Economic Survey of the Russian Federation: Modernisation Efforts and Fiscal & Monetary Policy Recommendations

1. Economic Survey of the Russian Federation Seminar hosted by the Higher School of Economics and the Russian Academy of Economy and Civil Service, Moscow12 December 2011 Geoff Barnard and Tatiana Lysenko Desk Economists, Russia/South Africa Desk Economics Department www.oecd.org/eco/surveys

2. 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.

3. 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

4. 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?

5. 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

6. Modernisation: how full is the glass?

7. Modernisation: how full is the glass?

8. Modernisation: how full is the glass? • There are some areas of relative strength… • Public debt • Unemployment • …and some notable weak areas • Life expectancy • Environment

9. 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

10. 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.

11. Chapter 3 Strengthening the fiscal framework to enhance resilience to external shocks and safeguard sustainability

12. Relatively good fiscal outcomes…

13. … facilitated by soaring oil prices…

14. … and supported by an institutional mechanism to manage resource wealth

15. The non-oil deficit is excessive Percentage of GDP

16. 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.

17. December spending peaks fuel inefficiency General government expenditure, each month as percentage of annual total

18. 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.

19. Chapter 4 Moving to a new framework for monetary policy

20. Inflation remains relatively high

21. Past tensions between policy objectives

22. A new monetary policy framework is evolving • More exchange rate flexibility; • Greater emphasis on the CBR’s policy rates; • Communication of policy decisions improved;

23. 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.

24. Policy transparency lags the OECD average *11 OECD banks for which assessment was made

25. 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.

26. Recommendations on monetary policy (cont.) Dealing with large-scale capital inflows If 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.

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

28. Improving the business climate • The economic consequences are serious • Underdeveloped SME sector • Low investment • Sluggish innovation • Slower convergence to OECD living standards • Less diversification

29. 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

30. Improving the business climate • But there are few clear signs of improvement

31. 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.

32. 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.

33. Raising energy efficiency • Russia has a very energy-intensive economy

34. Raising energy efficiency • …and this contributes to poor environmental outcomes

35. Raising energy efficiency • …as well as hindering competitiveness and reducing national income

36. 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

37. Raising energy efficiency • … but one problem is that energy prices in Russia are still too low

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

39. 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.

40. 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.

41. Economic Survey of the Russian Federation Thank you for your attention. www.oecd.org/eco/surveys Geoff.Barnard@oecd.org Tatiana.Lysenko@oecd.org