Economic recession hits Russia – IMF

August 3, 2015 – The International Monetary Fund (IMF) has said that Russia will be in recession in 2015 due to sharp drop in oil prices and prevailing sanctions from Europe and the United States.

The IMF made the disclosure in a press statement.

“GDP is expected to decline by 3.4 percent driven by a contraction in domestic demand weighed down by falling real wages, higher cost of capital, and weakened confidence”, the IMF said, adding that the external position will remain challenging due to deleveraging in the face of limited market access.

“Inflation is expected to come down due to the dissipating impact of the ruble depreciation, the limited wage indexation in the budget and the recession. Growth should resume in 2016 while inflation continues to decline. However, the recovery is unlikely to be strong as the limiting factors behind decelerating potential growth will take time to be addressed, leading to medium-term growth of 1.5 percent per year. An increase in geopolitical tensions is the main risk to the outlook”, the IMF said.

IMF which issued the statement at the end of Article IV Consultation 1 with the Russian Federation commended the policy actions taken by the authorities to stabilize the economy in light of the significant stress created by lower oil prices and sanctions.

According to the international agency, pre-existing structural weaknesses also contributed to this difficult situation.

“Directors concurred that continued prudent policies and reforms will be necessary to ensure macroeconomic stability and boost potential growth. Directors agreed that a supportive fiscal stance is appropriate at present, given cyclical considerations and available fiscal space”.

IMF however highlighted that quasi-fiscal operations should be limited and coordinated to avoid an overly stimulative impulse.

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For the medium term, Directors called for a gradual fiscal tightening to adjust to lower oil prices and rebuild buffers.

“ In this context, they welcomed the authorities’ intention to revisit the fiscal rule so that the oil price benchmark better reflects market developments. Directors also underscored the need for permanent and credible fiscal measures, including pension reform, reduction of energy subsidies, and better targeting of social transfers.

“Directors concurred that monetary easing should continue at a pace commensurate with the decline in underlying inflation and inflation expectations as external and financial stability risks abate…

“Directors noted that policies have been successful in stabilizing the banking system. They highlighted the need to support individual banks according to their specific capital needs while adjusting the parameters of the capital support program to strengthen incentives and minimize cost to the public sector.

“Directors encouraged the authorities to phase-out regulatory forbearance along with the implementation of the capital support program and better align Russia’s resolution framework to best international practices. They also saw a need for reducing banking sector fragmentation and encouraging competition among banks, by stepping up supervision and moving toward the adoption of Basel III capital standards.

“Directors emphasized that accelerating the pace of structural reforms is key to raising Russia’s potential growth. In this context, they noted that priority should be given to further measures aimed at strengthening governance and property rights and streamlining regulation. Directors also emphasized the need to reduce trade barriers, improve the transparency and efficiency of public investment, and increase competition in domestic markets. They noted that reinvigorating the privatization agenda, as soon as market conditions permit, would enhance economic efficiency. In addition, Directors highlighted that a deeper and more efficient financial system would improve the allocation of capital and boost potential growth”, the IMF noted.