The key drivers affecting Russia’s economic performance in the near term will be the pace of global economic recovery and the concomitant growth in oil prices. Other external factors that may affect Russia’s outlook include the possibility of a moderation in protectionist pressures, as well as new rounds of stimuli, sanctions scenarios, further progression of the pandemic and vaccine development, writes Valdai Club Programme Director Yaroslav Lissovolik.
The year of the pandemic proved to be an unprecedented test for the global economic system, with the decline in global GDP significantly exceeding the declines witnessed during the 2008 financial crisis. Russia’s economy during the past crisis episodes typically exhibited greater declines in economic activity on the back of the added effects of capital outflows as well as lower oil prices. During this crisis year however, Russia’s GDP decline was broadly in line with the global trends, which was due in part to the relatively greater emphasis placed in economic policy on securing macroeconomic stability and building sufficient reserves ahead of the crisis. A relatively low share of services and small businesses in GDP as well as a greater role of the industrial sector also played a role in limiting the scale of the global decline that was largely concentrated in the services/SME segment.
Indeed, Russia’s anti-crisis effort in 2020 was different from earlier such undertakings in 2008-2009. In particular, while the social sphere received a significant part of the support through subsidized loans and higher social transfers, there was a more concerted effort this time around to elevate potential growth via extending support to sectors that are linked with the development of Russia’s “human capital”, including healthcare, education and IT. There was also significant attention accorded to supporting those sectors of the economy that accounted for an appreciable share of employment.
Notwithstanding the severity of the economic decline and the relatively moderate scale of the anti-crisis measures, Russia is set to significantly reduce the ratio of state expenditures to GDP – by nearly 3 percentage points of GDP in 2021. This in turn may impart negative effects on Russia’s economic recovery, with the quality of the sovereign balance sheet allowing for a smoother and more extended period of stimulus withdrawal. One of the implications of the economic downturn was the redistribution of funding within the framework of Russia’s National Projects from infrastructure to the social sphere – according to the revisions introduced earlier in 2020 the allocations for infrastructure development are to be reduced compared to earlier projections by more than 20%.
In the monetary sphere the CBR reacted to the crisis via emphatic interest rate reductions – by 200 basis points so far this year. Inflation in Russia reached 4.4% in November 2020 (0.7% on a month-on-month basis), with most of the acceleration coming on the back of the rouble weakness in the preceding months. The levels of inflation registered in 2020 exceed the 4% target of the CBR as well as the upper bound of its forecast. While the elevated levels of inflation may be seen as temporary and likely to be reversed in Q1 2021, rising inflationary expectations and external vulnerabilities are likely to keep a lid on further activism of the CBR in reducing rates in the near term. A lot will also depend on the further dynamics in the rouble, which exhibited sizeable swings in the course of 2020.
The rouble was under pressure particularly throughout most of the second half of 2020 from worsening geopolitics. During the peak of the pandemic in Q2 2020 the rouble exhibited relative stability, which is likely explained largely by the restrictive/quarantine measures (both in Russia and globally) that resulted in lower capital outflows, lower imports of goods and services as well as lower remittances from Russia to the near abroad. The latter was due to a significant decline in migrant inflows into Russia as the pandemic resulted in severe restrictions on travel within Russia and abroad. Later in the course of the year as these crisis-related restrictions were relaxed, the pressure on the rouble to depreciate mounted, fueled by geopolitical factors.
Another important element in the outlook for Russia’s economy in the near term will be the global environmental agenda, including the active steps undertaken by advanced economies in the area of promoting a “green recovery” from the current pandemic. While Europe has championed the cause of advancing the creation of climate-neutral economy by 2050, the US may further reinforce the global momentum towards green development as the new US administration under Biden is likely to prioritize environmental policies. And while this challenge is still largely seen in Russia as a longer-term challenge, its impact on Russia’s economy may prove to be more swift than widely anticipated.
All in all, while the year 2020 presented a major challenge to the Russian economy, its ex-ante preparedness to external shocks served to attenuate the adverse effects of the global economic slowdown. One of the challenges in the post-pandemic period will be to overcome the “defensive mode” in economic policy and to switch gears into prioritizing faster economic growth. So far, the intensity of external shocks appears to have firmly rendered the maintenance of macroeconomic stability and increasing reserves the overriding economic policy objective.