MOSCOW - Russia's economy has improved significantly since the country's 1998 financial collapse, but poverty remains a key problem and the government faces serious challenges in implementing further economic reforms, according to an OECD report released Tuesday.

The OECD's last report on Russia dated from 1999-2001 and came on the heels of the 1998 financial crisis in which the ruble lost three-fourths of its value, consumer prices soared and Russia defaulted on dlrs 40 billion in Soviet-era debts, seriously damaging foreign investor confidence.

Since then, the OECD said in its new report "the Russian economy has experienced a number of favorable trends and developments. Output, employment, consumption and investment have grown significantly."

Recent growth, the report said, has reversed years of economic decline in Russia and brought GDP in Russia almost back to the level of 1993.

The report noted that the Russian government succeeded in eliminating chronic budget deficits and that political stability and cooperation between the federal government, parliament, regional and local governments "has created greater opportunities" to implement key economic policies and reforms.

Strengthening of oil and gas prices on world markets has contributed to Russia's economic success by providing the federal government with surplus resources. However, the boost from gas and oil revenues has its downside, making the Russian economy vulnerable to fluctuations in world prices, which have been declining.

The Organization for Economic Cooperation and Development is based in Paris and is made up of 30 of the world's richest nations. Its reports are considered an important barometer of a country's economic health.

The OECD said short-term prospects for Russia's economy appeared favorable provided world prices for oil and gas do not deteriorate. However, it added that medium- and long-term prospects depend on just how well Russia continues to reform and whether it can establish a friendly climate for business.

Major challenges lie ahead and serious problems remain, the OECD said.

Poverty "remains a key problem in Russia, as witnessed by continuing disturbing trends in some demographic and health statistics," the report said. Estimates put the number of Russians who live below the official poverty line at between one-fourth and one-third of the population.

Household income remained lower in 2001 than before the 1998 crisis, the report said.

The business environment is still considered difficult, reflected in continuing large outflows of capital. Russian entrepreneurs must struggle against pressure to give bribes, as well as harassment and extortion by state officials, the report said.

While growth was positive and unemployment fell over the past two years, consumer price inflation has exceeded targeted rates, the report said.

Russia has made steps to implement structural reform, maintaining fiscal discipline, but it still faces challenges in reforming the energy sector and could face "acute" electricity shortages in the next five years due to deteriorating equipment.

The report concluded by identifying three problematic areas, including small business development, regulation and reform of the energy sector and federal fiscal policy.