Russian Federation: 2015 Article IV Consultation-Press Release; and Staff Report

KEY ISSUES AND RECOMMENDATIONS Context. Growth was anemic in 2014, reflecting preexisting structural bottlenecks exacerbated by geopolitical uncertainty and sanctions. The ruble depreciated for the most part of 2014 and came under severe pressures at the end of the year due to the sharp decline in oil prices and the intensification of sanctions. As a result, inflation accelerated sharply. In response, the shift to a flexible exchange rate was accelerated and monetary policy was tightened significantly. Measures to stabilize the banking system were introduced, including a bank capital support plan. The authorities' policy response stabilized the economy. However, structural reforms have remained stalled. Near-term macroeconomic policy mix. The fiscal policy stance for 2015 appropriately allows for limited stimulus. Monetary policy normalization should continue at a prudent pace, commensurate with the decline in underlying inflation and inflation expectations. The size of the bank capital support program appears to be sufficiently large, but the parameters of the program should be adjusted to strengthen incentives for banks to seek private capital and reduce cost to the public sector. Medium-term policy challenges. An ambitious and credible medium-term fiscal consolidation program is necessary to adjust to lower oil prices. Changes to the fiscal rule should be considered to support medium-term fiscal sustainability. Boosting potential growth will require implementation of structural reforms. This would include (i) strengthening governance and protection of property rights; (ii) lowering administrative barriers and regulation; (iii) increasing competition in domestic markets; (iv) enhancing customs administration and reducing trade barriers; and (v) improving the transparency and efficiency of public investment procedures. Reinvigorating the privatization agenda, as soon as market conditions permit, would enhance economic efficiency. A deeper and more efficient financial system would improve the allocation of capital thereby enhancing economic growth.