Information about Europe Europa
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International Monetary Fund
Published Date:
August 1997
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I. The Domestic Economy

A. Output and Expenditure

Overall trends

1. Following the disintegration of the Soviet Union in 1991, Russia suffered a massive output collapse, with real GDP estimated to have fallen by 35 percent during the 1991–94 period. The dissolution of the CMEA, combined with the disruption of traditional supply arrangements within the former Soviet Union and the breakup of firms that spanned republic borders, all contributed to the dramatic contraction (Table 1).2

Table 1.Russian Federation: Selected Indicators of Economic Activity, 1990–96(Annual percentage change)
Gross domestic product (1990=100)-3-5-15-9-13-4-6-5
Industrial output 1/-8-18-14-21-3-5-4
Extraction industries-3-4-11-10-10-10
Processing industries-8-19-15-24-4-6
Of which:
Consumer goods7-1-15-11-21-12-5
Military goods-21-19-37-23-20
Agricultural output-4-5-9-4-12-8-7-7
Freight (railroad)-3-9-16-18-21-3-7-11
Source: Goskomstat.

Includes estimates for small enterprises.

Percentage change over January–June 1995.

Source: Goskomstat.

Includes estimates for small enterprises.

Percentage change over January–June 1995.

2. According to official statistics, the output decline slowed to 4 percent in 1995, the smallest decline since the beginning of the transition. The decline is reported to have accelerated to 6 percent in 1996, with lower investment—generally attributed to the uncertainty associated first with the presidential elections and subsequently with the President’s health being a major source of the decline. Many observers believe, however, that official statistics do not capture the full extent of the economy. In particular, the informal sector3 and new private businesses may not be adequately reflected and also the underreporting of production and profits by enterprises may have become more prevalent in 1996 as tax evasion became increasingly pervasive.4

3. In recent statements to the press, Goskomstat officials have acknowledged that the 1996 national accounts understate shadow economy activity—including unreported activity of known businesses, the informal sector, and illegal activity—and therefore overall output. Goskomstat now reports that it estimates shadow economy activity had grown to the equivalent of 30 percent of reported activity by end–1996, while the official statistics for the year had incorporated an estimate of only an additional 25 percent in activity—i.e., the share of the shadow economy in the official GDP data amounted to 20 percent. The higher estimate has already been reflected in monthly GDP estimates for 1997 and will be reflected in revised 1996 statistics, to be issued in the course of 1997.5 At the same time, Goskomstat officials have stated that the economy appears to have begun to rebound in the second half of 1996 although the growth is difficult to ascertain from the seasonally–unadjusted official data. Central Bank of Russia (CBR) estimates of trend GDP also show output rising from mid–1996.6

Expenditure side developments

4. As in 1994, the decline in output in 1995–96 mainly reflected large drops in investment. Official estimates of private fixed investment indicate declines of 8 percent in 1995 and another 19 percent in 1996 (Table 2). In both years, uncertainties about the course of policy and prospective investment returns, combined with high real interest rates, discouraged borrowers and encouraged lenders and investors to purchase treasury bills rather than participating in risky business investment decisions. In 1996, the investment climate was also adversely affected by political uncertainty and its possible implications for economic policies. Meanwhile, public investment fell markedly in 1996 as government spending was cut sharply in the face of a weakening in tax revenues. Inventory investment is also estimated to have fallen during 1995–96; this reported decline, however, may reflect the improved estimation of inventory accumulation—which had been recorded at excessively high levels during the high inflation years—rather than actually lower stockbuilding.

Table 2.Russian Federation: GDP by Expenditure, 1994–96(Annual percentage change)
Total Consumption-3.1-2.7-4.5
Expenditure by
Public consumption
Government consumption-2.91.1-1.6
Individual goods and services 1/-1.06.7-0.4
Collective consumption 2/-4.6-3.4-2.6
Good and services for households
supplied by non–commercial org. 3/-35.9-30.5-1.6
Fixed capital formation-26.0-7.5-18.5
Net exports-
Source: Goskomstat.

Consumption of goods and services provided by the government, i.e. healthcare, education, and government financed culture.

Including, defense and government administration.

Goods and services provided by enterprises for their employees; i.e., housing services, health care, and child care.

Source: Goskomstat.

Consumption of goods and services provided by the government, i.e. healthcare, education, and government financed culture.

Including, defense and government administration.

Goods and services provided by enterprises for their employees; i.e., housing services, health care, and child care.

5. Among other demand components, consumption (private and public taken together) fell somewhat less than overall output, declining by roughly 4 percent in both 1995 and 1996. Household consumption contracted by 5 percent a year in 1995–96. The decline in household spending in 1995 was small in relation to the reported drop in average real wages of 24 percent, reflecting consumption smoothing, underreporting of total compensation, and households’ reliance on other sources of income such as informal sector earnings. In 1996, however, the weakening in consumption occurred despite rising real wages. Two factors that appear to explain the rising propensity to save in 1996 are the high real interest rates offered on bank deposits and securities, and political uncertainty. Also, a sharp increase in wage arrears may have reduced the propensity to consume as well as constrained the ability to spend. Government consumption remained broadly unchanged in real terms during 1995–96. After falling by 30 percent in 1995, the consumption of nonprofit organizations was roughly stable in 1996, as enterprises reduced sharply the level of social services they provided to their neighboring communities. Real net exports were the sole source of output expansion in 1995–96. In particular, in 1996 the change in net exports contributed 2 percent to GDP. Exports of energy rose strongly, while imports were relatively stable in real terms.

Sectoral trends

6. The goods and services sectors each account for roughly one–half of GDP. Industrial activity accounts for nearly 30 percent of GDP, while construction contributes close to 9 percent and agriculture about 7 percent. Services are dominated by trade (about 15 percent of GDP) and transportation (about 11 percent). Nonmarket services, including education, health care, and government, jointly account for about 12 percent of GDP. More than two–thirds of GDP is now produced in the private sector.7

7. Following a slowing of the decline in industrial output to 3 percent in 1995, the reported drop in industrial production in 1996 accelerated slightly to 5 percent in 1996 (Table 3). It is difficult to evaluate the true change in the health of the industrial sector. The 1996 industrial output decline may be overstated as a result of the same reporting problems as those associated with the GDP statistics. To be sure, gradually rising unemployment and layoffs (see discussion in Section B below) demonstrate that some enterprises have downsized their operations, although this may have had a salutary effect on productivity. Similarly, the renewed escalation of interenterprise and wage arrears and enterprises’ increased reliance on barter transactions in 1996 may indicate a deterioration of enterprises’ financial position, but may also reflect efforts to make enterprise profits and revenues less transparent so as to evade taxation. Statistical reports indicate that the output of medium and large enterprises—all former state-owned enterprises—fell by 8 percent in real terms. Small business surveys, however, indicate that their output expanded strongly. This development may reflect an increase in the number of small businesses, which is reported to have risen by 8 percent in 1996 (mostly in light industries such as clothing and footwear, food processing, and construction materials), but it may also reflect growth in average output of individual firms. Although some export sectors, notably mining and chemicals, expanded in 1995, the official data show declines for all sectors in 1996.

Table 3.Russian Federation: Gross Industrial Output by Sector, 1991–96 1/(Annual average percentage changes)
Electric power generation0-5-59-3-2
Ferrous metallurgy-7-16-17-1710-4
Nonferrous metallurgy-9-25-14-93-5
Petrochemicals 2/-3-19-25-3510
Forestry, timber processing, and
pulp and paper-9-15-19-30-1-22
Construction materials-2-20-16-27-8-25
Light industry-9-30-23-46-30-28
Food processing-10-16-9-17-8-9
Source: Goskomstat.

Data for large and medium enterprises.

Starting in November 1996, chemicals and petrochemicals are combined.

Source: Goskomstat.

Data for large and medium enterprises.

Starting in November 1996, chemicals and petrochemicals are combined.

8. Agriculture has suffered two consecutive bad years, with output losses of 6 and 7 percent, respectively, in 1995 and 1996. In 1995, unfavorable weather conditions led to a poor grain crop (mainly due to a poor wheat harvest). Continued bad weather conditions, as well as falling livestock production, accounted for the further drop in agricultural output in 1996. As in industry, the accuracy of official production statistics is uncertain, and Ministry of Agriculture officials have commented publicly that, due to underreporting, the official crop statistics likely understate production. (Annex III describes recent trends in agriculture in more detail.)

B. Labor Market Trends

9. The composition of employment across sectors has changed little in Russia since 1991, although total employment has declined (Table 4). Industry continues to provide the largest number of jobs, employing 26 percent of all workers in 1995; the social sphere (including health care, education, and culture) is the next largest employer, accounting for 20 percent of jobs.

Table 4.Russian Federation: Distribution of Employment by Sector, 1991–95 1/
(In thousands)
Agriculture and forestry9,97010,33710,34710,52810,003
Transportation and communication5,7505,6315,4085,3545,253
Commerce, food service, material and technical
supply, marketing and procurement5,6265,6796,3746,4846,679
Public health, physical training, social security,
education, art, culture and science14,65314,05513,71913,61113,450
Administrative staff, lending
and state insurance2,1612,0132,2302,4032,833
Other sectors (housing, pub.utilities, nonproduction types of gen. services to the public)4,7935,1454,8294,7404,833
(In percent of total employment)
Agriculture and forestry13.514.314.615.415.1
Transportation and communication7.
Commerce, food service, material and technical
supply, marketing and procurement7.
Public health, physical training, social security,
education, art, culture and science19.819.519.419.920.2
Administrative staff, lending
and state insurance2.
Other sectors(housing, public utilities, nonproduction types of general services to the public6.
Source: Goskomstat.

Average for the year; does not include students.

Source: Goskomstat.

Average for the year; does not include students.

10. The decline in employment since 1991 has been rather slow in relation to the large cumulative output loss. Total employment fell by 10 percent during 1992-95, and the rate of unemployment, even according to ILO definitions, has never exceeded 10 percent (Table 5). According to ILO definitions, the unemployment rate reached 9.5 percent in February 1997; registered unemployment, however, remains significantly lower, standing at 3.5 percent8

Table 5.Russian Federation: Unemployment and Vacancies, 1992–February 1997
Registered UnemploymentUnemployment
RegisteredRegisteredReceivingAccording to
VacanciesJobseekersTotalBenefitsILO Definition
(In thousands; end of period)
1996Jan2942,7022,4182,099 1/6,446
(In percent of labor force)
Source: Goskomstat.

Allocated benefits.

Source: Goskomstat.

Allocated benefits.

11. Regional disparity in unemployment is very substantial. In March 1996, when the nationwide unemployment rate was 8.9 percent, unemployment rates ranged from a low of 4.7 percent in Moscow to a high of 33 percent in the Republic of Ingushetia. Of Russia’s 89 regions, six had unemployment rates below 6.5 percent, while twenty recorded unemployment rates exceeding 12 percent.9

12. The gap between the magnitude of the output and employment loss highlights several characteristics of the Russian transition. In the absence of effective bankruptcy procedures or strict enforcement of payment obligations, Russian enterprises have remained open and have largely maintained their work forces despite a drop in output of unwanted products. As such, open unemployment has been limited, and firms have instead managed their wage bills by allowing wages to decline substantially in real terms—a trend which only began to abate in 1995—and by delaying wage payments, often incurring large cumulative arrears to their employees (Table 6 and 7). In mid-1996, roughly one-third of employees were owed some back wages.

Table 6.Russian Federation: Monthly Wages, 1987–March 1997(In rubles)
Average wageMinimum wage
1996 Jan654,80063,250
1997 Jan812,00083,490
Source: Goskomstat.
Source: Goskomstat.
Table 7.Russian Federation: Wage Arrears in Industry, Agriculture, and Construction, 1992–February 1997
Nominal 1/Real 2/Nominal 1/Real 2/Nominal 1/Real 2/
End year 1992184.371.692.3
End year 199340210.32817.21684.3
End year 19942,50721.31,37211.78687.4
End year 19957,73428.42,5729.51,9417.1
End year 199621,19363.95,82117.66,18318.6
Source: Goskomstat.

In billions of rubles, first of month.

In constant March 1992 prices, deflated by CPI.

Source: Goskomstat.

In billions of rubles, first of month.

In constant March 1992 prices, deflated by CPI.

13. The reluctance of nonviable enterprises to downsize their work forces seems to relate closely to the administrative cost of firing. Whereas firms incur no penalty for running up wage arrears, for each worker they discharge permanently they must pay severance equal to twice the average monthly wage and, if the Federal Employment Service cannot find the worker a new job within two months, the firm must then pay the equivalent of a third monthly wage in severance. High severance costs also explain why many firms elect to put employees on administrative leaves or part-time schedules, enabling them to pay reduced wages without incurring severance bills (Table 8).

Table 8.Russian Federation: Indicators of Hidden Unemployment, 1993–96 1/
Shortened Workday2/Forced Leave3/

of persons
In percent

of workforce

of persons
Avg. leave days per

person per quarter
Q122444.42466 4/14.7 5/
Q219913.91868 4/11.1 5/
Q319003.81621 4/9.6 5/
Q420514.12401 4/14.4 5/
Source: Goskomstat.

In industry, construction, transportation, communication, services, science, and scientific support.

For 1993, 1995, and 1996 data include number of people on shortened workday at the end of each quarter, for 1994 data show those on shortened workdays over the course of the period.

Without pay or with partial pay.

Data for last month of the quarter.

Full-quarter estimate based on data for last month of the quarter.

Source: Goskomstat.

In industry, construction, transportation, communication, services, science, and scientific support.

For 1993, 1995, and 1996 data include number of people on shortened workday at the end of each quarter, for 1994 data show those on shortened workdays over the course of the period.

Without pay or with partial pay.

Data for last month of the quarter.

Full-quarter estimate based on data for last month of the quarter.

14. At the same time, enterprise sector jobs carry a variety of social benefits including housing and health insurance, providing the incentive for employees to remain officially on enterprise payrolls. Because many of the newly-created jobs in the economy are in the new private sector where firms typically do not register their payrolls with the Federal Employment Service, and where social benefits are not provided, workers may take a second job as a new source of income, undetected, while remaining on their enterprise payroll in order to maintain their social benefits. In high unemployment regions where vacancies are few, workers may similarly prefer to remain on the payroll, even if they are unpaid, just to maintain their benefits.

15. While layoffs have been relatively limited, voluntary turnover in the Russian labor market is substantial. About 5½ million workers, or 11 percent of regular employees, left jobs at medium and large enterprises in the first half of 1996. Of this number, 92 percent were voluntary quits, presumably almost all for new employment. Of workers who voluntarily left their jobs, 79 percent were replaced by new employees. Despite rising overall unemployment, enterprises in competitive industries are maintaining their labor force levels and filling vacancies. As such, many skilled workers with experience in these industries, or with broadly applicable skills, can and do change jobs frequently.10

16. Nontraditional employment patterns, as compared to the Soviet standard of permanent employment by an organization, are becoming increasingly common. A recent Goskomstat survey found that over 10 percent of employed workers are self employed, including farmers and proprietors of small businesses. In addition, over 6 million workers were hired under fixed-term contracts rather than as permanent employees, of which 70-80 percent also held another, “permanent,” job. Survey data also revealed that at least 2.8 million workers hold two or more jobs.

C. Prices and Wages

Price developments

17. The rate of increase in consumer prices has declined steadily since the beginning of 1995. From an average monthly rate of 10.1 percent during 1994, monthly CPI inflation moderated to 7.2 percent during 1995, with the rate of increase falling to 3.2 percent by December(Table 9). This steady decline continued during 1996, with average monthly inflation registering 1.7 percent. The average monthly inflation rate remained at 1.7 percent during the first quarter of 1997. However, given that food prices tend to rise in winter, it is estimated that the underlying rate would be in the 1.0 percent range or even less.

Table 9.Russian Federation: Consumer Price Inflation, 1992–March 1997 1/
(Percentage changes from December to December)
(Monthly percentage changes)
Memorandum items:
1992 weights10044.546.19.4
1993 weights10055.338.95.8
1994 weights10053.540.36.2
1995 weights10052.537.89.7
1996 weights10056.630.113.2
1997 weights10054.429.916.6
Source: Goskomstat.

The Russian authorities have discontinued the practice of publishing average monthly inflation rates since November 1994. Data reported in this table, since December 1994, are on an end of period basis.

Includes food, beverages, and tobacco.

Includes clothing and footwear, household goods, medicines, recreation, education, and culture, and personal care and effects.

Includes rent, water, fuel and power, transport, and communication.

Source: Goskomstat.

The Russian authorities have discontinued the practice of publishing average monthly inflation rates since November 1994. Data reported in this table, since December 1994, are on an end of period basis.

Includes food, beverages, and tobacco.

Includes clothing and footwear, household goods, medicines, recreation, education, and culture, and personal care and effects.

Includes rent, water, fuel and power, transport, and communication.

