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COVID-19 (Coronavirus) Policy Response to to Macro-Fiscal Policy in Russia

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CHALLENGES

The Russian economy is expected to slip into a recession in 2020.

Containment measures introduced by the government at the end of March to stop the spread of the virus, currently set to last until May, have caused disruptions in work operations and resulted in supply shocks. At the same time, declining incomes and elevated uncertainty have led to a demand shock for both households and investors. The slump in global demand for energy and other goods exported by Russia is adding to the negative effect on the economy.

The financial and corporate sectors are likely to fall victim to an economic decline.

Security markets in Russia have seen major corrections (the RTS [Russian Trading System] index has dropped by 25.6 percent since the beginning of the year), and banks are likely to see huge pressures on their balance sheets as debtors default, new borrowers disappear, and savings dwindle due to job and livelihood losses.

Firms are being hurt by the collapse in demand and, on the supply side, by the inability of workers to go to work and the breakdown in global supply chains and transportation networks. As a result, the likelihood of large-scale corporate bankruptcies is rising. Consumer services sectors have been hit the hardest.

Moreover, the oil production industry’s output will shrink on the back of the slump in global demand for oil. The OPEC+ agreement signed by Russia will require oil production cuts of about 20 percent beginning in May 2020.

Low oil prices, containment measures, and an economic recession will turn a planned budget surplus into a deficit.

With oil prices going far below the US$42.4/bbl (the threshold specified in the fiscal rule), federal budget oil revenues will drop substantially and the federal budget deficit could reach up to 5 percent of GDP. The low oil prices and diminishing global demand have also reduced export revenues and put pressure on the current account and exchange rate.

The current account surplus is expected to turn into a deficit in 2020, and the Central Bank of Russia (CBR) expects to spend US$47 billion of international reserves. Despite these challenges, Russia maintains sizable macroeconomic buffers to confront the strong economic headwinds. As of April 1, international reserves stood at US$563.5 billion.

The National Welfare Fund (NWF), which currently stands at 9.8 percent of GDP, will finance about 2 percent of the federal budget deficit. With public sector debt at about 15 percent of GDP, Russia is favorably compared to other emerging market and developing economies.



WHAT RUSSIA HAS DONE TO CONFRONT THESE CHALLENGES

Fiscal policy

  • Funding for the health sector: increases in facilities, supplies, and materials, such as test kits and ventilators, and additional payments to medical staff in contact with COVID-19 patients
  • Social protection: unemployment benefits increased to the minimum wage level, cash transfers to the unemployed with children, an easing of utility and financial obligations, paid sick leave, and possible delays in loan repayments for those who have lost 30 percent of their income
  • Support to regional budgets: RUB 200 billion allocated to the regions to balance their budgets
  • Support to the business community:
    • to prevent layoffs, assistance to businesses that face severe drops in activity, including subsidies, state guarantees, six-month interest free loans to pay salaries, 75 percent of credit guaranteed by VEB (a Russian state development corporation)
    • measures for small and medium enterprises (SMEs) in the most affected sectors to include a tax deferral (except for value added tax)
    • a deferral of rental payments on state or municipal property
    • a reduction of the security requirements for SME contracts in public procurement
    • a social tax rate cut
    • a six-month moratorium on fines and bankruptcy
    • social security payment deferrals for microbusinesses
  • Additional countercyclical spending to contain recessionary pressures through: compensation for the fiscal revenue fall-out from the NWF, additional borrowing, proceeds from Sberbank purchase

Monetary policy

  • On April 24, the CBR cut the key rate by 50 basis points (bp) to 5.50 percent in annual terms. The CBR has started to sell foreign exchange reserves from the NWF under the fiscal rule framework; it will also use the foreign exchange from the government’s purchase of Sberbank shares. The CBR increased the limit on its foreign exchange swap operations to US$5 billion.
  • On March 27, the CBR approved a RUB 500 billion package to support SMEs, of which RUB 150 billion must be channeled to SMEs to maintain employee salaries (up to one year at 4 percent terms for participating banks).

Regulatory policies

  • Exemptions from import customs duties have been put in place for essential goods, including medicines and medical equipment (COVID-19 test kits, ventilators, medical masks, protective suits), from March 16 until September 30, 2020. There is also a temporary ban on the export of medical masks, bandages, gauze, gloves and goggles, biohazard suits, medical robes, and other disposable medical products until June 1, 2020. 
  • Field tax and customs inspections have been suspended until June 1, 2020. There has also been an automatic extension of licenses and permits that are due to expire in 2020 and a relaxation of government procurement requirements.
  • The CBR has allowed regulatory forbearance for banks and microfinance organizations to allow for the restructuring of loans for SMEs and individuals affected by the pandemic and also softened the requirements for lending to the most affected industries.
  • For mortgage lenders the CBR has reduced the risk weights for mortgages granted from April 1, 2020 and changed the procedure for applying risk weight surcharges on loans with a low down payment.
  • The CBR has reduced the regulatory pressure on financial institutions.

