Russia: Fragile Recovery from Crisis

Economy recovering from contraction of nearly 8 percent in 2009

Strong response to crisis but growth still fragile

Need to reverse fiscal stimulus and boost potential growth

Inflation has fallen rapidly, the current and capital accounts have both rebounded from sharp deteriorations, and the ruble has strengthened. But the IMF says the banking system is still under strain and financial markets remain vulnerable. The key policy challenges are to reverse the large fiscal stimulus and implement structural reforms to boost potential growth.

The IMF’s Russia team recently conducted its annual checkup of Russia’s economy, known as the Article IV consultation. IMF Survey Online spoke with Poul Thomsen, who is now moving on after having been mission chief for Russia since 2004, about how the government has been managing Russia’s economy and what more needs to be done.

IMF Survey Online: The authorities responded strongly to the crisis. What allowed them to do so?

Poul Thomsen: Above all, the authorities’ precrisis policy of taxing and saving much of the oil revenue windfall gave them ample room for maneuver in responding to the crisis. They were running large headline budget surpluses in the precrisis years. And in the process, they accumulated large reserves—almost $600 billion—as a result of sizable current account surpluses and substantial capital inflows.

So when oil prices declined and the crisis hit, the oil stabilization fund mechanism meant the authorities had significant scope for a vigorous policy response. There was room for a dramatic turnaround in the fiscal position from a large surplus to a large deficit—this turnaround amounted to almost 10 percent of GDP. And the authorities could, at the same time, have an accommodating monetary policy— essentially financing the deficit by drawing down on their oil funds held at the central bank, which is equivalent to printing money. This was on top of their earlier massive support to the banking system and to private entities that had large, unhedged foreign exchange exposures.

IMF Survey Online: Despite the forceful response, Russia was hit hard by the crisis. Why do you think this happened?

Thomsen: Even though the authorities did save much of the oil windfall, they gradually began to spend more and more of it in the years preceding the crisis.

At the same time, private sector activity was very buoyant, so the economy began to overheat. Then, when the crisis hit, the economy was...