_ Yaroslav Lissovolik, Senior Managing Director — Head of Research at Sberbank Investment Research (CIB). Moscow, 17. August 2020.
Russia’s recovery pattern may indeed prove to be more extended in time and less emphatic than in the largest economies of the world, but it may turn out to be more sustainable in case the macroeconomic stability is firmly secured.
While the current crisis has engendered sizeable transformation in the global economy – from the composition of demand to supply-side changes in production chains and delivery modes – the markets appear to have weathered this storm far better than in the 2008-2009 crisis as the S&P500 is near its all-time highs. This in turn is largely due to the unprecedented stimulus measures undertaken across the world economy, with the largest developed economies putting together notably higher stimulus packages compared to large emerging markets, including Russia.
At the global level, the two key factors affecting the markets are concerns about the second wave of the pandemic and the countervailing rhetoric from the regulators regarding additional stimulus packages. In view of the large-scale stimulus packages delivered by regulators in the US, the EU and China, the recovery path of the global economy is likely to be V-shaped, with lingering question marks, however, over the sustainability of further recovery given the risks of new waves of the pandemic, the rise in macroeconomic imbalances (particularly debt levels) and the ongoing political and trade tensions between China and the US. A possible negative scenario in the second half of this year may involve a combination of renewed waves of the pandemic with lower scope for stimulus due to the exhaustion of reserves, high debt levels or political constraints associated with the onset of the electoral cycle (the US may be a case in point).
With respect to Russia’s economy, one of the questions frequently raised over the course of the past several months has been the relatively low size of the stimulus package in Russia as compared with those observed in the US, China and other largest economies. This relative caution exhibited by the Russian authorities may be a function of several factors. Firstly, the prevalence of external drivers in Russia’s growth dynamics, most notably through such channels as oil prices that in turn are quite sensitive to the scale of the stimulus in the world’s largest economies. As was the case in the 2008-2009 Russia’s recovery may be seen as being largely a function of the scale of the stimulus in the US and China, with domestic policy measures largely geared towards attenuating the negative effects of the economic decline on the most vulnerable segments of the population and the corporate sector.
Another possible reason for the reserved activism in undertaking the stimulus in Russia may be a different “utility function”/preferences of the authorities with respect to spending reserves. Indeed, given the scale of uncertainty, including regarding the “second wave” of the pandemic, excessive use of reserves early on may be viewed as undermining the resilience of the economy in later periods. Related to this may the difference in preferences between macroeconomic stability and growth, with the former being accorded greater priority in Russia in the pre-pandemic period in the face of external headwinds associated with sanctions and high dependency on oil prices.
In fact, it is quite telling that despite the onset of the pandemic, the scale of the economic decline and the vote on constitutional amendments held on July 1 the scale of the stimulus was still relatively contained. Another important sign is that despite the widespread expectations of the fiscal rule being discarded or significantly modified in the end this key instrument of securing macroeconomic stability has been retained. This in turn suggests that the prioritization of macroeconomic stability may continue in the second half of the year, with the scale of fiscal spending by the Ministry of Finance and rate cuts by the Central bank delivering a recovery of 3,2% next year after a fall in GDP of 4,8% this year according to the forecasts of Russia’s Ministry of Economy. This compares with a decline of 4.9% in 2020 and a recovery of 5.4% next year for the world economy according to IMF’s latest projections. At the same time Russia’s current account surplus is expected to stay in positive territory around 2% of GDP in 2020-2021, while the federal budget deficit is projected to contract from 3% of GDP in 2020 to 2% in 2021. Such a macro backdrop together with low debt figures and still sizeable reserves will stand in contrast to increased debt levels observed across the EM and DM worlds in the post-pandemic period on the back of large-scale stimulus packages.
This emphasis on securing reserves and not going overboard with fiscal spending may be all the more opportune in the post-pandemic setting in which buffers and reserves are likely to be particularly valued against the headwinds of increased uncertainty and loss-aversion. In fact this emphasis on securing reserves may be observed in the coming years as the after-effect of the crisis both at the level of corporates as well as among the sovereigns.
Given the above, Russia’s recovery pattern may indeed prove to be more extended in time and less emphatic than in the largest economies of the world, but it may turn out to be more sustainable in case the macroeconomic stability is firmly secured. Oil prices that are likely to be in the range of USD 45 bbl this year and USD 55 bbl in 2021 provide a positive external setting for Russia’s recovery. The rouble may have further scope to recover some of the lost ground on the back of the subdued imports and the recovery in fuel exports, with weak demand and low imports also limiting the advantages of import-substitution and a “weak rouble policy”.
The sectoral composition of Russia’s stimulus packages will significantly impact the post-crisis recovery patterns across key sectors. Thus far the bulk of the relief funds has been directed towards the most affected sectors, including aviation, catering and travel services, SMEs. An important difference compared to previous anti-crisis packages however is a greater emphasis on financing the “human capital” sectors, including sizeable increases in healthcare spending as well as wages and transfers to doctors. Also, there is more emphasis this time around on supporting demand, which has been particularly affected during this pandemic crisis – this is likely to lead to a change in the composition of fiscal spending away from capital to current outlays. Going forward, greater attention will need to be accorded to such factors as multiplier effects across sectors as well as the longer-term transformational needs of the Russian economy.