The IMF and World Bank will warn the Russian government against mis-spending its oil windfall at meetings in Washington this week. Both organisations are urging that less of Russia's oil revenues be spent on pensions and wages, and more on difficult restructuring programmes.
'The oil wealth should be spent primarily on restructuring, not on recurrent expenses that do not raise potential growth, such as pensions and wages,' Paul Thomsen, the IMF's Russia mission chief, told Emerging Markets. 'There is scope for relaxing fiscal policy in the medium term, but not until inflationary pressure has eased.'
The recent IMF mission expressed concern that GDP growth 'remains subdued', at 5.5% in 2005, down from 7.1% in 2004, and urged that the pace of fiscal relaxation be 'reconsidered'. It complained that the vast bulk of higher spending to date more than 90% of the extra spending in the 2005 budget was on wages, pensions and other recurrent expenditures.
The message was not fully heeded. Russia is sticking to its decision to raise the level above which it diverts oil revenues to its stabilisation fund, from $20 a barrel to $27, starting on 1 January 2006. The fund was set up in 2004 to sterilizes excess oil revenues.
Thomsen also believes attention must be paid to Russia's slowing oil production growth. Increases in recent years were achieved mainly by technical improvements to existing fields rather than investment in new fields, transport and infrastructure.
'New fields require very large-scale and long-term investment, and here the investment climate remains a problem,' he warned.
Kristalina Georgieva, World Bank director for Russia, told Emerging Markets: 'There's a risk that Russia, having made good use of the bad times, may end up making bad use of the good times.'
In President Vladimir Putin's first term, Russia had focused on fiscal discipline, a simplified tax regime and tax collection, and spending restraint, Georgieva said. 'But now foreign exchange is pouring in, and there are dangers from inflation, and from ruble strengthening making Russia less competitive.'
She fears that, with Moscow's politicians already preparing for the 2008 presidential election difficult reforms will be avoided and time lost.
In the mid-term, the World Bank will prioritize support for reform of Russia's housing and communal services sector, investment climate improvements, health, and education. The Bank is also active in reforming public sector governance, particularly with respect to a draft law envisaging the creation of 10,000 new municipal self-government bodies in 2006.
Georgieva also favours World Bank involvement in tackling Russia's unsolved demographic crisis, regional disparities, and linked issues of sub-sovereign fiscal management and anti-corruption measures.