Summary: KEY ISSUES AND RECOMMENDATIONS Context. The growth slowdown continued in 2013, reflecting pre-existing structural reasons, despite accommodative policies. The fallout from geopolitical tensions relating to Ukraine is bringing the economy to a standstill. Fiscal tightening is expected this year as the non-oil deficit remains near record high. In response to mounting pressures on the ruble, the Central Bank of Russia (CBR) raised interest rates to address risks to medium- term inflation and increased intervention to support the ruble. Some structural reforms were initiated, including a partial pension reform and a new procurement law. Near-term macroeconomic policy mix. Faced with exceptional circumstances, policies should aim at preserving macroeconomic stability. A tighter monetary stance is required over the next year to attain the 2015 inflation target. The CBR should resume its policy towards greater exchange rate flexibility as soon as the current uncertainty subsidies. Modest fiscal tightening, despite the economic slowdown, appears justified as output remains close to potential. Adhering to the fiscal rule is essential to support its credibility and the needed medium-term fiscal consolidation. Medium-term policy challenges. Structural reforms remain essential to enhance Russia’s growth potential. Continued efforts at global integration are necessary to attract investment and boost potential growth. Reforms discussed in the context of the stalled OECD accession negotiations should continue, including improving labor markets and reducing tax burden, administrative barriers, and corruption. Pushing ahead with the privatization plans should enhance economic efficiency. Additional fiscal consolidation in outer years is recommended to rebuild buffers and to safeguard intergenerational equity.

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