Russia: Fragile recovery from crisis
*Strong response to
crisis but growth still fragile
*Economy recovering
from contraction of nearly 8 percent in 2009
*Need to reverse
fiscal stimulus and boost potential growth
The IMF expects Russia’s economy to resume growth in 2010, by 4¼
percent, after a contraction of 7.9 percent in 2009. Inflation has
fallen rapidly, the current and capital accounts have both rebounded
from sharp deteriorations, and the ruble has strengthened.
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But the IMF says the banking system is still under strain and
financial markets remain vulnerable. The key policy challenges are to
reverse the large fiscal stimulus and implement structural reforms to
boost potential growth.
The IMF’s Russia team recently conducted its annual checkup of
Russia’s economy, known as the Article IV consultation. IMF Survey
Online spoke with Poul Thomsen, who is now moving on after having been
mission chief for Russia since 2004, about how the government has been
managing Russia’s economy and what more needs to be done.
Q.IMF Survey Online: The authorities
responded strongly to the crisis. What allowed them to do so?
A. Poul Thomsen: Above
all, the authorities’ precrisis policy of taxing and saving much of the
oil revenue windfall gave them ample room for maneuver in responding to
the crisis. They were running large headline budget surpluses in the
precrisis years. And in the process, they accumulated large reserves,
almost $600 billion, as a result of sizable current account surpluses
and substantial capital inflows.
So when oil prices declined and the crisis hit, the oil stabilization
fund mechanism meant the authorities had significant scope for a
vigorous policy response. There was room for a dramatic turnaround in
the fiscal position from a large surplus to a large deficit, this
turnaround amounted to almost 10 percent of GDP. And the authorities
could, at the same time, have an accommodating monetary policy,
essentially financing the deficit by drawing down on their oil funds
held at the central bank, which is equivalent to printing money. This
was on top of their earlier massive support to the banking system and to
private entities that had large, unhedged foreign exchange exposures.
Q. IMF Survey Online: Despite the
forceful response, Russia was hit hard by the crisis. Why do you think
this happened?
A. Thomsen: Even though
the authorities did save much of the oil windfall, they gradually began
to spend more and more of it in the years preceding the crisis.
At the same time, private sector activity was very buoyant, so the
economy began to overheat. Then, when the crisis hit, the economy was in
overdrive, and output dropped by more than in many other countries.
Another problem was that the relatively fixed exchange rate policy
before the crisis fueled expectations of ruble appreciation as oil
prices increased steadily. This policy essentially encouraged investors
and borrowers to take one-way bets on the ruble, which led to very large
capital inflows. This was especially pervasive among Russian banks and
corporates. Indeed, the private sector built up external liabilities of
almost half a trillion dollars, while the government built up reserves
of roughly the same amount. This left Russia vulnerable to the reversal
of capital flows that took place during the crisis.
Q. IMF Survey Online: What do you see
as the main challenges facing Russia in the future?
A. Thomsen: Our main
concern is on the fiscal side. Russia has undertaken an enormous fiscal
stimulus, almost 10 percent of GDP, to help mitigate the impact of the
crisis. It will now have to reverse this fiscal stimulus as cyclical
conditions in the economy normalize and private sector demand picks up.
Some three-quarters of the stimulus reflects permanent measures,
mostly in the form of higher pension outlays, which means expenditure
cuts will have to happen in other areas. Discretionary spending, as
opposed to statutory spending, accounts for only 9 percent of GDP. This
means that Russia will not be able to withdraw the fiscal stimulus
unless it undertakes significant public sector reforms in order to allow
savings in socially sensitive areas such as health care, education, and
pensions. Obviously, these social sector reforms have to be done in a
way that protects the most vulnerable. But without such structural
changes, it will be difficult for Russia to complete the necessary
unwinding of the fiscal stimulus.
Q. IMF Survey Online: Russia has made
progress in strengthening banking supervision. What more is needed to
increase confidence in the Russian banking system and to facilitate
credit extension?
A. Thomsen: Much has
indeed been done to improve banking supervision in recent years. The
central bank has stepped up its monitoring and analysis of risks to the
banking system. Clear progress has also been made on day-to-day
supervision over institutions, including recently through stress
testing. And the central bank now has a wide range of tools that can be
used to provide emergency liquidity.
But there are still some weak spots. Perhaps one of the most
important ones is the ongoing pervasiveness of connected lending in the
Russian banking system, with banks lending to owners and their related
enterprises, which is a potential source of serious instability if there
is a shock to the system. This is why we have called for the central
bank to be granted greater supervisory powers over banks and their
affiliates.
Another area of concern in the banking sector is the loan
classification and provisioning system, which is still not up to
international standards. For instance, it is not clear how many current
loans were actually restructured during the crisis, so greater
transparency is needed in this area. And loan provisioning needs to be
made more forward looking, so that banks are preparing for expected
future losses and not just those that have already taken place.
IMF Survey Magazine |