Russian Federation: 2013 Article IV Consultation

KEY ISSUES

Context. Growth has slowed amidst weak investment and external demand, while theoutput gap appears to be at or near zero and inflation is elevated. Activity is currentlyweak, but is expected to accelerate somewhat later this year. However, structural factorsconstrain medium-term prospects. The introduction of a new oil price-based fiscal rule, amore flexible exchange rate, and operational improvements in monetary policy havestrengthened the macroeconomic policy framework. Financial sector reform hasprogressed, though sector indicators are mixed and rapid growth in unsecured retailcredit is of some concern. Risks remain tilted to the downside, including on account ofpossible external (e.g., oil price) and domestic (e.g., investor sentiment) shocks.

Near-term macroeconomic policy mix. Calls for policy stimulus are testing Russia'snewly strengthened macroeconomic anchors. But absent a widening output gap,expansionary fiscal and monetary policies would at best provide only a modest andunsustainable increase in GDP, while generating overheating and greater policyuncertainty. So far, the Central Bank of the Russian Federation (CBR) has kept its mainpolicy interest rate on hold. Fiscal policy is appropriately neutral this year but is underthreat from off-budget spending plans. To contain inflation and reduce risks, theauthorities should keep monetary policy on hold with a tightening bias, resist additionalfiscal stimulus, and consider further measures to dampen excessive retail credit growth.

Medium-term policy challenges. To reach higher sustainable growth, Russia needs tofurther strengthen the macroeconomic policy framework and implement supply-sidereforms. The authorities should gradually tighten the fiscal rule to rebuild fiscal buffersand save more of the nation's exhaustible oil income. The CBR should complete itstransition to a flexible exchange rate and inflation targeting (IT) by end-2014 as planned,which, combined with fiscal policy changes, would help anchor inflation expectations. Tomitigate supply-side growth constraints, Russia should reduce the regulatory burden tofacilitate more private sector activity in key sectors, strengthen the financial sector toimprove its ability to channel savings into productive investment projects, increasetransparency, and enhance the business climate. Further global integration, includingcompleting OECD accession, would support and broaden these efforts.