By Alexander Miller, consultant in emerging markets, for Eurasia Business News –April 27, 2020
The Moskova river along with the Kremlin walls, Moscow – Source : Pixabay
The Central Bank of the Russian Federation warns the national GDP may fall in the second quarter of 2020 by 4-6% instead of growth forecast by 1.5-2% announced in the previous forecast released in February.
The Russian economy would recover in the 2021–2022 years, as the Central Bank forecasts an increase in GDP of 2.8 – 4.8 % in 2021 and then 1.5 – 3.5% in 2022.
This was revealed in the medium-term report of the Russian banking regulator, published following a meeting of the Board of directors held on Friday April 24, during which it was decided to lower the key rate by 50 bp to 5.50% from 6%, as of April 27. The Central Bank admitted the possibility of a further reduction, depending on the development of economic situation.
Since the last Board of Directors, the Bank of Russia reported that three factors have immediately hit the national economy and caused the decrease of the key rate. All of them are mainly associated with the coronavirus pandemics.
Firstly, the global economy entered into a significant recession due to coronavirus outbreak worldwide. Secondly, another round of a significant drop in oil prices took place this week, despite the new OPEC + deal. Thirdly, restrictive measures have been introduced in Russia by the Federal Government and local authorities.
As a result, a large number of companies cannot work anymore or have transferred their workforce to remote mode. Many Russian citizens are in self-isolation, amid coronavirus pandemics in the country. Some continue working from their home, others are waiting when they can safely go back to work.
The economic activity in Western countries fell sharply in April after lockdowns in Europe and in the United States. This situation negatively affects the demand for Russian export goods and services and fuels the volatility in global financial markets, reported the Central Bank.
In addition, the banking regulator noted that leading indicators, including polls, indicate a significant decrease in business activity in the services and manufacturing industries, as well as a decrease in new orders in the foreign and domestic markets. In this context the mood and expectations of the business have worsened.
“Under these conditions, there will be a decline in GDP in the second quarter of this year with a gradual recovery of economic activity as the situation with the spread of coronavirus normalizes and the majority of restrictive measures in Russia and in the world soften” said the Central Bank in its report.
Besides, the Bank of Russia linked the economic recovery with an increase in oil prices :
“The parameters of the base scenario of the Bank of Russia forecast have been substantially revised. GDP will decrease by 4-6% in 2020. In the future, the recovery growth of the Russian economy is forecasted to be 2.8-4.8% in 2021 and 1.5-3.5% in 2022. The Bank of Russia’s basic forecast includes the average price of Urals oil at $ 27 per barrel in 2020 and its subsequent increase to $ 35 and $ 45 per barrel in 2021 and 2022, respectively […]”.
The key rate cut to 5.5%
In order to stimulate the economic activity, the Russian Central Bank decided to cut its key rate from 6% to 5.5%, amid oil prices fall and economic lockdown due to the coronavirus pandemics. Lower financing costs can support lending and investing.
The decision was expected by analysts, although there was still no unanimity in their forecasts – some experts predicted that after the March pause the Central Bank would return to easing monetary policy with a more familiar and cautious step of 25 bp.
The Central Bank has already used a step of 50 points decrease in October 2019. Prior to this, the last decline of 50 bp was in December 2017.
Taking into account the situation in the oil market, some analysts would expect a further decrease of the key rate, due to low inflation and the GDP growth fall due to the coronavirus pandemics.
Governor Elvira Nabiullina told journalists and experts on April 24 that small monetary policy steps could be insufficient in the current extraordinary situation:
“With the development of the situation in accordance with the basic forecast, the Bank of Russia sees room for further monetary policy easing at upcoming meetings […].”
The global economy is also hit by the coronavirus pandemics. The economic activity in developed countries fell sharply in April after lockdowns in Europe and in the United States, which negatively affects the demand for Russian export goods and services and supports volatility in global financial markets.
