The recovery year

‘Meduza’ answers key questions about what awaits the Russian economy in 2021

Thanks to the peculiarities of its structure, the Russian economy has been riding out the coronavirus pandemic more easily than many others. That said, Russia now faces a longer and more difficult recovery than many other countries around the world. And this will likely be felt already in the coming year. Meduza looks back on how the “coronavirus crisis” has affected the Russian economy and breaks down what might happen in the months ahead, as well as the government’s plans for handling the situation.

How did the pandemic impact the Russian economy?

A not-so-deep recession

The economic “coronavirus crisis” hasn’t hit Russia as hard as the majority of developed and developing countries. In fact, the decline in the country’s economy will be less than the world average by the end of the year. This is due to the fact that in Russia, the consumer services sector — the one the pandemic has hit hardest — is smaller than in most countries. Moreover, the authorities took measures that improved the situation: without the government’s soft budgetary policy and the Central Bank’s monetary policy the recession would have been much deeper.

The International Monetary Fund (IMF) is predicting a 4.1 percent decrease in Russia’s GDP by the end of the year; similarly, the World Bank is forecasting a 4 percent drop. According to the IMF’s predictions, the world economy will decrease by 5.2 percent. The U.S. is anticipating a 4.3 percent decline, while Germany and the UK are facing 6 percent and 9.8 percent declines, respectively. India, which has been one of the engines of global growth in recent years, will see its economy shrink by 10.3 percent. That said, there are, of course, exceptions. The Chinese economy, which has suffered less during the coronavirus epidemic than most other countries around the world, will grow — but “only” by 1.9 percent; China hasn’t seen such low growth since the 1970s.

Record fall in real incomes, but no increase in poverty

At the same time, the Russian population’s real disposable income fell by a record-breaking 13.1 percent during the first three quarters of 2020. And the fourth quarter, with its relatively high inflation, is unlikely to improve the situation. By the new year, the average Russian family’s income will drop to the level seen in 2013.

That said, according to World Bank’s calculations, while the incomes of single-person households and households consisting of couples with one child fell sharply, families with at latest two children, as well as retirees, saw their incomes increase as a result of the social benefits handed out during the crisis. The authorities decided that it was better to send support payments to citizens through proven channels — child benefits and one-time payments to pensioners — than to attempt to identify and support all of those affected by the crisis (in all likelihood, conditions in Russia would have made it simply impossible to do this quickly).

Such social support resulted in a decrease in poverty levels compared to the second and third quarters of 2019, the World Bank calculated. However, this is a temporary effect and without urgent support measures in 2021, Russians will begin to grow poorer once again.

A slow and difficult recovery

According to the IMF’s forecasts, Russia’s GDP will only grow by 2.5 percent this year (in the event that the epidemic is over by spring); the World Bank is predicting 2.6 percent recovery growth in 2021. In any cases, the Russian economy won’t make back its losses from the coronavirus crisis before 2022.

At this point, the world will be experiencing turbulent recovery growth. Developing economies as a whole will grow by 8 percent (according to predictions from the IMF); Russia will be one of the outliers (among large developing economies, only Belarus’s recovery will be slower). All of the leading developed economies will also recover from the crisis faster than Russia.

There are two reasons for this:

1. In Russia in 2020, government support for the economy and population affected by the pandemic was lower than in developed countries, and in 2021 it will decline even further.
2. Long-standing economic problems will hamper rapid recovery: its growth potential has long been less than that of most developing and developed countries.

As a result, even in the best case scenario (if the pandemic is over by the spring and the West refrains from tightening sanctions against Moscow too much) Russia will lag even further behind most of the world’s economies.

At the same time, there’s the risk that even this relatively positive scenario won’t materialize. The fall coronavirus wave has already slowed Russia’s exit from the crisis even though the authorities decided not to introduce harsh restrictions like those seen during the spring lockdown. If vaccinating the population en masse doesn’t offer a quick effect (not to mention the fact that millions of people will have to be immunized successfully in the coming months for this to really influence the situation), then exiting the crisis will be postponed for another one or two quarters.

What lies ahead in 2021?

Oil prices will remain unpredictable

All of the baseline forecasts suggest that oil prices will rise slowly in the coming years, following an increase in demand for fuel as the global economy recovers. However, this scenario isn’t a sure thing. Today, the relative stability in the oil market is provided by a record reduction in supply. And this isn’t so much a natural process as the result of an agreement reached by the world’s largest fuel exporters — the OPEC countries, led by Saudi Arabia, along with Russia and other independent suppliers — in the spring of 2020.

The OPEC+ deal

The OPEC+ deal is an agreement on oil production between the 13 members of the Organization of the Petroleum Exporting Countries (OPEC, whose leader and main exporter is Saudi Arabia) and major oil producers that don’t belong to this group — led by Russia. Notably, OPEC+ doesn’t include the world’s largest oil producer in recent years — the United States — and several other oil-producing countries.

In April 2020, negotiations involving the U.S. and the OPEC+ countries resulted in an agreement on record oil production cuts (11 million barrels per day) designed to prop up world oil prices, which had collapsed due to the coronavirus pandemic. The deal was set to remain in place until 2021.

