Sharp drop in real GDP expected

Despite the pre-emptive containment measures – such as the closure of borders with China and later some European countries, and mandated self-quarantine measures – put in place by the authorities as of the end of December 2019, Russia is not immune to the covid-19 pandemic. As a result, the central government asked the regional authorities to implement the necessary containment measures. The domestic lockdown measures and the sharp drop in commodity prices – in oil prices in particular – hit the Russian economy hard. Real GDP growth is expected to reach -5.5% this year, which represents a sharper contraction than in 2015 (-2%) but a lower decline than in 2009 (-7.8%) (cf. graph 1). The actual growth in 2020 and expected recovery in 2021 will depend on the duration and severity of the covid-19 pandemic and the oil price evolution. The oil price is likely to remain low for a long period despite the cut in oil production that would last until 2022.

Large domestic and external buffers

The country is now better prepared to face such an economic crisis than it was in the past. Indeed, since 2014, the Russian authorities have put in place a strong macroeconomic framework in the form of inflation targeting, a flexible exchange rate and a prudent fiscal policy (with the adoption of a fiscal rule). They even implemented some unpopular reforms such as an increase in VAT in January 2019 and a pension reform in the summer of 2018. The sound macroeconomic policies, low public and external debt, the large gross foreign exchange reserves (covering almost one year of imports), and the limited sovereign wealth fund should help the country to support the economy and weather the sharp and sudden shock without external support. The very sound public finances allow the authorities to put in place a fiscal package without jeopardising the sustainability of the public. However, despite the ample room for manoeuvre and the relatively low breakeven prices for oil compared to other countries in the region (estimated at USD 48 per barrel), the fiscal measures put in place to support the households and businesses – currently estimated at 2.1% of GDP – are relatively limited compared to other countries.

Deterioration in creditworthiness expected despite support measures

Despite its reliance on commodities (oil and gas, metal, grains) and the sharp drop in demand from its main trade partners (the Euro area and China), the current account balance is expected to remain in surplus this year. Unlike in 2008 and 2014 when foreign exchange reserves dropped sharply (cf. graph 2), this time it is the exchange rate that is under pressure rather than the gross foreign exchange reserves. That being said, the central bank has intervened in the exchange rate market, a move that is likely to lead to a slight decrease in foreign exchange reserves.

The central bank cut its policy rate by 50 bps to 5.5% on 24 April and indicated that it is ready to further reduce interest rates to support the economy. Inflation is under control for the moment. That being said, exchange rate depreciation is likely to put additional pressure on inflation, which was at 2.5% in March 2020, below the target of 4%. In order to stem food inflation and concerns about food security, the authorities introduced a grain export quota of 7 million tonnes for April through June. 

Despite the authorities’ support measures it is likely that exchange rate depreciation, more difficult access to credit amid deteriorating banking sector asset quality, and the sharp drop in economic activity will put pressure on companies’ creditworthiness. An increase in the bankruptcy rate can thus be expected.

Analyst: Pascaline della Faille - P.dellaFaille@credendo.com