WHAT ARE OTHER COUNTRIES DOING?

Currently, and in planning the easing of lockdown measures, it will be crucial to ensure safety (access to testing and provision of the necessary protective goods) at the workplace and associated communal space (e.g. cafes, dormitories).

South Korea has facilitated access to its employment retention subsidy program and temporarily increased the wage subsidy for companies that keep their employees on paid-leave programs. In Brazil, a three-month emergency cash transfer will be provided, targeting adults without a formal job (informal workers) who are not receiving transfers through other channels. Access to protection and testing and the possibility of isolation need to be available to all during this crisis; in Malaysia, for example, free testing has been made available also to migrant and undocumented workers.  

Measures are needed to encourage and support companies, especially SMEs, in adopting teleworking and digital solutions. Multiple countries (Argentina, China, Japan, France, Latvia, Slovenia, South Korea, Spain) have introduced measures (subsidies, financial support, toolkits, free advice services) to encourage the adoption of new technologies and a range of new business practices and models (use of online services for work, education, entertainment, etc.). Italy’s Ministry of Innovation and Digitalization has created a portal for “Digital Solidarity” that allows SMEs and the self-employed access to digital services from large private sector companies.

Measures are needed that are aimed at supporting export-oriented SMEs. In China, large enterprises are encouraged to work with SMEs, for instance, in relation to the supply of raw materials and project outsourcing. The Italian export credit agency (SACE) is providing a €4 billion package to assist SMEs with cash flow needs and to diversify export markets. Turkey has set up a new lending facility for SMEs in the export sector in which exporters’ inventory financing is being supported by extending maturities for existing and new export rediscount credits.



WHAT MORE COULD BE DONE?

Amid this broad and multifaceted crisis, policies need to be bold and implemented quickly. It is crucial that policies are implemented in a way that is timely, time bound, targeted, and transparent to react in a responsible and fair manner to the rapid pace at which the virus spreads.

Currently, the government program plans to spend roughly 2.8 percent of GDP for COVID-19 mitigation. In contrast, packages in advanced economies tend to be much larger; for the whole the Euro zone, fiscal support packages of 10–20 percent of GDP have been implemented or are being discussed (and possibly even higher if guarantees and credit lines are considered).

Even recognizing the limitations on fiscal space amid low oil prices and concerns over the lasting nature of those low prices, there is some space to increase fiscal support, and the authorities have indicated that they are ready to make an escalation if it is warranted.

The immediate policy response must focus on containing the virus outbreak and managing it in terms of its health, economic, financial, and corporate dimensions.

Measures need to address the unemployment of a wide variety of workers (to include non-standard and self-employed workers, for example), as implemented in other countries.

In order to support resilience in exporters, particularly SME exporters, authorities could reduce trading costs that are affected by taxes and customs duties. This can be tackled in a short-term period by granting a temporary zero rate policy to specific tariff codes, limited or provisional tax/tariff exemptions to relevant sectors, etc.

The country needs to encourage and support companies in adopting digital tools for remote work and training.


RISKS AND PITFALLS TO AVOID

A deep and prolonged recession must, to the extent possible, be avoided as it can cause lasting damage in lost incomes and productive capacity. Economic cycles are a regular occurrence even in normal times. If the peak of the cycle is not excessively high, the situation usually returns to normal when the economy gets back to its long-term trends. But deeper and more prolonged recessions have the potential to erode human capital, weaken the institutions of governance (often with the affected country taking an illiberal turn), subdue the commitment to globalization, and prevent firms from making long-term investments.

Long periods of weak supply and demand can lead to elevated structural unemployment, permanently lower capital stock, and significantly weakened “animal spirits.” Flattening the recession curve (to contain both its height and duration) is therefore critical.

During episodes of deep financial and corporate distress, especially if caused by factors external to the sector, even productive banks and firms can experience widespread failures that can undercut the economy’s productive capacity and the functioning of financial markets.

Moreover, the fiscal cost of bailing out banks and firms can become prohibitive (as was the case during the East Asian crisis in the 1990s), forcing governments to then cut back on other productive spending to make the fiscal space for the bailouts. This argues for the need to also flatten the financial distress curve.

Although the level of uncertainty is high, timely, time-bound, targeted, and transparent measures could help to reduce it. It is necessary to assess the additional financing needs, prepare a supplemental budget, and reprioritize public spending. This could also entail reductions in lower-priority spending, including on less important domestically financed infrastructure and new investment projects, toward more essential, priority spending.

Last Updated: May 07, 2020