IMF repeats its calls for Russia to implement economic reforms

BOFIT Viikkokatsaus / BOFIT Weekly Review 2015/32

​A report on the IMF’s annual Article IV consultations with Russia states that Russian GDP is expected to contract 3.4 % this year and then recover slowly to a meagre growth of 0.2 % next year. The IMF said increased geopolitical tensions were the largest risk to the Russian economy, but pointed out that e.g. a further drop in oil prices and inward-looking policies could also produce even more anaemic economic trends than currently expected. The report noted, however, that Russia still has substantial buffers to confront risks over the short term.

Over the medium term, the IMF was most concerned about the sustainability of public finances as oil prices are expected to remain low. The IMF encouraged Russia to modify its budget rule to more quickly respond to changes in oil prices and put greater emphasis on saving. For example, the Fund noted that substantial fiscal savings could be achieved by reforming the pension system, and e.g. cutting energy subsidies and better targeting of social transfers. In addition, the IMF would like to see more tailored capital support to the banking sector with strengthened supervision, as well as eliminate the temporary regulatory forbearance measures to minimize the costs for the public sector.

Because Russia has failed to tackle its structural economic problems, the IMF estimates that potential growth of the Russian economy has slowed to 1.5 %. Unfavourable demographics and low retirement ages mean a shrinking labour force. A weak business environment and poor infrastructure cause disincentives to invest. The large role of state-owned and state-controlled firms in the economy hampers competition and efficiency. In addition, many recent measures to support the economy have generated additional distortions that further impair growth potential. The IMF noted that reforms to support growth could include reform of the pension system, reduction of barriers to trade and improved oversight of large government capital investment projects.

Russian officials broadly agreed on the need for structural reforms.

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