18. Within the aggregate CPI, services prices have consistently risen more rapidly than goods prices, due to the continuing gradual adjustment in the administered prices for rent, utilities, and transportation; generally, such publicly provided services still remain below-cost, subsidized either directly or through cross-subsidization of households by industrial customers. Among goods, prices on food and nonfood items have risen at similar rates.

19. Producer price inflation has also declined, but remains somewhat above CPI inflation. From an average monthly rate of 10.5 percent during 1994, producer price inflation moderated to 8.8 percent per month during 1995, and then fell to 1.9 percent monthly over the course of 1996 (Table 10).

Table 10.Russian Federation: Industrial Producer Prices, 1991-February 1997
PPI IndexElectricityFuelMetallurgyChemicalsMachineryMaterialsIndustryIndustry
(Percentage changes from December to December)
(Monthly percent changes)
1996 Jan3.
1997 Jan1.
Source: Goskomstat.
Source: Goskomstat.

20. Although PPI inflation has consistently exceeded CPI inflation, individual producer prices have tended to signal price increases on downstream consumer products whose prices are unregulated, with a lag of two to three months. The linkage between the PPI and CPI indices is broken by administered consumer prices. On these goods, a producer price increase without a subsequent rise in the administered consumer price—for example, an increase in gasoline prices without an administered increase in bus fares—generally squeezes profits of suppliers of final goods or services. In addition, producer price inflation has tended to increase with the economy-wide accumulation of interenterprise arrears. This may mean that, as arrears again became increasingly common in 1996, enterprises increasingly build implicit interest into their contract prices; in fact, some contracts explicitly stipulated penalties for late payments.

Wage developments

21. Any discussion of nominal wages in Russia needs to recognize the distinction between reported wage rates and actual compensation. Many workers—roughly one-third by mid-1996—are not paid their full wages as scheduled, as many enterprises are constantly behind on wage payments. The problem of wage arrears has intensified since mid-1995, after moderating somewhat in the first half of 1995 (Table 8). On average, only about 80 percent of wages are paid when due. Statistics on wage arrears indicate that typically 80 percent of arrears have been due to enterprises’ lack of funds, and the other 20 percent due to delays in payments from the budget either directly to workers or to enterprises which have in turn delayed wage payments. Although the federal government coordinated the clearance of public sector wage arrears in March and April 1996, such arrears began to rise again by the summer.

22. For many workers, especially those in the new private sector, reported wages may compose only a small share of compensation. In order to avoid payroll taxes, many firms have devised indirect means of employee compensation. One such scheme involves making non–withdrawable bank deposits in the name of employees, with the employee keeping the interest that accrues on the deposit. Because it is not clear how large or widespread indirect compensation schemes are, it is difficult to assess to what extent wage statistics—collected from medium and large enterprises and budgetary institutions rather than households or private sector employers—understate average paid compensation.

23. Subject to these caveats, average nominal wages are reported to have risen by 114 percent in 1995, which was well short of keeping pace with inflation, which amounted to 191 percent on average (Table 6). Some of this loss was made up in 1996, with average nominal wages up 65 percent relative to 1995.

24. In contrast to the fluctuations in ruble real wages, the U.S. dollar value of average wages rose rapidly and steadily from January 1995 to mid-1996, before falling back somewhat by end-1996. As stabilization took hold in 1995 and the pace of the nominal depreciation of the ruble slowed well below the inflation rate, the average monthly wage in dollars rose by 80 percent, from $79 in January 1995 to $142 in January 1996, and peaked at $170 in July 1996. Since then, depreciation of the ruble and the decline in wage inflation has reduced the dollar value of wages, to an average of $160 during August-December 1996.

II. Public Finances

25. Since 1994, the major aim of budgetary policy has been to reduce the fiscal imbalance by halting and reversing the decline in revenues and by reducing unproductive expenditures. Some headway to that end was made during 1995, but lack of progress in resolving weaknesses in revenue collection put the whole burden of fiscal adjustment on deep expenditure cuts. The sustainability of these deep cuts remained in doubt—particularly in the absence of a coherent program of restructuring government expenditures—leaving the fiscal position fragile and vulnerable to shocks. In 1996, consolidation of the overall fiscal position was set back by a further decline in revenues and a sharp increase in the interest burden linked to uncertainties about the presidential election. The deficit rose and budgetary arrears began to increase. A sustained improvement in the fiscal position will require further improvements in tax administration and reforms of the tax system, the budget process, and expenditure management and control.

A. Overview, 1993–96

26. Beginning in the spring of 1993, the Russian authorities launched an ambitious fiscal adjustment program, focussed on eliminating monetary financing of the budget and phasing out the quasi–fiscal operations of the CBR (such as directed credits). Prudent limits were placed upon government credits to CIS countries, import subsidies were phased out, and tight expenditure control was implemented through cash rationing. The outcome of this program was a reduction in the deficit of the federal government to 6½ percent of GDP in 1993 from 10½ percent of GDP in 1992.11 The fiscal adjustment of the enlarged government12 was even greater, with the deficit shrinking by 10 percentage points of GDP, to 7½ percent of GDP (Table 11).

Table 11.Russian Federation: Summary Operations of the Enlarged Government, 1992-96
(In trillions of rubles)
Enlarged government balance(deficit-)-3.5-12.6-63.6-94.3188.8
Federal government balance 1/-2.0-11.2-69.7-88.5-179.0
Transfers to local government0.34.425.124.160.2
Local government balance 1/
of which: Federal transfers0.34.425.124.960.2
Extrabudgetary funds balance 1/
Federal transfers0.
Intra– EBFtransfers1.1
Unbudgetted import subsidies2.33.6
Financing of the enlarged government3.512.663.694.3188.0
Net foreign financing2.13.30.2-3.114.5
Foreign disbursements2.34.55.411.128.8
Principal repayment 2/-0.2-1.2-5.3-14.2-14.3
Domestic financing1.39.363.597.4174.3
Domestic Banking system1.08.754.379.4152.5
Monetary Authorities1.710.149.425.648.4
Rest of the banking system-0.7-1.44.953.8104.1
Net credit from commercial banks-2.0-6.14.8166.0
Securities held by commercial banks0.611.051.1-61.9
Other financing0.
Privatisation proceeds0.
Net proceeds from sale of gold, gems,
and precious metals0.21.03.910.418.3
Securities held by nonbank sector-0.65.5-1.1-3.0
Domestic principal repayment0.0-0.4-0.9-0.6-0.6
(In percent of GDP)
Federal government overall balance-10.4-6.5-11.4-4.8-6.3
Federal government primary balance-9.7-4.6-9.4-1.8-1.9
Enlarged government overall balance-18.4-7.4-10.4-5.1-6.7
Enlarged government primary balance-17.7-5.4-8.4-2.1-2.1
GDP(In trillions of rubles)19.2171.5611.01862.12823.0
Source: Ministry of Finance, CBR, Goskomstat, and IMF staff calculations.

Unconsolidated revenues and expenditures (inclusive of intragovernmental transfers).

Scheduled principal payment in 1995.

3/ Excludes budgetary funds before 1994 Road fund, ecological fond, STS funds).
Source: Ministry of Finance, CBR, Goskomstat, and IMF staff calculations.

Unconsolidated revenues and expenditures (inclusive of intragovernmental transfers).

Scheduled principal payment in 1995.

3/ Excludes budgetary funds before 1994 Road fund, ecological fond, STS funds).

27. While the fiscal tightening continued in early 1994, the stabilization effort was ultimately not sustained. The 1994 federal budget, passed in mid–year, allowed a rapid expansion of budgetary lending to agriculture and industry, which led to an increase in the federal deficit 11½ percent of GDP in that year. The enlarged government deficit also rose sharply to 10½ percent of GDP. Moreover, during 1994 there was a resurgence of monetary emission on a significant scale as a means of deficit financing.

28. In early 1995, a renewed effort toward fiscal adjustment was initiated under the program supported by a stand-by arrangement. The key elements of the tightening in fiscal policy were incorporated in the federal budget, and enhanced with a supplementary revenue package and a new Central Bank law which eliminated direct credits to the government from the CBR.13 Despite a further decline in revenue collections, the federal deficit was brought down to 4¾ percent of GDP while the enlarged government deficit was reduced to 5 percent of GDP. However, the run-up to the parliamentary elections in December 1995 brought heavy pressures to increase government noninterest expenditures. A partial accommodation of these pressures raised the deficit of both the federal and the enlarged governments to over 9 percent of GDP in the last quarter of 1995.

29. The economic program for 1996 envisaged a further reduction of the deficit to 4 percent of GDP, for both the federal and enlarged governments. However, the performance of revenues deteriorated markedly, and there also was a surge in interest rates on Treasury bills in the run-up to the presidential election. The combination of weak revenue and higher-than-anticipated interest expenditure led to a rise in the federal deficit to 6¼ percent of GDP, although substantial cuts in noninterest spending held the primary deficit unchanged from that recorded in 1995. Delays in federal wage payments and in the federal contribution to the Pension Fund led to an accumulation of arrears, with the outstanding amount of these unpaid federal obligations estimated at ½ percent of GDP at the end of 1996. Significant arrears also arose on other goods and services. The fiscal outcome of the enlarged government in 1996 was broadly similar to that of the federal government.

30. As the above description of fiscal developments pertaining to the federal and enlarged governments indicates, local and regional governments and the social extrabudgetary funds moved slightly into deficit in 1995-96, although the magnitude of their deficits was largely constrained by the absence of well-developed financing mechanisms.14 Expenditure pressures were accommodated frequently through increases in payments arrears, notably on wages in 1995 and social payments (particularly pension benefits) in 1996.

B. Key Features of 1995–96 Developments

Federal government expenditure

31. As indicated above, a major expenditure adjustment occurred in 1995–96, with noninterest federal expenditure (cash basis) being reduced by 10 percent of GDP during those two years; the great bulk of the spending reduction took place during 1995 (Table 12 and 13). Measured in relation to GDP, reductions were largest—with declines of two–thirds—in spending on industry, energy and construction (largely transfers and investment subsidies), and net lending (mainly subsidies to the Northern regions, agriculture, and industry). Intergovernmental transfers fell in 1996 to less than half their 1994 level (as a ratio to GDP), while spending on defense and internal security fell by nearly one–half. Other spending—including on public administration, science, higher education, international activity, and road building—was reduced by about 15 percent as a share of GDP.

Table 12.Russian Federation: Federal Government Operations, 1992–96 1/
(In trillions of rubles)
Revenue 1/3.223.572.1198.1268.1
Cash revenue69.6168.9198.2
Noncash revenue2.529.370.0
Excise taxes0.21.14.517.751.4
Nonenergy excise taxes0.
Energy excise taxes0.10.515.244.0
Profit taxes0.75.517.141.034.8
Personal income taxes0.
Natural resources taxes0.
Taxes on trade0.55.49.629.727.6
Export taxes0.
Import tariffs0.
Other(excluding gold transactions)
Budgetary funds3.015.422.9
Expenditure 1/5.234.7141.8286.6447.2
Noninterest expenditure5.031.3129.8231.9320.4
Administration, science, int activity0.11.614.430.832.6
Law enforcement and public order0.22.410.819.228.5
Health and emergency management0.
Social policy0.
Housing and municipal services1.32.0
Culture and mass media0.
Industry, energy and construction1.14.518.225.726.2
Agriculture and fishing6.28.5
Transportation and communication0.50.7
Net lending0.
Intergovernment transfers0.34.425.124.151.1
Budgetary funds3.014.116.5
Unallocated noncash expenditure15.7
Other 2/
Interest payments0.13.412.054.7126.8
Overall balance(deficit–)-2.0-11.2-69.7-88.5-179.0
Source: Ministry of Finance; and IMF staff estimates.

Excludes budgetary funds (road and ecological funds) before 1994.

Includes float and statistical discrepancy. In 1996 includes 3.8 trillion rubles in extrabudgetary expenditure in 1996 for compensation of Sberbank depositors.

Source: Ministry of Finance; and IMF staff estimates.

Excludes budgetary funds (road and ecological funds) before 1994.

Includes float and statistical discrepancy. In 1996 includes 3.8 trillion rubles in extrabudgetary expenditure in 1996 for compensation of Sberbank depositors.

Table 13.Russian Federation: Federal Government Budget Operations, 1992–1996
(In percent of period GDP)
Revenue 1/16.613.711.810.69.5
Cash revenue11.49.17.0
Noncash revenue0.41.62.5
Excise taxes0.
Nonenergy excise taxes0.
Energy excise taxes:
Profit taxes3.
Personal income taxes0.
Natural resources taxes0.
Taxes on trade2.
Export taxes1.
Import tariffs0.
Other foreign(excluding gold)
Budgetary funds0.50.80.8
Expenditure 1/
Noninterest expenditure26.318.321.212.511.3
Administration, science, intactivity0.
Law enforcement and public order1.
Health and emergency management0.
Social policy0.
Housing and municipal services0.10.1
Culture and mass media0.
Industry, energy and construction5.
Agriculture and fishing0.30.3
Transportation and communication0.00.0
Net lending3.
Intergovernment transfers1.
Budgetary funds0.50.80.6
Unallocated noncash expenditure0.6
Other 2/
Interest payments0.
Overall balance(deficit-)-10.4-6.5-11.4-4.8-6.3
Source: Ministry of Finance; and IMF staff estimates.

Excludes budgetary funds (road fund, ecological funds) before 1994.

Includes float and statistical discrepancy. In 1996 includes 3.8 trillion rubles in extrabudgetary expenditure in 1996 for compensation of Sberbank depositors.

Source: Ministry of Finance; and IMF staff estimates.

Excludes budgetary funds (road fund, ecological funds) before 1994.

Includes float and statistical discrepancy. In 1996 includes 3.8 trillion rubles in extrabudgetary expenditure in 1996 for compensation of Sberbank depositors.

32. While only limited data are available on the economic classification of federal spending, the available evidence suggests that the burden of expenditure adjustment fell on subsidies, transfers (particularly to regions), net lending, and capital expenditure. Categories which were relatively less affected included wages, other goods and services, and social transfers. The share of wages and social insurance payments in total expenditure is estimated to have increased to 22 percent of noninterest expenditure in 1996, reflecting an increase in government wages in real terms in 1996. Capital expenditures were curtailed sharply and were down to a little over 1 percent of GDP in 1996.

33. The weak control over expenditure commitments—due both to a somewhat decentralized federal treasury system and to legislation preventing energy suppliers from cutting off a group of energy users for the reason of nonpayment (so–called strategic energy customers which include a number of budgetary organizations)—was a major factor contributing to payment arrears.15 By end-1995, federal arrears approached 1 percent of (annual) GDP, largely reflecting delayed wage and federal contributions to the Pension Fund. During 1996, arrears on wages and pensions taken together remained broadly unchanged in nominal terms and fell somewhat in relation to (annual) GDP, with federal wage arrears falling but large new arrears arising on federal transfers to the Pension Fund. In addition, however, delays on payments for goods and services (particularly energy) emerged; while information is incomplete, various estimates suggest that such arrears may have amounted to ½-1 percent of 1996 GDP at the end of the year. Moreover, expenditures financed by the issuance of government guarantees against borrowing from commercial banks amounted to ½ percent of GDP in 1996.16 Finally, there was also an increase in off-budget activity 2 funded by profits from oil exports executed under state contracts during 1996; net proceeds from this activity amounted to about ¼ percent of GDP.

Financial position of local and regional governments

34. The financial position of local and regional governments has deteriorated in the past few years as a result of the assumption of new expenditure responsibilities and a drop in revenue collections. Accordingly, the overall balance of the local and regional governments swung from a modest surplus of ¼ percent of GDP in 1994 to a deficit of ½ percent of GDP in 1996 (Table 14). In the period from 1992 through 1994, expenditures of local and regional governments had increased from 12 percent to 17½ percent of GDP, as the result of responsibilities transferred from the federal government, notably the payment of child allowances and some education expenditures. Also, the transfer of welfare functions from enterprises, including subsidized housing and utilities, increased the expenditure burden on local and regional governments. Until 1995, revenues largely kept pace, particularly as the federal government increased transfers corresponding to higher local spending responsibilities.

Table 14.Russian Federation: Local Government Operations, 1992–1996
(In trillions of rubles)
Federal transfers0.34.425.124.960.2
Profits taxes0.911.431.775.864.1
Personal income taxes0.44.417.433.251.4
Natural resource payments0.
Property taxes4.816.036.6
Housing municipal services 1/0.78.933.961.389.5
Social security0.11.36.616.926.9
Other 2/
Overall balance(–deficit)
Banking system-0.4-1.4-3.8.-0.10.0
of which: monetary authorities-0.2-0.6-
(In percent of period GDP)
Federal transfers1.
Profits taxes4.
Personal income taxes2.
Natural resource payments0.
Property taxes0.
Housing municipal services 1/
Social security0.
Other 2/
Overall balance(–deficit)
Banking system-1.9-0.8-
Sources: Ministry of Finance; CBR; and IMF staff estimates.

