Economic Survey of the Russian Federation

Seminar hosted by the Higher School of Economics and the Russian Academy of Economy and Civil Service, Moscow

12 December 2011

Geoff Barnard and Tatiana Lysenko

Desk Economists, Russia/South Africa Desk

Economics Department

www.oecd.org/eco/surveys

The context: the accession process

• Accession review by the Economic Development and Review Committee (EDRC) in October 2011.

• Further discussion in EDRC later, when other Committees have completed their reviews.

• EDRC formal opinion to be sent to OECD Council.

• Having received formal opinions from all committees, Council takes final decision.

Implications of accession context for Survey

• Broad focus – the EDRC Road Map

• Ability to resist shocks

• Structural policy settings promoting rapid convergence in per capita incomes

• Governance environment suggesting that commitments can be met sustainably

• 5 chapters: 1 on economic modernisation, 2 on macro policy, 2 on structural policy areas

Modernisation: how full is the glass?

• To what extent has the Russian economy begun to resemble those of OECD member countries?

• Are policies in line with best international practice (where that is well defined)?

• Is the glass getting fuller?

Modernisation: how full is the glass?

• In some areas Russian socio-economic outcomes are within the range of OECD countries, though towards the lower end. For example:

• Income per capita and self-assessed well-being

• Educational achievement

• Use of information and communication technology

Modernisation: how full is the glass?

Modernisation: how full is the glass?

Modernisation: how full is the glass?

• …and some notable weak areas

• Life expectancy

• Environment

• There are some areas of relative strength…

• Public debt

• Unemployment

Modernisation: how full is the glass?

• Generally policies are moving in the right direction. Many examples, including:

• Greater emphasis on lifestyle factors for health

• Improved pay for teachers, judges, civil servants

• New environmental policy legislation

Modernisation: how full is the glass?

• But deficiencies remain in many areas, and some reforms have yet to show concrete actions or measurable results

• Dangers: “high-tech myopia” and overly state-oriented solutions

• Broad set of complementary policies needed, and underpinned by better framework conditions for business.

• The glass is getting fuller, but convergence would be faster with intensified policy efforts.

Chapter 3

Strengthening the fiscal frameworkto enhance resilience to external

shocks and safeguard sustainability

Relatively good fiscal outcomes…

… facilitated by soaring oil prices…

… and supported by an institutional mechanism to manage resource wealth

The non-oil deficit is excessive

Percentage of GDP

Fiscal rules should be quickly restored

•Institutional constraints can lead to better fiscal outcomes;

•No one-size-fits-all rule; •Checklist: simplicity and transparency, flexibility in face of shocks, stable link between targets and objectives;•Non-oil balance target scores well on many dimensions•Expenditure rule can usefully complement the non-oil balance target;•A well-defined escape clause is important.

December spending peaks fuel inefficiency

General government expenditure, each month as percentage of annual total

Recommendations on fiscal policy

● Restore a fiscal rule like the one in the Budget Code.● Add a rule restricting the annual increase in total

expenditure in real terms to some ceiling.● Develop expertise on the cyclical adjustment of non-oil

revenues. Publish more detailed information on the underlying fiscal position, highlighting uncertainties.

● Set up an independent fiscal council.● Consider including a contingency reserve in the budget.● Consider transferring privatisation proceeds to the

National Welfare Fund.● Raise pensionable ages.

Chapter 4

Moving to a new frameworkfor monetary policy

Inflation remains relatively high

Past tensions between policy objectives

A new monetary policy framework is evolving

• More exchange rate flexibility;

• Greater emphasis on the CBR’s policy rates;

• Communication of policy decisions improved;

Further steps toward (flexible) inflation targeting

• Strengthening institutional arrangements;

• Monitoring inflation expectations;

• Coordination with fiscal policy;

• Raising the effectiveness of interest rate policy;

• The role of the exchange rate;

• Dealing with large and volatile capital flows.

