Economic Policy Reforms 2019

Russian Federation

More than ten years after the crisis, the Russian economy is growing slowly and the gap in GDP per capita with respect to the upper half of OECD countries persists. Rapid ageing and a productivity growth decline are hardly compensated by investment and improved labour market participation.

Real household income growth is sluggish and poverty remains high. Widespread exposure to ambient air pollution and poor water quality have important health consequences. Poor energy efficiency causes high greenhouse gas emissions and weighs on the performance of the energy sector.

The fiscal framework has improved with the adoption of the new fiscal rule in 2017. On the other hand, state control in the economy has increased, particularly in the energy and financial sectors. Barriers to foreign investment remain high and the transparency of the public administration is weak. Public support to R&D still fails to foster business innovation.

Reducing government ownership and policies to improve innovation at the firm level could boost entrepreneurship, productivity and growth. Lifting the barriers to foreign investment and restrictions in trade in services, particularly in transport and logistics, would enhance competition and productivity. Public administration quality and efficiency need to be improved. The tax and transfer system needs to better address inequality and poverty.

Growth performance, inequality and environment indicators: Russian Federation

Source: Panel A: OECD, Economic Outlook Database; Panel B: OECD, Income Distribution and National Accounts Databases and World Bank, World Development Indicators (WDI) Database; United Nations Framework Convention on Climate Change (UNFCCC) Database and International Energy Agency (IEA), Energy Database; Panel C: OECD, National Accounts and Productivity Databases; The Conference Board Total Economy Database.

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Policy indicators: Russian Federation

Source: Panel A: OECD, Services Trade Restrictions Database; Panel B: OECD, Main Science and Technology Indicators Database.

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Beyond GDP per capita: Russian Federation

Source: Panel A: OECD, Income Distribution Database, World Bank, World Development Indicators Database and China National Bureau of Statistics; Panel B: OECD, Environment Database.

Note: For the explanation of the sets of indicators above, please go to the metadata annex at the end of this chapter.

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Russian Federation: Going for Growth 2019 priorities

Reduce state control over economic activity and other barriers to competition. State-owned companies are predominant in key sectors such as energy and banking and limit modernisation and good management. Restrictive product market regulation reduces competition and innovation.

• Actions taken: No actions taken. Part of the state-own oil company (Rosneft) has been privatised in December 2016. Yet overall privatisations have virtually stalled, as the budget deficit pressure eased with the rebound of the economy in 2017.

• Recommendations: Reboot the privatisation of state-owned enterprises. Reform banking sector regulation to establish a level playing field between public and private banks and financial intermediaries.

Raise the quality of public administration. Efficient, accountable and transparent public administration is key to implement reforms that boost inclusive growth.

• Actions taken: Public administrations extended digitalisation with improved transparency and reductions in red tape in 2018. Single-window custom offices were opened in 2018. A substantial rise of public servants pay was introduced in January 2018, which will contribute to improve motivation and attractiveness of public administration jobs.

• Recommendations: Further increase civil servant pay to improve efficiency and reduce incentive for corruption. Invest in digital technologies to improve transparency. Boost the independence of the judiciary power to help protect private property and entrepreneurs and shelter citizens from arbitrary decisions. Protect whistle-blowers and independent media to reduce corruption.

Lower barriers to foreign direct investment and to trade in services. Several industrial and service sectors are subject to tight restrictions on FDI and trade, with negative consequences on competitiveness and growth.

• Actions taken: No action taken.

• Recommendations: The list of sectors that require special approval for foreign direct investment should be reduced. The transportation and logistics sectors should be open to foreign entrants to boost efficiency. Reduce regulatory uncertainty, in particular for foreign companies to improve the attractiveness of investing in Russia.

Raise the effectiveness of innovation policy. R&D and the diffusion of innovations are key to improve productivity and growth. However, private sector innovation performance is disappointing.

• Actions taken: Total spending on research and development has increased to around 1% of GDP, notably due to the extension of public-private partnerships.

• Recommendations: Continue broad-based public support to research. Strengthen partnership with the business sector. Use broad-based fiscal support for innovation and for the adoption of new technologies. Reduce disincentives to job mobility of workers of state owned research centres toward the business sector to further boost innovation and its diffusion.

Improve the quality of the public finances. Increasing revenues and improving spending efficiency and predictability as well as boosting public investment are key for sustained economic growth and inclusiveness.

• Actions taken: The fiscal rule introduced in 2017 helps shelter federal spending from oil price fluctuations. Property-based taxes will increase in the 2019 budget and new profit-based taxation is being gradually introduced this year to incentivise investment in the extraction sector.

• Recommendations: Continue the shift towards more property-based tax and taxation on profits in the extraction sector. Reduce social security contributions and increase the value added tax. Increase investment in infrastructure.