IMF Executive Board Concludes 2005 Article TV Consultation with the Russian Federation

Under Article IV of the IMFs Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. These are the extracts from the summary of the report dated September 21, 2005

Russia is in its seventh year of robust economic growth. This strong performance was ignited by the sharp depreciation in the wake of the 1998 crisis, and subsequently sustained by large terms-of-trade gains, in combination with increased political and macroeconomic stability. Higher output and investment in the oil sector have been key conduits of the broad based recovery, which is still running its course.

While still vibrant, the economy has softened notably since mid-2004, despite record high oil prices. Yearly GDP growth decelerated from 7? percent in the first half of 2004 to 5? percent in the same period this year, mainly owing to lower growth in oil production and investments. Consumption has remained buoyant and has been the main source of domestic demand growth, fueled by continued rapid increases in real wages.

Monetary policy remains relatively lax. While reserve money growth has slowed somewhat since mid-2004, mainly because of an accelerated build-up of government deposits with the Central Bank of Russia, it remains high, as do the increases in broader aggregates. Rising inflation, declining interest rates, and large capital outflows point to a continued accommodative stance.

The economy is expected to continue to grow robustly, although not at the pace seen before last year’s slowdown. Staff projects GDP growth of 5? percent in 2005, fuelled by consumption. Both exports and investment are expected to remain subdued compared to previous years, high oil prices notwithstanding, as concerns about the investment climate linger and supply constraints in the oil sector are unlikely to ease in the near future. Inflation, which was already running at an annual rate of 7? percent in the first half of 2005 is likely to exceed the official target again this year. External vulnerability has been greatly reduced since the 1998 crisis owing to a very favorable balance of payments position and large foreign reserves of more than 3? times short term debt.

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The Economic Situation

A specific situation formed in the world market is sometimes characterized by the ancient Latin term “conjuncture” (economic situation, state of the market, market situation, or economic conditions).

The market situation is varying with many changing parameters. The economic situation usually involves a great number of concepts.

a) The first thing is, of course, the demand and supply relation, or the market equilibrium (balance).

Supply is determined by a number of influences. The first is price itself: the higher the price, the more profitable it is, other things being equal, for producers to sell a good and the more they will attempt to sell. The second is the cost of inputs: the lower are costs, the more profitable it is to sell a good at a given price and more will be offered for sale. The third is the price of other goods: when the price of other goods rises, the supplier of a good may find it advantageous to switch his production to the supply of the newly high-priced goods rather than stay in the relatively less profitable industry, where supply will fall. It should be noted that supply is planned supply, not necessarily what is actually sold. The latter depends on equilibrium in the market.

The conditions of supply constitute but one aspect of the determination of the economic situation. A market equilibrium is no less important. It is a situation in which the actions of all economic agents are mutually consistent. It is a concept meaningfully applied to any variable whose level is determined by the outcome of the operation of at least one mechanism or process acting on countervailing forces. For example, equilibrium price is affected by a process which drives suppliers to increase prices when demand is in excess and to undercut each other when supply is in excess — the mechanism thus regulates the forces of supply and demand.

It is possible for a short-run equilibrium to exist, when some quickly adjusting processes are in balance, while other longer-term forces are still causing change to occur. For example, in perfect competition, in the short run firms’ profit-maximizing behavior can lead to a market equilibrium with price equal to marginal cost; yet if abnormal profits exist at that price, new firms might enter

the industry — a process quite separate from the price-setting behavior of those already in it —that will change the long-term equilibrium price.

A distinction can be drawn between a static equilibrium, when the value of the relevant variable is unchanging, and a dynamic equilibrium, when the value of the variable is changing but in a regular way. Equilibrium growth, for example, might manifest itself in a steady 2.25 per cent rise in GDP.

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