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Will the Russian economy cope with the inevitable recession?

Economy
18.03.2020
77
Will the Russian economy cope with the inevitable recession?

The rapid drop in quotations on oil markets, an increase in country risk and a significant weakening of the national currency are beginning to resemble the collapse of 2015. At that time, the economy lost 2%, and by the current year it has not increased its previous indicators. This poses the logical question: will the same situation happen?

It is quite difficult to answer it unambiguously, at least because of important changes that have occurred recently.

Shock from the collapse in oil markets

Despite the significant ruble plummet, the scale of the fall in foreign exchange markets in the past period seemed more serious. Today, even if we assume the worst-case scenario, the drop will not be so drastic and will reach about 15-25%, while in 2015 it was almost 60%.

One should keep this in mind that the effect of the ruble’s rate change will affect the Russian economy more than the volatility of oil. The problem is that the negative consequences with a stable ruble have less impact on exports and the budget than with a volatile national currency, which causes negative feedback from the population and importers.

Fiscal policy changed course

In 2014-2015, the budgetary policy of the Russian economy was much softer than now. The cut-off cost was about ​​$100 per barrel, and therefore the central bank was unable to protect the economy from a sharp collapse of markets.

After the last recession, the government has established a new fiscal rule, which is one of the strictest and most conservative. The cut-off cost is now $42.4 per barrel.

Among other things, the new conditions have reduced the ruble’s dependence on raw material prices, and surplus profits from oil sales are now used to buy out currency on open markets.

Consolidation of knowledge

At the end of 2014, the regulator first switched to interest rate policy and released the national currency into free float. It was not easy, but now the Central Bank is doing much better. Therefore, a sharp increase in the refinancing rate can hardly be expected. A gradual strengthening of monetary policy seems to be the most likely scenario.

Budget hopes

For the country which is as dependent on exports as Russia, the current situation bodes no good: supplies abroad will fall, thereby lowering GDP. In addition, the spread of the coronavirus will force the government to spend a lot of money on the implementation of quarantine measures, health care support  and the affected population. As a result, the budget deficit will lead to a reduction in funding for national projects, which in turn will affect the economic performance.

It appears that the Russian economy will not be able to avoid a recession. The hope remains that the budget stimulus will not be cut, which will prevent the economy from severe falling.

Author:Елена
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