It has been reported today that Prime Minister Vladimir Putin has set an ‘ambitious goal’ for Russia to become one of the world’s five largest economies in the next decade, planning to send the oil-based economy up into the realm of the world’s financial superpowers. That certainly is ambitious, the IMF might say, given some of the less-than-glowing reviews the Russian balance books received after the fund’s two-week mission in Moscow. (We can but dread to think what it has to say about Belarus.) Here are some of the recommendations drawn up by the mission’s cautionary overseers from the FT:
The fund has counselled Russian officials on the need to reduce the non-oil budget deficit from its current level of 11 per cent of gross domestic product to 4.7 per cent and increase interest rates to head off rising inflation.
The collapse of Russia’s economy in 2008-2009, when GDP fell nearly 8 per cent, laid bare the shortcoming of an economy that remains heavily skewed towards consumption and has very low investment rates.
Many economists have warned that Russia faces stagnation unless itrationalises a budget process that is politically beholden to specialinterests and focused on social spending.
And from Reuters:
The Central Bank should continue tightening policy by withdrawing liquidity and raising rates. More tightening is needed to achieve the inflation target,” mission chief Juha Kahkonen told reporters after an annual Article IV staff visit.
The fund forecast 2011 inflation in Russia at 8 percent, down from its previous forecast of 9.3 percent but still above the Central Bank’s goal of bringing inflation down to below 7 percent by the end of the year.
The fund expects inflation to fall to 7.2 percent next year from the current reading of 9.6 percent.
The Central Bank raised its overnight deposit rate last month by a quarter-point to 3.5 percent, narrowing the interest-rate corridor whose upper boundary is formed by the refinancing rate of 8.25 percent.
Kahkonen praised the narrowing of the corridor, which should make interest-rate policy more effective, and welcomed the greater exchange-rate flexibility that has been tolerated by the Central Bank as it shifts to an inflation-targeting approach.
Higher interest rates are poised to attract capital inflows, but for now Russia is hemorrhaging billions of dollars in capital outflows. According to Central Bank data, more than $55 billion has left the country in the past eight months.
Kahkonen said political uncertainty ahead of next year’s presidential election and a poor investment climate are to blame for continuing capital outflows.
But he added that outflows “are not large compared to the size of the economy.”