Russia's economy is stagnating.Seasonally adjusted growth for the first two quarters of2014 was near zero. Consumer and business sentiments werealready weak in 2013 due to lingering structural problemsand contributed to the wait-and-see attitudes of householdsand companies. Heightened market volatility and policyuncertainty due to geopolitical tensions during the firsthalf of this year exacerbated this confidence crisis. TheRussian economy needed to internalize several rounds ofsanctions, countersanctions and measures to stabilize theeconomy; this environment of higher risk lowered domesticdemand. While the macroeconomic stabilization measures weretimely and successful, medium term policy objectives arestill being defined. This continued policy uncertainty aboutthe economic course of the country is casting a shadow onRussia's medium-term prospects. Prospects for furtherpoverty reduction and shared prosperity are limited. In thepast, rising wages and pension transfers allowed Russia toreduce poverty significantly and to expand the ranks of themiddle-class. Unless structural reforms to expand theeconomy s potential are pursued, low investment makes itless likely that plentiful well-paying jobs will be created.High inflation, moreover, will slow real income growth andhurt consumption growth, dimming the likelihood for furtherpoverty reduction and limiting the ability of the bottom 40percent of the population to share in prosperity.
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