Russia must transform its lumbering bureaucracy and stamp out corruption if it is to function as an effective state, an OECD report has warned.
Russia needs to improve the transparency of state institutions
The Paris-based economic club said Russian administrative "weakness" was leaving too much power in the hands of government officials.
The OECD called on Russia to end heavy-handed state intervention in the economy and refocus its market reforms.
The strongly-worded report comes ahead of July's G8 summit in Gleneagles.
Despite being a major oil and gas producer, Russian has failed to capitalise on record oil prices.
The country recently reduced its domestic growth forecast for 2005 to 5.8%.
Britain is due to hand over to Russia the rotating presidency of the G8 group of leading industrialised nations at the end of the year.
The OECD praised Russia for reforms already undertaken, but said the actions of state authorities often fell short of the government's own reform goals.
It said far-reaching state reform was necessary for Russia's long-term growth.
"The patronage dispensed by individual officials - particularly those charged with managing state property or large financial flows - can be enormous," the report said.
"The weakness of the administrative machinery makes it easy for officials to use that power to pursue narrow or political ends."
The OECD report described the state's behaviour as "more interventionist, less rule-governed and sometimes predatory".
Critics say the government waged a political campaign against Yukos
It pointed to the campaign waged by the Russian government against oil giant Yukos - and its founder Mikhail Khodorkovsky - over unpaid taxes. Yukos' main production unit was eventually transferred to a state-run company, while Mr Khodorkovsky was sentenced to nine years in jail at the end of May.
The report said new regulatory bodies needed to be created, while existing regulatory agencies needed greater independence. It said strengthening the rule of law and increasing the transparency of state institutions were key challenges facing the country.
The OECD also said Russia should encourage greater and more effective competition in the country's natural gas, electricity, rail and banking sectors.
"The absence of real progress on gas sector reforms must surely be counted as one of the government's major policy failures," the report said.