The Central Bank noted that leading indicators, including polls, indicate a significant decrease in business activity in the services and manufacturing industries, as well as a decrease in new orders in the foreign and domestic markets. In this context the mood and expectations of the business have worsened :
“Under these conditions, there will be a decline in GDP in the second quarter of this year with a gradual recovery of economic activity as the situation with the spread of coronavirus normalizes and the majority of restrictive measures in Russia and in the world soften […].”
Inflation target at 4%
The Russia’s annual inflation target remains 4%. In March 2020, the registered inflation was 2.5 %. The Central Bank explained in its report that the fall in domestic and foreign demand this year will significantly curb inflation, which, without additional monetary policy measures, creates the risks of significant deviation down from the target in 2021 and in the medium term.
According to official estimates, easing monetary policy would be necessary to maintain the Russian annual inflation near 4% in the forecast horizon.
The disinflationary effect of weak demand would already now compensate for the effect of temporary inflationary factors – the weakening ruble and the increased demand for certain goods amid coronavirus outbreak. The increase in inflation expectations caused by these factors is also assessed as temporary by the Central Bank.
Read also : Inflation in Russia reached 3% in 2019
The released estimation notes that in conditions of easing monetary policy, annual inflation would be in the range of 3.8–4.8% according to the results of the current year and will stabilize near 4% in the future. At the same time, in the middle of 2020 there would be a reversal in inflationary trends. In annulled terms, monthly inflation would begin to decline, while annual inflation would still continue to grow, according to the Bank of Russia.
Ruble exchange rate
On April 27 morning the dollar and the euro were rising at the Moscow Stock, the ruble getting cheaper against the dual-currency basket amid falling oil prices, in spite of the OPEC + deal about reducing global crude output.
Oil prices fall
Regarding oil prices, the Russian Central Bank has chosen a conservative view in its estimation, especially for 2020. The regulator assumes that oil prices will slowly increase from an average of $ 15 per barrel in the second quarter to $ 25 per barrel in the fourth quarter of 2020.
Further on the forecast horizon, the Central Bank expects a gradual increase in oil prices to reach $ 45 per barrel in 2022 as global demand would recover and crude oil stocks would mechanically decrease.
However, huge oil reserves have been accumulated and oil demand sharply dropped worldwide. Economic lockdowns in Europe and in America may last. These factors will restrain the recovery of oil prices even in the conditions of full implementation of new OPEC + agreements.
Major oil producers reached a final agreement on April 12 after OPEC + talks with 23 countries, to cut global oil output in an attempt to stabilize the market amid coronavirus outbreak and collapse of the oil prices since early March 2020. Under the historic deal, oil producers committed to cut their output by 9.7 million barrels per day from 1st May 2020 until 30 June 2020. This effort would strengthen the oil prices.
According to the agreement, the Russian Federation will reduce its national oil production to 8.5 million barrels per day from the current 10.3 million barrels per day.
The Central Bank noted in its report :
“The Bank of Russia’s basic forecast includes the average price of Urals oil at $ 27 per barrel in 2020 and its subsequent increase to $ 35 and $ 45 per barrel in 2021 and 2022, respectively […]”.
Exports and investment will fall
The largest contribution to the decline in the GDP for 2020 will be made by the fall in exports, which can be from 10 to 15%, revealed the Central Bank. Indeed, the coronavirus pandemics severely hit the regional and the global trade.
Also, the fixed investment is expected to decrease. The financial resources of Russian companies will mainly aim at restoring current activities. The uncertain prospects for domestic and foreign demand will constrain investment plans. The decline in production and investment will limit the opportunities for revenue growth and there will be a reduction in consumer demand.
Now more than 80% of Russian companies in various industries are affected by the coronavirus pandemics and restrictive measures, reported the Central Bank of Russia. In such a situation, it will take time to restore the business processes, logistics and production chains, to compensate the losses in profits and revenues and to increase corporate reserves and savings. Along with the uncertainty of the development of external conditions, this context may restrain production, investment, and consumer activity.
