Ms. Christine Lagarde, Managing Director of the International Monetary Fund (IMF), today called on Russia and emerging Europe to strengthen policies to guard against rising risks in the global economy.
“The risks emanating from the global economy are serious. Particularly if the storm strengthens further in the euro area, emerging Europe—as its closest neighbor—would be severely hit by lower exports and increased financial strains. We must all be vigilant,” she said in a speech at the State University of the Ministry of Finance in Moscow during a two-day visit to Russia.
Ms. Lagarde said that since the advanced economies are at the center if the current turmoil, they have a special responsibility to undertake policies to restore confidence and lift growth. She added that recent decisions among the euro area and G20 leaders were steps in the right direction and that they need to be implemented expeditiously.
Recognizing the progress emerging Europe made in the last few years, she drew attention to remaining vulnerabilities–high external debt in many countries, a high share of foreign currency loans, diminished fiscal space, and weakened western parent banks–which left countries exposed to the current uncertainties and volatilities in the global economy.
On Russia, the IMF Managing Director praised actions taken during the economic crisis to fortify its defenses. But she also noted some important vulnerabilities, especially from drops in commodity prices and potential fallout from distress in core euro-area banks. And she noted that Russia’s budget deficit, excluding oil revenues, has “more than tripled since the crisis, leaving limited space for a flexible fiscal response.”
Ms. Lagarde emphasized that for Russia “a key priority must be to rebuild fiscal buffers while oil prices are still high.” She also called for monetary policy to focus on reducing inflation, and for strengthening banking supervision.
If the outlook deteriorates further, Ms. Lagarde said that Russia could allow the exchange rate to adjust, deploying its reserves to cushion the transition. “It could provide liquidity support to banks as needed. It could let automatic stabilizers operate, allowing unemployment benefits to rise and the tax burden to fall in response to weaker growth.”
“Dealing with clear and present dangers is the key priority at this time,” Ms. Lagarde said. “And doing that effectively will help Russia move to the future it needs– to higher, more sustainable growth that creates enough jobs and benefits the whole population.” This would include policy measures to reduce Russia’s dependence on oil, moving toward a more vibrant and diversified economy, and improving the investment climate.
The IMF Managing Director also addressed the transformation of the global economy brought about by the rise of new centers of growth, drawing particular attention to the role of Russia. “As a leading emerging market, Russia plays an important role on the global stage and in the G20. And in the IMF, Russia is one of our top ten shareholders,” she said.