Global Corporations and Economy
Russia’s Economic Outlook: Risks Prevail Over Drivers

Geopolitical risks coupled with a second wave of the pandemic across the globe, waning activism from the largest economies in launching anti-crisis measures do not seem to be countered sufficiently by forceful drivers that would be supportive for the markets, writes Valdai Club Programme Director Yaroslav Lissovolik.

On the global scene, the support for the markets has been undermined by waning anti-crisis stimuli from the main centres of the world economy. In the case of the US the current political scene is making it increasingly difficult for the Democrats and Republicans to agree on a new stimulus package. In the case of China, the rate of recovery throughout the past months as well as the successful containment of the spreading of the pandemic limit the need for new anti-crisis measures.

Across all G20 countries Russia together with Saudi Arabia has one of the lowest levels of anti-crisis fiscal stimuli of around 4% of GDP. In September the government approved the plan for the recovery of Russia’s economy, which envisages the allocation of Rb 5 trn in 2020-2021 for anti-crisis measures. The plan targets the recovery in employment and income levels, with priorities accorded to housing construction, education and active labour market policies, export-promotion and import-substitution.

The limited scale of the anti-crisis stimulus further underscores the overriding priority accorded by the Russian authorities to securing macroeconomic stability and maximizing reserves in the face of external adversity.

This prioritisation of securing reserves even possibly at the expense of cutting ambitions on the growth front is further evinced by recent tax initiatives from the government, which entail notable increase in the taxation of the natural resources sector (oil extraction and metals mining sectors) as well as the elevation of the income tax rate for annual incomes of more than Rb 5 mn per annum from 13% to 15%. And while in the corporate space the effect of the tax measures on natural resources producers will in part be compensated by rouble depreciation as well as the price rise in some of the segments of the commodity market, the effect of higher taxes, pandemic-related effects and rouble weakness on consumer sentiment could prove palpable.

The drivers for Russia’s growth, most notably consumption and investment, face headwinds and uncertainties in the post-Covid setting. On the investment front, one of the uncertainties has to do with the likely re-formatting of the national projects, which were to serve as the main platform for infrastructure and industrial development in which private sector was to co-finance projects with the funding from the federal and regional budgets. On the consumer side, the detrimental effects on consumer confidence arising from the pandemic may be compounded by adverse demographics as well as changing consumption patterns. The changes in consumer preferences are increasingly driven by the younger generation.

The younger generation is also driving sizeable changes in Russia’s financial markets, in particular the greater prominence of retail investors in Russia’s stock market. Against the backdrop of falling deposit rates (on the back of low inflation and reductions in the CBR’s key rate) there is the inflow of the funds from Russia’s retail investors into the stock market. According to NAUFOR nearly 80% of all retail investors with individual investment accounts are younger than 45 years. The share of retail investors aged between 18 and 25 years is 18%. The inflow of funds of retail investors into Russia’s financial markets in the first half of this year amounted to 1,5 trn roubles, with a rising propensity to allocate investments into the stock market. The latter was bolstered in part by the launching of the trading of US stocks in the Moscow exchange in August 2020.

Overall, the outlook for the remainder of the year is far from crystal-clear – geopolitical risks coupled with a second wave of the pandemic across the globe, waning activism from the largest economies in launching anti-crisis measures do not seem to be countered sufficiently by forceful drivers that would be supportive for the markets. A lot is riding until the year-end on the timing of the dissipation of geopolitical uncertainty. Recent events in the world economy suggest that optimism may be hard to come by in the near term, at least until the year 2020 finally draws to a close.

Global Corporations and Economy
The Macro Dilemmas of Dealing with the Pandemic
Yaroslav Lissovolik
Russia’s recovery pattern may indeed prove to be more extended in time and less emphatic than in largest economies of the world, but it may turn out to be more sustainable in case the macroeconomic stability is firmly secured, writes Yaroslav Lissovolik, Programme Director at the Valdai Discussion Club.
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