Russian Federation: Worsening balances
The fall-out from the global financial crisis will sharply reduce real GDP growth in Russia through 2009, with a pick-up expected in 2010. With a reversal in the substantial rise in oil and metal prices, the pattern of terms of trade gains fuelling rapid growth in domestic demand has come to an end. Inflation has risen strongly, but may now have peaked and should decline in 2009-10. Fiscal and current account balances are expected to worsen sharply.
Policy challenges will multiply in a new environment of more binding fiscal constraints. At a minimum, less economically efficient forms of stimulus, like reducing the rate of value-added tax, should be resisted. As to monetary policy, countering the effects of short-term speculative capital outflows on the exchange rate is justifiable, but reserves should not be run down to postpone adjustments warranted by economic fundamentals. The authorities have responded decisively to threats to banking system stability, but further action, including improved co-ordination with foreign regulators given the global scale of the problem, may be needed.