BOFIT Viikkokatsaus / BOFIT Weekly 2019/33

The International Monetary Fund (IMF) reports that Russian GDP grew by 0.5 % a year during 2014−2018, while in the same period other emerging economies in the G20 and eleven EU new member countries on the averages of the two groups saw growth exceeding 3 % a year. The IMF estimates that foreign sanctions reduced Russian GDP growth in those years by 0.2 percentage points a year, while the fall in oil prices knocked off 0.6 percentage points a year.

The IMF expects Russia’s 13 national projects to lift GDP growth in the next few years to 2 % a year through increased government spending. The projects focus on such areas as transport infrastructure, education and health care. The IMF also estimates that the national projects, if properly targeted and effectively implemented, could together with a gradual increase in the retirement age increase Russia’s potential economic growth from the earlier-estimated 1.5 % a year to 1.6−2 % by 2024 that marks the end of the period reviewed.

The IMF recommended that the central bank stays the course with its policy of gradual relaxation of the monetary stance. Improving communications on factors affecting monetary policy will also help, which should focus on the central bank’s view of the outlook for the economy and inflation.

The IMF encouraged Russia to keep to its fiscal rule (e.g. refrain from measures like the relaxation already made as regards the deficit limit for the 2019−2024 budgets). In the IMF’s view, the assets of the National Welfare Fund (NWF) should not be used in a quasi-fiscal manner of e.g. lending for such purposes as project financing even after the liquid assets in the NWF reach the required level of 7 % of GDP, which is likely to happen next year.

Regarding government finances, the IMF also recommended lowering the high wage-based social taxes, which could then be offset by cutting back on various tax benefits. Oil taxation needs to be simplified, especially given that after a promising start of the reform in this area the taxation became more complex. Subsidisation of domestic oil consumption should be phased out gradually, and the classification of budget spending as secret should decrease. Due to the lack of reform, early retirement provisions remain overly generous, and social support policies have not been overhauled to better meet the needs of people and reduce poverty.

The IMF offered several recommendations for the banking sector, including the introduction of regulations to prevent a bank’s related parties from receiving more favourable treatment from the bank, as well as reaffirming the independence and professional competency of external auditors. The Duma remains reluctant to pass legislation that would give central bank supervisors the necessary legal protection when exercising professional judgement in supervision tasks.

Looking at broader economic reforms, the IMF noted that the lack of competition and the related government’s involvement in the economy remain core problems for Russia. Oversight of state-owned enterprises needs to improve, which in turn requires proper standardised economic reporting. Regarding barriers to trade, the IMF noted that the domestic content requirements applied in Russia are the third highest among the G20 countries.