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IMF: Russia managed to avoid serious economic instability

January 12, 19:01 updated at: January 12, 19:09 UTC+3
First Deputy Managing Director of the International Monetary Fund David Lipton has told TASS about the prospects for the Russian economy and the impact of OPEC decision on oil prices
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© Valery Sharifulin/TASS

Russian President Vladimir Putin has recently set a goal for Russian GDP growth in 2019-2020. He told government in December 2016 that Russian GDP growth rate should become equal to the World GDP growth rate by 2019-2020. According to the new forecast of the World Bank global GDP will increase by 2.9% in 2019. Do you think that 2.9% GDP growth rate is a feasible target for Russia in 2019? Or maybe this growth rate is not fast enough for the Russian economy?

D.Lipton: We at the IMF have been forecasting that global growth will be somewhat higher and we have growth rising to 3,4% this year and 3,6% in 2018. We haven't made a forecast for 2019. But just to say we see global growth somewhat higher.  I think it makes sense for Russia to aspire to higher growth rate. I think our forecast right now, 5-year growth forecast for Russia, which is based on present policy, have growth only averaging about 1,5%. So, we believe that for growth to be higher will require some policy change and some structural changes that will boost potential of the economy.

We think that's the right thing to do. And so we certainly agree that planning to make changes to achieve higher growth is the right goal. It's been the case that within a very difficult past decade Russian growth has been low with oil prices declining and sanctions being imposed.

And during that period Russian living standards have stopped converging to European levels. And with 1,5% growth, which is our present forecast for the next 5 years, Russian living standards wouldn't converge at all because European growth is about the same 1,5%. So I think if Russia wants to be catching up to the living standards elsewhere in the advanced world it has to aspire to more rapid growth and find ways to achieve it.

Today experts have more positive view on the perspectives of the Russian economy in 2017 than they had at the beginning of 2016. That is partly because of OPEC and non-OPEC countries decision to cut oil production. How long and how sustainable will be the positive effect of that decision on the oil prices and on Russian economy as well?

D.Lipton:  It's very hard to know how OPEC and non-OPEC oil producers will behave and whether agreements like the one that's been reached will have sustained effect. It's very hard to tell. The Russian economy is going to be affected by oil market developments for sure, and it's possible that positive shock of higher prices or negative shock of lower prices will happen, and I think that Russian economic policy has to be ready for both outcomes. And the kind of fiscal rules that have been discussed here can help keep the economy steady and help make sure that ups and downs in oil prices don't have the kind of disruptive effect in the future that they had in the past. 

Is IMF going to revise forecasts for oil price and Russian GDP now that OPEC and non-OPEC countries have come to unanimous decision to cut oil production in 2017?

D.Lipton:  We had already in our last projections in the fall taken into account the OPEC decision but the non-OPEC countries agreement came later. We'll be putting out a new World Economic Outlook Update next week that will take this into account. We tend to use the futures market prices for oil as our projected prices, and that's the way we'll base that forecast. 

Russia is trying to accelerate economic growth, but the Central bank of Russia at the same time is trying to reduce inflation. The objective of the Bank of Russia today is the achievement of the inflation target of 4%. How do you estimate the probability of CBR to reach its inflation target in 2017?

D.Lipton: First, I want to say that I think that what Central Bank has done to bring inflation down following the oil price decline, the ruble depreciation and its impact on inflation, has been a very important accomplishment. Those events had possibility of destabilizing the finances of Russia and the Central Bank's actions have prevented that from happening in conjunction with the management of fiscal policy, which has also been I think appropriately cautious.  I think that they are close to achieving their goal. Whether at the end of 2017 inflation is a little above or a little below 4%, they are on a track to make that achievable. It's very had to know a year ahead of time what exactly the inflation rate will be because to use the example again in case of Russia, oil price developments could affect the headline inflation rate for a period. But I think that setting this goal and making sure that it's achieved over the medium term is a very important way to ensure the stability of the Russian economy.

Given the inflation target, the Central Bank conducted fairly tight policy in 2016. Do you find tight fiscal policy and tight CBR policy in Russia appropriate given current economic conditions? How long should Ministry of Finance and CBR keep such a tight policy?

D.Lipton: I think that policy that had been set has been appropriate over the past 2 years and has saved Russia from the kind of instability Russia has experienced in the past and that had been very disruptive. Policy always has to react to events in the world and events in the world are uncertain at this point. So if things change in the global economy they will have to react. I think that setting of policies right now, meaning an inflation targeting regime that the Central Bank aimed at getting at 4% and the use of fiscal rule to try to keep the public finances of the country on track, these are the right policies.

Apart from conducting the monetary policy Central Bank of the Russian Federation carries out banking supervision. And during the past few years CBR has been actively revoking bank licenses. Don't you find too aggressive current pace of cleaning of Russian banking system by CBR that withdraws bank licenses almost every day now?

D.Lipton: When banks are either insolvent or being run in a way that benefits owners at the expense of depositors through connected lending or engaged in either money laundering or financing the terrorism, it's important that actions are taken and taken quickly. And I think that the CBR has had the aim of trying to prevent any of those three things from persisting for any period of time. The banks that have been closed are numerous but each one of them with maybe one or two exceptions are quite small individually. I think that the Russian banking system and financial system has been strong enough to handle these closures. In fact, I think over time it will be beneficial for everyone knowing that the CBR will act when banks are behaving inappropriately and that assurance will raise the trust in the remaining banks. 

In 2019 Russia is planning to implement pension reform and reform of the tax system. Do you appreciate the new system of a private pension capital and a new tax system in Russia? Do you find it adequate in current economic situation?

D.Lipton: I'm not very familiar with the private pension system but it's clear that a private pension system needs to deliver for its pensioners and that means getting appropriately strong returns so it's important that the pension system has sufficient diversification to bring high but safe returns and it has appropriate supervision and regulation so that retirees' finances are safe. And I think it's also important that the retirement age being examined and reexamined over time. If retirees retire very early in life it means that the average pension for everyone in the system will be lower and now the demographics has shifted and life expectancy after declining for a couple of decades has begun to increase. With that, it makes sense to reexamine retirement ages in order to keep pension payments strong.

As far as the tax system is concerned, there's been a lot of tax reforms but really quite important changes have been made. This is part of the process. That's probably a process that should continue. We think that there should be over time more rents paid on natural resources to support the budget, greater reliance on indirect taxes rather than on direct taxes. There are a series of improvements that can be considered over time.

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