Executive directors of the International Monetary Fund have recommended to the Russian government gradually phasing out state support programs.

The Russian government has been requested to phase out the country’s economic stimulus program by officials at the International Monetary Fund. The International Monetary Fund executive board held talks with Russia in the middle of the summer. 

The Russian economy came back after the global economic crisis; however the country is still vulnerable to world market fluctuations. In 2009, the gross domestic product decreased 7.9 percent amidst falling world markets and decreasing oil prices. The inflow of capital into Russia reversed, and the availability of credit substantially contracted. Recovery resumed in the third quarter of 2009 with the rise in export activity and inventory accumulation. Despite several small problems in the first quarter of 2010, economic indicators now make it evident that recovery is progressing steadily. As demand grows, economic expansion becomes a function of consumer activity. The government’s increase of state pensions by 45 percent is also considered to have played a part in the Russian economic rebound. With a significant gap in product output, the inflation rate went down considerably. The situation on the labor markets has also stabilized, as the unemployment rate went down and earnings increased. The balance of payments has exhibited a healthy surplus. The Russian currency appreciated significantly after reaching its low point in the first quarter of 2009. 

At the same time, the banking system in Russia continues to face problems. The credit crunch has not been fully alleviated. The banks’ scramble to reorganize their balance sheets, coupled with a low demand for credit, placed significant restraints on commercial and consumer lending. Nonetheless, the number of past due accounts is decreasing. The banks already are ending their programs for boosting provisions and capital. Credit outlays showed slight increases in March and April of 2010. Increased demand for credit allayed the fears of economists and moderated the problems facing the lending industry. The Russian government has meanwhile been scaling back its unprecedented support measures designed to aid the banks during difficult economic times. 

Substantial economic stimulus was provided to lending establishments in 2009. As a consequence, the general government deficit (if one excludes oil revenues) rose from 8.25 percent of the gross domestic product in 2008 to 15 percent of the GDP in 2009.  However, the expansion was targeted primarily at low-multiplier areas, such as strategic industries, as well as the defense and security sector. By end-2009, the underlying federal government non-oil balance was some 9 percent of the GDP above both its pre-crisis level and the government’s own medium-term target. In June, the government passed a supplementary budget.

The fiscal policy of the Russian government has led to the flexibility of the rouble’s exchange rate. The Central Bank lowered the refinancing rate by 525 bps to 7.75 percent. Interest rates were at their highest in April 2009.

The lack of complete confidence in the stability of the Russian market, as well as new risk avoidance business imperatives, restrained banking activity. Deposit and lending rates stayed low for a number of months. The declining balance of payments from the federal budget, combined with the widening gap between production and consumption, lowered the targets for inflation and the currency exchange rate.   

Russia’s economic horizon looks bright, at least in the near term, with the rise in GDP estimated at 4.25 percent for 2010. While the increase is attributable to the reversal of the inventory cycle, increased consumer activity prompted by rising wages, as well as the revival of the banking sector, economists are in agreement that without increasing oil prices, the growth of the economy will be slow. In 2011, economic growth may even be lower than in 2010. Some forecast that the GDP will increase by only 4 percent in 2011. The gap in production, relatively low demand, currency appreciation, and depressed inflation (projected at 6 percent for 2010 and 5.5 percent for 2011) will not be conducive to a robust economic expansion.  

In line with their observations, the executive directors of the International Monetary Fund have recommended to the Russian government gradually phasing out government support programs. International Monetary Fund officials consider Russia’s pre-crisis policy of accumulating oil revenues in a stabilization reserve  fund to be highly effective, as the state savings allowed for fiscal expansion, monetary easing, and liquidity support to Russia’s banking establishments. Russia’s fiscal policies also prevented the depreciation of the rouble. Medium term macroeconomic projects for Russia now include performing fiscal consolidation, relieving the market pressure for appreciation and inflation, as well as reviving the banking industry and enhancing the business conditions for investment in the country. Fundamental structural reforms will be required to achieve these objectives.   

In view of ongoing market developments the directors of the International Monetary Fund think that it would be best for Russia to phase out its stimulus programs and to resume economy support measures in 2011 and 2012. The International Monetary Fund does not believe that supplementary budgetary appropriations recently secured by the Russian government were necessary and opposes any additional appropriations in the fall of 2010. As most stimulus measures adopted in Russia were permanent in nature, such as pension increases, the reforms of the public sector that have been overdue for quite some time will be essential for precluding rapid appreciation. The International Monetary Fund advised Russian officials to strengthen the country’s fiscal framework. In view of IMF directors, Russia’s priorities should be set on minimizing the non-oil deficit in yearly and interim state budgets. These measures will help Russia adopt a strong countercyclical fiscal position, all the while strengthening the nation’s fiscal policy.

In the view of the International Monetary Fund, among the primary objectives for the country’s monetary policy should be the goal of restraining inflation. Most IMF directors think that Russia should start a tightening cycle, while some directors believe that tightening could lead to exchange rate volatility and capital loss.

According to the International Monetary Fund, easing the exchange rate policy is also an important goal for Russia. Increased flexibility in the exchange rate was welcomed by the IMF directors, as it helps to control the inflow of speculative capital and furnishes incentives for internal borrowing.     

At the same time, others have said that the Russian economy would not be able to handle the instability in the exchange rate. Critics of the IMF proposal have cited Russia’s reliance on world commodity prices and the exposure of the country’s financial sector to problems that could arise from exchange rate volatility.

Russia received high marks from the International Monetary Fund for instituting workable procedures to supervise the banking sector. Among other IMF recommendations were suggestions to improve loan risk assessment and to make provisioning forward looking. According to an IMF report, the Central Bank of Russia should be granted increased supervisory authority, specifically in relation to consolidated supervision and lending. Of course, with the current level of state reserves, the Russian government is in a position to ensure the country’s financial stability. Still, past-due and modified loans have the potential for curtailing healthy economic growth and limiting credit availability.       

With the short-range and medium-term goals in mind, Russian officials in charge of the economy should look to broader objectives, according to the IMF. Among such long-term goals are structural economic reforms, improving the investment climate, and increasing the potential for productivity gains. 

Russia’s accession to the World Trade Organization could aid in the achievement of the country’s ambitious economic agenda. Russia’s current policy of continuing state taxation and accumulating revenues derived from the sale of oil and gas are critical for the country’s programs of modernizing and diversifying its economy.