Nevertheless, the measures taken by the Federal Government and the Bank of Russia could support the most affected industries by the economic situation and would enable companies to go through this crisis.
The slowdown of the national economy and domestic demand could be also mitigated by the monetary policy of the Bank of Russia. An easing monetary policy would support lending that could increase from 3 – 8% in 2020 to 6 – 11% in 2021–2022, according to the Central Bank. In addition, regulatory exemptions and the expansion of specialized refinancing instruments by the banking regulator could help to maintain the lending potential.
Budget deficit to reach 6% of GDP
Maxim Reshetnikov, the Russian Minister of the Economic Development since January 21, said on April 25 that the Russia’s budget deficit in 2020 could reach 5-6% of the GDP.
The Minister commented during an interview on the TV channel Russia 24 :
“We have never stopped helping citizens, this help has only increased from year to year. Why do we have such a budget deficit amounting to 5-6% of the GDP? We have this deficit because in the recent years, indeed, the budget has become even more social. We have a share of social benefits that have increased in the recent years. The main task of the State in these conditions is to ensure the rhythm and continuity of these payments”.
The Russian Ministry of Economic Development will present by the end of May an updated macroeconomic forecast, said Maxim Reshetnikov.
“We are now looking at what the situation is in the oil market, what are the estimates of income. I think that by the end of May we will make estimates, we will present a public forecast. Now we consider different options”, added the Minister during the interview.
The dynamics of economic recovery will largely depend on the scale and effectiveness of measures taken by the Russian Government and the Bank to mitigate the consequences of the coronavirus pandemics, concluded the report.
A country in isolation
In an effort to stem the spread of coronavirus, the Russian President Putin announced a “paid non-working” week on March 28, later extending it until April 30.
Moreover, the Russian regions have received more power to coordinate the efforts against the pandemics and to adapt them under local circumstances.
From April 21 to 22, 5,236 new cases of coronavirus have been recorded in 78 regions of the Russian Federation, reported the Interfax press agency. The country recorded 57,999 cases of infected persons as of April 22.
As of April 26, about 81 thousand infections cases with coronavirus were registered. Almost 750 people died. On April 26, the increase amounted to 6.4 thousand diseases and 66 deaths, revealed the daily Kommersant.
In the estimations of the Russian Central Bank, most restrictive measures introduced by the Federal Government against the coronavirus pandemics would be gradually lifted or substantially softened in the II quarter of 2020, after successful implementation of the state measures. Then the economic activity would recover in the III – IV quarters of 2020.
Local authorities also support companies in this difficult economic context. According to the packages of measures adopted by the Moscow city authorities, the financial support allocated to the companies registered in the Russian capital will amount to about 70 billion rubles (871 million euros), reported the business daily Vedomosti on April 20.
These funds cover 23 billion rubles (286 million euros) of subsidies and exemptions from payments, more than 22 billion rubles (274 million euros) are deferrals of payments while another 20-30 billion rubles (249 – 374 million euros) will be aimed at subsidizing the interest rate on loans for small businesses registered in Moscow.
The Moscow authorities presented these support measures after the Russian President Vladimir Putin announced direct financial help for small and medium-sized businesses, hit by the economic slowdown.
Loans from commercial banks for the payment of wages by companies have been recognized as an ineffective measure, since banks considered them too risky and refused to issue them. Now these loans will be guaranteed (by at least 75%) by the state-owned Vnesheconombank.
Starting on May 18, companies that have kept at least 90% of employees (as of April 1) will receive funds from the Federal state to pay the wages. Each employee will be able to claim payment in the amount of one minimum wage, worth 12,130 rubles (151.21 euros).
According to the Federal Finance Minister Anton Siluanov, these payments will affect 970 thousand companies and individual entrepreneurs, benefiting 3.3 million people in the country. Anton Siluanov also estimated on April 16 the volume of fiscal support towards the Russian economy at 6.5% of the annual GDP, revealed the media RBK.
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