The economy is in recession. Falling oil prices, international sanctions and capital flight have reduced investment, domestic consumption and imports. The large depreciation of the ruble has pushed inflation to double digits and reduced real incomes, especially of the poorest. Recovery will be only gradual against the backdrop of an uncertain external environment and lack of structural reforms. Unemployment will rise from the current low levels. Growth is projected to turn positive in 2017 as exports strengthen and domestic demand recovers.
The accommodative fiscal stance is appropriate, given the size of the demand shock. Targeted income support to lower-income groups would reduce poverty risks from large falls in real wages. Fiscal consolidation is nevertheless needed in the medium term to adjust to lower oil prices and an ageing population. The scope for monetary policyeasing will depend on declines in inflation and inflation expectations. Weakening bank balance sheets should be monitored closely to arrest the build-up of non-performing assets. Measures to combat corruption, reduce the role of the state in the economy and to reinforce skills and innovation would raise potential growth.
Energy intensity is high and Russia is one of the world's largest emitters of greenhouse gases. Low air quality contributes to a high premature mortality rate. Attaining the goal of a 40% reduction of the energy intensity of GDP from 2008 levels by 2020 will be challenging. Energy intensity could be substantially reduced by eliminating high fuel subsidies (costing 2% of GDP), which would improve energy efficiency in transport, housing and industry.