Russia is not immune from the resurgence of the Covid-19 infections that hit the northern hemisphere. As during the first wave in the spring, it is up to the regional authorities to impose the most appropriate lockdown measures. These are likely to have a less severe impact on the economy than in the spring.
The Russian economy has been hit hard by a double shock arising from Covid-19 infections and low oil prices. After a sharp GDP contraction in the second quarter of 2020 (- 8% annually), the economic activity showed signs of recovery in the third quarter (with an annual contraction of 3.6%). The surge in Covid-19 infections is now likely to threaten this recovery even if lockdown measures are likely to be less severe than during the first wave. All in all, real GDP is expected to contract by about 4% this year and to recover modestly in 2021.
Thanks to its very solid macroeconomic fundamentals – sound public finances, low inflation, current account surplus, large foreign exchange reserves and low external debt – the country was well prepared to withstand this large external shock. Hence, the authorities were able to put supportive measures in place, estimated at about 4.5% of GDP (taking into account off-budget measures such as state guarantees). The central bank also supported the economy by cutting, among others, its policy rate to a record low of 4.25%.
Despite these strong macroeconomic fundamentals, the rouble was under severe pressure at the beginning of the year amid a large drop in oil prices and, lately, geopolitical tensions and their related risk of sanctions, notably around alleged poisoning of Alexei Navalny. As no major change in relations between Russia and the West is expected in the coming months, Credendo’s short-term political risk classification – which is largely driven by risks related to sanctions in a context of very ample external liquidity – remains stable.
Analyst: Pascaline della Faille - P.dellaFaille@credendo.com