Page 15 - RusRPTApr20

Russia may have strong macrofundamentals, but the lack of structural reform means growth has been disappointingly low. Preliminary data shows that GDP was up by just 1.3% last year.
“Growth was restrained by a slowdown in growth of private consumption from the hike in the value-added tax and shrinking exports [in 2019],” says BOFIT.
However, despite the continuing importance of oil to the Russian economy, the reforms of the last six years since the last oil shock in 2014 have considerably reduced Russia’s dependence on oil.
“The oil price is still an important factor for Russia’s economic development, but due to prudent fiscal policy and shift to floating exchange rate policy, Russia is now better equipped to deal with an oil price fall than before,” says BOFIT.
That means the budget plans will not be altered substantially and the policies laid out in Putin’s January state-of-the-nation address for a “transformation of the economy” remain in place. If anything, public spending on social issues should rise slightly more than anticipated last autumn, according to BOFIT.
Fiscal policy loosing
The Kremlin has been running a tight ship in recent years as it builds up its reserves and pays down its debt as part of the construction of a “financial fortress” that was designed to withstand any harsh sanction attacks by the US.
However, with the launch of the national projects last year the government will loosen fiscal policy and the coronavirus pandemic will only encourage further loosening. The state has already announced a RUB300bn fund to support companies that have been directly affected by the virus and other measures are expected to follow. That may mean a budget of intentional deficit spending, which would be a first for Russia.
The Russian government carries little debt (just 14% of GDP), but US sanctions have limited its ability to borrow abroad. Instead the state intends to rely on the National Welfare Fund that currently holds about $150bn in liquid assets, or 9% of GDP.
Private consumption and investment decline this year
Another drag on economic growth will be the fall in private consumption and shrinking real incomes. Russia’s real incomes have been stagnant for most of the last six years, but finally started to grow at the end of 2019. In 2019 consumer returned an economic growth driver, albeit modestly.
That trend is likely to reverse now and incomes will fall again as a result of the multiple shocks, says BOFIT.
“We expect private consumption to turn to decline this year. Consumption is hampered by slower economic activity and factors related to the dispersion of the corona pandemic,” says BOFIT. “The recent ruble depreciation is set to increase inflation and thus reduce purchasing power. In addition, consumption growth will be restrained by lower growth in consumer credit due to tighter regulation.”
BOFIT goes on to say that the situation will improve next year and there after as consumption will be supported by a gradual rise in incomes, partly funned by the the planned increases in social spending.
Fixed investment on the rise
Rising investment will also provide some support for growth. Fixed investment recovered slightly last year, growing by slightly more than 1%, according to
15 RUSSIA Country Report April 2020 www.intellinews.com