For 1992-94 defined as 75 percent of expenditure in national economy category.

Includes float/statistical discrepancy.

Sources: Ministry of Finance; CBR; and IMF staff estimates.

For 1992-94 defined as 75 percent of expenditure in national economy category.

Includes float/statistical discrepancy.

35. However, in 1995, federal transfers were cut sharply, and other revenues also declined with the general weakening of revenue performance. As a result, local expenditures were reduced by 5 percentage points of GDP and payment arrears—particularly on wages, goods, and services—are believed to have increased significantly. The main expenditure reductions occurred in subsidies for household utilities (which in turn led to increased payment arrears on electricity, district heating, and gas), and health and education expenditures. Outlays on social benefits and other spending, including administration, were reduced only modestly. In 1996, local government expenditure fell by a further 0.8 percent of GDP, but core expenditures on health, education, communal services, and social security were maintained.

36. The deficits of local and regional governments have been constrained by their limited financing capacity. However, the issuance of domestic securities, often collateralized by investment or housing projects, has increased since 1995, although net issues during 1995–96 amounted to less than ¼ percent of GDP. In addition, several regions have announced plans to finance expenditure with the issue of Eurobonds in 1997 and subsequent years.

Financial position of extrabudgetary funds

37. The financial position of the social extrabudgetary funds— the Pension, Employment, Social Insurance, and Medical Insurance Funds—has deteriorated since 1994 due to a shrinkage in the payroll tax revenue base, leaving not only financial imbalances but also a benefits system which is increasingly unable to provide adequate support for the most needy segments of Russian society. The combined social funds balance, after transfers from the federal government, weakened from a surplus of 0.5 percent of GDP in 1994 to a deficit of 0.2 percent of GDP in 1996 (Table 15). Moreover, arrears have accumulated on pension payments.

Table 15.Russian Federation: Extrabudgetary Fund Operations, 1992–96
(In trillions of rubles)
Pension fund1.711.138.385.2121.7
Employment fund0.
Social insurance fund0.32.07.517.625.4
Medical insurance fund0.01.16.614.614.6
Pension fund1.310.437.385.8127.1
Employment fund0.
Social insurance fund0.21.66.616.625.2
Medical insurance fund0.
Overall balance0.
Financing(banking system)-0.5-1.1-2.9-0.10.0
of which: monetary authorities-0.4-0.5-
(In percent of period GDP)
Pension fund8.
Employment fund0.
Social Insurance fund1.
Medical insurance fund0.
Pension fund6.
Employment fund0.
Social Insurance fund1.
Medical Insurance Fund0.
Overall balance2.
Source: Extrabudgetary funds.
Source: Extrabudgetary funds.

38. The Pension Fund is by far the largest social program, with expenditures amounting to 4½ percent of GDP in 1996.17 The labor pension is earnings related—though subject to a relatively low ceiling—and financed on a pay–as–you–go basis by a payroll tax on employers amounting to 29 percent of employee wages. With the exception of federal transfers—for social, military, and disabled pensions, as well as delivery expenditures—which finance slightly over 10 percent of the Pension Fund’s expenditures, other resources are almost entirely derived from taxes on current wage payments. As regards pension benefits, the replacement rate—i.e., the ratio of the average pension to the average wage—remained almost flat in 1994–1996 in the range of 35–38 percent, and real pension movements have mirrored the real wage decline in 1995 and recovery in 1996.

39. The structural position of the Pension Fund has weakened in the past few years due to four major factors: (i) an increase in the dependency ratio; (ii) a rise in the minimum pension level; (iii) a steady fall in payroll tax compliance; and (iv) insufficient transfers from the federal government with respect to its own obligations. The dependency ratio—i.e., the ratio of pensioners to workers who pay contributions—rose from 53 percent in 1994 to 57 percent in 1996. Pension expenditure increases in 1996 resulted mainly from increasing minimum pensions; the effective pension floor relative to the minimum subsistence income was raised from 48 percent in 1995 to an average of 72 percent in 1996 (and over 80 percent by end–1996). Payroll tax compliance has steadily fallen from around 75 percent in 1994 to 66 percent in 1996. These factors, combined with a lack of sufficient transfers from the federal budget, led to problems of rising arrears on pension payments.

40. The Social Insurance Fund (SIF) provides birth, maternity, sickness, and a few other benefits, including subsidized sanatoria visits and certain child allowances. Many of these benefits are not targeted to needy groups. The SIF is funded by a 5.4 percent payroll tax and, over the past three years, has consistently generated financial surpluses. However, these have declined in magnitude over time, and the financial surplus in 1996 amounted to less than 0.1 percent of GDP.

41. The nature of the Employment Fund has changed significantly in recent years, in parallel with developments in the labor market, with an increasing share of resources directed to the payment of cash benefits and a reduction in enterprise support through labor subsidies. The number of registered unemployed individuals receiving benefits rose from 1.4 million persons at end–1994 to 2.3 million persons at the end–1996 (see Table 5). Moreover, the share of unemployed—according to the DLO definition—that received benefits rose from 26.3 percent at end–1994 to 36.8 percent in May 1996. The share of outlays on benefits relative to total expenditures more than doubled from 18 percent in 1994 to 45 percent in the first half of 1996. Benefit levels have remained relatively modest and have been limited in duration to one year. The Employment Fund has recorded financial surpluses since 1992. However, starting in 1995, these surpluses were transferred to the Pension Fund to finance early retirement pensions. Furthermore, the payroll tax rate for the Employment Fund was cut from 2 percent in 1995 to 1.5 percent in 1996.

C. Tax and Revenue Issues for the Enlarged Government

42. The revenue decline of the enlarged government has continued throughout the transition period and has become more pronounced during more recent years.18 Revenues of the enlarged government fell by 4½ percentage points of GDP during 1992–94 and by additional 10 percentage points of GDP during 1994–96.19 One aspect of the revenue decline has been that the informal economy has grown, implying a decline in the recorded tax base relative to estimated GDP. However, the yield of taxes in relation to the recorded base has also declined, due to three main factors: (i) the ad hoc settlement of tax liabilities through bargaining and increasing deferrals; (ii) an increase of tax–deductible allowances for some taxes; and (iii) to a lesser extent, new exemptions. In addition, a number of tax rate changes have been less than fully compensated for by offsetting measures.

43. Fundamental weaknesses in tax administration have also been a critical factor in explaining the revenue losses. The problems of tax administration in Russia have been centered around the continued use of procedures developed during the Soviet era, organizational problems relating to the highly decentralized structure of tax collection agencies, and poor coordination between the various tax collecting agencies, enforcement agencies, and the Ministry of Finance. Reforms to overcome these problems accelerated significantly in late 1996 when the government, in close cooperation with a number of technical assistance providing agencies, adopted an action plan aimed at addressing major issues in tax administration. The plan seeks to strengthen the effectiveness of the tax–collecting agencies by streamlining their operations vis-à-vis large taxpayers, improving the system of auditing, and enhancing their ability to deal with tax arrears. Also of critical importance are steps to significantly strengthen the taxation of alcohol products.

44. Finally, progress in reforming tax legislation was very slow and undoubtedly led to relatively unchecked growth of tax evasion and tax fraud. While some elements of the modernization of tax legislation have been instituted during 1995 and 1996, particularly at the federal level, much remains to be done. The main elements of tax reform implemented during 1995–97 have been: (i) the elimination of the excess wage tax component of the corporate profits tax in January 1996, thus removing incentives to hoard surplus labor and reducing incentives to pay employees in nonmonetary forms; (ii) a requirement to use invoices for business transactions introduced in January 1997 as a precursor for switching the VAT from the mark–up method to the credit–invoice method; (iii) the elimination of export taxes; and (iv) the introduction of a 15 percent tax on interest on domestic securities as of February 1997 to bring it in line with taxation of other financial instruments.

45. Since late 1994, the authorities have been working towards a far–reaching legislative tax reform to be implemented in the context of a Tax Code. However, the general principles section of the code (dealing with administrative and definitional issues) has not progressed beyond committee stage in the Duma since submission in early 1995, while the detailed provisions for individual taxes were only submitted to the Duma by the government at end–April 1997. Nonetheless, the authorities have now raised legislative passage of the draft tax code to a top priority for 1997.

46. The draft Tax Code aims at simplifying the tax system while at the same time significantly reducing tax exemptions. The key tax policy initiatives incorporated in the draft Tax Code include:

  • The unification of the VAT at a single rate of 22 percent (compared with the present 20 percent for most categories and 10 percent for a few others) and with the tax assigned solely to the federal government.
  • Introduction of the accrual method of accounting for the VAT, profit, and excise taxes.
  • Adjustment of specific excise tax rates for inflation.
  • Application of the destination principle for trade with other CIS countries starting in the year 2000, with the exception of oil and gas excises which are essentially royalty taxes.
  • Elimination of most tax exemptions.
  • Unification of the rate of the profit tax at 35 percent, and deductibility of business expenses when measuring the profit tax base. The tax on dividends would be abolished and the tax on interest from bank deposits and government debt would be unified at 12 percent.

III. Monetary Policy and Financial Sector Developments

47. Monetary and credit policies were tightened substantially in early 1995 as part of a determined effort to stabilize the economy. This initiative was supported by a tightening in fiscal policy and a strengthening of the role of the Central Bank of Russia (CBR). Growth rates of base money and broad money have fallen significantly, and the progress in reducing inflation has allowed a fall in interest rates, although this trend was interrupted in the first half of 1996 by the effects of election-related uncertainties. The remonetization of the economy, however, is still at an early stage.

A. Institutional and Legal Structure

48. The banking sector in Russia includes the CBR and around 2,000 banks at present, including some state-owned banks, notably Sberbank (the Savings Bank) which holds the majority of household deposits.20 The role of the CBR is determined by a law passed in April 1995 which provides considerable supervisory authority over banks and independence in the formulation and implementation of monetary policy. The CBR has recently improved its ability to influence monetary conditions through steps such as the introduction of a Lombard facility, a repurchase facility, and a primary dealer system for government securities. The CBR is also working to modernize the payment system and reduce potential systemic payment problems stemming from the weak financial condition of many commercial banks.

49. Treasury bills, spot and forward foreign exchange, and commodities are traded on numerous exchanges in different financial centers across Russia. Interbank markets for these instruments are also active and have grown in importance over the last few years. Debt markets in Russia are liquid and are dominated by trading in federal government debt instruments including Treasury bills, floating rate Federal savings bonds, and medium-term foreign-currency bonds. The issuance of other bonds is extremely limited, although short-term debt instruments, including promissory notes (veksels) issued by banks, companies, and local governments are widely issued and actively traded.

50. Equity markets are less liquid than debt markets, and almost all trading is over-the-counter. Until recently, Russian firms had raised only modest amounts of capital through public issuance of equity, and the majority of outstanding equity dates from the mass privatizations of 1993 and 1994. Further, due to perceived high risk and other factors, the valuations of Russian companies (e.g., in terms of potential profitability based on assets or resources) have typically been substantially below what might be expected abroad for companies in similar conditions. However, a number of Russian companies—including Gazprom, the largest Russian company—began to tap foreign capital markets in late 1996, via issues of American Depository Receipts (ADRs) and similar instruments.21 The benchmark equity index—the Moscow Times index—rose by 123 percent in U.S. dollar terms in 1996, after falling by 36 percent between its inception in September 1994 and December 1995. Stock prices continued to increase substantially in the first four months of 1997, with a further increase of more than 60 percent in the Moscow Times index. Recent increases have been attributed to greater interest by domestic investors in response to falling Treasury bill yields and to continuing interest by foreign investors amid the establishment of specialized foreign mutual funds and the inclusion of the Russian market in several emerging market indices.

B. Evolution of Monetary and Credit Aggregates, 1994–96

Monetary and exchange rate policies

51. After what seemed to be promising developments in early 1994, when fiscal and monetary outcomes were in line the government’s stabilization plans, a loosening of fiscal policy led to a marked expansion in CBR net credit to government in the second half of 1994. Confidence in policy ebbed, exchange market tensions re-emerged, and net international reserves (NIR) declined, culminating in the “Black Tuesday” episode of October 1994 when in one day the ruble depreciated by more than 20 percent. Monthly inflation rose from 6 percent in June to 16 percent in December 1994.

52. Following these slippages, monetary policy became more restrictive in late 1994, and was tightened sharply in January 1995 to cope with pressures in the foreign exchange market. The CBR stopped providing direct credit to the budget, with credit to the government from the monetary authorities limited by law to secondary market purchases of government securities and the ruble counterpart of sales of foreign exchange.22 The CBR also stopped providing directed credit to the banking system. Reserve requirements were increased sharply on ruble deposits and were introduced on foreign currency denominated deposits, and the CBR’s refinance rate was raised in several steps, from 130 percent in November 1994 to 200 percent in January 1995.

53. Reflecting the tightening of fiscal policy in 1995 and the greater reliance on sales of government securities in financing the deficit, the rate of expansion of the net domestic assets (NDA) of the monetary authorities declined markedly. In particular, the growth of CBR net credit to government fell sharply, from an average monthly rate equivalent to 12.5 percent of beginning-of-period base money in 1994 to an average monthly rate of only 0.2 percent in 1995 (Table 16).23 Despite the sharp reduction in credit expansion, base money growth remained high through 1995, at an average of almost 7 percent per month, as NIR rose by $5½ billion during 1995. Much of this NIR growth occurred in the second quarter, when the CBR bought foreign exchange to reduce the pace of the appreciation of the ruble while not being in a position to fully offset its monetary impact by sterilization. In July 1995, with the aim of stabilizing market expectations about the exchange rate, the CBR introduced an exchange rate band—ranging from Rub 4,300 to 4,900 per dollar—for the period until end-1995. The foreign exchange market subsequently stabilized, and base money expansion slowed substantially during the latter half of the year.

Table 16.Russian Federation: Monetary Authorities’ Accounts, December 1992–March 1997(End-period stocks in billions of rubles)
Net international reserves 1/1.257.958.1512.5633.5532.3235.7442.0523.0917.079.526.74
Net domestic assets0.988.7439.5337.0639.5956.2868.0071.65106.28108.57121.39123.43
Net credit to enlarged government1.1911.2866.3167.2879.15100.24111.16114.94.141.45150.12162.06162.31
Net credit to federal government1.8313.0472.1373.6285.94106.04115.36120.20145.23154.17166.39167.31
CBR net credit to federal government 2/3/2.3012.3364.0765.4370.8585.3284.5990.4898.82103.63111.99111.88
Ruble counterpart to NIR4/-0.470.718.068.1915.1020.7230.7729.7246.4150.5554.4055.43
Net credit to local governments-0.26-0.84-3.27-4.17-4.40-3.62-2.12-3.42-2.39-2.61-2.07-2.58
Net credit to extra budgetary funds-0.38-0.91-2.54-2.18-2.39-2.18-2.08-1.84-1.40-1.45-2.26-2.43
Net credit to banks0.823.061.497.33-6.84-2.79-3.22-2.85-4.04-11.79-11.36-10.81
Gross credit to banks2.848.7414.9019.8212.9510.1711.6712.1012.045.546.395.85
Liabilities to banks 5/-2.03-5.69-13.40-12.49-19.79-12.95-14.89-14.95-16.09-17.32-17.75-16.66
Other items, net-1.03-5.60-28.27-37.55-32.73-41.18-39.94-40.45-31.13-29.76-29.30-28.07
Base money2.2316.6947.6849.6273.1388.60103.74113.70129.37125.65130.91130.16
Required reserves0.472.719.9812.5716.1519.8920.3623.4221.0224.5922.3223.60
Memo items:
Net international reserves(billions of dollars)3.016.372.292.567.397.187.708.664.523.161.711.19
Gross int’l reserves(billions of dollars)4.538.876.506.5512.5513.7917.3319.3815.9915.1615.3415.27
Gross int’l res.(months of imports of g.n.f.s.)
End– period exchange rate(rubles per dollar)4151,2473,5504,8994,5394,4994,6404,8565,1085,3965,5605,675
Sources: Central Bank of Russia; and IMF staff estimates.

Valued at end-period exchange rates.

Includes Rub 19.3 trillion debt assumed from commercial banks between June 1995 and December 1995.

Interstate official loans or Rub 2.1 trillion are included in credit to the federal government from December 1996.

Refers to the ruble counterpart of the use of government NIR, but excludes changes in the value of the stock due to changes in the exchange rate.

Excludes required reserves on ruble deposits.

Sources: Central Bank of Russia; and IMF staff estimates.

Valued at end-period exchange rates.

Includes Rub 19.3 trillion debt assumed from commercial banks between June 1995 and December 1995.

Interstate official loans or Rub 2.1 trillion are included in credit to the federal government from December 1996.

Refers to the ruble counterpart of the use of government NIR, but excludes changes in the value of the stock due to changes in the exchange rate.

Excludes required reserves on ruble deposits.

