By Andreas Schwabe, RBI and Stanislav Murashov Raiffeisenbank in Russia |
Russia entered the year 2020 on a positive note in line with our slightly upbeat global macro-scenario: The Russian economy had gotten accustomed to the sanction regime in place since 2015, substantial new US sanctions have not materialised during 2019 and the economically and fiscally important oil price hovered above USD 50 dollar per barrel in 2019. This oil price was high enough to generate surpluses for the Russian state budget and replenish the National Welfare Fund, the sovereign wealth fund of Russia, given the break-even point in the oil price rule at USD 42. Fiscal and monetary policy have been oriented towards stability for years, resulting in a renewed interest of portfolio investors in the country, budget surpluses and rising fiscal and foreign exchange reserves. Economic growth was still moderate and consumer demand has been feeble for half a decade, thus Russian authorities made tentative steps to refocus from stability-oriented policies to growth policies on the base of the national projects under the President’s May Decree. The newly appointed Prime Minister Mikhail Mishustin was tasked to lift economic growth above 2% per year by implementing these projects more efficiently since in 2019 their realization was much behind the schedule. In sum, Russia’s economy was to some extent well prepared for another economic shock.
And with the arrival of the Coronavirus global pandemic such an external shock happened quicker and in a much different way than we imagined! Moreover, in parallel, the disagreements with the OPEC and especially with Saudi Arabia triggered a price war on oil from March. Thus, Russia is again hit by a double whammy: the challenges posed by the virus and an oil price shock.
Initially it seemed that the health crisis would largely spare Russia. Authorities quickly closed the border with China and initiated virus testing measures. Thus, infection numbers remained low in the first quarter of 2020. However, from April, when the virus was still rampant in Western Europe, Russia and especially its globally connected capital Moscow could not escape the pandemic anymore. As of 26 May, there are 362,342 confirmed COVID-19 cases in Russia, propelling Russia to the third place in the number of global cases globally after the United States and Brazil. The surge in the numbers of confirmed exceeded 10,000 cases per day since the beginning of May and only slowly started to decline from mid-May. The increase was partly due comprehensive virus testing capacities. With almost 9 million tests so far, the number is more than twice the one of Germany. At the same time, the number of fatalities remained with 1% of confirmed cases or overall 3,807 deaths, at a very low level. Other CEE countries, but also Germany or Austria have on average higher mortality rates of around 4%-5% of confirmed cases, which opens the possibility of some statistical issues in Russian data.
The Non-working days regime, a relatively modest Russian version of the economic shutdown, which has been in place since 30 March, is officially over from 12 May, though Russian administrative regions will take decisions on the restrictive measures on their own. A nation-wide 3-stage exit plan has been announced without clear dates and deadlines. At the first stage, outdoor exercising and accompanied walks for kids will be allowed, small non-food stores will be opened. At the second stage, outside walks will be allowed, schools and larger stores will start to reopen. At the third stage, parks and gardens, all stores, hotels and restaurants will open. In Moscow, the self-isolation regime mandated by local authorities will remain largely in place, only industrial and constructions companies were permitted to reopen from 12 May.
We have worsened our outlook for economic growth in Russia and now expect negative GDP growth at 4.9% yoy in 2020, given the longer COVID-19 restrictions in place compared to our initial assumptions and a new OPEC++ agreement, which is decreasing oil exports. Moreover, the high number of cases may prolong the process of lifting the restrictive measures, posing downside risks to our forecast. We estimate that each non-working week will result in a GDP decline by ~0.5 percentage points. The decline in oil production and export is a new negative factor for the Russian economy, dampening growth by up to 1 percentage point. Economic data for the first quarter still came out relatively strong with GDP growing by 1.6% compared to the previous year since restrictive measures became effective only beginning from the end of March. Real disposable income continued to deteriorate, and, in our view, this is mostly an extension due to the conservative fiscal policy of recent years rather than the COVID-19 effect. In April, most key industries (oil & gas, metals & mining, utilities, finances, transportation, public services, healthcare) have continued to function. As in other countries, airlines, tourism, non-food retail, hotels & restaurants, consumer services, etc. will take the hardest blow. Q2 will be the toughest period (-14% in GDP compared to Q2 2019). Afterwards, a recovery in Q3-Q4 is expected on the back of the gradual easing of quarantine measures and an oil price increase.
The announced state support measures are relatively modest (compared to some other countries), estimated at 2.6% GDP. Russian authorities – so far – try to avoid quickly running down the National Welfare Fund standing at around 10% of GDP as of April 2020. Among the latest fiscal measures – tax holidays for small and medium enterprises, state-guaranteed loans for wage payments, one-off benefit for households with families. Moreover, the budget rule protects against large cuts in budget expenditures, which is positive for the economy but implies a fiscal deficit of at least 3% of GDP this year, also depending on the recovery path of the oil price. However, the budget deficit could become even larger, as the economic and social toll on the population is rising. Russia may be forced to follow other countries with larger fiscal packages, also to partly avoid a wave of bankruptcies of the small and medium enterprises.
Regarding monetary policy, the Russian central bank showed a very strong reaction, in line with global and regional institutions. This is different compared to earlier crises as now the Russian central bank (and other Emerging Market central banks) did not hike interest rates to defend the exchange rate and reduce capital flight, but instead reduced the key rate from 6.25 to 5.5% this year and already indicated another bold cut. While we see only a moderate effect of the key rate on the economy, a lower key rate will be favourable for raising money on the local government bond market to partly cover the budget deficit.
Andreas Schwabe, MBA, CFA is Senior Economist for Central and Eastern Europe in the Economics Department at Raiffeisen Bank International in Vienna.
Stanislav Murashov, Macroanalyst, is Executive Vice President at the Research Department at Raiffeisenbank in Russia.
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