Russia’s economy ‘recovered’ quicker than most of industrialised world

Moscow’s targeted approach to supporting Russia’s economy during the pandemic has helped it bounce back from the crisis quicker than most of the industrialised world, says a deputy finance minister.

Although the Kremlin’s Rbs4tn ($54.3bn) Covid-19 support package amounted to a scant 4 per cent of gross domestic product, or less than a tenth of the assistance provided by Germany, Italy, and the US, Russia estimates the contraction in its GDP has slowed from 8 per cent year-on-year in the spring to 3.6 per cent in the third quarter of 2020, which placed it in the top five of G20 nations.

Russia benefited from a stimulus ordered by president Vladimir Putin before the virus struck, of which Rbs1.75tn has been spent this year.

“It’s a myth that Russia’s anti-crisis package was small,” Vladimir Kolychev said in an interview with the Financial Times. “The economy doesn’t care how you paint your expenditure. The important thing is that it increased.”

The country was able to make a quick recovery because targeted spending made it more efficient in handling the coronavirus crisis, even though it spent less than other countries, Mr Kolychev added.

He said Russia had boosted government spending in total by 27 per cent this year, a figure Moscow claims is higher than that of any EU country.

“It’s obvious that Russia’s economy suffered less in the second quarter and recovered more quickly in the third quarter,” Mr Kolychev said. “That’s not just because of our support measures, but because the quarantine itself in Russia was structured differently than in Europe.”

Russia has recorded more Covid-19 cases than all but three countries worldwide, hitting a new daily record of 29,093 on Sunday.

Mr Putin, however, chose not to impose a nationwide lockdown in favour of delegating patchwork measures to local authorities who largely left Russia’s industry alone while shutting the consumer sector almost entirely.

The recovery plan eschewed tapping Russia’s $167bn cushion of savings from its oil and gas wealth to make direct payments to businesses and citizens in favour of tax holidays and loan guarantees.

Vladimir Kolychev, a deputy finance minister, said Russia’s Rbs500bn in yearly payments to families with children had helped consumer activity grow © Luke MacGregor/Bloomberg

Elina Ribakova, deputy chief economist at the Institute of International Finance, said Russia’s “proactive fiscal support” in the wake of Covid-19 had been small. “Not surprising as Russia was facing a triple shock in 2021 from Covid, oil and risk of sanctions given the US election.”

She said the country would have “one of the smallest contractions globally due to the arithmetic of keeping lockdowns limited to keep economic damage under control”.

She added: “Unfortunately, it is not clear whether in Russia the healthcare system is capable of handling so many Covid cases.”

Mr Kolychev said Russia’s Rbs500bn in yearly payments to families with children — one of the few direct support measures in the coronavirus package — had helped consumer activity grow 3 to 5 per cent in the second quarter and continue to rise 1 to 2 per cent.

Moscow also passed several tax breaks for sectors including small businesses and the petrochemicals, including a cut from 20 to 3 per cent for IT businesses.

Mr Kolychev claimed the contraction in Russia’s GDP would have been negligible if not for the Opec+ deal of oil producers that limited production during the first wave of the pandemic.

“European countries haven’t grown their expenditure as quickly. The US, Canada, and Australia might have, but their programmes evidently were set up in a way that didn’t lead to quick growth in consumer spending. They recovered, but there hasn’t been a consumer boom,” he said.

“We wanted to use these temporary benefits to target growth in places where people had the most problems with their income. If you give everyone [money], including the rich, then the rich are hardly going to change their consumption habits.”

Mr Kolychev defended Russia’s decision not to spend the $167bn national wealth fund, squirrelled away from surplus oil and gas revenue, on economic stimulus payments, saying it had to be saved to “spread natural resource revenue fairly among the generations over time” rather than used as a way out of the crisis.

The finance ministry has used some of the fund to cover budget shortfalls during the pandemic, but has doubled its external borrowing to Rbs5tn rather than tapping its oil savings to boost spending.

Mr Kolychev said: “When there’s a fall, the private sector is careful about spending and doesn’t want to go into debt, and the financial sector doesn’t want to give debt to the private sector because it knows the risks of default might be quite high. That creates a space for the state to borrow more without there being issues for the availability of debt financing for the private sector.”

Last month, Russia raised €2bn in eurobonds for the first time this year, taking advantage of favourable market conditions at a time when the Kremlin fears US president-elect Joe Biden’s administration could ramp up sanctions on Moscow next year.

Mr Kolychev said the country had drawn up plans to ease the impact of any future US sanctions that would bar foreigners from holding Russia debt. Those potential countermeasures include regulatory easing for Russian borrowers and a possible pause in future issuances to ease pressure on the secondary market.

But even though foreigners hold more than a third of Russia’s rouble bonds, Mr Kolychev said Moscow could replace them through local demand if required.

“Foreign holdings of Russia’s sovereign debt haven’t gone up much in cash terms in the last two years,” he said. “That essentially means that as far as debt is concerned, there isn’t that much reliance on foreign investors. Our domestic financial system can easily handle the existing level of borrowing.”

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