54. The trend toward lower rates of growth in base money continued in 1996, with the average monthly growth rate falling to 2 percent, but this slowdown was accounted for by a contraction in NIR; NDA expanded at a pace somewhat faster than base money. The increase in NDA, in turn, was accounted for mainly by an increase in monetary authorities’ credit to the federal government which, in turn, reflected broadly equal increases in CBR credit to government and in the ruble counterpart of the government’s use of its NIR. Net credit to banks remained approximately unchanged in 1996, with new CBR credit limited to temporary use by banks of the CBR’s collateralized short-term facilities (Box l).24 In contrast to the experience of the previous year, NIR fell in 1996 by around $6 billion, despite sizable inflows related to purchases of Treasury bills by nonresidents and a Eurobond issue which raised $1 billion. The decline in NIR resulted from large capital outflows that occurred against the backdrop of the political uncertainties noted above, with much of the contraction taking place in the second quarter of the year when NIR fell by over $4 billion.

55. The heavy exchange market intervention was necessitated by the authorities’ policy of maintaining the exchange rate within its announced band even in the extreme conditions in the run-up to the presidential elections, which in turn echoed the view shared by most observers that the exchange rate corridor had contributed to stabilizing expectations about economic policy and marked one of the clear successes in economic management to date. The corridor system was extended into the period July-December 1996, but with a sliding band in contrast to a flat corridor in previous periods, starting at Rub 5,000 to Rub 5,600 and ending at Rub 5,500 to Rub 6,100 per dollar at end-December, with an implied monthly depreciation of 1.5 percent. Within the wide band, the CBR announced a narrower daily band at which it would transact with market participants. The exchange rate depreciated smoothly, and remained in the more appreciated part of the wide band through the second half of the year (Chart 1). However, the CBR’s market intervention was at times substantial.

Box 1.Monetary Policy Instruments and Procedures

Since the adoption of the 1995 Budget Law, the CBR has not provided direct credit to the government or to enterprises. Instead, monetary and exchange rate policies have been directed at meeting I objectives for net international reserves, net domestic assets, and reserve money, as well as stabilizing the government securities and foreign exchange markets.

In addition to open market operations in government securities and foreign exchange market intervention, the CBR can add liquidity to the banking system via several instruments. First, there is the “Lombard facility” introduced in April 1996 whereby the CBR provides refinance credit (collateralized by government securities) for periods of 1, 2, and 4 weeks. Credit was initially available in weekly auctions subject to minimum interest rates, but is now provided on a continuous basis for banks in good standing with prudential requirements, subject to a weekly aggregate limit (of Rub 2 trillion, as of March 1997). Lombard interest rates were lowered during 1996 and early 1997, and in March 1997 stood at 24,33, and 42 percent for 1–, 2–, and 4–week loans, respectively. Second, the CBR began offering 2–day repurchase agreements (repos) with primary dealers (large banks that have undertaken to make markets in government securities) in October 1996. It is expected that this facility will reduce the volatility of interbank rates, especially as the repo market develops. Third, there is also an end–of–day overnight settlement facility for selected banks (at 1.3 times the refinance rate) to ensure the smooth functioning of the payments system.

The CBR has the capacity to remove liquidity from the system via open market operations and by attracting deposits from banks (through deposit auctions). Historically, rates on such deposits were not generally attractive, so there was little use of this instrument, although this has changed somewhat following changes in September 1996 to a more market–oriented system. The CBR plans also to introduce reverse repos with primary dealers to withdraw liquidity from the banking system.

Reserve requirements, which are levied on almost all liabilities of banks, have in part saved as an adjunct to the various prudential requirements imposed by the CBR for supervisory purposes. However, two episodes where they were used as a front–line instrument of monetary policy occurred in early 1995 amid the general tightening of monetary policies and in June 1996 when the CBR attempted to offset the liquidity injection resulting from the transfer to the budget of Rub 5 trillion in CBR profits. With the exception of these episodes, changes in reserve requirements have recently been aimed at reducing the variation on requirements on deposits of different terms and denominations. Thus, the dispersion in the requirements on ruble liabilities of commercial banks has narrowed from 10–20 percent (deposits over 91 days–deposits of up to 30 days) in early 1996 to 8–14 percent in May 1997, while the reserve requirement on foreign currency was raised from 1.5 percent in early 1996 to 6 percent in May 1997. In addition, the CBR announced in October 1996 that the special reserve requirements on Sberbank (the Savings Bank) would be gradually changed to the same levels as apply to other banks; this became effective in May 1997. Compliance with reserve requirements in the past was relatively low, because penalties for noncompliance were not significant, but is now very close to 100 percent following an increase in penalties and the introduction of a provision by which the CBR can unilaterally transfer funds from banks’ correspondent accounts to reserve accounts.


Exchange Rate System June 1994–December 1997

Sources: Goskomstat; Moscow Interbonk Currency Exchange; and Fund staff estimates.

1/ End of period date.

2/ The exchange rate band of Rub 4300–4900 per US$ was applicable during the period July 6–“December 31, 1995. and a now bond of Rub 4550–5150 per US$ was set for the period January 1–” “July 1, 1996. On July 1, 1996 a sliding bond was introduced with the upper and lower boundaries” “Initially set at Rub 5000 and 5600 per US$ respectively, and a predetermined slide to” “Rub 5500–6100 per US$ at end–1996. On November 26, 1996 the Control Bank of Russia announced” “that the sliding band arrangement would continue In 1997, sliding from Rub 5500–6100 per US$ to” Rub 5750–6350 per US$ at end–1997.

3/ Based on consumer price inflation in the United States and the Russian Federation. Increase corresponds to a real appreciation.

56. For 1996 as a whole, the ruble depreciated by 16.5 percent (an average monthly rate of 1.5 percent), as compared with a depreciation of 23.5 percent (2.2 percent per month) in 1995. For 1997, the CBR has retained a sliding band, beginning at Rub 5,500 to 6,100 (compared with the actual rate of Rub 5,560 at end-1996) and ending at Rub 5,750 to 6,350 at end-1997. The center of the band will therefore depreciate by 4 percent in the course of the whole of 1997, and the ruble would depreciate by 8 percent if it ended the year at the center of the band, given that it started the year in the more appreciated part of the (sliding) band.

Monetary survey

57. Developments in the broader monetary aggregates in 1995 and 1996 have largely mirrored the behavior of base money, as is reflected in the relatively modest changes in this period in the money multiplier (Table 17 and Chart 2). Average monthly growth in ruble broad money decelerated from 9.5 percent in 1994 to 7.1 percent in 1995 and further to 2.4 percent in 1996.

CHART 2Russian Federation: Monetary Indicators

58. The ruble money multiplier—at around 2.3 in early 1997—is low by international standards, reflecting both the high currency–deposit ratio (around 0.50) and the high reserve–deposit ratio (around 0.14).25 In real terms, both bank deposits and holdings of currency reached their lowest levels in the first quarter of 1995, in the wake of the burst of inflation and exchange rate depreciation in late 1994. Since then, currency holdings and deposits have both grown in real terms. Currency holdings were first to recover when the ruble stabilized, with the recovery in deposits being both smaller and slower (Chart 3). The currency–deposit ratio peaked in June 1996 at 0.64 amid the uncertainty over the presidential elections, but has since fallen as confidence in bank deposits has increased. Nonetheless, uncertainty over the financial health of the banking system remains high and the average maturity of deposits is still very short. The ruble reserve–deposit ratio also fell in late 1996 and early 1997 as the CBR lowered average reserve requirements. However, the decline in ruble reserve requirements over this period overstates the decline in overall bank reserves since reserve requirements on foreign currency deposits have been increased over the same period.

Table 17.Russian Federation: Monetary Survey 1/(End-period stocks in billions of rubles)
Net foreign assets 2/5.118.840.450.863.656.745.547.730.826.412.96.8
NIR of the monetary authorities1.
NFA of commercial banks 3/3.810.932.338.330.
Net domestic assets5.625.994.0109.7153.4180.3226.9244.0296.0312.5350.2363.1
Net credit to enlarged government0.711.369.678.697.6127.3158.0171.9211.2253.9284.6289.3
Monetary authorities 4/1.211.366.367.379.2100.2111.2114.9141.5150.1162.1160.1
Commercial banks-
Claims on rest of economy6.435.1119.8159.0171.1189.4194.5206.0220.4227.3233.1242.9
Ruble credit5.627.977.594.3103.6118.2122.3131.3144.0151.3154.0164.0
Foreign currency credit0.87.142.364.767.671.272.274.776.475.979.178.8
Other items, net-1.5-20.5-95.5-128.0-115.3-136.4-125.5-133.9-135.6-168.7-167.6-169.0
Broad money10.744.7134.4160.5217.0237.0272.5291.7326.8338.9363.1369.9
Ruble broad money6.232.697.0107.2156.7179.8220.7241.7266.6276.7293.8296.3
Foreign currency deposits 3/4.512.137.353.360.357.251.849.960.262.269.373.7
Memorandum Items:
Ruble money velocity(not seasonally adjusted)6.611.111.012.511.812.512.110.310.611.311.29.6
Broad money velocity3.
Ruble money multiplier2.761.952.
Currency/ruble deposit ratio0.370.690.580.490.54.0.590.580.560.640.530.550.48
Banks’ reserves(percent of ruble deposits)0.540.400.350.320.330.
Required reserves/deposits0.
Excess reserves/deposits0.450.
NFA of commercial banks(billions of dollars) 3/9.168.719.097.816.635.422.111.161.511.730.620.64
Foreign exchange deposits(billions of dollars) 3/10.939.6910.5110.8813.2812.7211.1610.2911.7911.5212.4713.09
Real credit to private sector(index)1.000.580.660.610.530.510.460.440.450.460.450.46
Sources: Central Bank of Russia, and IMF staff estimates.

Consolidation of the accounts of the monetary authorities, commercial banks, Sberbank, and Vheshekonombank.

Valued at end-period exchange rates.

Estimates based on a survey and subject to revision.

Includes the ruble counterpart of the use of government NIR, but excludes changes in the value of the stock due to changes in the exchange rate.

Sources: Central Bank of Russia, and IMF staff estimates.

Consolidation of the accounts of the monetary authorities, commercial banks, Sberbank, and Vheshekonombank.

Valued at end-period exchange rates.

Estimates based on a survey and subject to revision.

Includes the ruble counterpart of the use of government NIR, but excludes changes in the value of the stock due to changes in the exchange rate.

CHART 3Russian Federation: Currency and Ruble Deposits in Real Term

(Index, March 1995 = 1.00)

59. The velocity of ruble broad money is high is high, at around 10, versus 1 or 2 in many industrial countries and in the more advanced economies in transition (Chart 4).26 The low level of monetization in Russia has prompted some observers to argue that it is a reflection of excessively tight monetary policy. Such an argument is, however, difficult to reconcile with the large capital outflows that occurred during 1996 and the large stock of flight capital outside Russia. Rather, the low level of monetization appears to reflect dollarization—which in turn indicates the relatively low level of confidence in ruble–denominated assets, despite the recent gradual improvement, owing to both lingering macroeconomic uncertainties as well as lack of trust in the banking system—and in some cases a desire to keep assets away from the scrutiny of tax authorities. Velocity has begun to fall from the peak levels of 1995, as low inflation has taken hold and confidence in ruble financial assets has begun to increase. However, this decline has been slower than in some other countries that have successfully reduced inflation from extremely high levels.

CHART 4Russian Federation: Velocity of Money 1/

1/ Annualized nominal monthly GDP divided by broad money.

60. Including foreign currency deposits, the velocity of broad money is lower, at around 8 in early 1997. While there are problems in estimating the value of foreign currency deposits, available estimates suggest that total foreign currency deposits have been around $10–13 billion for several years and that the share of foreign currency deposits in total deposits has fallen from over 40 percent in early 1995 to 27 percent in early 1997, reflecting the real appreciation of the ruble and some increase in confidence in ruble–denominated assets.

61. Estimates of broader monetary aggregates that include nondeposit liabilities such as money market instruments are not yet produced by the CBR. However, (incomplete) data on promissory notes (or “veksels”) and similar instruments issued by banks indicate an increase in recent years; such instruments are estimated to have amounted roughly to 9–10 percent of total broad money in early 1997. The CBR has made the issuance of promissory notes subject to both prudential and reserve requirements.27 The relative anonymity of promissory notes (compared with bank deposits or Treasury bills for which ownership is registered) as means of exchange may, however, remain an incentive for their use for tax evasion purposes.28 Banks’ asset portfolios have shifted towards holdings of government securities in recent years. As of early 1997, around 35 percent of commercial bank credit was to the government, up from 19 percent at end–1995 and close to zero at end–1994. This trend reflects both the attractiveness of high real yields on Treasury bills and the risks involved in commercial lending, including difficulties in securing collateral. Around one–third of credit to the nongovernment sector is to state enterprises, with the remainder being to private enterprises; bank lending to the household sector is virtually zero, although some limited mortgage lending is now beginning to emerge. Bank loans are predominantly short term. The share of loans denominated in foreign currency peaked at over 40 percent in early 1995, but had declined to 32 percent in early 1997 as confidence in the ruble has increased. Finally, the net foreign asset position of commercial banks peaked at around $10 billion at end–1994 but has also fallen as confidence in the ruble has increased and as banks have gained access to foreign borrowing.

C. Interest Rate Developments

62. The most prominent official interest rate in Russia is the CBR’s refinance rate. The refinance rate—which serves predominantly as a signal of policy, since it is not used in normal CBR lending—is set by the CBR based on its monetary and credit policy objectives, and with reference to the level of market rates, but in recent years has typically been substantially higher than the reference interbank rate (Chart 5). The refinance rate has been gradually reduced from 200 percent per annum (noncompounded basis) in January 1995 to 36 percent at end–April 1997.

CHART 5Russian Federation: Official and Market Interest Rates

(In percent per month)

Source: Russian authorities; and IMF staff estimates.

63. Interbank money markets in Russia are active, albeit less so since the market crunch of August 1995 when interbank rates rose as high as 1,000 percent and trading virtually stopped. Following this episode, banks that relied on this market as a major source of, or outlet for, funds have curtailed their activity in the market and reduced the average maturity of their transactions towards levels that are more common in other countries. Most interbank operations now occur between banks with good knowledge of their counterparts, often with collateral. Interbank rates have fallen over the past two years as inflation has declined.

64. Treasury bills, with maturities up to 12 months, are auctioned on a weekly basis on Wednesdays, with occasional additional placements based on the government’s financing needs. The primary market is active, and auctions are typically substantially oversubscribed. The secondary market is also active, with average daily turnover reported at the equivalent of around $800 million in early 1997 (versus a record monthly turnover in the equity market in January 1997 of only $800 million). The market value of all outstanding Treasury bills and Federal savings bonds was Rub 232 trillion ($41 billion) at end–January 1997, with estimates suggesting that around 7 percent were held by the CBR and around 20 percent by foreign investors.

65. With the exception of a sharp increase in mid–1996 amid the uncertainty around the presidential elections, yields on Treasury bills have declined more or less in line with interbank rates. However, the yields on Treasury bills more than compensated investors for domestic inflation and the depreciation of the ruble in 1995 and 1996. For example, an investment made in Treasury bills at the end of 1994 and rolled over on a continuous basis until the end of 1996 would have yielded a cumulative ruble return of around 410 percent, compared with cumulative inflation of 180 percent and a ruble return of around 70 percent on a U.S. dollar LIBOR investment over the same period. The yield on three–month Treasury bills in April 1997 stood at 30–35 percent per annum, still substantially higher than recent or projected rates of inflation and the depreciation of the ruble implied by futures prices.

66. The returns on Treasury bills in 1995 and 1996 would likely have been substantially lower if market access for nonresident investors had been broader. Nonresident access to the Treasury bill market was not officially permitted until early 1996, when a scheme was introduced to allow nonresidents to purchase securities in primary auctions and to hold them to maturity in special “S” accounts in certain commercial banks. The investor received a predetermined dollar yield of 19 percent through a CBR foreign exchange forward contract, the purpose of which was to provide protection against sudden capital outflows. A modified scheme introduced in August 1996 allowed nonresidents to participate in the primary and secondary markets in the same way as residents and to keep all the ruble proceeds, except that repatriation of the balances in the “S” accounts at commercial banks could not occur until the investor had purchased and held until maturity a forward foreign exchange contract on the balance in these accounts with a minimum maturity of three months. These forward contracts were provided by commercial banks which were required simultaneously to enter into forward contracts with the CBR for 90 percent of the amount to be repatriated; the contracts yielded a 19 percent return on the CBR component, with the banks covering the remainder of the contract.

67. The effective dollar return for nonresident investors (for the forward contracts) has been cut in stages to 12.5 percent in April 1997, the proportion of the forward contract provided by the CBR has been reduced to 50 percent, and the minimum forward contract period was reduced to two months. Inflows from nonresident investors have remained strong, thereby contributing to the decline in interest rates in late 1996 and early 1997. The CBR announced in February 1997 that all restrictions on capital outflows would be removed by end–1997, and in April 1997 announced a schedule for the removal of remaining restrictions.