The deal helped bring oil prices back up: during the peak of the crisis in March 2020, a barrel of Urals oil cost $17, but by the end of December prices had risen to more than $50 per barrel. This is above the $42 mark that served as the basis for Russia’s budget, though still less than before the pandemic when oil prices exceeded $60 per barrel. Deputy Prime Minister Alexander Novak recently said that $45–$55 is an ideal price for Russia.

The rise in prices at the end of the year didn’t make the Russian budget deficit-free: the fact is that under the terms of the OPEC+ deal, Russia is now selling less oil than before the pandemic. The country was producing 11.3 million barrels daily in March, but less than 9 million per day in July. And according to the latest version of the OPEC+ deal, production won’t recover in full in early 2021 either.

The OPEC+ deal was supposed to end at the beginning of 2021, but the coronavirus epidemic hasn’t ended, which doesn’t allow for the quick resumption of full-fledged production. The agreement has been extended several times, so that its main participants increase production gradually. At the same time, they’re all complaining that the smaller players are violating the agreement constantly and supplying more oil than they promised, making the agreement’s renewal more difficult each time.

New waves of the pandemic aren’t allowing demand to recover either, which limits the growth of oil prices. Everyone understands that the OPEC+ deal can’t last forever: the parties are already suffering great losses not so much because of the fall in prices, but because they’ve been forced to sell much less oil than a year ago. So the entire structure of the agreement could fall apart at any moment.

A possible rise in oil prices after the end of the pandemic is more likely a destabilizing factor. In other words, you can’t predict the balance of supply and demand — and hence, the price of oil — in the years to come. For Russia, low oil prices mean a fall in the ruble’s value, rising inflation, and a budget deficit.

‘Geopolitical complications’

Following Donald Trump’s defeat in the U.S. presidential elections, Moscow faces an increased risk of more serious sanctions (including sanctions on Russian debt).

So far, all sanctions have targeted individuals — persons with whom Americans, as well as representatives of other countries, have been forbidden to do business (under threat of losing the opportunity to do business in the U.S.) — or organizations. There’s also a separate type of sanctions concerning military and dual-use goods considered “sensitive technologies” — an effective ban on supplying various pieces of equipment and components to Russia. This has done great damage to the Russian government’s military and civilian programs, forcing the authorities to undertake an “import substitution” program, which is proceeding with varying degrees of success.

The purchase of Russian debt by foreign investors has thus far been subject to few sanctions: the U.S. has banned Americans from buying new issues of foreign debt securities, but hasn’t interfered with the placement of securities in rubles, trading on the secondary market, and the rights of investors from other countries in any way. And such restrictions can’t be taken lightly: this “powerful tool” affects the interests of investors worth billions of dollars.

The Russian authorities consider new sanctions against the country’s debt instruments unlikely, but given the situation surrounding the poisoning of opposition figure Alexey Navalny and recent cyberattacks on the U.S. government, they can’t be ruled out completely. For Russia, this is a big risk: new sanctions could lead to an increase in the withdrawal of capital from the country and, as a result, trigger a renewed fall of the ruble.

What’s the government’s plan?

Stability over rapid recovery

The Russian government’s decision not to spend money on supporting recovery growth will undoubtedly affect the pace of recovery. Such spending would contradict the government’s policy from previous years, which prioritizes economic stability above all else; accumulating reserves and only spending them on large-scale “national projects,” which, according to the government’s plan, are supposed to radically alter the country’s economy. Spending on the national projects is effectively frozen at the moment due to the crisis, but the government is continuing to accumulate reserves to implement them in the future.

The crisis has also disrupted macroeconomic stability. In the spring and summer, the government had to spend massive amounts of money on combating the coronavirus epidemic, supporting the economy, and public demand. The additional spending (2.5–3.5 percent of GDP, according to various calculations) was less than that of rich and developed countries, but rather significant among developing economies. In combination with the fall in budget revenues due to the collapse of oil prices and the slowdown of domestic production, this created a large budget shortfall; in 2019, the consolidated budget had a surplus of 1.9 percent — in 2020, the deficit was 4.6 percent.

In the summer, the authorities decided to urgently carry out “budgetary consolidation,” reducing the budget deficit by cutting spending and — to a lesser extent — raising taxes. Economists pointed out immediately that a drastic spending cut will lead to a sharp slowdown in recovery and, possibly, even a renewed crisis.

In the end, the draft crisis budget for 2021–2023 contained the following amendments:

• The budget cuts for 2021 (in comparison to the real, increased spending due to the crisis in 2020) will be smaller than anticipated — just over a trillion rubles (about $13.4 billion). In the summer, the expected cuts totaled slightly more than two trillion rubles (about $26.8 billion).
• This will be enabled by a temporary change to the budget rule, namely, the maximum amount of borrowing required to finance the budget deficit.
• The budget’s structure is also set to change: social items will be financed almost as abundantly as at the height of the coronavirus epidemic (which will, incidentally, be very useful to the authorities during a State Duma election year). Many other items — for example, support for the economy — will still face cuts.
• Budgetary “consolidation” will continue in 2022–2023 — until the deficit drops from the current crisis level, 4.4 percent of GDP, to 1 percent of GDP.
• Russia’s debt level will increase sharply — from 12 percent of GDP in 2019 to more than 21 percent of GDP in 2023. However, the country’s debt to GDP ratio will remain one of the lowest in the world.
• According to IMF experts, in 2021–2022 Russia is expected to have deeper budgetary consolidation than all major developing countries.

