* Collapsing prices of oil and other commodities have resulted in a sharp turnaround in the terms-of-trade, which no longer support domestic demand.
* The drying-up of access to international capital markets hit some Russian banks and corporations hard, and a sudden deterioration of Russia-specific and more general emerging market risk premia increased financing costs steeply.
* The sharp depreciation of the rouble against the dollar in particular (related to falling oil prices and the deterioration in the private capital account) greatly increased the burden of foreign currency corporate debt, which has risen considerably in recent years.
The government and central bank responded swiftly to the onset of the crisis, providing liquidity and capital to the banking system and seeking to boost aggregate demand. The government is ready to accept a large fiscal deficit in 2009 and can do so because of accumulated reserves saved in better times. Aggressive fiscal stimulus should aim at maximising the multiplier effect on domestic demand. Such stimulus should be cast in a credible medium-term framework, to safeguard fiscal sustainability. Monetary policy in the short term should make financial conditions as easy as possible, which means inter alia not resisting fundamental pressures for depreciation of the rouble. Maintaining the functioning of the banking system is of prime importance, but that is consistent with allowing considerable consolidation of the sector.
Looking beyond the crisis, a broad-based and comprehensive policy package is needed to put in place a more robust growth model. This Survey makes recommendations in four important areas where co ordinated reforms promise considerable synergy effects:
* Economic rents from natural resource extraction should be captured and mostly saved by the government, but without unduly discouraging exploration and development, and the tax structure should be further reformed to enhance economic efficiency (without worsening equity - equity concerns will be addressed in more detail in the forthcoming OECD Labour Market and Social Policy Review).
* There should be a gradual switch to inflation targeting in order for monetary policy to complement fiscal policy and create a sound, price stability oriented macroeconomic policy framework which also allows Russia to resist Dutch Disease pressures.
* The banking system should be made more efficient and less crisis-prone. Making prudential supervision counter-cyclical, facilitating effective competition by allowing further consolidation of the sector and reducing the state’s role as an owner of banks would be important steps to that end.
* Product markets are overly regulated, hampering competition, innovation and productivity growth. Pervasive state involvement should be reduced, barriers to entry eliminated and public administration reform stepped up. Russia could also benefit from lower barriers to foreign direct investment and reduced levels and dispersion of import tariffs.
