COMMENT: IMF concludes 2020 Article IV consultations with Russia.

COMMENT: IMF concludes 2020 Article IV consultations with Russia.
Russia has not borrowed any money from the IMF for over two decades but it continues to invite the fund to review its economy every year as a health check-up
By Artem Zaigrin Chief Economist at Sova Capital in Moscow February 10, 2021

After the mission’s visit to Russia in November 2020, the IMF released a concluding statement with its Article IV report on February 9. This kind of assessment is typically conducted on an annual basis when IMF resources are requested. Although Russia has not requested IMF aid for nearly two decades, it traditionally asks for such visits anyway.

Russia entered the coronavirus (COVID-19) crisis with low growth but significant buffers and a disciplined fiscal policy, as well as an up-to-date monetary policy (inflation targeting).

GDP declined less than the mission expected in 2020 (-3.1% year on year vs. -3.6% y/y) and proved to be more resilient than its peers. This was partly related to the small service sector and high share of public-sector employment, while the industrial sector avoided COVID-19 restrictions for the most part.

Another pillar of the rather limited contraction was the mix of fiscal and monetary policies, including a relief package amounting to 4.5% of GDP and 200bps in rate cuts along with respective liquidity support to banks.

Low oil prices and geopolitical risks triggered the ruble’s weakness, which in turn boosted inflationary pressures. The CA surplus narrowed on the back of lower oil prices and weaker demand.

The ongoing recovery should accelerate from 2H21, with GDP growth projected at 3% y/y in 2021 and 3.9% y/y in 2022 as the second wave of COVID-19 recedes, vaccines become widely available and oil production cuts ease in line with the OPEC+ agreement.

The short-term risks are skewed to the downside and comprise the situation with COVID-19 and geopolitical tensions.

While authorities intend to withdraw the fiscal stimulus as the economy recovers in 2021, the IMF insists on keeping fiscal support in place as long as the situation remains fragile.

The fund commends Russia for its growth-friendly tax reforms in the SME and IT sectors, targeted social assistance and its recent decision to keep the maximum unemployment benefit at its post-March 2020 level. However, fuel subsidies should be phased out, although the most vulnerable groups should remain compensated.

The IMF welcomed the cuts to the key rate in 2020 and the introduction of new liquidity instruments. However, as the current upturn in inflation is driven mostly by one-off factors, the fund recommends cutting the key rate by another 50bps to guarantee that YE21 inflation is in line with the 4% target (the IMF sees CPI at 3.1% by YE21).

The potential growth upgrade and resumption of Russian incomes converging with those of advanced economies require far-reaching structural reforms that reduce the state’s share in the economy, improve the business climate, increase competition, address governance shortcomings and take steps to reduce the regulatory burden.

While national projects are believed to be a good step towards tackling structural bottlenecks, the fund warns that they should not result in the state’s share in the economy increasing.

“We agree with the IMF on Russia’s performance and policy response in 2020, and we do think that a milder fiscal consolidation with additional social disbursements could be necessary to support the fragile economic recovery. At the same time, we view the fiscal consolidation in 2021 as less aggressive and therefore unlikely to lead to significant disinflationary pressures. Because of this, we think CPI is unlikely to deviate significantly towards the downside from the 4% target (we project it at 3.8% y/y at YE21), while the pick-up in growth in 2H21 could make further rate cuts unnecessary. Moreover, elevated external volatility and geopolitical risks could keep inflation expectations at elevated levels, which could interfere with the transmission of Russia’s monetary policy,” said Artem Zaigrin, chief economist at Sova Capital.