68. Commercial bank deposit and lending rates have fallen substantially in 1995 and 1996 (Chart 6) and were down to around 30 and 60 percent per annum (noncompounded basis), respectively, in early 1997. After–tax deposit rates would appear to be substantially positive in real terms; consequently, the relatively low level of deposits in the banking system may be ascribed to a lack of trust in the banking system (perhaps related to previous inflation and depreciation) rather than a low level of interest rates. The spread between lending and deposit rates has fallen slightly, but remains large reflecting the high risks in lending which are related to the difficulty in securing real assets as collateral for loans. Rates on ruble deposits and loans have typically been substantially above rates on foreign currency–denominated transactions, and foreign currency interest rates offered by Russian banks are typically substantially above comparable rates in industrial countries, because of perceived high risks of banks and borrowers.

CHART 6Russian Federation: Commercial Bank Interest Rates

Source: Rating Monthly Bulletin (rates are average for 60 to 70 Moscow banks plus 10 regional banks); and IMF staff estimates

 (In percent per annum)

IV. External Sector Developments

69. Over the last three years, the current account position has remained strong, helped by export liberalization and improvements in the terms of trade against the background of sluggish domestic demand (see tabulation below, and Table 18). In 1994, the current account surplus was offset by capital outflows. Capital outflows declined in 1995 as improving domestic financial conditions and growing securities markets increased the attractiveness of ruble assets, leading to an improvement in the overall balance, a buildup of gross international reserves, and a steady real exchange rate appreciation. Political uncertainties, however, contributed to a sharp increase in capital outflows in 1996. The overall balance thus weakened despite a doubling of the current account surplus in dollar terms, and gross international reserves fell by $1.6 billion (see Chart 7).

Table 18.Russian Federation–Balance of Payments, 1994–96(In billions of US. dollars)
Current account10.
Trade balance21.
Non CIS53.964.515.317.117.420.470.1
Non CIS 1/-36.0-47.5-12.1-13.1-10.1-11.8-47.1
Services, net-10.6-13.1-2.8-3.2-3.4-4.0-13.4
Non–factor services, net-6.5-8.1-1.3-1.3-1.1-1.7-5.4
Receipts 2/
Payments 2/-15.4-20.5-3.3-3.7-3.9-4.5-15.4
Interest, net-4.3-4.9-1.4-1.8-1.9-2.3-7.5
of which: official-4.9-5.7-1.4-1.5-1.5-2.2-6.7
Other factor services0.2-0.1-0.1-0.1-0.30.0-0.5
Transfers, net-0.10.2-0.1-
Capital account-29.2-7.7-0.2-4.9-7.8-6.7-19.6
Transfers, net0.8-0.3-0.2-0.2-0.2-0.1-0.8
Capital to the public sector-13.1-
Disbursements 3/
of which: official-15.3-12.3-2.9-1.1-3.2-0.9-8.1
Purchases of govt securities, net0.
Other 4/
Capital to the private sector-16.82.0-1.5-7.2-5.7-7.1-21.5
Foreign direct investment, net0.
Portfolio investment, net0.0-
Short–term and other-17.51.3-2.0-7.5-6.9-7.6-24.0
Commercial banks, net-
Change in stock offor.curr.notes 5/-6.40.2-1.0-3.4-3.0-3.5-10.9
Enterprise transactions, net 6/-8.0-4.1-1.5-5.5-4.6-6.1-17.7
Other private, net7/-2.8-1.8-0.51.7-
Errors and omissions-1.7-3.0-1.5-0.9-0.50.0-2.8
Overall balance-20.5-6.2-1.2-5.4-4.7-1.4-12.8
Net official international reserves3.9-5.4-
Gross reserves2.4-10.8-
Exceptional financing 8/16.611.
Memorandum items:
Gross foreign reserves
in billions of U.S. dollars6.517.315.7
in months imports(G&NFS)
Current account(In percent of GDP)
Source: CBR; Ministry of Finance; and IMF staff estimates.

Includes an adjustment for discrepancies between Russian customs data and data given by partner countries, as well as an estimate of imports not registered in partner–country data.

Based on changes in the estimating method, non-factor service estimates beginning in 1996 are not strictly comparable to estimates for 1994 and 1995.

Includes government international bond issues.

Receipts and payments on Non-CIS debts denominated in non-convertible currencies net of reschedulings and deferrals, including debts to COMECON countries.

Represents the change (–increase) in residents’ holdings of foreign exchange notes outside banks.

Represents changes in the stock of non-bank enterprise loans, trade arrears, trade credits, and export proceeds not repatriated.

Includes identified capital transactions the classification of which is unspecified.

Includes arrears, debt rescheduling, and debt deferral.

Source: CBR; Ministry of Finance; and IMF staff estimates.

Includes an adjustment for discrepancies between Russian customs data and data given by partner countries, as well as an estimate of imports not registered in partner–country data.

Based on changes in the estimating method, non-factor service estimates beginning in 1996 are not strictly comparable to estimates for 1994 and 1995.

Includes government international bond issues.

Receipts and payments on Non-CIS debts denominated in non-convertible currencies net of reschedulings and deferrals, including debts to COMECON countries.

Represents the change (–increase) in residents’ holdings of foreign exchange notes outside banks.

Represents changes in the stock of non-bank enterprise loans, trade arrears, trade credits, and export proceeds not repatriated.

Includes identified capital transactions the classification of which is unspecified.

Includes arrears, debt rescheduling, and debt deferral.

CHART 7Russian Federation: Balance of Payments Flows, 1994–96

(In billions of U.S. dollars)

Source: CBR; Ministry of Finance; and fund staff estimates.

1/ Reflects interest net of debt rescheduling.

2/ Reflects amortization net of debt rescheduling.

Summary Balance of Payments(In billions of dollars)
Current account2.
Trade balance9.521.117.523.1
Capital account-10.4-29.2-7.7-19.6
of which:
Capital to the public sector-10.7-13.1-9.22.7
of which: scheduled amortization-14.7-15.3-12.3-8.1
Capital to the private sector1.2-16.82.0-21.5
of which: foreign direct investment, net0.
Errors and omissions-5.1-1.7-3.0-2.8
Overall balance-13.4-20.5-6.2-12.8
Net international reserves(–=increase)-3.43.9-5.44.6
Exceptional financing16.816.611.68.3

A. Current Account Developments

70. The current account surplus was in the range of 1-2 percent of GDP in 1995-96, with a sizable trade surplus more than offsetting a deficit in factor and nonfactor services (reflecting net imports of tourism and transportation services, and external debt service obligations). Russia’s external trade has recovered significantly in recent years, with total trade measured in U.S. dollars nearly doubling during 1994-96.

Merchandise exports

71. Exports grew by 27 percent in U.S. dollar terms during 1995-96. During this period, export growth was led by a large increase in the value of energy exports, which currently account for about 40 percent of total exports (Table 19). In 1995, the direction of Russia’s oil and natural gas exports shifted sharply away from CIS countries toward non-CIS markets where higher prices were obtained (see following tabulation). This shift, together with an associated increase in prices paid by CIS countries, accounted for one-third of the growth in export values in 1995. In nonenergy areas, export volumes of most products grew significantly in 1995, reflecting the elimination of export quotas early in the year against the background of sluggish domestic demand. Growth was particularly strong for ferrous and nonferrous metals, chemicals, wood and paper products, and machines and equipment.

Exports of Oil and Natural Gas
Oil & oil products (millions of $)12,52016,90120,874
Volume(million tons)130160158
Price($ per ton)96106132
Natural gas (millions of $)6,5708,5419,649
Volume(billion cubic meters)109123128
Price($ per thousand cubic meters)606976
Oil & oil products (millions of $)3,0101,7881,227
Volume(millions of tons)461912
Price($ per ton)6596103
Natural gas (millions of $)3,7842,8694,339
Volume(billions of cubic meters)755757
Price ($ per thousand cubic meters)505076
Table 19.Russian Federation: Composition of Foreign Trade, 1994–96(In millions of U.S. dollars)
Food, beverage, tobacco1,4101,3323273893755631,654
Stone and ore641943205180168197750
Fuel products27,28830,4409,2528,8089,18511,12038,365
of which:
Oil and oil products15,53017,2914,3825,2455,8236,60722,056
rubber, and plastics)5,4767,4531,7111,6251,6691,8946,899
Wood products1,6652,1084544604484891,851
Paper products9582,2124203313874621,600
Stone and glass255279671397877361
Gems and precious metals6,4585,3566651,0368581,0663,625
Non–ferrous metals4,8957,5221,8542,0472,0202,0537,974
Ferrous metals6,3477,7581,9812,0671,9822,1038,133
Machines and equip.5,3987,3961,5001,9171,9552,1057,477
Instruments and other8114,1146671,4651,0081,2524,392
Food, beverage, tobacco10,70013,0413,0833,0732,6452,22711,028
Stone and ore1,1301,028135201204193733
Fuel products1,3891,5844934313823971,703
rubber, and plastics)3,8024,8571,4461,5541,6051,5356,140
Wood products9119039404649174
Paper products4758762593173193581,253
Stone and glass434505136150173149608
Gems and precious metals8742610217098185555
Non–ferrous metals562779175219220199813
Ferrous metals1,9622,6176838538075622,905
Machines and equip.12,05912,9552,6763,0283,2362,91911,859
Instruments and other2,7655,2671,3321,5891,2171,4375,575
Source: State Customs Committee

Excludes shuttle trade and other adjustments to the customs data that appear in estimates in Table 18.

Source: State Customs Committee

Excludes shuttle trade and other adjustments to the customs data that appear in estimates in Table 18.

72. Export growth in 1996 was accounted for primarily by the increase in the world price of petroleum products. The average price received by Russia for energy exports rose by 12 percent in 1996. Higher prices on energy products accounted for $4.4 billion, or two-thirds, of total export value growth in 1996.

Merchandise imports

73. Total import values in U.S. dollar terms grew by 34 percent in 1995-96. Registered imports increased for most categories of goods, particularly for food, beverages, and pharmaceuticals. However, registered import growth has been relatively sluggish in comparison to the estimated growth in unregistered imports. These latter imports, mostly representing imports of automobiles, electronics, and other consumer goods from non-CIS countries (and often referred to as “shuttle” imports), appear to have risen steeply beginning in the second quarter of 1995. By mid-1996, unregistered imports increased to an estimated one quarter of total imports (see following tabulation).29 Despite the rise in these imports, however, overall import growth appears to have slowed considerably in 1996.

Registered and Shuttle Imports30
(In billions of dollars)
Total imports48.564.016.817.914.815.765.1
Registered imports(customs)38.646.611.012.211.510.745.4
Estimated shuttle trade7.
Other adjustments312.
(In percent of total imports)
Total imports100100100100100100100
Registered imports(customs)80736568786870
Estimated shuttle trade14222726172524
Other adjustments296586576

74. With the growth in the volume of unregistered imports in the last two years, the activities of “shuttle traders” have become increasingly more efficient. Initially, most unregistered imports were physically carried in through customs as the accompanied baggage of shuttle traders, who later sold the goods in private markets in Russia. Over time, shuttle trade has become increasingly more organized to take advantage of economies of scale. Unregistered medium-sized enterprises now reportedly exist in Russia which, for a relatively small fee, handle all the logistics of the trade, including in many cases procurement, shipment, “safe” passage through customs, and delivery of goods to their final markets. This development toward economies of scale in shuttle imports may have been hastened by recent changes to customs laws and enforcement practices, which effectively penalize individual importers. In addition, shuttle traders, who purchase their imports in world markets with U.S. dollar notes, are widely believed to be the main source of demand for the large volume of U.S. dollar notes imported into Russia by commercial banks each year (reaching some $32 billion in 1996).

B. Capital Account

75. Although the current account was in surplus during 1994-96, this surplus was accompanied by an absence of private capital outflows only in 1995. In that year, private capital outflows ceased altogether as a tightening of credit policy and an increase in real interest rates raised the attractiveness of ruble assets. Private capital flows turned sharply negative, however, in the second quarter of 1996, and outflows reached an estimated $22 billion for the year as a whole. In contrast, capital to the public sector net of debt rescheduling grew significantly in 1994-96. Although the capital account of the public sector appears in deficit for the period 1994-96, this deficit mostly represented public sector amortization falling due and largely rescheduled according to agreements with the Paris Club and other creditors (see Annex V).

Foreign direct investment

76. Foreign direct investment into Russia remains small both in terms of its stock and in comparison with other private capital flows (see following tabulation). Most of the direct investment has taken place in food production (27 percent of total FDI in 1996), finance (13 percent), and retail trade and catering (12 percent). Foreign direct investment to the energy sector (around $0.2 billion in 1996) has remained at only a fraction of its potential level. Investment in this sector has remained low as foreign investors avoided commitments pending Duma approval of a list of sites authorized under the Law on Product-Sharing Agreements, a law which protects investors in oil and gas from changes in the tax regime. An additional impediment to investment in the oil industry has been the inability of potential investment projects to guarantee access to constrained export pipelines.

Foreign Direct Investment by Sector(In millions of dollars)
Fuel & energy97110181
Woodprocessing & paper4983160
Retail trade & catering46469255
Transportation & communications4277147
Machinery & metalworking4310266
Finance, insurance & pensions23159266

Other private capital flows

77. In addition to foreign direct investment, the three main components of net private capital flows have been: (i) changes in the net foreign assets of commercial banks; (ii) changes in the stock of foreign currency notes held by the population; and (iii) changes in net foreign assets of enterprises, mainly through the non-repatriation of export proceeds. Although all three items recorded outflows in 1994, the situation improved significantly in 1995 with a tightening in credit policy. As ruble assets became more attractive, Russian commercial banks began drawing down their balances held in foreign banks and shifting into domestic assets, mainly by purchasing Treasury bills. The corresponding capital inflow was particularly large in the second quarter of 1995, forcing the central bank to intervene heavily to prevent excessive appreciation of the ruble. Greater preference for ruble denominated assets was also reflected in a decline in capital outflows by enterprises and in the form of net accumulation of foreign currency notes by the population in 1995.32

78. Private capital outflows increased sharply, however, in the first half of 1996. The main channel for such outflows was the accumulation of foreign assets by means of the trade transactions of exporting enterprises. As reported to customs by enterprises, the rise in these claims took the form of the provision of trade credits, import advances, arrears owed to Russian firms, and the nonrepatriation of export proceeds. Although there is some uncertainty about how reliably these transactions are reported, capital outflows from this source may have reached almost $18 billion in 1996. In addition, outflows through net foreign currency imports increased to an estimated $11 billion in 1996. Combined, these outflows more than offset the sizeable purchases of Treasury bills by foreigners (see below) and capital inflows by commercial banks in 1996.

79. Much of the outflow of short-term Private capital can be attributed to the environment of political uncertainty which characterized 1996, beginning in the first half with the presidential elections and continuing into the second half of 1996 with concerns over the weak health of the President. In addition, tax evasion, together with a weakening in the enforcement of capital controls may have contributed to the outflow, as enterprises sought to keep their export revenues away from tax authorities or ruble settlement accounts by building up claims on foreign enterprises.

C. Public Sector Borrowing

80. In contrast to the private sector, foreign capital flows to the public sector (after accounting for debt relief on scheduled amortization) increased significantly in 1996 from the low level of 1995 and small deficit of 1994 (see following tabulation). Nearly half of this increase was accounted for by foreign purchases of government securities following the liberalization of foreign access to the domestic securities market. Net purchases of Treasury bills by foreigners, including purchases through domestic intermediaries (the so-called “gray scheme”), are estimated to have exceeded $4 billion in 1996. In addition, loan disbursements to the federal government increased significantly in 1996. These disbursements mostly took the form of loans for project financing, but also included a $1.0 billion Eurobond issue in November 1996.33

Capital Flows to the Public Sector(In billions of dollars)
Total (excluding rescheduling and deferrals-13.1-9.22.7
Disbursements (including Eurobond in 1996)
Principal repayments-3.4-3.0-2.0
Scheduled amortization-15.3-12.3-8.1
Rescheduling and deferrals11.99.36.1
Purchases of govt. securities, net4.2

D. International Reserves

81. Gross international reserves rose quickly from the low level of $6.5 billion at end-1994 (equivalent to 1.2 months of imports of goods and nonfactor services) to $17 billion by end-1995 (equivalent to 2.5 months of imports of goods and nonfactor services). As capital flows reversed in 1996, CBR sold foreign exchange to keep the nominal exchange rate within the pre-determined band. As a result, there was a large reduction in net international reserves ($6 billion as noted above in the monetary section), involving a decline in gross reserves of about $1½ billion to $16 billion, or 2.3 months of import cover, by end-1996.

