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International Monetary Fund Urges Russia To Abandon Oil "Props"
October 23, 2013 12:21


Russia requires far-reaching policy reforms with the support of new investments, tight fiscal policy and more efficient use of resources. The pre-crisis growth factors of the Russian economy have been exhausted, according to the International Monetary Fund's annual review of the Russian economy.

 "Large-scale reforms of economic policy are needed to implement the medium-term potential of the Russian economy and reduce its vulnerabilities", - the document emphasizes. “It is impossible to go back to pre-crisis growth model based on rising oil prices, increasing download of free capacities and reduce of the technological gap. Growth in the next decade should be based on more efficient use of resources and diversified increased investments”. 

To realize this, International Monetary Fund experts suggest, firstly, improving corporate governance in order to ensure the transparency of the economy, as well as the investment and business climate; to reduce the role of regulation and state involvement in the economy, strengthen the macroeconomic policy framework and the financial sector.

These efforts will be supported and expanded through further integration into the world economy, including eventual accession to the OECD, as the authors of the report suppose.

In general, the balance of risks in the Russian economy is moving to negative direction now, as a result of possible external (e.g., oil prices) and internal (e.g., investors’ decisions) changes, the experts say.

Expansionary fiscal and monetary policies, at best, can only lead to a modest and unsustainable in the long term increase in GDP, while creating conditions increasing uncertainty about the state's policies.

To control the inflation and reduce the risks, the authorities should continue to pursue the current monetary policy with a tendency towards its tightening, contain additional fiscal stimulus measures and consider conducting additional measures to reduce the excessive growth of retail lending, the document says.

The government needs to tighten fiscal rule gradually and save greater amounts of revenue from non-renewable petroleum reserves in the country, As for the Central Bank of the Russian Federation, it should complete its transition to a flexible exchange rate and the inflation target system by the end of 2014, the International Monetary Fund reports.

The political pressure aiming to stimulate the economy in the short term makes a threat to the stability and the newly created macro-economic policy supporting measures.

At the same time, Russia is better prepared to withstand adverse problems at present than in the past. More flexible exchange rate can absorb external problems, and improved crisis management should facilitate the provision of sufficient liquidity to reduce the consequences for the banks. More significant international reserves will provide a buffer.

However, when the level of the Reserve Fund is below the Target Fund, the authorities face the risk of pro-cyclical fiscal adjustment in case of a significant and prolonged downturn in oil prices, the experts warn.

According to International Monetary Fund experts, the authorities should resist the pressure in order to increase government spending in 2013. Additional incentives can at best lead only to a modest and unsustainable in the long term growth, but with negative consequences, such as increased inflationary pressure and volatility of the exchange rate.

International Monetary Fund strongly urged the authorities starting from year 2014 to tighten fiscal policy further by additional 0.4% of GDP per year (relative to baseline). This might help to restore the Reserve Fund in 2018 leading it to the level of about 7% of GDP. "This level will allow the authorities to keep the costs within the budget rule for two years without recourse to additional borrowing in the market if the price of oil does not drop to 60 dollars”, - as mentioned in the report.

Author: Anna Dorozhkina

Tags: International Monetary Fund oil prices Russian oil and gas industry Russian economic policy  

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