Page 37 - BNE_magazine_10_2020

bne October 2020 Cover story I 37
2020 ticked up to 6.4% as of August – again 12 national projects. However, the
2020 crash
That brings us to the current crisis that began in March when Russia walked out
uction cut
March 6 and the oil prices crashed yet
again, falling from an average of $63.5 in December 2019 to a low of $21.2 in April this year – the nadir of the oil price crisis. Since then they have recovered
to between $40 and $45 – the breakeven price for the Russian budget.
And then the coronacrisis came on top of an oil price crash in March. With oil prices already back in Russia’s comfort zone by June it is the total lockdown of the economy that started in May that will do the real damage this year; and not just to Russia.
Russia’s federal budget will still go into deficit in 2020 from a 1.8% GDP surplus last year as a result of the extra stimulus spending and reduced industrial produc- tion and consumption. The deficit was already at circa 2% in the first half of this year and expected to end 2020
at -4.4%.
Growth will also hurt. Russia will
go from 1.3% growth in 2019 – that stagnation problem hasn't gone away – to an estimated 8.5% contraction for 2020 before returning to growth in 2021. But this is actually a good result. It is less the full year contractions in all the previous major crises’ contractions and it is also better than those in many of the developed markets.
Inflation too has not been affected. Consumer price inflation was a mere 3.6% in August, still below the CBR target rate of 4% so instead of the massive 17% interest rate hike the CBR was forced to make in 2014 the CBR actually cut rates this year in order to stimulate more growth. Cutting rates in the midst of a nasty economic crisis is something that developed markets do, not emerging markets.
Unemployment has also escaped largely unhurt. The jobless rate was running
at record lows of around 4.3% before the two shocks hit in March (also
a developed market level) but has
the mildest increase in any of the previous crises.
And finally the ruble has also escaped with very little pain. As bne IntelliNews reported in “Russia’s amazing levitating ruble” the currency lost about 17% in the first half of this year when oil prices were halved over the same period. Inflows into Russia’s OFZ by foreign investors have offset the fall in oil taxes and held the value of the currency up.
If you remember, in 1998 foreign investors fled the GKO market causing it, and the Russian economy, to collapse.
Perhaps most remarkably of all Russia has managed to continue to accumulate hard currency reserves throughout this year, with gross international reserves topping the $600bn mark this summer – the fifth largest reserves of any country on the planet. It is this huge war chest that gives the bond investors confidence and the Kremlin a lot of options.
The Russian economy is coping better with the Covid-19 pandemic than it
did after the global financial crisis, the head of Russia's Accounts Chamber and ex-finance minister, Alexei Kudrin, said on September 28.
"The current economic situation is certainly better than predicted at the beginning of the pandemic," Kudrin told RT. "For a number of reasons, Russia now looks much better than in 2009, when the economy fell by eight%." What is the silver lining this time round? Russia gained benefits from the previous crises. The collapse in 1998 killed off the virtual economy and remonetarised the country. The crisis of 2014 forced a radical fiscal reform on the Ministry of Finance. So what will happen this time? The answer has to be the adaptation of
a new economic model. The Russian economy has been stagnating since about 2011 and little has been done to fix it. The Kremlin has been well aware of the problem and Russian President Vladimir Putin has attempted to deal with the issue with his so-called May Decrees that were last updated in 2018 and have since grown into the
programme got off a poor start in 2019 and has now been delayed after the crises of 2020 broke. This crisis made be the goad that the government needs to finally see these changes through.
But the geopolitics will hamper the kind of spending Russia needs to do to modernise its economy. With its huge fiscal reserves and extremely low debt
– Russia could pay off its entire external and public debt tomorrow and still have $100bn left over, which would still be sufficient to ensure the stability of the ruble – the Kremlin could massively ramp up spending just by using the money in the National Welfare Fund (NWF). In addition it could borrow heavily and still not be under pressure. Russia currently has public debts of about 15% of GDP and the Ministry of Finance intends to increase that to 20% under the new 2021-2023 budget, but Maastricht recommended maximum borrowing level is 60% of GDP and almost all the EU countries are already well beyond that level.
The Kremlin won’t go down this road. With geopolitical tensions rising again thanks to the Belarus revolution and poisoning of anti-corruption blogger and opposition activist Alexei Navalny there is new talk of sanctions. On
top of that with Joe Biden looking increasingly likely to win the US November presidential elections relations with the America will probably get worse over the next four years.
For the Kremlin all that money and the low debt is a strategic weapon in its
fight with the US and gives it impunity from sanctions. Its not an economic resource that can be actually used to promote growth. In effect the Ministry of Finance has been running austerity budgets to preserve these reserves, when it doesn't really need to. The Kremlin is clearly hoping to continue this policy and generate the extra money it needs from recovering oil prices and even more efficiency gains. And given how prone Russia is to crises maybe that is not
a bad plan?
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