Table of Contents

  • Between the financial crisis which struck Russia in August 1998 and the global crisis which broke out in earnest in September 2008, the country had the strongest decade of growth in its history, with real GDP nearly doubling. This strong increase in output, coupled with the vigorous real appreciation of the rouble, driven mainly by the surge in energy and raw material prices, meant that nominal GDP measured in US dollars rose almost 7-fold during that period, more than in any other major country. Awide range of other economic and social indicators also saw dramatic improvements during those ten years. Total factor productivity grew strongly, real wages soared, and unemployment and poverty rates fell sharply. Strong current account surpluses, combined with a swing in the private capital account from large net outflows to even larger net inflows, pushed international reserves to nearly USD 600 billion, behind only China and Japan. The transformation of the government finances was particularly marked. After defaulting on part of its debt in 1998, the federal government ran a string of surpluses and almost extinguished public debt while building up foreign assets amounting to 13% of GDP by end-2008. The picture for inflation was more mixed, but for most of the past decade inflation was on a trend decline, falling from 85% in late-1998 to single digits by mid-2007. At that time, a combination of surging international food and energy prices and very rapid money supply growth in Russia pushed inflation back up to 15%, before it began to fall again in late-2008 as energy and commodity prices collapsed and money supply growth came to a sudden halt.

  • The Russian Federation enjoyed a decade of strong growth between the 1998 financial crisis and the intensification of the global economic crisis in September 2008, but has since been gripped by a severe recession. The main near-term challenge for policy-makers is to manage the consequences of the economic downturn and limit its severity and duration. Looking beyond the crisis, the overarching challenge is to put in place a sounder growth model, one driven by innovation, investment, and the accumulation of human capital. This will ultimately require reforms in many areas, but this chapter focuses on a limited number of key challenges: 1) further strengthening the macroeconomic policy framework; 2) improving the functioning of the financial system; and 3) raising the levels of competition throughout the economy via streamlined state involvement and lower barriers to entry.

  • Until late 2008 the main fiscal policy challenge for Russia was to decide what proportion of abundant oil revenues to save and which assets to accumulate. The onset of the crisis transformed that situation, giving rise to large deficits and bringing questions of fiscal sustainability back into play. The main short-term fiscal policy challenge is to gauge the optimal amount and form of fiscal stimulus as well as the right scale and modalities of public support for the banking system, while safeguarding fiscal sustainability. Over the longer term, fiscal policy has an important contribution to make to raising potential growth rates. Taxation of natural resource wealth will remain a critical issue in this respect, and scope exists for the government to appropriate economic rents more efficiently and consistently across sectors while protecting incentives for exploration and development. Reforms in this and other areas can make the overall tax system more growth-friendly without worsening equity.

  • This chapter discusses the challenges for monetary and exchange rate policy in an environment of large terms terms-of-trade shocks and a volatile capital account. It first examines how effective the quasi-fixed exchange rate regime was in fostering disinflation during the upswing in oil prices (2002 to mid-2008), arguing that, while the upturn in inflation from mid-2007 can be attributed partly to the surge in international commodity prices during this period, underlying inflation remained high due to an excessively accommodative monetary policy stance. The chapter then reviews monetary and exchange rate policy after the onset of the global financial crisis, which triggered a large negative terms-of-trade shock and massive capital outflows. It acknowledges that the pre-announced gradual depreciation of the exchange rate was costly, but suggests that this policy can be seen – ex post – as a second-best policy in an environment of debt dollarisation. However, the first-best policy would have been not to offer such strong incentives for corporate borrowing in foreign currency in the years leading up to the crisis by allowing more exchange rate flexibility. The chapter suggests that not all conditions for adopting inflation targeting in Russia are yet in place, but that preparations should be accelerated.

  • Russia’s banking system has grown considerably larger and stronger since the aftermath of the 1998 financial crisis, but even before the onset of the current global crisis it continued to play a limited role in intermediating savings and investment, especially for small and medium-sized enterprises. Moreover, despite important improvements, some weaknesses in prudential supervision remained, and the Russian banking sector continued to have too many very small banks doing little if any banking business. Further consolidation of the sector would both strengthen competition and improve the robustness of the system. This chapter discusses the policy imperatives in the short term, in the face of the crisis, and reforms that could be implemented over the longer term to improve the efficiency and resilience of the financial system and raise Russia’s potential growth rate. While the current crisis is painful for the banking sector as well as the broader economy, it may facilitate a restructuring of the system that will be positive in the long run, as well as new approaches to regulation that will make banking less crisis-prone.

  • This chapter uses the OECD’s product market regulation (PMR) indicators to assess the extent to which the regulatory environment in Russian Federation is supportive to competition and to draw attention to the areas where further reform efforts would pay dividends. The results of estimating these indicators suggest that, despite improvements in some areas, many aspects of Russia’s regulatory framework are still restrictive and there is considerable scope for enhancing economic performance by bringing regulation into line with best practices. In particular, the scores indicate that reducing the role of the state-enterprise sector in markets that are inherently competitive and reinvigorating efforts to liberalise foreign trade and direct investment regimes would benefit Russia’s economic performance. In some network sectors, recent regulatory changes have significantly improved the scope for competition. However, ongoing work needs to focus on separating competitive and monopoly market segments and eliminating barriers to entry. In addition, the authorities need to develop the capacity and strengthen the hands of the sectoral regulators. Introducing an overarching competition policy would also help bring the issue of competition to centre stage and spread a competition ethos through different levels of government.