Russia achieves medium overall compliance with international standards and codes, with a score of 47.5 out of 100 in our Standards Compliance Index. Russia's compliance in all three broad categories is average. In recent years, Russia has made improvements in compliance with standards, most notably in the areas of data dissemination, auditing, and fiscal and monetary policy transparency. On the other hand, Russia has yet to introduce a real-time gross settlement system, its securities regulatory framework is lagging behind that of other emerging markets, and its insolvency laws have major weaknesses. While reforms have been adopted in the area of corporate governance, enforcement remains lax. Russia has, however, shown evidence of ongoing reforms in financial sector supervision. It is also strengthening its anti-money laundering framework, showing some regulatory progress in 2006.

Macroeconomic Policy and Data Transparency

The Russian Federation has been a subscriber to the Special Data Dissemination Standard (SDDS) since January 2005. The International Monetary Fund (IMF) in its 2006 Article IV Consultation report indicates that economic and financial data provided to the IMF by Russian authorities are considered broadly adequate for surveillance purposes. The report also states that Russia has a reasonably comprehensive and timely statistical database, but difficulties remain in terms of data accuracy and frequent data revisions. According to data provided on the IMF's Dissemination Standards Bulletin Board (DSBB), Russia meets the coverage, periodicity, and timeliness for all but three categories. Russia also satisfies the requirements for the access and quality dimensions of the SDDS. However, advance notice of methodological changes for several data categories are not clearly stated on the IMF's DSBB. More »

In its yearly update on Monetary Policy Transparency in Russia, Oxford Analytica stated that Russia's overall score of "Enacted" remained unchanged from 2004. The independence of the Central Bank of the Russian Federation (CBR) is formally enshrined in law. Both the Central Bank Law, as well as a commitment to effective macroeconomic policy-making, mean that the central bank cooperates with the government in certain areas, whether formally or by choice. The establishment of unequivocal de facto independence in the post-Soviet era has been gradual and further complicated by the challenges of the 1998 financial crisis. However, this process now appears largely complete and the central bank's operations are, moreover, supported by adequate human and material resources and generally characterized by a high degree of professionalism. The main challenge to the central bank's operations from the perspective of transparency has to do with the conduct of monetary policy making at a time when the CBR remains committed to combating inflation and managing the exchange rate at the same time. During the Financial Sector Stability Assessment in 2003, the International Monetary Fund identified many areas for improvement in respect to the clarity of roles, responsibilities and objectives of the CBR and open process for formulating and reporting monetary policy decisions. In the 2006 Article IV consultations, the Fund suggested that the CBR could strengthen its monetary policy framework by focusing on a continuous inflation path rather than an end-year target, although a formal inflation targeting would still appear premature. More »

In its yearly update on Fiscal Transparency in Russia, Oxford Analytica stated that Russia's overall score of "Enacted" remained unchanged from 2004. The Russian government has continued to build on its steady progress towards improving fiscal transparency standards. The provision of information on fiscal operations has improved dramatically in recent years. Fiscal projections remain extremely cautious and the country is increasingly prepared for the tasks of minimizing fiscal risks and ensuring long-term sustainability. Russian statistical data on fiscal operations is generally recognized to be of a high standard. However, in spite of the generally positive progress, developments during the past year have revealed the limited capacity of the Russian administrative apparatus to meet the ambitions of policy-makers in certain areas and a number of reforms have had to be delayed. In particular, due to a lack of preparedness at the sub-national level, the overhaul of the federal fiscal relations has had to be delayed from 2006 to 2009. In the context of the 2006 Article IV consultations, the International Monetary Fund expressed concern about the pace and composition of fiscal relaxation. Since 2003, the policy of taxing and saving oil revenues had been key to preventing serious overheating in the face of unprecedented terms-of-trade gains, and staff expressed concern that the rapid increase in the non-oil deficit during the last 1.5 years suggested that support for this important policy was flagging. More »

