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  Assessment and recommendations
  Real GDP growth during 1999-2005 averaged 6.7%. Initially driven by a rebound from the 1998 financial crisis, recent growth has been underpinned by large terms-of-trade gains that have translated, on the demand side, into a surge in domestic consumption. However, booming consumption has coincided with weakening export performance and surging imports. Investment is growing strongly but investment rates remain relatively low and will need to rise substantially if Russia is to sustain strong growth over the longer term. Already, there are indications that growth in many sectors is supply-constrained, and growth since 2003 has been driven increasingly by non-tradables. The growth of oil production, which was the major driver of growth during 2000-03, has slowed markedly.
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  Sustaining growth in the Russian Federation: key challenges
  The Russian economy continues to grow strongly, buoyed by rising terms of trade, which, in turn, are supporting a boom in domestic consumption. This chapter analyses the main challenges involved in sustaining strong growth over the long term. It argues that growth since 1999 has been largely dependent on transitory factors and that the transition to self-sustaining, investment- and innovation-led growth will require both continued sound macroeconomic management and a range of structural reforms aimed at improving framework conditions for business. The chapter assesses recent macroeconomic and structural policy, and introduces the chapters that address the main challenges Russia faces with respect to macroeconomic management (Chapter 2), public administration reform (Chapter 3), innovation policy (Chapter 4) and healthcare reform (Chapter 5).
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  Ensuring sound macroeconomic management
  This chapter addresses the challenge that the adjustment to sustained high oil prices poses for macroeconomic management. It first examines the impact of rising terms of trade on the domestic economy, particularly with respect to exchange-rate appreciation, competitiveness and inflation. It then considers the role of monetary and fiscal policies in ensuring a smooth adjustment to the higher terms of trade. The chapter argues that fiscal policy should be the primary instrument for tackling this challenge. It therefore focuses on the potential role of a fiscal rule in insulating the economy and the budget from commodity-price fluctuations, and on the management of windfall oil and gas revenues accumulated in the fiscal Stabilisation Fund.
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  Improving the quality of public administration
  The inefficiency, corruption and lack of accountability that afflict public administration in Russia impose substantial direct costs on both entrepreneurs and ordinary citizens. This chapter examines the major weaknesses of Russia’s public administration and assesses the government’s recently revised programme of administrative reform. It lays particular stress on the relationship between public bureaucracies and the larger institutional environment within which they operate, as well as on the need for far greater transparency of public bodies and stronger non-judicial means of redress for citizens wishing to challenge bureaucratic decisions. Many of the problems of Russia’s public administration are aggravated by the fact that the Russian state often tries to do too much: the chapter therefore explores the link between administrative reform and the scope of state ownership and regulation.
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  Raising the effectiveness of innovation policy
  This chapter examines the potential role of innovation policy in enhancing long-term productivity growth in Russia. It begins by exploring the role of framework conditions for business in encouraging innovative activities, particularly with respect to intellectual property rights and competition. Realising Russia’s innovation potential will also require reform of the large public science sector. This raises issues pertaining to the organisation and financing of public research bodies and, in particular, to the incentives and opportunities they face in commercialising the results of their research. Finally, the chapter looks at the potential role of direct interventions, such as special economic zones and technoparks, as well as the scope for improving the tax regime for private-sector R&D.
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  Reforming healthcare
  This chapter examines the prospects for reform of Russia’s healthcare system. It begins by exploring a number of fundamental imbalances that characterise the current half-reformed system of healthcare provision before going on to assess the government’s plans for going ahead with healthcare reform over the medium term. The challenges it faces include strengthening primary care provision and reducing the current over-reliance on tertiary care; restructuring the incentives facing healthcare providers; and completing the reform of the system of mandatory medical insurance.
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