E. Trade Policy

82. Russia maintains a liberal foreign trade policy. Following the dismantling of the state monopoly of foreign trade which prevailed until the final years of the Soviet Union, import operations were rapidly decontrolled. Export quotas and licenses were abolished at the beginning of 1995, and all remaining export duties on strategic goods were abolished by June 1996. All other administrative controls on exports in the form of pre-shipment contract registration requirements and mandatory certification of quality, quantity, and price were eliminated in March 1996, although pressures to reintroduce administrative controls have persisted. The government currently monitors the repatriation of foreign exchange proceeds from exports through the “passport” system of exchange registration. Under this system, exporters must present to customs prior to shipment a breakdown of all financial transactions involved in the export, thereby allowing ex-post verification that export proceeds have been repatriated. A parallel scheme exists for the prepayment of imports. With the elimination of the system of strategic exporters in 1995, all enterprises are eligible to engage in export activity. Centralized trade is currently limited to arms exports and defense-related equipment.

83. Imports are subject to tariff rates ranging from zero to 100 percent, with nearly all tariffs lying in the zero to 30 percent range. Most of these tariffs are applied on an ad valorem basis, although specific duties are also levied on a range of goods. Despite frequent revision in the structure of import duties across goods, the trade-weighted average duty rate has remained around 13 percent since July 1995 (see Table 20).34 In addition, the dispersion of rates narrowed measurably during 1996. Despite the elimination of discretionary import duty exemptions in 1995, widespread exemptions allowed for under the customs law remain, including exemptions for humanitarian aid, contributions to the charter capital of joint ventures, and equipment for the mass media. Partly as a result, import duty collection is significantly below the average statutory rate. As the application of these exemptions has narrowed, average import duty collections have risen.

Table 20.Russian Federation: Import Tariff Regime, 1995–96(In percent)
ProductWeight 1/Average statutory rates 2/
Food, beverages, and tobacco 3/29.414.515.3
Stone and ore2.15.05.0
Fuel products0.85.05.0
Wood and paper products1.711.711.8
Stone and glass0.919.719.7
Gems and prec. metals0.150.050.0
Non–ferrous metals3.418.211.9
Ferrous metals0.45.05.0
Machines and equipment32.810.911.9
Instruments and other8.712.013.8
Trade weighted average100.012.713.3
Memorandum items:
Average effective duty 4/5.99.7
Trade weighted standard deviation 5/9.69.1
Source: State Customs Committee, World Bank, and IMF staff estimates.

Based on 1994 data collected by the State Customs Committee on imports from non–CIS countries.

Trade weighted average rates. Rates include for some products specific duties which have been converted into ad valorem equivalents.

Excludes alcoholic beverages.

Defined as the ratio of actual duty collections to imports (fob from non-CIS countries as registered by customs.

Measured over the list of individual goods (over1, 300) to which statutory rates apply.

Source: State Customs Committee, World Bank, and IMF staff estimates.

Based on 1994 data collected by the State Customs Committee on imports from non–CIS countries.

Trade weighted average rates. Rates include for some products specific duties which have been converted into ad valorem equivalents.

Excludes alcoholic beverages.

Defined as the ratio of actual duty collections to imports (fob from non-CIS countries as registered by customs.

Measured over the list of individual goods (over1, 300) to which statutory rates apply.

With the exception of licensing requirements for a few goods such as weapons, radioactive materials, alcohol, and precious metals and stones, there are currently no quantitative or administrative restrictions on imports. However, pressures for protectionist trade policies have manifested themselves in a number of recent initiatives to restrict imports. In particular, a decision was made in late 1996 to introduce quotas on imports of ethyl alcohol and vodka and on a broad range of food products. This decision was canceled before the quotas became effective (planned for January 1, 1997), and instead the government introduced an import licensing requirement for ethyl alcohol and vodka on February 1, 1997. Under this regime, import licenses are issued on demand after prepayment of all customs duties. Russia has also recently taken a more active role in trade disputes with the European Union, threatening to introduce quantitative restrictions on imports of textiles and clothing in response to concerns of widespread trade distortions in this sector. In addition, there appears to be an increased reliance on the Safeguard Commission as a potential vehicle to protect domestic industry from import competition; the Safeguard Commission is currently considering applications from a number of companies in a broad range of industries requesting the introduction of import protection measures.

G. WTO Accession

84. Russia applied for membership of the World Trade Organization (WTO) in 1993, and the first meeting of the Working Party on Accession was held in July 1995. Talks on accession to the WTO continued during 1996 and early 1997, and the fourth meeting of the Working Party on Accession was held during April 15-16, 1997. Although progress has recently accelerated, some issues remain unsettled while others are yet to be discussed. As regards the former, new labeling requirements on retail goods and the slow progress toward meeting the requirements under the Trade Related aspects of Intellectual Property Rights (TRIPs) agreement remained unresolved after the April 1997 meeting. Concerning the latter, government procurement, preferential trade, and implementation of the Trade Related Investment Measures (TRIMs) agreement are to be discussed at future meetings.


1. With financial stabilization in place, Russia has established a key precondition for growth. It has also made progress in the structural reform process—most notably by liberalizing prices and the trade regime, and in privatization—although the latter is far from complete. In addition, however, achieving successful transition requires the creation of an institutional and regulatory environment that fosters investment and promotes new private sector activity. Declining investment, the rising share of activity in the gray economy, and sluggish foreign investment all signal that Russia’s policies in those areas are still not fully conducive to growth. To lay the foundation for sustained medium-term growth, Russia must establish a legal and regulatory infrastructure that will attract capital and encourage businesses to operate fully within the law.

2. The present climate for business in Russia may appear hostile in several respects rather than facilitating. A complex tax system and high statutory tax burden, onerous regulatory requirements, backlogs at regulatory and administrative agencies, and inadequate legal infrastructure all serve to deter business starts, drive businesses into the gray economy, and reduce businesses’ profitability and rate of expansion. Encouraging private sector development requires eliminating such distortions across the board. The most critical changes, addressed in this chapter, are: reforming the tax system, revising legal and regulatory requirements to make them simple and transparent, eliminating bureaucratic corruption, strengthening the judicial system, and improving capital market infrastructure.

A. Tax System

3. The tax system must be reformed to reduce the tax burden on fully compliant enterprises, to make it less cumbersome, and to reduce distortions.36 The heavy burden of full compliance has led to concealment of activity, increased reliance on nonmonetary transactions, and the sheltering of incomes and assets offshore. The transfer of assets offshore, moreover, has deterred economic activity by reducing the resources available for either financial intermediation or investment in Russia. Also, it is unlikely that the return on assets held offshore is repatriated.

4. The business community in Russia commonly argues that its total tax burden, as a share of profits, is excessive due to the simultaneous taxation of turnover, wage costs, profits, and capital, such that full compliance may leave almost no after-tax profit. The tax system is further regarded as unfair due to the distortionary proliferation of tax preferences and rates, distortionary rules, and the uneven application of the code by tax inspectors. Imprecise drafting and ill-defined terminology give tax inspectors a large margin of discretion and facilitate corruption. Particularly at the regional and local government level, tax requirements may be undocumented or not publicly available. Despite the law’s ambiguities, inadvertent errors are penalized at the same rate as willful noncompliance; penalties run as high as 500 percent of the error plus interest from the date the error was made at a rate sharply higher than the CBR’s refinancing rate.

5. Tax evasion, as a result, has become increasingly sophisticated. Firms rely heavily on legal means of reducing reported profit: using transfer pricing to report all profit as accruing to offshore subsidiaries, underinvoicing of exports and overinvoicing of imports, and concealing income in the general directorate office by overstating the office’s expenses. Many smaller enterprises do not pay taxes, and larger firms are believed to falsify their returns.

6. Press reports and staff interviews with businesses suggest that corruption involving tax inspectors further undermines tax compliance and collections. A firm’s total tax obligation is widely accepted to be a negotiated settlement between a business and its tax inspector, with inspectors exploiting the ambiguities in the code to adjust a firm’s assessment and extract bribes. Inspectors are reportedly skillful at determining how much they can extract from a business without driving it under or without the business challenging the assessment in court.37 According to interviews with Moscow businesses as well as research on organized crime in Russia, collusion between tax inspectors and organized crime groups has severely undermined tax collection. The collusion may involve either the sharing of bribes paid by taxpayers in exchange for reduced tax assessments or the sale of tax information, such that taxpayers are wary of fully reporting either corporate or individual incomes or assets.38

7. According to staff discussions with members of the Russian business community, as well as press reports, the specific provisions of the tax laws that are viewed as most objectionable include:

  • High combined payroll and income tax rates, particularly for high-wage workers, which can cumulate to nearly 100 percent of wages. By driving a wedge between wages paid to workers and the employers’ cost of labor, the high combined payroll and income tax rates reduce demand for labor, especially at high-wage jobs, and thereby contribute to unemployment.39 These high rates also lead to under-the-table cash payments and, for high-income workers, direct deposit payments to offshore bank accounts.
  • The property tax, which applies to all assets except cash, including inventories, is perceived as excessive. Moreover, the appraisal rules are believed to overstate property values. For 1997, firms must revalue their property by 50 percent relative to 1996 unless they obtain a new, expensive private appraisal of its value.
  • Nondeductibilhy of conventional expenses under the profits tax, including advertising and part of interest on borrowing for capital investment.
  • Multiple turnover tax rates; 3.9 percent on manufacturing turnover versus 1.5 percent on trading turnover.

B. Excessive Red Tape

8. Another factor hampering growth and contributing to the expansion of the gray economy in Russia is the bureaucratic burden and expense of playing by the rules. According to press reports, given the large number of approvals required for legitimacy—each involving extensive documentation, lags for approval, and fees—many businesses prefer to operate underground or to shortcut administrative approval processes by paying bribes. In order to promote private sector activity, the regulatory and administrative requirements of starting and operating a business need to be streamlined so as to protect the public interest while minimizing the burden of compliance. Accordingly, fewer bureaucratic approvals should be needed while remaining requirements need to be rendered transparent and require a minimum of paperwork. Also, adequate funding should be allocated to administrative offices in order to reduce corruption.

9. According to a study by the American Chamber of Commerce in Russia, the difficulty of compliance, whether with requirements for import clearance by the State Customs Committee or for hygienic certification of consumer products, consistently originates from lack of transparency in legal and administrative requirements and the underfunding of the administering agencies.40 The process of registering a business, for example, can take months because registrations need to be obtained in a proscribed sequence, such that one cannot initiate all procedures simultaneously.41 Because of the poor drafting of laws and regulations—combined with the lack of public access to those regulations—substantial managerial and financial resources are consumed simply in identifying the statutory requirements: determining what range of approvals are needed in order to operate in full compliance with federal, regional, and local laws; in what sequence; and what documentation is required for each.

10. The inadequate funding of administrative agencies and low salaries of bureaucrats lead to obstructionist implementation and rent seeking in the form of high fees for services and demands for bribes. The lack of clear, published requirements facilitates such corruption because applicants cannot independently verify the requirements for approval. Based on a survey of 55 small shops in Moscow, Frye and Shleifer found that in 1995 the average shop had submitted to over 18 different inspections, conducted by three to four different agencies, and that 83 percent of shops had been fined by at least one inspector.42 Moreover, on a scale of 1-5 (with 5 being the highest), shopkeepers rated on average the frequency of needing to bribe officials at 2.9. Pravda found corruption sufficiently common that in 1994 it published the following bribe rates for Moscow: $2,000 for quick register of foreign joint ventures; $1,200 to get the documents, stamps, and signatures required to open a bank; and $300,000 to avoid banking regulations.4344

11. Ad hoc public expenditure reductions through budget sequestration and wage arrears exacerbate the situation, as ad hoc charges for services become the means by which public sector agencies fund their operations and salaries. The costs of corruption and bureaucratic delays may price some potential new businesses out of the market, or drive them underground. Similarly, the costs of compliance affect existing businesses through changing requirements (typically without notification or grandfathering), the need for regular recertification, and onerous record keeping requirements.

C. Legal Infrastructure

12. An orderly environment for business requires a comprehensive and effective legal system to impose the rule of law and resolve disputes. In this area, Russia has especially far to go: public access to the existing law is limited, major areas of law are incomplete, the judiciary has yet to develop independence and specialization, and courts lack mechanisms to enforce decisions:45

  • The very first step in creating a transparent and effective legal system is disseminating the law by ensuring that all judges have full, updated codes, and that the public has access to the code to guide business practices and investment decisions.
  • Legislation needs to be overhauled to include clear statements of purpose, so as to direct judicial interpretation and prevent abuse of the law by administering agencies.
  • The hierarchy of laws needs to be made clear in order to reduce uncertainty and help parties determine what rules will govern. The hierarchy that exists in principle is often ignored in practice.
  • Property right protections and contract law must be developed.

13. Only with stronger courts can stronger laws be implemented effectively. Although the 1993 Constitution establishes judicial independence, the evolution of precedent has been slow. The creation of specialized courts would enable judges to develop expertise and facilitate the evolution of judicial interpretation norms, particularly in technical areas such as tax, bankruptcy, patent, and intellectual property rights. Some progress is occurring: judges and attorneys are gaining expertise, notably in tax law, and lawsuits are increasingly being brought to challenge contract violations and bureaucratic corruption.46 However, many judges and prosecutors are also believed to be corrupt and incidents of violence against judges undermine the system.

14. The courts will only become effective, however, if judges have mechanisms to enforce judgements: the power to charge a party with a crime for not complying with an adverse judgement; an enforcement service to protect judges and to force compliance (by seizing unyielded assets or forcibly selling illiquid assets to satisfy a judgement); and jurisdiction to seize offshore assets.47

15. Rendering the courts effective also requires controlling organized crime.48 Reportedly, the use of force often precedes recourse to the legal system.49

D. Financial Infrastructure

16. Improved capital market infrastructure is urgently needed in order to promote financial intermediation and improve corporate governance as well as to attract investment. In order to force corporate managers to maximize profits and shareholder interests, investors need to be able to purchase controlling shares through the markets. The most urgent reforms affect registration, clearing, settlement, and tax treatment of securities transactions:

  • In order to make shareholding secure, verifiable, and easily transferable share, registries need to be centralized, independent, and regulated. In contrast, today many companies control their own share registry, making transactions costly because registry changes need to be verified in person and making ownership uncertain because firms have altered their registers and unilaterally decertified shareholders.
  • The system for taxation of capital income deters securities transactions driving, many settlements offshore. Among the problems are the 43 percent tax on broker profits and the treatment of capital gains, which allows neither adjustment for inflation nor offsetting of capital gains against capital losses.

1. Russia’s mass privatization program, completed in 1994, succeeded in transferring about 60 percent of industrial assets and employment to the private sector. However, it left the majority of shares (59 percent on average) in the hands of employees and managers and led to little corporate restructuring. Subsequently, the Russian government’s privatization efforts shifted to cash sales of share blocks in partially privatized and wholly government-owned enterprises, with the intention of raising revenue for the budget.

2. With values on the Russian stock market depressed, the program to auction state-owned shares in both partially privatized and wholly state-owned enterprises fell short of achieving its revenue targets for 1995. Moreover, those sales that were completed were problematic in several respects. Due to the need for restructuring and investment in the enterprises for sale, combined with a lack of available information on the firms for sale and the limited number of potential investors willing to purchase shares for cash, the government relied on investment tenders rather than cash auctions. The tender procedures, however, were nontransparent and the quality of tender evaluation was criticized as formalistic, rather than a practical assessment of whether the prospective investor could implement the proposed investment program. The process of privatization was also slowed by a frequent lack of cooperation from enterprise managers and regional and local government administrations.

3. In order to redress the privatization revenue shortfall, in mid–1995 the government introduced the loans-for-shares program. Following a proposal from a consortium of Russian banks, the government offered large stakes in some of the country’s most valuable companies (in oil, metal, and shipping) as collateral for hard currency loans and, in some cases, payment of the firm’s tax arrears. The government would pay interest at the three–month LIBOR rate plus 3 percent from the date of contract until end–1995; in exchange, the winner would act as a trust manager of the shares until September 1, 1996, after which it would have the right to sell them. The government would have the right to repay its loan and take back its shares at any time until the sale date.

4. The results of the loans–for–shares auctions—the nontransparent procedures and the low price that the shares brought, combined with the fact that the banks leading the process won most of the auctions—led to widespread allegations of corruption and cronyism and undermined confidence in the privatization process. Although the original plan called for open auctions, foreign investors were barred, while the bank acting as manager of a particular auction was permitted to submit bids. In the end, six of 12 auctions were won by the bank acting as auction manager, and four more were won by corporate affiliates of the company for sale. Suspicions of corruption were heightened by unexpectedly low winning bids: the loans yielded only 60–90 percent of the market value of the shares and, in eight cases, the winning bids were within 6 percent of the pre–established minimum bid. Although the scheme was presented as reversible, as of April 1997 the government had not repaid any loans, nor had any banks resold the shares they obtained.

