BOFIT Viikkokatsaus / BOFIT Weekly Review 2021/07

The expert mission conducting the International Monetary Fund’s latest Article IV Consultation projects the Russian economy to show 3 % GDP recovery this year and even higher growth next year. Central assumptions of the IMF’s forecast are that the price of Urals crude oil will average around USD 50 a barrel, that Russia will make good progress in covid vaccination by mid-summer, and that oil exports will recover following the current OPEC+ agreement. The IMF notes that downside risks are likely to dominate in the next few years. These include possible protraction of the covid epidemic and the vaccination effort, possible oversupply on international oil markets, as well as geopolitical tensions with the west. The upside risks for the forecast include the possibility of strong growth of pent-up demand.

Largely due to the drop in fixed investment, the IMF estimates the Russian economy’s growth potential has moved slightly down to 1.6 % a year, and actual growth is to slow towards that rate after 2022. The IMF team noted that total factor productivity was already around zero before last year’s recession struck.

The IMF commended the central bank for its monetary response to the recession, i.e. a gradual but substantial lowering of the key rate in 2020. It recommended continued easing to avoid the risk that inflation might decline from its current accelerated pace to a level below the CBR’s inflation target of 4 % p.a.

As to fiscal policy, the IMF encouraged Russia to keep with the reservation stated by the authorities that there is a need to be ready to re-evaluate plans to reduce the budget deficit if the economy weakens and additional spending support is required. The IMF experts said it would be appropriate to retain the upper and lower limits of unemployment compensation at the increased levels of last spring. Russia should move further to a profit-based oil taxation scheme from the current interim phase which involves subsidising domestic oil refining and fuel consumption. They hoped that this tax manoeuvre could be completed by 2024. The IMF also highlighted the benefits from scaling down tax rebates, which reached 4 % of GDP in 2019.

The IMF recommended that forbearance on balance-sheet valuations granted to the banking sector last spring should not be continued. This, with the phasing out of certain other breaks already earlier, concerns mainly loan quality appraisals and loss provisions on restructured bank loans. The IMF noted that Russia’s recession-related losses do not seem to present risks for capital adequacy of systemically important banks. The IMF recommends that Russia refrain from excessively prolonging the housing loan subsidy programme, which, for its part, may be related to recent increases in house prices.

Regarding economic reforms alongside overall issues such as corporate business environment, governance and corruption, the IMF welcomed Russia’s ongoing efforts to “guillotine” old regulations governing business operations and replace them with new rules. At the same time, the IMF team noted that the process should not become a substitute to increasing competition. The consultation report commented that the 13 national projects Russia launched in 2018 could improve the economic growth possibilities over the longer term as long as they do not increase the government’s role in the economy but rather expand opportunities for private enterprises. It emphasized that the project procurement procedures should be fair and transparent.

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