The Russian government’s anti-crisis measures clearly differ from those pursued by Western countries and many developing countries, where governments are creating new debts to expand support for the economy. In other words, future generations will pay the price for their country’s quick exit from the current crisis.

This raises the question of who will pay for Russia’s “way out.” Some believe that this will be up to the government; that economic conditions will force the authorities to increase the efficiency of budgetary expenditures. On the other hand, many experts maintain that businesses and part of the population will pay (and are already paying) the price.

Meanwhile, Accounts Chamber Chairman Alexey Kudrin suggests another possibility: that the regions (alongside enterprises) may be among the main victims of the crisis. While the federal budget can increase borrowing painlessly, the regions have no such possibility. And while at the height of the crisis the federal government provided the regions with extensive assistance (though it was distributed unevenly with many regions receiving much more money than others for some reason), in 2021, judging by the budget law, the regions will have to find the money to get themselves out of the crisis on their own.

According to Kudrin (and a number of other economists), the government could further relax the budget rule and spend much more money to support citizens and the economy in 2021. But instead, the authorities are planning to continue saving for a future economic breakthrough: the National Welfare Fund (whose “surplus” is meant to finance the breakthrough national projects) grew in volume in 2020 — and that’s in spite of the crisis.

What will be the result?

An economic breakthrough or stagnation

During a press conference in December, Putin said that Russia has become less dependent on fuel exports. This is true, but only in part: thanks to strict budgetary policy and the floating ruble exchange rate, and less fluctuations in oil prices than in 2014–2016 affecting budget stability. However, as the new crisis has shown, Russia hasn’t eliminated this dependence either. In terms of the structure of GDP and exports, Russia’s reliance on exporting raw materials remains far too high.

And the current crisis can only make the situation worse. If fuel producers have suffered during the crisis (more precisely, from forced production cuts), then they will be able to catch up after the world economy recovers. Meanwhile, metal producers, for example, have only benefited (due to the global rise in prices for their products).

The most affected industries are those not related to raw materials: services (tourism, hospitality, restaurants, and entertainment), manufacturing, and the informal sector (which basically comprises different kinds of services). Obviously, after the crisis, the situation there won’t change on its own.

Meanwhile, the government is predicting that “good times” will follow the “recovery year” (2021); that the economy will grow more than 3 percent per year for the first time since the early 2010s. This will be achieved primarily with the help of state investment — through the implementation of the national projects that the authorities continue saving for even amid the crisis. Spending on the national projects is expected to grow to 12 percent of all budgetary expenditures in 2023 (9 percent of spending was allocated for these purposes in 2019, but in actual fact much less was spent).

Economists — including Accounts Chamber Chairman Alexey Kudrin — doubt that these goals can be achieved. For many years already Russia has suffered from low potential growth; much lower than it ought to be for a country with its level of GDP per capita. After the short (and not so strong) recovery growth of 2021, when enterprises will simply startback production put on hold due to the coronavirus epidemic, the problem of low potential growth will only escalate. In 2022–2023, potential growth is unlikely to exceed 1.6 percent, according to the IMF. And in all likelihood, the national projects will not help: the government implementing them will only increase the state’s share in the economy, and competition will decrease. At the same time, Russia will remain in (partially forced, partially voluntary) isolation, which won’t allow for increased competition and cooperation with foreign manufacturers — this will also limit potential growth.

According to the World Bank, the only way to increase potential growth is to open the Russian economy for competition with foreign investors and begin integrating Russian enterprises into international production chains. But this would likely require radical reforms to the judicial system and other measures to improve the investment climate.

What else might happen?

The ‘epidemic’ crisis may take a financial turn

Russia’s Central Bank doesn’t see great risks to the stability of banks, regardless of the fact that many of the enterprises that they’ve loaned money to are suffering due to the coronavirus crisis. At the same time, the Central Bank has even lowered some reserve requirements for banking institutions (so that banks don’t lose stability in the event of massive defaults on loans). This measure improved the capital situation of the banks themselves.

The IMF and the World Bank believe that there is some risk of a banking and financial crisis in 2021, when the easing of reserve requirements for banks, as well as the deferred tax payments and other support measures for businesses, will come to an end. In the first nine months of 2020, large- and medium-sized enterprises in Russia saw a 40 percent decrease in profits compared to the same period last year, and losses were recorded across entire sectors (in particular, in the hotel and tourism business, and in passenger transportation). And it’s quite possible that many enterprises that managed to make it through 2020 thanks to relief and assistance from the government will be massively unable to service their debts.

Text by Dmitry Kuznets

Translated and abridged by Eilish Hart