core sector communique

Statement by IMF Mission to Russia

December 9, 2010

An International Monetary Fund (IMF) mission headed by Mr. Juha Kähkönen visited Moscow during December 2–9. The team met with Deputy Prime Minister Kudrin, Bank of Russia Governor Ignatiev, other senior officials, and representatives of the banking community, academics, and think tanks. The discussions focused on Russia’s economic policy priorities as the authorities exit from the extraordinary measures they put in place in response to the international economic crisis. At the conclusion of the mission, Mr. Kähkönen made the following statement today in Moscow:

“Fundamental structural reforms and stronger macroeconomic policies are needed to boost growth in the medium term. Russia’s recovery has resumed following a slowdown in the summer, but is likely to remain subdued against the backdrop of an uneven global recovery and heightened macro-financial risks. Growth is projected at 3.7 percent in 2010 and 4.3 percent in 2011.

“A more ambitious, growth-friendly, and credible government budget deficit reduction than currently planned is needed. The deficit reduction envisaged for 2011 is a step in the right direction, but consolidation should be stepped up in the following years to reach the government’s long-term target for the federal deficit excluding oil revenue (the non-oil balance) of 4.7 percent of GDP by 2015. The more ambitious adjustment should be underpinned by a stronger and more credible fiscal framework. Specifically, the framework should avoid excessive use of supplementary budgets, and anchor budget policy on the non-oil balance to reduce expenditure volatility in response to oil price fluctuations.

“Monetary policy should focus squarely on reducing inflation. While the sharp increase in inflation in recent months has been driven largely by a drought-related spike in food prices, nonfood prices have also been increasing steadily since July. Inflation may be as high as 8½ percent during 2010 and is likely to remain elevated on unchanged policies. Accordingly, an increase in policy interest rates would seem warranted to prevent the second-round effects of food-price increases from taking hold. The increased exchange-rate flexibility is welcome, as it reduces the scope for conflict between the exchange rate and inflation and deters speculative capital flows. Indeed, a flexible exchange rate should be the first line of defense against volatile capital flows.

“While the banking system has stabilized, considerable risks remain and bolstering the supervisory framework is vital. The proposed strengthening of capital adequacy requirements and the government’s strategy for the banking sector, which envisages enhancing the Bank of Russia’s legal supervisory powers, and improving transparency, asset valuation, and corporate governance in banks, are welcome. Implementation of legislation on consolidated supervision and connected lending should also be a priority.”