5. In 1997, the government has initiated a third stage of privatization focusing on case–by–case sales of large enterprises in order to attract strategic investors and raise revenues for the government budget. To this end, the government intends to specify rules and implementation procedures for case–by–case transactions, including the competitive selection of financial consultants who will analyze the property’s market value and make recommendations on the time and means of its sale. Further, to avoid the lack of transparency associated with the loans for shares deals, all information on and participation in new sales is intended to be made publicly available to both domestic and foreign investors.


A. Background

1. Under programs of land reform and farm restructuring initiated in 1991, the state has substantially divested its holdings of agricultural land. Yet, other than the change of farm ownership, restructuring of the agricultural sector has been limited. Although most farms are now joint stock companies whose land and asset shares are held by the farms’ workers, the legal status of the shares and their transferability remain uncertain. Traditional large farm enterprises remain largely intact and continue to function as in the past: over 70 percent of land is still managed collectively and 17 percent is still controlled by the state, while only about 11 percent of land is directly held by private farmers, associations of private farmers, or households. With management and incentives little changed, agricultural enterprise production, of both crops and livestock, has declined steadily; the production of private farms, however, has been relatively stable.50

B. Financing to the Agricultural Sector

2. The government’s efforts toward financial stabilization and reforms to reduce government intervention in the economy have forced the agricultural sector to be more financially self-sufficient. The government has reduced its direct financial support to the sector, cutting direct budget subsidies to agriculture from an estimated 12 percent of GDP in 1992 to under 3 percent in 1995, about half financed by federal and half by oblast governments. In addition, government-subsidized credit has diminished. Directed credits to the agricultural sector were reduced to 1 percent of GDP in 1995 and eliminated in 1996, as compared to 7 percent of GDP in 1992. In an effort to compensate partially for these cuts in support, in 1995-96 the federal government ensured pre-season, interest-free financing to farms from agricultural input suppliers rather than from banks. Under the commodity credit schemes of the federal government, fuel and other input suppliers provided inputs to farms in exchange for tax credits; farms, in turn, were to pay the government for the price of the inputs after the harvest. Financing under this scheme amounted, however, to just ¼ percent of GDP in 1995.51

3. Market financing to the sector also fell in 1996, as financial difficulties at the majority state-owned Agroprombank, the largest lender to farms and agricultural enterprises, caused the bank to reduce its lending.52 In response to reduced levels of financial support and bank lending, the agricultural sector has incurred large arrears on trade credits. At end-1996, agriculture’s overdue accounts payable had reached 26 percent of the value-added of the sector, compared with 7 percent at both end-1994 and end-1995.53 The sector’s net trade credit indebtedness54 also increased to 21 percent of its value added at end-1996, more than six times its previous high of 4 percent at end-1995.

C. Recent Trends in Production, Profitability, and Prices

4. Agricultural output continued to decline in 1995-96, bringing the cumulative output loss since 1990 to 38 percent. Most of the 8 percent decline in gross agricultural output in 1995 resulted from a poor grain crop. Due to drought in the Black Earth region, the grain harvest was the worst since 1963, and 22 percent smaller than the 1994 harvest. The poor quantity and quality of feed grain also hurt meat, poultry, milk, and egg production. In contrast, the potato and vegetable crops, which are produced mainly by private farmers, each increased by over 16 percent. Output declined another 7 percent in 1996, primarily reflecting lower production of livestock products and large declines in the sugarbeet, flax, and sunflower crops (down 15, 34, and 14 percent, respectively). Unfavorable weather again contributed to a small grain harvest. The potato and vegetable crops, although down by 3 and 5 percent from 1995, were still large by historical standards.

5. Following several years during which agricultural producer prices fell in relation to input prices, leading to greater declines in agricultural sector profitability than in output, profitability appears to have improved in 1996, especially in the crop sector. One factor behind improving profitability has been the increase, beginning in 1995, in agricultural producer prices in relation to world prices, due in part to the elimination of export taxes on agricultural products. Crop prices reached about 50 percent of world prices and livestock prices rose to 60-80 percent of world levels in 1995. In 1996, prices for livestock and grain reached world levels. The number of loss-making enterprises remains high, however; in 1995, an estimated 70 percent of enterprises registered losses.

D. Key Problems in Agriculture and a Reform Strategy

6. As the liberalized trade regime no longer protects agriculture, Russian producers will have to quickly improve their efficiency and quality of output in order to compete on the international markets. Yet, until structural reforms lead to farm restructuring and force financial discipline on insolvent farm enterprises, the profitability and productivity of Russian agriculture are unlikely to recover further. Four major problems need to be addressed:

  • (i) Large farm enterprises will not be viable in the long term without restructuring. Many farms remain larger than is operationally efficient and, more importantly, continuing collective management generally does not give individual farm workers adequate financial incentives to improve productivity.
  • (ii) Financial discipline has not yet been imposed on the agricultural sector. Bankrupt farms continue to operate because effective procedures for enterprise restructuring or liquidation do not exist. A history of tolerating and writing off agricultural debts and arrears has long eroded farms’ incentives to show accounting profits. Although the supply of centrally-provided agricultural credit has diminished, these practices continue: amortization on the first round of commodity credits, granted in the spring of 1995 and due to be repaid in 1996, was rescheduled to 1998.
  • (iii) Government programs to support agriculture undermine incentives for efficient production. Although the federal government reduced its budgetary subsidies to agriculture in 1996 and the 1997 budget mandates further cuts, most government expenditures to agriculture still finance distortionary credit, input, and product-specific subsidy programs. Nontransparent subsidies need to be replaced with direct transfers. State procurement contracts, which have been granted by noncompetitive means, were another source of distortion through 1996: because state contractors receive input subsidies and special financing, contract prices are artificially low, thereby driving down farmgate prices for all producers. This problem should be alleviated in the future, as an April 1997 presidential decree mandates competitive procurement and should break the link between input subsidies and farmgate prices.
  • (iv) Although improved, the lack of full security of individual land rights continues to diminish incentives for investment. Because the legal framework protecting private ownership is fragile and adequate land registration has not been established, few transactions occur and land prices remain depressed. A March 1996 Presidential decree made land shares and individual land parcels fully marketable, but the registration and documentation of land shares is needed to make this practicable. In August 1996, a decree mandated the introduction of registration procedures to provide the information needed to protect the rights to own, sell, lease, mortgage, and inherit land and real estate, and to make this information publicly available. However, land rights will not be adequately secure until guarantees of ownership and rights of sale and lease are established by federal law. Although Presidential decrees in principle have nationwide force, they may be preempted by regional laws. While the reforms thus far have had some positive effect, their implementation in the regions has been inconsistent.

A. Introduction

1. Following several years of rapid growth and healthy profits, the financial fragility of Russia’s banking system has become increasing apparent. The decline in inflation and relative stability of the exchange rate have eliminated banks’ profits from high interest margins and currency speculation, and balance sheet weaknesses—including nonperforming loans, undercapitalization, and high operating costs—are now beginning to show. According to CBR data, at most 60 percent of banks were in sound financial condition as of end-March 1997.

2. Before stability can be restored to the banking system, a shake-out of insolvent banks will need to occur. Accordingly, the CBR has intensified its efforts to identify problem banks and close those that are insolvent. Those banks strong enough to survive will need to shift their operations to true financial intermediation in order to operate profitably in a low-inflation environment.

B. Broad Characteristics of the Banking Sector in Russia

3. Following explosive growth in the number of commercial banks, from fewer than 100 in 1988 to over 2,500 in 1994, consolidation in the banking system began in 1995.55 By early 1997, the number of operating banks had fallen to around 2,000, the CBR having withdrawn over 570 bank licenses since the beginning of 1995, including from several large banks. Russia’s banking sector is relatively small, with total banking assets (i.e., including fixed assets, interbank claims, etc.) amounting to only about 20 percent of GDP, at end-1996.56 As regards their basic operations, when inflation was high and the economy contracting, banks concentrated on foreign exchange and short-term lending, rather than traditional credit operations.57 Then, as inflation fell over 1995-96, banks shifted their portfolios into Treasury bills, with bank credit to the private sector remaining under 10 percent of GDP throughout 1995 and 1996. Household deposits also remain low, although they rose from 3.5 percent of GDP at end-1995 to 4.4 percent in March 1997.

4. Despite the large number of banks, the Russian banking system is highly concentrated. As of mid-1996, the five largest banks (including Sberbank, the Savings Bank) accounted for over 35 percent of total commercial bank assets, up from 28 percent at end-1994. At end-September 1996, the 50 largest banks held over 60 percent of total assets. Over 75 percent of household deposits are held in the majority CBR-owned Savings Bank. Although its own financial condition is uncertain, evidence of problems in the banking system has increased the share of deposits held in the Savings Bank, as such deposits uniquely carry a government guarantee.

C. Financial Position of Russian Banks

5. The financial position of the Russian banking sector as a whole weakened significantly in 1995 as inflation fell and the ruble stabilized in the foreign exchange market. Already in 1994, when banks reported positive profits according to Russian accounting rules, it is possible that many banks would have shown a loss if internationally accepted accounting rules were used to reflect nonperforming loans, loan-loss provisions, and operating costs. Although banks paid dividends, much bank income went into excessive overhead, including lavish premises. By 1995, over one in five banks incurred losses, even according to Russian accounting rules, and in the first half of 1996, one in four banks reported losses. The CBR reported in April 1997 that 400 small and medium-sized banks were in such poor financial condition that they were likely to fail. The financial condition of the larger banks in the system is reported to be more solid—with each of the 100 largest banks announcing positive profits for 1996—but it is not certain whether they would be profitable according to international accounting standards.

6. At present, a large number of banks face serious balance sheet problems. The undercapitalization of the majority of banks is commonly recognized by both the authorities and the market.58 The extent of this undercapitalization, however, is difficult to assess as imperfections in the existing accounting rules and practices, as well as in the regulations on capital and asset classification, make it difficult to accurately evaluate banks’ financial statements. Published CBR statistics indicated that the systemwide capital-total asset ratio is below 3 percent, although even this figure is likely an overestimation, as it includes hidden losses and inadequate loan loss provisions.59 Other major balance sheet weaknesses include nonperforming loans (many of which have been rolled over repeatedly without provisioning), mismatch of asset and liability maturities, and open foreign exchange positions.

D. Strengthening the Banking System and Resolving Problem Banks

7. The recent deterioration in the financial position of commercial banks signals that those banks intending to survive in the more stable macroeconomic environment will need to develop traditional banking operations: i.e., earning a margin by attracting deposits and making solid, short- to medium-term loans. Given the CBR’s policy of revoking the licenses of insolvent or fraudulent banks and its intensified supervision, currently undercapitalized banks will be forced to recapitalize or close in the near term, and only those banks that have maintained the strongest portfolios and most prudent practices will be able to make this transition. Yet, for banks to develop the risk-assessment capability to make prudent loans will inevitably take time, and repayment rates are likely to remain low until lending rates fall because only investors with high-risk projects will apply for high-rate loans.

8. The CBR has responded to the increasing fragility of the banking sector with efforts to enhance bank supervision and enable the banks to better manage their liquidity. In 1996, measures to strengthen banking supervision included the introduction of stronger and more comprehensive prudential requirements and their stricter enforcement, the reorganization of the bank supervision staff to monitor the largest banks more closely, and the tightening of licensing requirements. In addition to closing small, insolvent banks, the CBR has imposed temporary administration on a number of the fifty largest banks in order to more closely assess their financial position and has closed several large banks including Tveruniversalbank (then 17th largest) and Baltschug Bank (ranked 121st). In the meantime, reserve averaging rights and Lombard and repo lending facilities have been created to enhance banks’ access to short-term liquidity.


1. Russia made important strides in 1996 in normalizing its external debt situation and easing the external debt burden. Rescheduling agreements were reached on Russia’s Soviet-era external debt60 with both London Club and Paris Club creditors. The rescheduling agreements imply a substantial lengthening of the average maturity of the government’s external debt (from about four years in 1993 to over twenty years in 1997), and a commensurate reduction in the debt service ratio (from some 30 percent of exports of goods and non-factor services in 1993 to a projected 11 percent in 1997).

A. Stock of Debt

2. The external debt of the federal government of Russia increased from $120 billion (29 percent of GDP) at end-1995 to $125 billion (23 percent of GDP) at end-1996 (Table 21). This amount is comprised of debts denominated in convertible currency amounting to $109.6 billion, and debts owed to former COMECON countries of $15.4 billion.61 About 40 percent ($50 billion) of Russia’s debt is to official creditors, mainly representing debts in the form of tied export credits. At end–1996, the Russian government owed about $35 billion to foreign commercial banks, of which $10 billion were overdue interest payments, and $1.1 billion to foreign bondholders, which was mainly accounted for by the November 1996 Eurobond placement of $1 billion.62

Table 21.Russian Federation: Federal Government External Debt, 1993-96(In billions of U.S. dollars)
Total external debt112.7119.9120.4125.0
Medium and long term70.679.087.092.5
Multilateral creditors3.55.511.415.2
World Bank0.
Official creditors41.
Paris Club bilateral credit46.9
Unofficial creditors24.525.626.525.8
Suppliers’ credits3.83.8
Short term13.115.216.817.1
of which:
Letters of credit/
suppliers’ credit7.
comecon debt29.025.716.615.4
Memorandum item:
Total external debt (in percent of GDP)61.243.329.422.6
Sources: Ministry of Finance; and IMF staff estimates.
Sources: Ministry of Finance; and IMF staff estimates.

B. Rescheduling Agreements

3. Since late 1991, Russia had faced major debt-servicing problems. While the size of Russia’s debt was not particularly large, its short maturity structure created serious cash flow problems after the break-up of the Soviet Union. During the period 1992-96, cash payments fell significantly short of amounts falling due, with the remaining debt service obligations either being rescheduled or falling into arrears pending discussions on debt rescheduling with various creditors (Table 22) shows external debt falling due and paid). During 1995 and 1996 the Russian authorities reached agreements on debt service reschedulings with all major groups of creditors, covering over 98 percent of the federal government’s external debt. Except for very small amounts due to a few non-Paris Club creditors,63 by end–1996 Russia had completed the restructuring of its entire external debt. In doing so, the Russian government changed the terms of its obligations from an average maturity of about four years with a grace period of less than one year in 1993 to an average maturity of over twenty years with a grace period of five years starting in 1997. As a result, the debt–service ratio that was in the range of 30 percent of exports of goods and services in 1993 will fall to about 11 percent in 1997.

Table 22.Russian Federation: Scheduled and Paid External Public Debt Service
Debt service due
Paris Club creditors10.
Other official creditors0.
Commercial banks7.
Uninsured suppliers0.20.2
Multilateral creditors0.
Debt service paid
Paris Club creditors3.33.1
Other official creditors0.20.1
Commercial banks0.61.3
Uninsured suppliers0.20.0
Multilateral creditors0.81.4
Sources: Ministry of Finance; and Fund staff estimates.

Totals may not add to sum of components due to rounding.

Sources: Ministry of Finance; and Fund staff estimates.

Totals may not add to sum of components due to rounding.

Rescheduling of debt to official creditors

4. The agreement reached on April 29, 1996 between official bilateral creditors meeting as the Group of Participating Creditors64 and Russia on an exit rescheduling covered the largest amount rescheduled for a single debtor (about $40 billion) in the Paris Club’s 40-year history. The agreement consisted of a multi-year rescheduling for January 1996-March 1999 and a subsequent stock treatment (reprofiling) of previously rescheduled debt. Under the rescheduling, 100 percent of principal and interest (excluding late interest) on pre-1991 contracts falling due during 1996–98, 40 percent of such payments falling due in the first quarter of 1999, and all principal falling due on debts consolidated under previous rescheduling agreements (1993, 1994, and 1995) during January 1996–March 1999, were consolidated and will be rescheduled on a graduated payments basis starting in 2002 and ending in 2020. In addition, principal and interest (excluding late interest) falling due during 1996–98 on 1991 contracts, and deferred principal payments falling due during January 1996–March 1999 as a result of earlier rescheduling agreements on 1991 and short–term contracts, as well as moratorium interest capitalized in earlier rescheduling agreements (for moratorium interest capitalized in the 1993 rescheduling, only 1996 maturities are included), will be deferred with a graduated repayment schedule starting in 2002 and ending in 2016. Unlike previous rescheduling agreements, there is no capitalization of moratorium interest.

5. The outstanding principal of pre–1991 debts consolidated under the earlier rescheduling agreements is expected to be reprofiled in April 1999 on the same terms as outlined above, with the first repayments in 2002 and the last in 2020. Similarly, outstanding amounts of principal deferred under these earlier agreements on 1991 and short–term contracts and moratorium interest capitalized under the 1994 and 1995 rescheduling agreements will be deferred on the same terms as described above with the first repayment in 2002 and the last in 2016.

6. Most of the Paris Club bilateral agreements have been either signed or initialed. Of those remaining, comments on the draft agreements have been exchanged with Finland, the Netherlands, Norway, Sweden, and the United Kingdom. A proposed draft from Portugal was received in March 1997, and a draft from Australia is expected soon. The Russian authorities expect to complete all the agreements before end–June 1997.

