around 126 percent in 2005 to 149 percent in the second half of 2008, reflecting the greater reliance of banks on external foreign borrowing. Further, some characteristics of loan portfolios exposed the banks to enhanced credit risk. Firstly, while most corporate loans are classified as having medium-term maturities, they are often in fact provided on a short-term basis with a rollover agreement and corporate borrowers usually repay these loans with their working capital. This arrangement subjects both companies and banks to significant liquidity and credit risk. Secondly, with 30 percent of loans denominated in foreign currency, Russian banks were exposed to a depreciation of the ruble. Thirdly, the concentration of bank lending in the real estate and construction sectors, coupled with a high reliance on real estate for collateral, exposed some banks to real estate prices. Finally, loans were often made based on stated income rather than documented income or audited financial statements, exposing banks to further credit risk. As a result, close monitoring financial sector risk and its fiscal implications will be important in the aftermath of the crisis, as will sustained supervisory and regulatory reforms required to strengthen the financial system in the medium term.

**_Against this background, Russia’s government has handled the global crisis well but long-term fiscal risks are significant._** It implemented a swift and massive set of fiscal measures to contain the impact of the crisis. The total fiscal cost of measures implemented in 2008 and 2009 amount to more than 2.9 trillion rubles or 6.7 percent of GDP (Box 1). The fiscal management and the economic and social impact during the crisis was analyzed at length elsewhere (Bogetic and Smits 2010; Bogetic, Smits, Sulla and Tesliuc 2010, and Bogetic, Smits and Sulla 2010).  Suffice it to say that the crisis has dramatically altered the short term economic, fiscal and social outlook, bringing to the fore the issues of longer-term fiscal risks and fiscal sustainability analyzed in this paper.

# **V. Fiscal policy for the next 30 years:**

# **Fiscal sustainability and managing oil price uncertainty**<sup>**5**</sup>

## **A. A framework for fiscal sustainability and managing uncertainty in oil-rich countries**

**_Russia has managed its public finances well._** The government has wisely chosen to reduce spending volatility below the levels of oil revenue volatility by diverting a stable flow of resources from oil revenues to the budget, and allocating the remainder to a stabilization fund. In doing so, Russia has moved significantly from complete fiscal discretion and lack of expenditure control of the past to sound, rule-based management of fiscal policy. Indeed, it could be argued that this was partly key to its economic success since 1999. Nevertheless, new expenditure pressures in late 2007 and 2008 could potentially result in a return to unsustainable fiscal spending under not unreasonable scenarios of lower oil prices and large spending pressures. How could such a scenario be avoided?

**_In the years leading up to the 2008-09 crisis, expenditures and non-oil revenues remained volatile._** Figure 13 shows an annual change, measured as a percentage of GDP in expenditure, in savings and non-oil revenue as a result of an increase or decrease in

> 5 This simulations of the fiscal sustainability here are based on Van Wijnbergen and Budina (2008).

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