Institutional and market infrastructure

According to an assessment issued by the European Bank for Reconstruction and Development (EBRD), the Law on Insolvency (Bankruptcy) (the "Insolvency Law"), which governs bankruptcy and insolvency in Russia, came into force in 2002 and has been amended on a number of occasions. This represented a significant improvement over the previous regime. In the 2003 EBRD Insolvency Law Sector Assessment, the law achieved a score of 'medium compliance' when benchmarked against international standards. The EBRD assessment was based solely on the content of the Insolvency Law. The law had a significant number of weaknesses. It did not provide a balance sheet test for insolvency, nor did it provide sufficient safeguards with respect to reorganizations including a failure to prohibit critical suppliers from threatening to cut off supply unless past debts are paid in full. The cross-border insolvency provisions were insufficient, relying on international treaties and reciprocity rather than the United Nations Commission on International Trade Law (UNCITRAL) Model Law or similar EU regulations. The power of insolvency administrators to review pre-bankruptcy transactions was weak and ineffective, preventing insolvency administrators from maximizing the estate value and preventing improper behavior by debtors. Most critical, however, the system was slow, inefficient and presented significant barriers to creditor participation. More »

In 1998, the Russian government adopted a program for accounting reform, which designated International Financial Reporting Standards (IFRSs) as the main instrument of the reform. In July 2004, the Ministry of Finance (MoF) developed and approved the Concept of Mid-Term Development of Accounting and Financial Reporting in the Russian Federation for the period 2004 - 2010. According to the Concept, requirement for IFRSs reporting will be gradually extended to different classes of companies in stages through 2010, though not to small companies. At the same time, the MoF will be working to bring Russian Accounting Standards (RASs), which significantly differ from IFRSs, more in line with IFRSs. However, according to the article "Russia's Road to IFRS", progress in accounting reform has been somewhat haphazard: as of 2006, there was no official translation of IFRSs into Russian, and several vital pieces of enabling legislation were held up in the Duma (Russian Parliament). Namely, the MoF prepared a draft of the law on prep¬aration of consolidated financial statements in accordance with IFRS and a draft of a new federal law on account¬ing. It is anticipated that the law on consolidation will define the timing for the transition to IFRS for different types of companies in Russia. However, as of 2007, both laws are still under consideration in the Duma. More »

In 2004, the European Bank for Reconstruction and Development conducted a Corporate Governance Sector Assessment, under which corporate governance related "laws on the books" were assessed. In this assessment, the Russian Federation was rated as having achieved "high compliance", when compared to the Organization for Economic Cooperation and Development Principles of Corporate Governance. The main legislation concerning corporate governance in Russia is the Law on Joint Stock Companies, most recently amended in February 2006. Further, in 2002 the FCSM, Russia's former securities market regulator, issued a voluntary Corporate Governance Code, which required joint stock companies to report compliance on a comply-or-explain basis. While most of the laws and regulations concerning corporate governance are on the books in Russia, the general consensus of available assessments for Russia is that implementation and enforcement is severely lacking. Improvement in the quality of legislation has not yet been matched by improvements in the quality of institutions that implement the laws or those that resolve legal disputes and enforce the laws. Without effective, impartial third-party enforcement of the law, property rights are likely to be insecure and arm's-length contracting will involve much higher transaction costs. Regarding the roots of the weak enforcement culture in Russia, the Institute of International Finance cites the combination of large-scale direct state involvement in the economy and persistent state corruption as a major obstacle to improving corporate governance. More »

