The Russian Central Bank noted foreign investors improving Russia’s credit rating through much of 2016, according to the Central Bank’s draft monetary policy guidelines for 2017-2019 published on Wednesday.

“Improvement of Russia’s credit rating as well as expectations of economic recovery after adaptation to new level of oil prices helped to increase interest of foreign investors to the Russian financial market,” the document said.

On September 16, Standard & Poor’s (S&P) upgraded Russia’s sovereign credit rating outlook to ‘stable’ from ‘negative’, and affirmed the country’s long-term foreign currency credit rating at ‘BB+’.

“The stable outlook reflects our expectation that the Russian economy and policy making will continue to adjust to the lower oil price environment and the country will maintain its strong net external asset position and modest net general government debt burden in 2016-2019,” the rating agency said in a press release.

External conditions in 2016 worse than baseline scenario

According to the bank, external conditions in 2016 were worse than the baseline scenario, which was a limiting factor for the Russian economy.

“In general external conditions were worse that the baseline scenario of the Central Bank considered earlier in last year’s draft monetary policy guidelines for 2016, 2017-2018, and remained a limiting factor for the Russian economy,” the document said.

In particular, the Central Bank notes that the global financial markets, as well as commodity markets presented inconsistent dynamics, and market participants’ dispositions were unstable. Unstable recovery of business activity in developing countries, changes in expectations on the US Federal Reserve System increasing the rate and Brexit – it all added uncertainty, according to the Central Bank.

Inflation targeting

According to the bank, inflation targeting acted as a bumper and mitigated the impact of external shocks.

“The monetary policy pursued within the framework of the inflation targeting strategy, along with other government policy measures, acted as a bumper, lowering the impact of external shocks on economic functioning and life of people,” the regulator said.

The Bank of Russia will continue focusing on domestic economic stability, on inflation slowdown and keeping at about 4% in the first instance.

The key task of the Central Bank within the inflation targeting policy framework is to reach 4% inflation in the next year.

Free float to play important role in Russian economy’s adaptation

Free-floating exchange rate mechanism will continue playing an important role in adaptation of the Russian economy to external conditions.

“The free-floating exchange rate mechanism is an important factor of Russian economy’s adaptation to influence of environment. Flexible response of Russia’s currency rate will provide for adjustment of forex balance of Russia. Ruble weakening will create natural stimuli to import contraction in case of an adverse change in environment, concurrently maintaining competitiveness of domestic export,” the regulator said.

International reserves possible replenishing to $500 bln

The Russian Central Bank in the implementation of the optimistic scenario based on oil prices rising to $55 per barrel in 2019, considers the possibility of replenishment of international reserves to $500 bln, without indicating the time of achieving the target.

“Given the fact that in this case external and internal conditions are somewhat better than expected in the baseline scenario, the Central Bank will consider the possibility of resumption of purchases of foreign currency to replenish international reserves to a level of $500 bln,” the document said.

According to the pessimistic outlook of the regulator, Russia’s net international reserves will be $361 bln as of January 1, 2020. The baseline scenario based on the average annual oil price of $40 per barrel includes reserves of $394 bln as of January 1, 2018.

According to the regulator, estimated volume of net international reserves at the beginning of 2017 will amount to $379 bln.

Potential of Russia’s growth model based on exports of raw materials exhausted

The document runs that the potential of the Russian economy growth model based on exports of raw materials is exhausted.

“Retaining the model of economic growth based on exports of raw materials and stimulating consumption will give only a short-term effect, because its potential was largely exhausted in previous years. At the moment, there is a need for a strategy to overcome structural problems of the Russian economy, improve quality of social and economic institutions, securing macroeconomic financial and price stability,” the document said.

The Central Bank Governor Elvira Nabiullina said earlier that Russia’s dependence on crude oil prices is gradually declining. “The share of oil is falling both in GDP, in export revenues and in budget revenues,” she said, adding though “it remains high.”

According to her, internal risks are key for the Russian economy. “The key risks for the Russian economy are internal ones. Nevertheless, external risks exist. The uncertainty over the global growth dynamics will persist and we have to be prepared to that. Speaking about particular external risks, the main channel of influence of those risks on us is through oil prices, of course,” she said.

Russia needs to stimulate productivity and efficiency of economy

According to the report, Russia needs to stimulate productivity and efficiency of the economy to transition to sustainable growth.

“It is it is necessary to create internal sources of development, incentives to improve performance and efficiency of economic activity, improve quality of management at all levels in both public and private sectors,” the Central Bank said.

The Central Bank said earlier that a positive quarterly growth of Russia’s GDP is expected in the second half of 2016, but the rate will be high. “A positive quarterly growth of GDP is expected as soon as in the second half of 2016, but in 2017 the growth rates of the GDP will not be high – below 1%,” the Central Bank said.

Earlier, the Russian Central Bank decided to lower the key rate by 0.5 percentage points to 10% for the first time since June, according to the regulator’s press release published on Friday.

The Central Bank has decided to lower the key rate, taking into account slowdown of inflation according to the forecast, as well as inflation expectations at the remaining unsustainable economic activity.

At the same time, according to the Central Bank’s estimates, in order to consolidate the trend towards a steady decline of inflation, it is necessary to maintain the achieved level of the key rate until the end of 2016 with the possibility of reducing it in the Q1 – Q2 of 2017.

First meeting on key rate in 2017

The first meeting of the Central Bank Board of Directors on the key rate in 2017 will be held on February 3.

In total the Russian Central bank plans to hold 8 board meetings in 2017 – on February 3, March 24, April 28, June 16, July 28, September 15, October 27 and December 15.

At the same time, meetings the Board of Directors of the Central Bank on March 24, June 16, September 16 and December 15 will be accompanied by the publication of the report on monetary policy and a press conference for media.