World Economy

Russia will recover, but it needs deep reforms: IMF

Russia will slowly recover in the coming year but cheap oil and sanctions continue to weigh on the country's economic outlook along with Moscow's "slow progress" in implementing structural reforms, the International Monetary Fund has warned.

Russia's economy is expected to contract by 3.4 percent in 2015, "although growth should return in 2016," the Fund said. The country's recovery next year would be supported by the ruble's more competitive exchange rate, increasing external demand and normalization of domestic financial conditions, it said.

"However, investment and consumption are likely to remain sluggish and the effects of sanctions in terms of external access to financial markets and new investment technology will linger. IMF staff expect weak GDP growth of around 1.5 percent in the medium term," the report noted.

Tourists explore Red Square in front of St. Basil's Cathedral in Moscow.
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"The external shocks, added to pre-existing structural weaknesses, are certainly weighing on Russia's growth prospects. Maintaining a prudent fiscal policy and reviving slow-moving structural reforms could help unlock Russia's growth potential," said Ernesto Ramirez Rigo, IMF Mission Chief for Russia.

The comments from the IMF come as Russia continues to remain in the economic wilderness, thanks in no small part to lower oil prices – which have more than halved from a high of $114 a barrel last June – and international sanctions placed on the country by western nations last March due to Russia's controversial annexation of Crimea and role in a pro-Russian uprising in Ukraine, which it denies.

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Subsequently, Russia's once-booming economy has been struggling and its currency, the ruble, weakened dramatically against the dollar, in turn prompting soaring inflation, the rate of which currently stands at 15.3 percent in June.

'Slow-moving reforms'

The IMF believed that "prolonged sanctions may compound already declining productivity growth" and estimated that the cumulative output loss could amount to 9 percent of gross domestic product (GDP) over the medium term. In order to mitigate the effect of sanctions and lower oil prices, on which Russia relies for much of its revenues, it needed to implement reforms, it urged.

"While countries around the world have suffered a drop in growth relative to their pre-crisis performance, Russia's reversal of fortunes stands out as being particularly pronounced."

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"Slow-moving structural reforms, sluggish investment and adverse population dynamics are all part of the picture. In particular, the state continues to leave a large footprint in the economy, and lack of competition and concentration in a number of sectors (among other factors), have contributed to low productivity growth."

There is an array of reforms that could help boost investment and trade, the IMF said.

"Strengthening governance and the protection of property rights, as well as cutting regulatory red tape would make a difference, as would better customs administration and reduced trade barriers. These measures could increase competition in domestic markets. Public investment could also be made more transparent and efficient."

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld