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The following OECD assessment and recommendations summarise chapter 3 of the Economic Survey of Russia published on 15 July 2009.
Just as monetary conditions during the period of strengthening oil prices were too easy, as balance of payments strength fed through to money supply growth via the central bank’s exchange rate-oriented monetary policy, so they risk becoming too tight in a context of falling oil prices and capital outflows. Intervention to support the rouble in the months following the onset of the crisis meant sharply falling reserves, and this was accompanied by a large fall in M2 since September 2008. Real interest rates are becoming positive for the first time in years just as aggregate demand is collapsing due to adverse external shocks. In addition, the resistance to depreciation delayed a compensatory stimulus for non-oil tradable when the oil price fell. The stepwise widening of the exchange rate band allowed some breathing space for firms with heavy foreign currency liabilities and possibly prevented a sharper weakening of confidence in the rouble and, thus, a run on deposits. But the costs were heavy, as expectations of further depreciation encouraged capital flight. The central bank’s communication policy should foster the recognition that the real exchange rate eventually has to move in line with large swings in fundamentals such as oil prices. This episode revealed the weakness in the monetary policy framework and illustrated that holding to a fixed exchange rate or managing a float for an extended period is difficult, as serious conflicts with fundamentals are likely to arise sooner or later, particularly in a commodity-dependent economy.
The plummeting oil price caused the quasi-fixed exchange rate regime
to be suspended
Source: OECD calculations based on Central Bank of Russia.
The central bank’s welcome intention to shift over time to an inflation-targeting regime would address the tensions which have beset monetary policy in recent years. Inflation targeting has proved a successful framework for a wide range of countries, including those with a high degree of commodity dependence. Also, it has often worked well even when some factors, advanced as pre-conditions for making the transition to inflation targeting, have not been fulfilled. Nonetheless, there is a good case in Russia for taking a gradual approach to such a transition, as certain important conditions, some of which go beyond technical preparations on the part of the central bank, requiring political support, remain unfulfilled. Too little is yet known about the ability to forecast inflation and the response of inflation to changes in policy interest rates. To that end, the Central Bank of Russia’s recently introduced quarterly inflation reports, which are a welcome innovation, should be improved to become less descriptive and more analytical. Also, inflation targeting would undoubtedly work better if Russia had deeper financial markets and greater central bank independence. The unexpected return to budget deficits should be used to issue more domestic government debt, providing banks with more paper for refinancing and establishing a benchmark for the financial sector.
Single-digit inflation is one condition that should probably be met before
adopting inflation targeting
Source: IMF and OECD estimates.
How to obtain this publication
The complete edition of the Economic Survey of Russia is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the Russia Desk at the OECD Economics Department at email@example.com.
The OECD Secretariat's report was prepared by Geoff Barnard, Roland Beck, Paul Conway and Tatiana Lysenko under the supervision of Andreas Wörgötter. Research assistance was provided by Corinne Chanteloup.