Prior to the commencement of the Technical Aid to the Commonwealth of Independent States (Tacis) Project "Implementation of Auditing Reform, Russian Federation" funded by the European Union, 23 Federal Rules (Standards) on Auditing Activity (RSAs) had been approved between September 2002 and April 2005 broken down into four stages. As noted in the 2006 concluding report of the Project, the approval process takes very long time and seems to be not adequate for the purpose of endorsement of auditing standards. Moreover, the 23 RSA were developed based on International Standards on Auditing (ISAs) in effect as of 2002. Since then, significant changes were made to ISAs, which resulted in only one RSA remaining unchanged. These circumstances led to the Tacis Project's decision to develop the "Complete Draft set of RSAs as of December 31, 2005". By 2006, all standards' drafts prepared by the Project had been officially submitted to the Audit Council at the Ministry of Finance (MoF) for further discussion, review and approval. On August 25, 2006, 8 new RSAs based on the drafts developed by the Tacis project were officially approved; as of October 2006, other drafts were still under consideration. In August 2006, pursuant to the Current IFAC Project Timetable for 2006 and Subsequent Years, published on the IFAC web site, the Project team updated its "Road Map/Action Plan to Ensure Compliance of Russian Standards on Auditing with ISAs effective as at December 31, 2006 and Subsequent Years". It describes the RSAs, which will need to be developed to ensure compliance with ISAs effective as at December 31, 2006 and in subsequent years. More »

The basis of the Russian Federation's anti-money laundering / combating the financing of terrorism (AML/CFT) measures is found in Federal Law No. 115-FZ on Combating Legalization (Laundering) of Criminally Gained Income and Financing of Terrorism, which became effective on 1st February 2002 and was amended in October 2002 to include terrorist financing. A 2003 Financial Action Task Force (FATF) report based on the 2002 (old) FATF methodology concluded that the Russian Federation substantially complies with the essential FATF Recommendations concerning the minimum requirements for membership. However, there is no subsequent information publicly available as to Russia's compliance with the Financial Action Task Force's (FATF) Recommendations based on the (2004) new methodology. According to a 2007 U.S. Department of State (DoS) report, through aggressive enactment and implementation of comprehensive AML/CFT legislation, Russia now has a well-established legal and enforcement framework to deal with money laundering and terrorism financing. Furthermore, the report indicates that Russia has the legislative and regulatory framework in place to pursue and prosecute financial crimes such as money laundering and terrorism financing but that serious vulnerabilities still remain. Corruption and deficiencies in the business environment undermine Russia's efforts to establish a well-functioning AML/CFT regime, and Russia should work to increase the effectiveness of its confiscation laws and their implementation including enacting legislation providing for the seizure of instruments, in addition to the proceeds, of criminal activity. More »

The Central Bank of the Russian Federation (CBR) has made substantial progress in developing a legal framework within which the payment systems can operate. A substantial body of regulations has already been developed and federal laws relating to funds transfers and electronic documents are now in the pipeline. The International Monetary Fund (IMF) Financial Sector Stability Assessment (FSSA) assessment of the Core Principles of Systematically Important Payment Systems indicated that the system is not in itself a major source of systematic risk. However, the picture is still one of a fragmented set of components rather than of a single unified system and there are efficiency shortcomings. During the FSSA in 2003 the IMF recommended that the CBR adopt a revised draft concept paper on payment system reforms and initiate the development of a national real-time gross settlement (RTGS) system. A new concept paper on the reform of the CBR payment system (including development of RTGS) is now being prepared within the CBR. Many of the actions points recommended by the IMF are covered in this concept paper, and CBR's vision of a new CBR payment system infrastructure. More »

