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Russian Federation

Briefing Notes for the Launch in Moscow, March 2009

Growth performance and medium-term prospects

  • The GDP of the Russian Federation increased by 5.6% in 2008, owing to robust growth in retail sales and investment in fixed assets. Retail turnover and investment in fixed capital grew by 13.0% and 9.1%, respectively, through 2008. The industrial sector, benefitting from expansion in manufacturing, grew by 2.1% over the same period. Agricultural production rose by 10.8% in 2008. The grain harvest was expected to be 108 million tons for 2008, exceeding the 2007 harvest by more than 25 million tons and permitting exports of grain to neighbouring countries. The country remained the second-largest oil producer in the world in 2008. Despite the sharp decline in oil prices, the hydrocarbon sector continued to play a key role in economic development.
  • Domestic demand and increased oil and gas production will enable the Russian Federation to continue its expansion in 2009-2011, but GDP growth rate is expected to slow to 3.5% in 2009, compared with the 5.6% expected in 2008. Inflationary pressures could accelerate from an increase in fiscal expenditure, greater foreignexchange inflows and domestic demand.

Fiscal policy developments

  • The budget of the Russian Federation, which has recorded a surplus for the last eight years, was expected to have a surplus of 5.5% of GDP, compared with 5.4% in 2007. Because oil and gas exports are expected to comprise one third of budget revenue in 2009, the Government took steps in 2008 to diversify the economy and reduce dependence on hydrocarbons. It diverted more oil revenues into the Stabilization Fund, which for years has been absorbing windfall taxes from energy exports to help control inflation. The three-year budget approved by the country’s parliament in November 2008 envisaged budget targets for 2009-2011 that take into account a high inflation rate and falling oil prices. The budget surplus is expected to decline to 3.6% of GDP in 2009 and to 2.8% of GDP in 2010. Government expenditures are planned to rise by about 20% in 2009 and by 14% in 2010.

Monetary policy

  • High oil prices, capital inflows and the effects of an earlier fiscal relaxation fed inflationary pressures in the Russian Federation. The Government raised its 2008 inflation projection from 7.5-8.5% to 14%, which would be the highest since 2002. Consumer price inflation was 14.1% in 2008. Food prices, one of the main drivers of consumer price inflation, were expected to moderate by the end of the year as a result of stabilized global food prices and a record grain harvest. The surge in inflation caused the continued appreciation of the ruble in real effective terms—in the first 10 months of 2008, the ruble became 4.7% stronger against the United States dollar. But in November 2008, it fell by 1% against the combined dollar/euro basket of currencies after the Central Bank of the Russian Federation reduced the floor at which it would defend its national currency.

Current account and trade performance

  • A foreign trade surplus was expected to cause the current account surplus of the Russian Federation to grow from 5.9% of GDP in 2007 to 6.0% in 2008. Exports grew by 52.5%, and imports rose by 47.6% in the first nine months of 2008. The trade surplus increased from $106 billion in the first nine months of 2007 to $169 billion in the same period of 2008. Hydrocarbon exports accounted for about 70% of the total export earnings in the first nine months of 2008. Machinery and equipment for new construction projects and consumer goods were the largest imports.

Policy responses

  • In November 2008, the Government announced a $20 billion package of fiscal stimulus that includes cuts in corporate tax and regional tax by 4 percentage points, and tax on business income from 15% to 5%. The Government will also support the real economy through faster amortization schedules, Government guaranties, restructuring of debts, excise policy and tariffs. It will continue to implement tax reforms by lowering the VAT and reducing the tax burden on small businesses to help businesses withstand the current economic crisis. The Government is also expected to continue to develop sectors of strategic importance, such as oil and gas industries, grain exports, engineering and metals, and banking.