISSN:
1934-7685
Pages:
58
DOI:
https://doi.org/10.5089/9781451945881.002

Production, Income, and Terms of Trade

(in annual percent changes)

Real gross fixed capital formation and terms of trade

(annual percent changes)

Annual private sector domestic and foreign borrowing 1/

(flows in percent of GDP)

Contributions to GDP

(log differences)

Real wages and real consumption 1/

(annual percent changes)

Energy export revenues and government balance

(annual changes in USD billions)

Contributions to GDP growth

(In percent)

Five basic sectors

(annual percent changes)

Crude Oil Production 1/

(Quarterly, yoy growth rate)

Real effective exchange rate

(average annual percent changes)

Import Leakage

(Imports in percent of real dom. demand)

Unemployment and labor utilization

(in percent)

Total factor productivity

(Annual percent change)

Headline and Core Inflation

(Annual percent change)

Inflation and Nominal Effective Exchange rate

Current account balance

(In percent of GDP)

Unit labor costs in US dollars1

(Index, 1997=100)

Russia: Equilibrium US-dollar wages and actual wages, 1993-2006

(Manufacturing sector)

External debt

(in USD billions)

General Government Balance

(In percent of GDP)

Monetary aggregates

(Monthly, real, annual percent changes)

Corporate bonds by sector, 2007