This article is reprinted with permission from Stratfor Worldview.
As the COVID-19 pandemic bites harder on Russia’s economy, Moscow’s reluctance to avert its vast financial reserves toward more stimulus spending will restrain its ability to fend off a cumulative economic crunch that triggers longer-term setbacks. In a televised address on April 14, Russian President Vladimir Putin announced additional or advanced support measures to help the country’s private sector weather the COVID-19 crisis. The support measures’ narrow scope, however, has failed to impress both the business community and economists.
Indeed, most of the “new” measures Putin unveiled only represent the further implementation of prior announcements or the expansion of existing measures. But with more than a third of domestic companies already at risk of bankruptcy, Russia’s unwillingness to cough up the capital needed to keep its private sector afloat during the pandemic could come at the cost of a much longer and more painful recession.
Limited Support Measures
- Wage support: Putin announced that the government would provide direct financial support to small- and medium-sized businesses in the form of minimum wage salary payments. With Russia’s minimum wage set at 12,130 rubles ($162) per month, this measure falls significantly short of average wages in the country that are about $623. These funds will also only be available beginning May 18, leaving companies with a relatively long period to bridge before receiving the support. The total size of this package will limit its reach to only a fifth of Russians currently employed by small- and medium-sized enterprises as well.
- Interest-free loans: The government will also guarantee 75 percent of the value of interest-free loans to businesses to pay wages. However, only the first six months of these loans will be interest-free, after which a (still favorable) rate of 4 percent will be applied. The government has also only allocated 150 billion rubles ($2 billion) to this scheme, which will severely limit the scope of its application. In addition, banks have been reluctant to provide these loans without a way to recover the added work and bureaucratic requirements attached to them through interests.
- Subsidized loans: For so-called “backbone industries,” which the government is still trying to define, the government has promised to subsidize loans for working capital at the central bank’s rate (currently at 6%). The Ministry of Finance will also guarantee half the size of these loans to the commercial banks offering them. In addition to wage, these loans can also be spent on new equipment or the acquisition of stock. But they still only provide limited relief to the sectors Moscow deems crucial to the Russian economy.
- Airline and region-specific bailouts: Moscow will also set 23 billion rubles ($307 million) aside to directly support the country’s airline industry, as well as another 200 billion rubles ($2.7 billion) to support Russia’s regions. These underwhelming amounts come in far below the estimated $1.4 billion in losses that Russian airlines face, and vast shortages of reserves - which currently total only a mere $10 billion outside of Moscow - across 70 percent of Russia’s 83 regional governments.
Russia’s Fiscal Frugality
Russia’s reluctance to avert its vast financial reserves toward more stimulus spending is restraining its ability to offer more significant COVID-19 relief measures, which explains why its support efforts have so far been largely based on reducing regulatory requirements for businesses or providing limited direct support. This fiscal restraint is baked into Russia’s economic legislation, which doesn’t allow the federal budget to spend more than 0.5 percent of its GDP (about $8 billion) over the government’s actual revenues. Instead, Russia’s reserves are automatically allocated to replace missed government revenues when oil prices (one of the main sources of government revenue) fall below the level at which the budget was calculated. This allows Russia to extend these reserves, and its budget, over longer periods of crisis. Right now, however, this means that Russia faces the difficult challenge of reallocating funds within its established budget, and inevitably cutting spending in some planned projects, in order to redirect as much of its finances as possible toward the COVID-19 response and support measures.
This has so far resulted in limited COVID-19 measures that Russia’s business community have deemed ineffective. Russia has attempted to convince businesses not to lay off its employees to avoid the burden of unemployment support and reduced economic activity. But its limited COVID-19 measures have yet to decisively convince employers to forgo layoffs. Over 16 percent of Russian private companies have already made staff reductions due to the COVID-19 crisis, and up to 31 percent more are expecting to conduct layoffs in the near future.
But even if the government were able to successfully stem additional layoffs, wage cuts and forced unpaid leave will still significantly reduce the income of Russia’s workforce. By impacting domestic consumption, this will, in turn, cause the crisis to reverberate further throughout the Russian economy. Declining expendable incomes could further restrict retail sales as well, which already dropped by 35 percent in April amid stay-at-home measures to contain the virus.
Risks Beyond COVID-19
Some projections have indicated that even with these support measures, up to 30 percent of Russian companies remain at risk of bankruptcy. The government has imposed a moratorium for at least six months on processing bankruptcies, but the financial situation of companies is unlikely to be rectified by the time this moratorium is lifted. Particular sectors at risk of bankruptcy include trade, transportation, real estate, construction, technology and heavy industry. This means that the impact of such bankruptcies could be spread widely across Russia’s economy, though they will most likely be concentrated among smaller, more vulnerable businesses.
Employment and industrial activity will pick up again over time once the COVID-19 pandemic has waned. However, the purchasing power of Russia’s population will most likely continue to erode, constricting domestic consumption. This ongoing dynamic has failed to rectify itself since the country’s 2015-17 economic crisis, generating a downward pressure throughout most of Russia’s economy. In addition to this, defaults on existing household debt or even corporate debt in the case of bankruptcies could threaten the stability of Russia’s banking sector. The full extent of the havoc COVID-19 could wreak on the Russian economy remains to be seen, but the crisis is certain to exacerbate the cracks in Russia’s economic foundation.