Russia: Government favors relatively moderate fiscal stimulus measures despite increasing Covid-19 fallout
At the end of March, the Russian government announced a RUB 1.3 trillion (approximately USD 18.3 billion) economic support package to combat the fallout from the Covid-19 pandemic. The fiscal stimulus, which amounts to just 1.2% of national GDP, largely focuses on supporting households and small- and medium-sized enterprises (SMEs) and comes as the government rolls out extended lockdown measures in the form of paid national holiday—de-facto quarantine—until 30 April amid the intensifying virus outbreak. Nevertheless, the economy’s relative immunity to external shocks after years of Western sanctions and substantial cash reserves mean Russia is in a relatively strong position to weather out the global downturn.
The announced fiscal stimulus aims to cushion the inevitable economic blow, by boosting spending to the unemployed and those on sick leave in order to support low-income households, while also enabling SMEs to defer taxes for up to six months and irreversibly slashing the payroll tax for companies from 30% to 15%. On top of that, individuals and business will be eligible for a six-month interest rate payment holiday. These measures will be financed by drawing from the National Welfare Fund, as well as significantly higher taxes on dividends paid to offshore entities, and a newly created 13% income tax for individual holders of bonds and retail deposits of over RUB 1.0 million.
Commenting on the effectiveness of the policy measures, Anatoly Shal, an economist at JPMorgan, noted:
“Russia is lagging most of its peers, sticking to conservative monetary stance and avoiding significant fiscal stimulus. Although the government has announced targeted measures worth 1.2% of GDP, we understand this will not be additional spending […] With oil at $25/bbl, we estimate the budget will run a deficit of around 6% of GDP this year, with roughly a third of sovereign liquid assets to be depleted. The conservative approach to fiscal policy is therefore understandable. […] The silver lining is that Russia’s conservative approach to policymaking is apparently praised by markets, with RUB stabilizing and yields closing half of prior increases, suggesting that market dynamics are less likely to accentuate economic stress.”
As highlighted by Dmitry Dolgin, chief Russia economist at ING:
“The recent downgrade in ING’s Brent price forecast for 2Q20 from US$33/bbl to US$20/bbl casts doubt on USDRUB’s ability to return to the RUB70-75 range soon […] Under the new oil price scenario and given the announced fiscal measures, the Russian budget is facing a 3-4% GDP deficit this year, which appears controllable if temporary. We do not see any willingness at the top level to ruin fiscal discipline and expect financing the recovery to be co-sponsored by large corporates and high-income household[…] This will not be a problem, given the liquid fiscal savings of around 10% of GDP, however one cannot exclude more potential waves of fiscal support needed.”
As such, notwithstanding crashing oil prices, the Russian economy seems relatively well positioned to weather the economic storm, mostly thanks to substantial reserves.
Clemens Grafe and Zalina Alborova, economists at Goldman Sachs, noted:
“Although oil revenue accruing to the government will fall sharply, oil revenue available for fiscal spending will be unchanged. This will be achieved by the government drawing on the National Welfare Fund (NWF) […] This extra funding is likely to be needed to compensate for the fall in non-oil revenue. While non-oil revenue in the federal budget is likely to be relatively protected, given that it mostly consists of indirect taxes, this will not be the case at the sub-federal level, where the main funding source is corporate and personal income tax. Even for the consolidated budget, we do not expect any need to curtail spending.”