May 21, 2015 / 2:01 PM / 4 years ago

UPDATE 2-IMF sees smaller Russian economic slump, warns of longer-term risks

* Russia tipped into economic crisis last year

* IMF urges fiscal, monetary caution

* Says government measures have stabilised situation (Writes through, adds context)

By Alexander Winning

MOSCOW, May 21 (Reuters) - The International Monetary Fund sees the Russian economy shrinking by 3.4 percent in 2015, a smaller contraction than previously forecast, but said the country’s public finances faced big longer-term challenges because of low oil prices.

The IMF gave the updated forecast at the end of its latest mission to Moscow, where it discussed economic policies with the Russian government. In April it said it saw Russian gross domestic product falling 3.8 percent this year.

Russia’s economy was tipped into crisis last summer when an existing slowdown was compounded by a sharp drop in oil prices and Western sanctions over the Ukraine conflict.

Those factors caused the rouble to collapse and inflation to soar, prompting emergency interest rate hikes by the central bank and huge injections of government money to prop up large businesses.

The IMF’s mission head, Ernesto Ramirez Rigo, said Russia’s anti-crisis response had helped stabilise the situation and that the country still had significant buffers to weather economic shocks, but he urged caution in fiscal and monetary policy.

The IMF now sees Russian GDP edging up by 0.2 percent in 2016, also better than its April forecast for a decline of 1.1 percent.

“Russia has significant foreign international reserves, the balance sheet of the public sector is strong, net debt is low, the currency composition of the debt is also good,” he said.

“Going forward the challenge is bigger because probably the low price of oil has a very significant permanent component which will require a permanent adjustment to Russia’s budget expenditure.”

The IMF recommended permanent fiscal measures including pension reform, reducing energy subsidies and better targeting of social transfers.

It also said any easing of monetary policy should be balanced against uncertainty over Russia’s economic outlook. The central bank has already cut its key rate by 450 basis points this year, in a move some analysts have attributed to fears over growth and banking sector frailty.

Russia’s official forecasts predict an economic decline of 2.8 percent in 2015, although Economy Minister Alexei Ulyukayev has suggested the contraction could be less severe than that. (Additional reporting by Gabriela Baczynska; Editing by Gareth Jones)

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