Policy transparency lags the OECD average

Policy objective

Policy decision

Economic analysis

Decision-making process

Overall transparency

Russia 0.42 0.90 0.37 0.25 0.48

OECD average* 0.80 0.89 0.73 0.56 0.74

OECD maximum* 1.00 1.00 1.00 0.92 0.98

OECD minimum* 0.33 0.60 0.41 0.17 0.55

*11 OECD banks for which assessment was made

Recommendations on monetary policy

Stepping up preparations for inflation targeting• Forex intervention should be conducted only if

consistent with price stability objective.• Designate one or two policy rates as main

instrument(s).• Consider establishing a Monetary Policy Committee.Improving monetary policy transparency• Amend CBR Law to spell out price stability as primary

objective.• Hold press conferences following policy meetings and

publish minutes of the meetings and/or voting records.

• Publish the CBR’s own projections of inflation and output.

• Publish regular information about inflation expectations, and consider developing a market for inflation-linked bonds.

Recommendations on monetary policy (cont.)

Dealing with large-scale capital inflowsIf inflows lead to excessive pressure for rouble appreciation, consider a range of policy responses:

• fiscal tightening• macro- and micro-prudential measures• sterilised interventions• temporary market-based disincentives for such

inflows. • Structural reforms aimed at financial deepening

would increase the capacity to absorb large inflows, while product market liberalisation can alter the composition of capital inflows in favour of FDI.

Improving the business climate

• International comparisons indicate that the business climate in Russia is poor

Improving the business climate

• The economic consequences are serious– Underdeveloped SME sector– Low investment– Sluggish innovation– Slower convergence to OECD living

standards– Less diversification

Improving the business climate

• The need to improve the business climate is recognised by the authorities, and there have been numerous initiatives and reforms– Anti-corruption drive– Anti-monopoly “packages”– Loosening of strategic sectors rules

Improving the business climate

• But there are few clear signs of improvement

Improving the business climate

• Many specific actions suggest themselves:– Accelerate privatisation.– Enhance consultation on regulation with affected

firms, provide for adequate transition periods, and introduce a “deemed clearance” regime.

– Eliminate remaining subsidies to large firms put in place during the global crisis

– Quickly ratify the WTO accession protocol and implement the accession package.

– Ensure a level playing field between domestic and foreign investors as regards procurement, access to subsidies, law enforcement and dispute resolution.

Improving the business climate

• …but it may be necessary to take a more holistic approach– top-down anti-corruption measures more

likely to succeed if complemented by reforms favouring political openness, transparency and civil society participation.

– improve quality and consistency of laws and regulations and reduce their quantity.

– make public institutions more transparent and accountable, increase media freedom and strengthen enforcement of laws.

Raising energy efficiency

• Russia has a very energy-intensive economy

Raising energy efficiency

• …and this contributes to poor environmental outcomes

Raising energy efficiency

• …as well as hindering competitiveness and reducing national income

Raising energy efficiency

• There have been important steps taken in recent years…– Federal Law No. 261 “On energy saving

and improving energy efficiency”– Creation of the Russian Energy Agency– Energy efficiency listed as the first of five

priorities in the work of the Commission on Modernisation and Technological Development of the Economy

Raising energy efficiency

• … but one problem is that energy prices in Russia are still too low

Raising energy efficiency

• … while final users need to be able to measure and regulate their consumption to a greater degree.

Raising energy efficiency

• At least until energy prices equal marginal social costs, other measures could help– mandatory fuel efficiency standards, eco-

driving programmes, and development of traffic management and road infrastructure.

– Remove obstacles to the development of energy service companies.

– Develop instruments to mobilise financing for the renovation of the housing stock and to speed up the rate of renovation.

Concluding remarks

• Russia’s weaknesses are interrelated and self-reinforcing

• But negative feedback mechanisms could be turned around

• A combination of sound macroeconomic policies, an improved business climate and greater energy efficiency would accelerate modernisation and raise living standards.

Thank you for your attention.

www.oecd.org/eco/surveys

Geoff.Barnard@oecd.orgTatiana.Lysenko@oecd.org

Economic Survey of the Russian Federation