Press Release No. 19/425

IMF Staff Concludes Visit to Russia

November 20, 2019

An International Monetary Fund (IMF) mission, led by James Roaf, visited Moscow and Kaluga during November 13-20, 2019, to discuss recent economic developments, Russia’s economic outlook, and the authorities’ policies. At the conclusion of the visit, Mr. Roaf made the following statement:

“Russia’s overall economic situation may be characterized by three main factors. First, adherence to a sound macroeconomic framework, which supports economic activity by reducing uncertainty, keeping inflation under control and providing confidence in the exchange rate. Second, structural rigidities limiting growth, notwithstanding important ongoing reform efforts in a number of areas, including under the national projects. Third, international sanctions which have pervasive effects in adding to business uncertainty, holding back both foreign and domestic investment, and reducing Russia’s international market integration. Taking these factors together, the medium-term outlook for the economy remains subdued, with growth projected at or below 2 percent through the next few years.

“In the near term, GDP is projected to grow by 1.1 percent in 2019, held back by weak domestic demand and an unfavorable external environment. Growth is forecast to pick up to 1.9 percent in 2020 as delays in government spending on the national projects are addressed. The inflation rate is projected to continue falling, to below 3 percent in early 2020, before rising gradually towards the 4 percent target as domestic demand strengthens and the effects of transitory disinflation factors fade out.

“The significant interest rate cuts implemented by the Central Bank of Russia (CBR) since June have been an appropriate response to weakening inflationary pressures. With inflation expected to remain below target throughout 2020, further interest rate cuts will be appropriate.

“Fiscal policy has been tighter than originally intended in 2019, due to the temporary delays in national projects execution and overperformance of revenues, especially personal and corporate income tax. This has probably contributed to the slowdown in demand. If the improved revenue performance is determined to be permanent, consideration should be given to further growth-friendly fiscal measures.

“Russia’s fiscal rule, under which government revenues from higher oil prices have been automatically invested abroad via the National Welfare Fund (NWF), has been successful in building national wealth and insulating the economy from fluctuations in oil prices, thus encouraging growth of the nonoil economy. To maintain these benefits, NWF funds should continue to be invested abroad once its level exceeds the 7 percent of GDP threshold required to be kept in liquid foreign assets. Any use of NWF resources domestically should be subject to tight limits and a strong governance framework to guide project selection and ensure market rates of return.

“The cleanup of the banking sector is well advanced and in aggregate the sector appears to be stable, well-capitalized, and liquid. However, unsecured consumer lending continues to grow at rates exceeding 20 percent. The macroprudential measures introduced by the CBR may suffice to rein in this lending. However, in case stronger measures on household borrowing turn out to be needed going forward to contain risks to financial stability, the CBR should be granted legal authority to impose hard limits on loan-to-value and debt service-to-income levels of individual borrowers.

“Structural reforms remain key to accelerate growth. The national projects, if selected according to rigorous economic criteria and implemented effectively, are expected to contribute positively to growth by improving infrastructure and supporting a healthier and better-educated workforce. Russia’s efforts to strengthen the business environment have been reflected in improved survey results. However, businesses – especially in the important small and medium sized enterprise sector – continue to suffer from excessive bureaucracy and regulations, legal uncertainty, and corruption vulnerabilities. Reforms are needed to tackle the lack of competition and the large footprint of the state, including facilitating the entry and exit of firms, strengthening SOE governance, and ensuring competitive public procurement.

“The IMF team thanks the authorities in Moscow and Kaluga, as well as other interlocutors in the public and private sectors for their cooperation, open and constructive discussions, and warm hospitality. The team expects to return to Moscow in May 2020 for the regular Article IV consultations.”