Coronavirus pandemic seriously challenges Russian economy

These measures have significantly limited the inflow of foreign capital into the country and complicated the prospects of Russian companies for international co-operation. In recent years, weak dynamics marked almost all key economic parameters – from investments in fixed capital to real disposable income. Due to the neglect of structural reforms, the government has failed to reduce its economic dependence on oil and gas, and volatile conditions of the hydrocarbon market have continued to influence the country’s socio-economic situation.

Profound and diverse

This stagnation has inevitably caused the authorities great concern. President Vladimir Putin has declared the objective on achieving economic growth rates not lower than the global average. The so-called “national projects” – development programmes in various spheres (from environment protection and health care to transport infrastructure) – have become the main instrument for accelerating economic growth. Although most experts have expressed scepticism about the potential impact of these national projects due to their insufficient scope and vague focus, it was planned that over 25 trillion roubles (288 billion euros) would be spent over five years at the expense of budgets at all levels and co-financing from private investors. According to the government’s official forecast, Russian GDP should be increasing at a rate of over three per cent per year as early as 2021.

Having ignited a new global economic crisis, the COVID-19 pandemic seriously undermined these plans. Quite soon it became clear that the previous goals of advanced growth are no longer relevant, the national projects in their original configuration will be impossible and the negative effects on the Russian economy will be profound and diverse. In mid-March, the first measures to limit the spread of the virus included the closure of external borders, a ban on mass gatherings and the suspension of full-time classes in educational institutions. However, despite the restrictions imposed, the rapid spread of coronavirus was not prevented. For this reason, a policy of “non-working days with preservation of wages” was introduced at the end of March, determining the suspension of a number of production facilities, closure of shops (except for grocery stores and pharmacies), as well as a full suspension of urban service sector (with only an online provision). These restrictions were extended until May 8th, with many remaining in place even after the end of that period.

The country has undertaken urgent measures in mobilising resources of the health system to combat the pandemic while at the same time performing broad-based testing. Earlier, however, the infrastructure for combating infectious diseases and the number of specialised doctors was significantly reduced as part of the “optimisation of the health system” programme which further complicated the existing challenges. Nevertheless, by the end of May, 177,000 beds, or approximately 15 per cent of the country’s total capacity, were made operational and reoriented for coronavirus treatment. More than 400,000 physicians and medical staff worked with coronavirus patients with the promise of increased payments.

At the same time, the mortality rate among medical personnel in Russia was the highest in the world, several times higher than in other countries. By mid-June more than six per cent of those who died from coronavirus were medical workers. It may indicate both the underreporting of the mortality statistics and the poor provision of protective equipment for medical personnel.

As the situation differed greatly from region to region, the federal government decided to grant regional authorities discretionary powers in determining necessary quarantine measures. As a result, the country has adopted many simultaneous quarantine regimes and imposed diverse restrictions in different areas of business activity and on the movement of people and goods within the Russian territory. Some federal subjects, including Moscow, have introduced electronic monitoring mechanisms for various categories of citizens as a means of enforcing the “self-isolation” regime and imposed fines for potential violations.

Consequences of the pandemic

Russian economic policies were quite different from other governments. Most countries ensured support for its citizens and businesses in order to mitigate the consequences of the economic slowdown. In Russia, despite the presence of substantial oil and gas savings (as of early April – 165 billion US dollars, or 11.3 per cent of GDP), securing these reserves have become almost the top policy priority.

In the first half of the year, federal budget expenditures increased by 27.9 per cent compared to the same period last year; the total amount of support provided to the economy was no more than three per cent of GDP. These measures are mainly represented by payments to families with children, increase in unemployment benefits, tax holidays for businesses in the affected sectors and the financing of companies that retain employment and pay wages. As a result of a decline in economic activity, price growth slowed down and the Bank of Russia was able to reduce its interest rate.

