IMF Urges Russia to Trim Deficits

The International Monetary Fund urged Russia to scale back spending and put interest-rate cuts on hold to avoid creating wider deficits, a weaker ruble and faster inflation.

At the end of a staff visit to Moscow, the IMF said economic and financial conditions have improved and forecast expansion next year of 3.5 percent. Failure to contain the budget deficit and slow inflation would undermine the recovery and leave the country more reliant on commodities, the IMF mission warned.

"Our main concern is that the higher spending contained in the 2009 and 2010 budgets will become entrenched," the IMF team said in the statement. "This points to the risk that the sizeable fiscal expansion will not be reversed, eventually leading to a highly pro-cyclical fiscal stance, inflation, rapid real ruble appreciation and increased dependence on oil."

Russia's budget deficit this year may be wider than official estimates show, Deputy Economy Minister Andrei Klepach said on Dec. 10, even after the shortfall in the first 11 months indicated state coffers benefited from oil windfall. He expects a 7 percent gap of gross domestic product in 2009, which compares with a cumulative deficit of 4.9 percent in the year through November.

The budget deficit will be 6.9 percent of gross domestic product in 2009, or 7.3 percent taking into account subordinated loans the government provided to bolster lenders' balance sheets, Interfax reported on Dec. 10, citing Finance Minister Alexei Kudrin.


The IMF also warned Russia's central bank to step up efforts to contain inflation and embrace a more "ambitious" policy and said it welcomed "increased exchange-rate flexibility."

The Washington-based lender warned that "in the near term, the monetization of large fiscal deficits will significantly circumscribe monetary policy" and "with banks still reluctant to extend credits on a substantial scale, significant excess liquidity will build up, eventually putting pressure on the ruble to depreciate and pushing up inflation."

The IMF said recent upward pressure on the ruble was "likely to be temporary" and called on the central bank to put "further cuts in policy interest rates on hold until the monetary implications of the very large end-year liquidity injection associated with the fiscal deficit become clear."

Rate Cuts

The bank has lowered the refinancing rate to 9 percent from 13 percent since April after the world's biggest energy exporter slid into its deepest economic decline on record, contracting 10.9 percent in the second quarter and 8.9 percent in the third. The bank has indicated it will use rate cuts to stem speculative capital inflows and avoid ruble volatility.

The IMF's concern about rates is "overplayed," UniCredit SpA (UNCFF) said in a note to investors today. The bank forecasts that rates will be cut a further half percentage point by the end of the year. "Cuts have been trailing falling inflation," it said. "Moreover, the planned withdrawal of fiscal stimulus looks satisfactory to us—public spending in the 2010 federal budget sees almost no change in nominal terms."

The Russian banking system has stabilized, according to the IMF report, though "generous liquidity support is likely to be masking more severe underlying problems." The IMF said it is concerned that "significant problems in the banking system could emerge once a normalization of cyclical conditions forces the central bank to tighten monetary policy."

Given these concerns, the IMF said the central bank "should take advantage of the current stable environment to restore more stringent regulatory requirements" and "determine the appropriate means for dealing with undercapitalized or insolvent banks —be it through merger, recapitalization, restructuring, or closure."

With assistance from: Paul Abelsky in St. Petersburg at

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