Recent Economic Developments
Elevated geopolitical risks and fewer restrictions on travel amidst the continued weakness of export receipts resulted in the depreciation of the ruble in August 2020. The average ruble exchange rate depreciated by 3.5 percent with respect to the U.S. dollar. Concerns over the pandemic’s second wave, lower oil prices, and an escalation of geopolitical risks led to stronger pressure for another depreciation in September. In the period from end-August to end-September, the ruble exchange rate depreciated by 5.4 percent against the U.S. dollar.
In August, annual headline inflation accelerated to 3.6 percent compared to 3.4 percent in July, though it remains below the Central Bank of Russia (CBR) target of 4 percent. Higher consumer price index inflation was driven by rebounding domestic demand after the lockdown (which was above expectations) and by the weakening of the ruble on the back of the increased volatility in global markets and higher geopolitical risks.
In September, the CBR paused its accommodative policy actions, leaving the key policy rate at a record low of 4.25 percent. This historically low policy rate, along with a 13 percent tax on interest from all bank deposits over rub 1 million ($14,000) that will become effective in 2021, stimulated an unprecedented surge in retail investors in the Russian stocks and bonds market.
Labor market dynamics deteriorated in August, with unemployment increasing to 6.4 percent, up from 4.5 percent at the beginning of the year. In the second quarter of 2020, real disposable incomes decreased significantly by 8 percent, year-on-year (y-o-y), compared to 1.2 percent growth, y-o-y, in the first quarter.
In the first eight months of 2020, the federal budget registered a deficit of rub 1,692 billion compared to a surplus of rub 2,674 billion in the same period last year. This was on the back of higher spending and lower oil/gas revenues.
Credit growth has slightly rebounded since the strict lockdown measures were lifted. In July, household lending grew by 1.7 percent, month-on-month (m-o-m), compared to 1 and 0.2 percent, m-o-m, in June and May, respectively. Mortgage lending continues to be the major contributor to household credit growth.
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ECONOMIC OUTLOOK
The economy will be in recession in 2020 but is expected to rebound in 2021 and 2022. In 2020, Russia’s GDP is expected to contract by 5 percent, an 11-year low. The agreed OPEC+ production cuts are expected to weigh on growth in 2020 and 2021. GDP is projected to expand by 2.8 and 2.4 percent in 2021 and 2022, respectively, in the baseline scenario (1.0 and 1.2 percent in an adverse scenario). With the fallout from fiscal oil/gas receipts and the relaxation of the fiscal rule in 2021, both the federal and regional budgets are expected to register deficits in 2020-22, largely financed through domestic debt borrowing and proposed tax increases to be borne by metals and oil and gas companies.
As of July 1, 2020, the regional budget deficit had reached about 0.2 percent of GDP compared to a roughly 0.6 percent surplus in the same period last year. No subnational crisis, however, is expected, as Russia has reasonably managed aggregate subnational finances.
Public debt, currently at 13.9 percent of GDP, could increase to about 24 percent of GDP by 2022, which is still manageable.
However, a rebound is not a recovery, particularly given Russia’s significant structural impediments noted earlier. Recovery measures are under way, though the new adverse economic environment has prompted the country to adjust and postpone its national development goals. The new goals will also require changes to the “national projects” that are planned to be finalized by end-October.
Although these projects aim to address the structural impediments, their success will likely boil down to three factors: first, how well they are implemented, particularly on the regional level; second, how “additional” they are, i.e., whether they will merely be old wine in new bottles; and finally, whether they can leverage private expertise and money.
Risks are firmly tilted to the downside. Downside risks involve a more protracted pandemic and hence a prolongation of containment measures; a slow and shallow global economic recovery; a further drop in commodity prices; growing macro-financial vulnerabilities; and a worsening of geopolitical risks and the triggering of worse-than-anticipated sanctions. If these risks materialize, growth would slacken. For example, a more protracted pandemic would lower growth from 2.7 to 1 percent in 2021 (preliminary estimate).
The main upside risk is the development of Sputnik V and Vector anti-COVID-19 vaccines, which, if proven safe and effective, could lead to mass vaccinations and hence accelerate growth in 2021–22. Currently, the vaccines are at the start of third-stage trials, with results expected by end-October (according to Russian authorities).
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Last Updated: Oct 12, 2020