For Russian businesses, the five-week holiday inevitably meant a cutback in production. In March, a sharp drop in oil prices on the world market augmented the negative effects of the virus and quarantine restrictions. In May, Gazprom’s average export price fell below a profitability level. Russian companies’ compliance with the OPEC+ agreement to reduce oil production caused another blow to the domestic economy which led to a one-third drop in total exports in the first five months of the year. According to The Economist, the rouble represents one of the most undervalued world currencies and, as a result, import volumes have also fallen markedly. External dynamics have had a considerable impact on the federal budget. In contrast to the corresponding period last year, oil and gas revenues (oil production tax and export duties on hydrocarbons and products of their processing) decreased by 35.4 per cent.   

By May, one million more people were unemployed, which accounts for 6.1 per cent of the workforce. In total, almost half of those employed, 35 million people, remain at risk of unemployment. Income levels have also undergone dramatic changes. While one in five reported a significant drop in earnings in the wake of the pandemic, one in ten declared a complete loss of income. Almost 45 per cent of Russians live on less than 15,000 roubles (875 euros) a month, while more than 60 per cent have no savings at all. Should those who do have savings experience a loss of income, they will be supported by savings for no longer than six months. Moreover, more than half of Russian households are paying back at least one loan.

Not only has there been a general decline in household incomes, there has also been a significant reduction in consumer activity. The decline in retail turnover in the first half of the year is 6.4 per cent. The pandemic crisis has had a negative impact on the country’s economic activity: compared to the same period last year, there was a 12 per cent drop in GDP in April, and nearly 11 per cent drop in May (the first six months of the year saw a 4.2 per cent drop).

What’s next?

The first shock of production decline as well as the fall in oil prices has now passed. Even though Russia could possibly avoid a second wave of the virus, and an antiviral vaccine could be developed for widespread use soon, experts are not certain that a swift economic recovery would follow the period of crisis.

Even after the end of the first outbreak, and faced with a sharp increase in uncertainty, businesses will, for some time, opt for more cautious patterns of behaviour. They will cut back on “unnecessary” costs, including investments and issuing redundancies. In order to save on office space, they will request that employees permanently work remotely, opening the way to a vicious circle of reducing production activity. Industries such as airline transport, commercial real estate, tourism, catering and entertainment are those most likely to be affected.

Shortened working hours and possible dismissals will reduce household incomes and increase economic insecurity for those burdened with credit obligations or without full access to social protections. Households will be lowering expenditures and creating rainy day savings. In other words, a return to pre-crisis consumption patterns can be very slow, if they recover at all.

Finally, the situation of the global economy remains far from optimistic. In a number of countries, including the US, Brazil and India, coronavirus infections continue to grow. In the meantime, US-China disagreements are intensifying and threatening to turn into a full-fledged trade war which will undoubtedly have a considerable deterrent effect on global economic development. As a leading supplier of raw material exports, Russia has traditionally been very sensitive to global economic dynamics; it is not interested in stagnation that could lead to a drop in demand and prices for energy resources.

Much will depend on the Russian government’s readiness to support household incomes and commercial activity in the country through accumulated reserves and borrowings. Unfortunately, for the time being, the authorities are determined to economise. In the coming period, cuts to budget expenditures are planned for a number of unprotected areas.

Considering the outcomes of the current year, the Bank of Russia expects a five per cent decline in GDP. Although the recovery of the economy will begin in 2021, it will not be able to compensate for the economic collapse. Next year will see the introduction of a tax on large bank deposits, as well as the transition from a flat scale of income tax towards a more progressive system. The decrease in inflation and interest rates does not seem likely to stimulate investment in an economy with high-level risks. It is estimated that real unemployment may become more visible and double the current levels to more than 10 million people. Heavier international sanctions against Russia, at the moment, seem far more likely than their easing.

Therefore, a combination of socio-economic factors not only indicates that the impact of the coronavirus crisis on the country’s economy will be profound, but that the recovery might take longer than it appears today. In order to overcome the long-term and painful challenges ahead, it is crucial to revise the state’s goals and priorities, implement deep structural reforms in many areas of life and normalise relations with the international community.

Translated by Anastasiia Starchenko

Oleg Buklemishev is the director of the Center for Economic Policy Research within the faculty of economics at Moscow State University.

coronavirus, COVID-19, economy, Russia