Moscow News
www.MN.Ru
November 9-15, 2005
IMF Disappointed by Stalled Reforms
By Natalya Alyakrinskaya
The International Monetary Fund is critical about the state of the Russian economy
The International Monetary Fund has published another report on the economic situation in this country, and its conclusions are unprecedentedly harsh and impartial; they cite the actual halt of structural reforms in the country, the impossibility of achieving a GDP growth without an accelerated inflation, the weakening of Russia's budgetary policy, and capital flight from the country. MN's Dmitry Dokuchayev asked Neven Mates, head of the IMF representative office in Russia, to comment on those conclusions.
The IMF's latest report contains a number of critical remarks on the Russian economy. Specifically, it notes the slow pace of the country's structural reforms. Exactly what reforms, in your view, must the country carry out today, and how urgent are these reforms?
Summing up the results of 2005's consultations, the IMF Board of Governors expressed concern that Russia's major structural reforms had virtually come to a standstill. The Board strongly recommended the Russian authorities to take measures to improve the investment climate, encourage the establishment of new private companies, and diversify the economy. The IMF report states that your government has a comprehensive program of specific structural reforms. Starting with 2002, however, the implementation of these reforms has been disappointing. Improving the business climate should become a first-priority task today; to carry it out, it is necessary to reform the civil service, the system of state administration, and the natural monopolies.
The report traces the connection between the economic growth prospects and mounting inflation in this country. Could we see in the near future high GDP growth rates and low inflation?
IMF experts put the potential growth rates of Russia's GDP at five to six percent. This pace of growth should not generate an inflationary pressure. While Russia has no immediate need to reduce its inflation to the level of the developed industrial nations, it should observe the targeted rates of inflation in order to gradually reduce it.
The Russian economy's successes are largely ascribed to high oil prices on the world market. Does the IMF think that our country is making good use of this advantage? Should oil prices slump, what will happen to the Russian economy?
In accordance with Russia's cautious tax and budgetary policies, a substantial part of the super profits from oil sales went into the payment of the national debt and into the buildup of state reserves. Undoubtedly, this was a very appropriate policy. However, a portion of these oil funds finds its way into home economic sectors, where it is used on consumption; this can create problems when oil prices fall or just stop rising. Any change on the world oil market will naturally affect both the state budget and economic growth rates. The 2006 budget shows that in the medium-term perspective, it is possible to ensure a balanced budget given an oil price of $34 per barrel. However, you have lately made a practice of constantly revising the initially approved budgetary expenditures and increasing them. And there is no indication so far that the government is going to abandon this practice. This could lead to a budget deficit even if oil costs more than $34 per barrel.
What does the IMF think of the Russian investment climate? Has our economy managed to overcome the consequences of the Yukos affair?
The IMF Board of Governors has called on the Russian authorities to take measures to improve the business climate. Although Russia's macroeconomic indicators have been rather high in recent years, while the country's susceptibility to unfavorable external factors has considerably decreased, investors' reaction to these positive changes has been rather sluggish. Even before the Yukos affair, investment volumes in relation to GDP were low in comparison with other countries with developing or transitional economies. It should also be noted that according to comparative international studies, India and China outperform Russia on many indicators pertaining to the quality of the institutional environment.
What positive factors do you see in Russian economic development? Do you think the positive factors outnumber the negative ones?
The swift slashing of the national debt and the state's accumulation of considerable currency reserves are a great achievement. One can only welcome the revival of small and medium-sized enterprises, although there is still room for growth here. Bank surveillance has obviously been enhanced, and sanctions are being imposed on banks involved in money laundering. At the same time, it is necessary to take measures to combat inflation and encourage the development of business in order to increase the potential rate of economic growth.
The IMF has long stopped crediting Russia, and your reports are no more than recommendations. Are they heeded in Russia's corridors of power?
We are continuing our dialogue with the Russian authorities. I think both sides consider it useful.