Rescheduling of commercial bank debt

7. On November 16, 1995, the Russian authorities and the Bank Advisory Committee of commercial banks chaired by Deutsche Bank reached an agreement in principle to restructure all principal obligations as well as interest arrears, estimated at about $29 billion at end–1995. The operation will be a debt stock rescheduling and will not involve debt or debt service reduction. Eligible principal obligations (amounting to about $25 billion) include current and previously deferred principal debt. Eligible principal debts will be rescheduled to be paid over a 25–year period, after 7 years’ grace, in equal semi–annual payments at an interest rate of 13/16 percentage points over LIBOR. Actual interest payments on principal are subject to a cap of 8 percent per annum and can be partially capitalized during the first 6 years.65 In addition to the $0.5 billion paid up-front on account of the 1992/93 interest arrears, $1.2 billion was paid on account of 1994-95 interest arrears during 1996. The cash debt service profile increases from $1.3-1.5 billion in 1996-99 to a peak of $3.5 billion in 2003. The Russian authorities expect to finalize the reconciliation of loans and complete the rescheduling agreement with commercial bank creditors by August 1997.

Rescheduling of debt to uninsured suppliers

8. On December 18, 1996 the Russian government reached a rescheduling agreement in principle with representatives of twelve national creditor groups. The agreement covers uninsured trade creditors located in Austria, Belgium, Denmark, Finland, France, Germany, the United Kingdom, the Netherlands, Italy, Japan, Sweden, and Switzerland, and provides for the restructuring of uninsured trade debts in terms comparable with those previously agreed with Russia’s Paris and London Club creditors.

9. The agreement provides for up-front cash payments equal to 25 percent of eligible interest falling due from January 1, 1992 through the initial closing of the trade supplier rescheduling. Promissory notes will be issued covering the balance of interest due during that period and principal amounts. The promissory notes, denominated in U.S. dollars and Deutsche Marks, are to be repaid in 37 semi-annual instalments commencing in 2002 and ending in 2020, according to a graduated repayment schedule. They will bear interest from the date of issue through 2001 at a rate of 5.6 percent in the case of the U.S. dollar obligations and at a rate of 4.6 percent in the case of the Deutsche Mark obligations. Thereafter, both series of promissory notes will bear interest at 6-month LIBOR plus 13/16 percent. The Russian authorities expect to finalize the remaining agreements with national clubs of uninsured suppliers by end-June 1997.

C. Russian Claims on Developing Countries

10. According to the Russian valuation,66 Russia’s claims on developing countries inherited from the former Soviet Union are large in absolute terms. About two-thirds of the heavily indebted poor countries are indebted to Russia, and on the creditor country valuation basis, Russia’s claims account for around one quarter of their total debt. Many of Russia’s claims are disputed by debtors in terms of both coverage and valuation. Due to these disputes, and also reflecting difficult economic conditions in some debtor countries, only small payments have been made on these debts during the last five years. A number of discussions between the Russian government, Paris Club creditors, and debtor countries have identified the main areas that remain to be resolved. These relate to exchange valuation issues for Soviet-ruble denominated claims and the discount to be applied on the claims. Russia has offered, and in some cases granted, sizable debt relief to many countries in the last few years.67 There has also been a substantial accumulation of arrears.


Developments in 1992–94 are described in the Recent Economic Developments paper prepared for the 1994 Article IV consultation (SM/94/235, 8/31/94); updated tables can be found in the Statistical Appendix prepared for the 1995 Article IV consultation (SM/95/234, 9/11/95).


The decline in real output is now understood to be smaller than previously believed: the current estimate for the cumulative output loss during 1991–94 of 35 percent is substantially below the original estimate of over 47 percent. The revision is a result of a joint project involving the World Bank, Goskomstat, and other Russian experts conducted in 1995, which used alternative data sources and techniques to adjust the production and expenditure aggregates and also introduced estimates of unreported or under-reported activity. These techniques have now been permanently incorporated into Goskomstat’s methodology for compiling GDP statistics.


The informal private sector is defined to constitute unregistered small business activity, including shuttle trade, retail trade, household services, and personal services.


Annex I provides a discussion of factors that have impeded economic growth.


The Russian Ministry of the Interior has suggested that the shadow economy accounted for an even higher amount (35 percent) of additional output in 1996.


As reported in a CBR publication, Current Macroeconomic Analysis and Forecasting, March 1997.


Annex II provides a discussion of progress in privatization.


Registered unemployment only includes workers officially laid off from jobs in the enterprise sector. Because new private sector firms generally do not register their employment rolls with the Federal Employment Service, workers who lose such jobs cannot register as unemployed. Moreover, new private sector firms typically do not make severance payments.


Other regions which recorded high unemployment rates include: the Republic of Dagestan (23 percent), the Kabardino–Balkar Republic (17 percent), the Karachaevo–Cherkess Republic (19 percent), and the Republic of North Ossetia-Alania.


In contrast, among the total unemployed, who on average experience an unemployment spell of 8.3 months, only 36 percent had quit voluntarily, 32 percent had been laid off, and 16 percent had not been previously employed, including those who had not found a job upon graduation or the completion of their education.


The Fund staff’s definition of the fiscal deficit differs from the authorities’ definition, and adjusts the treatment of several categories of spending and revenues. The principal adjustments—which tend to raise expenditure and the deficit—are the classification of Treasury bill interest payments from amortization to interest expenditure and reclassification of purchases and sales of precious metals and privatization receipts to financing. Unless specified otherwise, the fiscal deficit is expressed on a “cash” basis, i.e., excluding changes in budgetary arrears.


The enlarged government is defined as the federal government, local and regional governments, extrabudgetary funds, and any identified other extrabudgetary expenditures (e.g., import subsidies in 1991–93 and compensation of Savings Bank depositors in 1996).


In 1995, CBR credit to government was essentially limited to secondary market purchases of Treasury bills.


It may be noted that regional governments became increasingly active in security markets in the course of 1996 although the total amount raised remained limited.


Payment arrears data are based on Treasury estimates of overdue payments on commitments.


In August 1996, an executive order limited guarantees of commercial bank lending to a tight ceiling against projects relating to defense orders, gold purchases, and support for the Northern Territories. However, numerous exceptions undermined this initiative.


At end–1996, the Pension Fund had 38 million beneficiaries, including 29 million old age pensioners, 3.8 million disability pensioners, and 1.1 million social pensioners.


Annex V to EBS/97/78 provides a further analysis of the revenue decline in 1994–96.


The ratios for 1995 and 1996 are based on staff estimates of nominal GDP that are higher than the official data owing to recalculation of implicit GDP deflators in 1995 and adjustments for under–recording of real growth in 1996. Official national accounts data indicate a revenue decline of 4 percentage points of GDP in 1994–96.


See Annex IV for a detailed discussion of banking sector developments and issues.


ADRs are securities backed by foreign stocks that are issued by U.S. banks and traded on U.S. stock exchanges, to facilitate trading in those foreign stocks.


The use of government holdings of NIR—the ruble counterpart—is included as part of credit to government in the accounts of the monetary authorities, although it does not directly result in an increase in base money if the government’s foreign exchange is either used to meet foreign payments or is sold in the market without CBR intervention.


Quoted growth rates of NIR and NDA are calculated using constant exchange rates to abstract from valuation effects. For 1995, the growth rate of the stock of credit to government excludes the increase that resulted from the government’s assumption of directed CBR credits to commercial banks that were outstanding at the end of 1994.


The unchanged net credit to banks abstracts from the write–off in September 1996 of Rub 8.2 trillion of CBR credits to commercial banks that had been granted in earlier years.


These figures are based on the narrow definition of base money, which excludes banks’ holdings of excess reserves (in correspondent accounts) which are still relatively high reflecting payment system weaknesses—at 8 percent of deposits—and have historically been very volatile. If the broader measure of base money is used, the multiplier is even lower and the reserve–deposit ratio higher.


Alternatively, the money/GDP ratio—at around 10 percent—is low when compared with ratios of 50 to 100 percent in other countries.


During 1996, the CBR limited issuance of veksels to 200 percent of a commercial bank’s capital, with this limit tightened to 100 percent in March 1997.


Promissory notes are also issued by some large companies and—reflecting their higher risk—tend to trade at larger discounts than notes issued by banks.


Although shuttle imports are not registered by Russian customs and are therefore not observed directly, rough estimates of this trade can be made by comparing Russian customs data with partner–country trade data. Data on exports to Russia collected by customs of other countries suggests that recorded partner country exports to Russia (allowing for insurance and transportation charges) exceeded registered Russian imports by some $10 billion in 1995. In addition, some shuttle imports are believed to be excluded from both Russian customs statistics and the customs statistics of partner countries; for example, shuttle trade exports in 1995 from Turkey to Russia were thought to approach $5 billion, yet total recorded exports to Russia by Turkish customs amount to less than $1 billion.


Based on Customs Data and Fund staff estimates.


Includes adjustments made by Goskomstat to account for registered imports not recorded by customs.


These flows are measured as the gross volume of banknotes imported and sold in the domestic market by commercial banks less the estimated outflow of notes, mainly purchased by shuttle traders and used to finance unregistered imports.


A further Eurobond issue for DM 2 billion took place in March 1997.


This average duty rate calculation excludes specific duties on alcohol, which are significant in ad valorem terms.


This chapter is based on staff discussions with members of the business community, and business and legal advisors in Russia.


For analyses of businesses’ objections to the tax system, see American Chamber of Commerce of Russia, Investment White Paper: Barriers to Investment in the Russian Federation (January 1996), and Foreign Investment Advisory Council, Internal Barriers to Foreign Investment in Russia (mimeo).


Court challenges to tax assessments are increasingly common although still rare. Although certain courts are becoming somewhat specialized in tax issues, decisions are still treated as case–specific, rather than as a means of setting precedents.


Louise Shelley, address to the EU conference on “The Mutual Impact of and Measures Aimed at Combating Organized Crime within the European Union and the Russian Federation,” Helsinki, Finland, December 4–5, 1996.


To give an employee take home wages of $1000 each month, a firm needs to pay a 35 percent income tax rate ($350); then the firm is liable for 41 percent social taxes on the employee’s gross income of $1350 ($553.50). This brings the total monthly cost of employing the worker to $1,903.50.


American Chamber Of commerce in Russia, White Paper on Standardization, Certification, and Licensing Issues in the Russian Federation (June 1996). See also American Chamber of Commerce in Russia, Investment White Paper: Barriers to Investment in the Russian Federation (June 1996).


Among the requirements of opening a business are registration with the local government, registration of the charter capital with the local government, registration with the state tax service, agreement to retain the real estate profile of purchased or leased premises (e.g., these premises will be retained as a bakery), and certification of specific products. Additional requirements apply if foreign investment is involved, including registration of the shareholding structure; approval by the antimonopoly committee if foreign ownership will exceed 20 percent; and receipt of a CBR license for foreign exchange denominated equity investment or borrowing over 180 days.


Frye, Timothy, and Andrei Shleifer (1997), “The Invisible Hand and the Grabbing Hand,” American Economic Review Papers and Proceedings (forthcoming May 1997), as cited in Shleifer, “Government in Transition,” Harvard Institute for Economic Research Discussion Paper No. 1783 (October 1996).


International Maritime Bureau, Special Report on Trading with Russia Today (prepared in conjunction with the International Chamber of Commerce Commercial Crime Services), December 1995, as reprinted in Trends in Organized Crime, Volume 2, Number 1 (Fall 1996).


Corruption reportedly is closely linked to organized crime. The International Maritime Bureau estimated that 50 percent of the profit gained through criminal activity is spent on bribes to government officials and the police.


American Chamber of Commerce in Russia, Investment White Paper: Barriers to Investment in the Russian Federation (January 1996) provides a detailed analysis of the weaknesses in Russia’s legislative processes and legal enforcement.


Frye and Shleifer (op. cit.) found that 65 percent of Moscow shopkeepers felt they could use the courts to settle a dispute with a business partner and 50 percent thought they could bring a dispute with the government to court.


Also, the corruption of any enforcement service will need to be prevented, inter alia, by adequate compensation of its employees.


Frye and Shleifer (op. cit.) report that 76 percent of Moscow shops in their survey felt it necessary to pay for protection.


For a description of the role of organized crime groups in collecting debts, resolving disputes, and providing private security services, see Yuriy A. Voronin, “The Emerging Criminal State: Economic and Political Aspects of Organized Crime in Russia,” Transnational Organized Crime.


Karen Brooks et. al., Agricultural Reform in Russia: A View from the Farm Level, World Bank Discussion Paper number 327 (Washington, D.C.: World Bank, 1996) provides a detailed analysis of recent agricultural reform in Russia.


Complete data on the level of commodity credits extended in 1996 are not available.


In an effort to ensure the survival of Agroprombank, the federal government sold a majority stake to Stolichny Savings Bank, with the conditions that Agroprombank continue to devote 60 percent of its lending portfolio to farmers and the understanding that Stolichny would clean up Agroprombank’s balance sheet. Stolichny also agreed to temporarily transfer a 24.5 percent stake back to the government (in addition to the government’s retained 1.5 percent stake) with the intention that the government would share the burden of losses associated with preexisting bad loans.


This figure should be seen in the context of an economy–wide rise in accounts payable in 1996. However, the level of overdue accounts payable in agriculture was particularly high; the economy wide ratio of accounts payable to GDP at end–1996 was approximately 16 percent.


Calculated as the difference between the agricultural sector’s accounts payable and accounts receivable, as a share of annual value–added in agriculture.


Until 1988, the banking system in the USSR consisted of the Gosbank and its branches, which operated as a monobank, with specialized sectoral banks operating under Gosbank control. The Gosbank served as a disbursement channel, funneling government resources to economic entities. Banking reforms in 1987–88 created a two–tier banking system and separated commercial banking functions from Gosbank. Following the dissolution of the Soviet Union in 1991, most of the state–owned commercial banks were fully or partially privatized through voucher privatization and further reforms permitted the creation of private banks. At end–1991, the CBR assumed all central banking responsibilities formerly held by Gosbank. The 1993 Constitution granted the CBR considerable autonomy and responsibility for bank licensing, regulation, and supervision.


All GDP ratios in this annex are based on staff estimates to the relevant month’s annualized GDP.


The elimination of directed credit in 1994 gave banks even greater freedom to adapt their balance sheets. Unlike in other transition economies, directed credits have had little impact on the financial condition of most banks, except for a few former state banks, which inherited particularly large directed credit portfolios.


The segmentation of the interbank market since the August 1995 crunch demonstrates the banks’ lack of confidence in their competitors’ solvency.


The CBR intends to raise bank capitalization by gradually raising required capital–risk–weighted asset ratios, which were increased to 5 percent effective July 1, 1996, and will be increased further to 8 percent in 1998.


At the dissolution of the Soviet Union, Russia assumed the external debts and claims of the entire Union.


The stock of debt covers the external liabilities of the public sector only (i.e., where the government of the Russian Federation is the obligor or the guarantor of the loans), including loans contracted directly or guaranteed by Vneshconombank (“VEB”), and debt contracted or guaranteed by entities legally authorized to borrow on behalf of the Government of the Soviet Union, as well as outstanding arrears unpaid as at the end of 1996—net of payments held in trust by the Bank of England for the benefit of London Club financial creditors. These figures exclude obligations related to government domestic bonds denominated in hard currency (known as “Taiga” bonds or “MinFins”), as well as the stock of Treasury bills held by foreigners, which are considered domestic debt instruments.


The Eurobond registered on November 21, 1996 has a principal maturity of five years and an interest coupon of 9.25 percent (345 basis points over the comparable U.S. Treasury bond) accruing semi–annually from November 27, 1996. The first coupon payment is due on May 27, 1997.


These include, among others, Korea, Uruguay, and Saudi Arabia.


Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States.


The fraction of interest that can be capitalized is up to 75 percent in year 1; 60 percent in year 2; 50 percent in years 3 and 4; 40 percent in year 5; and 15 percent in year 6.


For valuation purposes, the Central Bank of Russia continues to quote a Gosbank official ruble exchange rate based upon a peg to a basket of six currencies weighted as follows: U.S. dollar, 42 percent; Deutsche Mark, 19 percent; French Franc, 10 percent; Pound Sterling, 10 percent; Swiss Franc, 10 percent; and Japanese Yen, 9 percent.


These include Bolivia (1990), Jordan (1992), India (1993), Bulgaria (1994), Egypt (1994), Poland (1995), Nicaragua (1996), and Peru (1996). With some countries (Viet Nam, Lao P.D.R., Mongolia) Russia has not concluded debt rescheduling agreements, but while negotiations continue, informal agreements provide for the debtors to make partial payments in kind. Under these informal arrangements, on an annual basis the parties agree on the amounts of goods to be shipped and their value in USSR rubles.

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