The dual external shock of lower oil prices and geopolitical tensions are key factors exerting downward pressure on Russia’s GDP in the near term. The recovery in 2016 will be supported by the ruble’s more competitive exchange rate, increasing external demand and normalization of domestic financial conditions. However, investment and consumption are likely to remain sluggish and the effects of sanctions in terms of external access to financial markets and new investment technology will linger. IMF staff expect weak GDP growth of around 1.5 percent in the medium term.
“The external shocks, added to pre-existing structural weaknesses, are certainly weighing on Russia’s growth prospects. Maintaining a prudent fiscal policy and reviving slow-moving structural reforms could help unlock Russia’s growth potential,” said Ernesto Ramirez Rigo, IMF Mission Chief for Russia.
In March 2014, the United States, the European Union, Japan and other countries started imposing sanctions against Ukrainian and Russian individuals and entities in response to developments in Crimea and Eastern Ukraine. The U.S. and EU sanctions targeted financial services and the energy sector, among other areas. In August, Russia imposed counter sanctions on agricultural and food imports.
These developments essentially restricted Russian firms’ access to international markets, with a negative effect on investment. It is very difficult to disentangle the impact of sanctions from the fall in oil prices. However, IMF estimates suggest that sanctions and counter sanctions might have initially reduced real GDP by 1 to 1½ percent. Prolonged sanctions may compound already declining productivity growth. The cumulative output loss could amount to 9 percent of GDP over the medium term. However, the report’s authors underline that these model-driven results are subject to significant uncertainty.
Prudent fiscal policy
The IMF report supports Russia’s decision to apply a short-term fiscal stimulus in the 2015 budget. The stimulus should be followed by gradual fiscal consolidation over the medium term to adjust to lower oil prices, rebuild buffers and safeguard intergenerational equity.
Reforming the pension system...