Financial Regulation and Supervision

In its 2003 Financial System Stability Assessment report, the International Monetary Fund (IMF) stated that while the legal foundation for banking supervision and banking regulations is generally well developed in Russia, improvements in supporting regulation for banking supervision and in actual practices were needed in several areas. According to a 2005 report on banking supervision in Russia written in the context of the European Union (EU)-Russian Cooperation Program and funded by the European Central Bank, the Central Bank of the Russian Federation (CBR) is guided in its function as a banking regulator by the best practices in international banking regulation and supervision and, above all, the Basel Core Principles for Effective Banking Supervision. The report further identifies that based on the Financial Sector Assessment Program (FSAP) by the IMF and the World Bank; the existing regulatory system of the Russian banking sector conforms, to a considerable extent, to the Basel Principles. In a 2006 Article IV Consultation report by the International Monetary Fund (IMF), officials from the CBR explained that banking supervision had continued to improve and considered the regulatory framework to be broadly adequate. The strengthening of prudential regulations in 2004-05 had enabled the CBR to withdraw a large number of banking licenses and the CBR planned to further strengthen prudential oversight by tightening enforcement of capital adequacy ratio requirements and broadening the definition of related party lending. More »

According to an International Monetary Fund assessment conducted in 2003 on Russia's adherence to the Objectives and Principles of Securities Regulation as promulgated by the International Organization of Securities Commission (IOSCO), there is a comprehensive regulatory and licensing regime governing securities market operations in Russia. At the same time, the Russian securities markets and its supporting clearing and settlement infrastructure were extremely fragmented and there was a need for further strengthening of the regulatory framework. As of 2003, a number of legislative initiatives were underway to address various issues. Since March 2004, the functions of the previous supervisory body, the Federal Commission for the Securities Market (FCSM), have been taken over by a new securities authority, the Federal Service for Financial Markets (FSFM). According to the findings of the European Bank for Reconstruction and Development Securities Market Legislation Assessment in 2004, the Russian Federation's existing securities market legislation (i.e. "law on the books", not how the relevant legislation is being implemented) when assessed against relevant international standards was rated among "medium compliance" countries. The assessment was updated in 2005 and the results confirmed the medium compliance rating. The Central Bank of Russia has acknowledged that the elements of the stock market regulation system that ensure the protection of investors, issuers' access to the market, and the prevention of insider deals are underdeveloped. More »

According to the International Monetary Fund's (IMF) Report on Observance of Standards and Codes (ROSC) conducted in 2003 on Russia's adherence to the Insurance Core Principles (ICPs) promulgated by International Association of Insurance Supervisors (IAIS) in 2000, the Department of Insurance Supervision of the Ministry of Finance (DIS) fell short of best practice in corporate governance, internal controls and dealing with controls over reinsurance. In addition, the work with respect to transparency in the insurance industry lagged behind the progress attained in other financial sectors. The IMF recommended to (1) adopt new insurance legislation to increase capital requirements, mandate the appointment of an actuary by each life insurance company, and provide the supervisor with powers necessary to promote improvements in corporate governance; (2) amend licensing requirements to include fit and proper tests for all owners, directors, and senior managers of insurance companies; (3) give the supervisor specific legislative authority to supervise the reinsurance activities of licensed companies. Following the IMF assessment, the 2003 amendments to the Insurance Law introduced a number of radical changes into the regulation of insurance business in Russia and were aimed at conforming Russian insurance regulation with international principles. Further amendments to the Insurance Law were introduced in 2005. However, since March 2004 the functions of the DIS have been taken over by a new insurance authority, the Federal Service for Insurance Supervision (FSIS) and there is no information publicly available regarding compliance of the new system of insurance supervision with the ICPs issued by the IAIS in 2003. More »

Legend:

Credit Ratings

Moody's Baa1/positive

Fitch BBB+/Stable

Standard & Poor's BBB

Macroeconomic Data

2007 GDP (Current Prices): 1,289.6 billion USD (IMF)

2007 GDP (Per Capita): 9,075 USD (IMF)

2008 GDP (Growth Forecast): 6.8% (IMF)

2008 Inflation (CPI): 11.4% (IMF)

2007 Unemployment: 5.9% (CIA)

2006 Foreign Direct Investment

FDI (Inward): 28.7 billion USD (UNCTAD)

FDI (Outward): 18 billion USD (UNCTAD)

2006 Official Development Assistance

ODA (Received): N/A million USD (OECD)

ODA (Disbursed): N/A million USD (OECD)