The Social & Economic Impact Of Covid-19 On Russia And Recovery Potential

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By Maria Kotova, Dezan Shira & Associates Moscow 

Current Situation 
On March 28, most regions of Russia introduced ‘Recommended Restrictive Measures’ due to the situation with coronavirus. Cafes and catering establishments, shopping and leisure centers, cinemas and cultural institutions were closed. In some regions, a ban on visiting religious institutions came into force and public transport stopped working.

President Putin announced the week of 28th of March to 5th of April as paid, non-working week while asking citizens to keep self isolation regime and stay at home. Later he extended quarantine till the end of the month (30th April). The measures were imposed based on the analysis of the experience and measures in other countries. The government wanted to ensure that the increasing curve of the cases is not that sharp and the pressure on the medical institute is spread gradually and the system will have the capabilities and beds to take in people with the virus. If the curve was sharp, the system would not be able to cope as in many European countries. Although it is early to make conclusions. It is estimated that the hardest are 4-5 first weeks which means that Russia would have another 2-3 weeks before it may get to the peak and so called “plateau” where the daily number of cases stop to grow.

The total confirmed cases in Russia as at April 12th is 18,328, with 148 deaths. Most of the cases are in the Moscow region with 11,568, St. Petersburg with 557 and the Komi republic in Russia’s Northwest with 208.

The government of the Russian Federation, in order to prevent the spread of a new coronavirus infection in Russia, temporarily limited the entry into the Russian Federation of foreign citizens and people without Russian citizenship, including those arriving from the territory of Belarus, as well as citizens of Belarus, from March 18. The restriction will be valid until May 1, 2020.

On 27th of March, Russia suspended all charter and regular international passenger flights from and to any country. There were only export flights that were arranged by the government to evacuate Russians who could not return from other countries.

The Russian capital, Moscow is an international hub with thousands of people travelling through. This had the effect of bringing more cases of infection into the country. Moscow is in the most difficult position with the highest number of cases in the country (around 70% of total), with ambulance services operating at peak limits. Cases doubled over the past week and heavy cases increased (where 85% of virus infection caused pneumonia). Self-isolation now operates in the Moscow region for all residents. It is not allowed to leave the house unnecessarily. It is permitted to leave the apartment in cases of dog walking, going to work (for those who operate in special industries), going to a pharmacy, to a store (within 100 meters) and for taking out garbage. People returned from abroad or have been in contact with those as well as people older than 65 year are mandatory quarantined at home. Those who break the restrictions are fined.

This weekend government decided to lock down the capital completely. Transportation with the capital and suspended everyone who wants to drive a car or a bike within the city without online permit which will be granted if the applicant has specific reason ( e.g. medical staff traveling to work). Domestic transportation flows between different regions have decreased, although varying federal government didn’t choose to close all transport, freight, passenger traffic between regions, massively restrict the work of enterprises when only isolated cases of infection are recorded in the region. It is instead suggested to carefully evaluate measures and damage and take a case by case approach.

However, to date 15 regions (of 85) of Russian Federations have now limited transportation within the region and between the regions. These may vary from one region to another, but in many cases it means that it is restricted to drive within/across the region without special documents issued to the workers of certain essential sectors (medical, housing and communal services).

Media control
To eliminate misinformation, the government proposed new measures that came into effect in the end of March that impose criminal liability and penalties for those who made public statements that government would consider to be “fake news”. These are identified as those that pose a threat to the life and safety of citizens, or about measures taken to ensure the safety of the population and territories, methods and methods of protection from these circumstances. Such acts are punishable by a fine of Rs.300,000 to 700,000  ($4,000-$9,500),  disciplinary labor for up to 1 year, or detention up to 3 years. While these measures might work well specifically against publications on “miracle” drugs that can cure coronavirus, at the same time it can be used by local authorities who may try to take advantage of the situation and target unpopular individuals.

Measures
The Government already building sixteen additional hospitals across all the regions in Russia. By the end of the April, there will be additional 100,000 beds with required equipment prepared across the country. The hospitals are being built by the military working in 3 shifts each 24 hours.

The federal support to the medical care services has already been allocated and has arrived in the regions. In addition to all the additional features, infectious departments. Another 13 billion rubles was allocated for the purchase of medical equipment, including artificial ventilation and ambulances, which were initially received in the regions in exchange.

The government is forming teams of specialists capable of working with new equipment in the hospital, who were requalified to treat people with coronavirus infection. Last week additional payments were provided to doctors, nurses, medical personnel for special working conditions and increased workload fighting coronavirus. Funds from the federal budget for these purposes – more than Rs.10 billion (US$140 million) – are allocated to Russia’s federal regions.

Additional monthly pay for medical staff will be Rs.80,000 (@US$1,000) per month to the doctors, and Rs.50,000 rubles (around US$676) for mid-level paramedical personnel and nurses, as well as ambulance staff. For junior medical personnel, paramedics, nurses and drivers of car crews – an additional salary of Rs.25,000 (around US$340) is payable.

Social Support
The Federal government imposed special procedures for the payment of sick leave due to quarantine. Payments of benefits to families with children aged from three to seven years will begin in June. A payment of Rs.5,000 (US$69) per child under three years of age for those who have the right to maternity capital will be paid in April-June.

Remote payments of benefits, including unemployment have been arranged, while the formation of a list of essential goods and operational monitoring of their availability in trade organizations is underway, as are the remote sale and delivery of over-the-counter drugs.

There is a moratorium on the calculation of fines and penalties for non-payment of utilities. It is forbidden to collect penalties for late or incomplete payment for housing, utilities and overhaul.

The number of qualified laboratories for testing the population has been increased, including through the involvement of private organizations. New regulations have also come into effect on the retail prices for medicines and medical devices to prevent profiteering.

Economic Impact 
Russia’s Federal government has proposed the following measures to support the economy:

  • Deferred payments of budget loans, as well as compensation for losses of regional budgets;
  • Deferral of tax collection for enterprises of the most affected sectors of the economy.
  • A moratorium on business audits, including tax audits, with the exception of issues that pose risks to the life and health of citizens;
  • Expansion of the soft loan program;
  • Increase in the amount of subsidies for small and medium enterprises;
  • Launching a service to help employees and employers on-line inspection;
  • Facilitation of lending conditions for industries affected by coronavirus;
  • Lower property taxes for lessors in exchange for lower rental rates or deferred payments for tenants of certain business categories;
  • Green Corridor for the import of certain categories of goods at customs.
  • On the regional level, each head of region of the Federation was authorized to form preventative norms for the spread of coronavirus in consistence with the specific situation in each region.

The Government also proposed deferred payments for existing credits and loans, however, the thresholds confirmed are relatively high in that less than 50% of the borrowers qualify to use it (and less in Moscow where mortgages etc. are higher).

Below are the threshold of the loans that can be deferred ( if exceeding below amounts, the loans should be still payed on time)

  • Mortgage loans – Rs.1.5 million (US$20 000)
  • Auto loans – Rs. 600,000 (US$8 225)
  • Сonsumer loans for individual entrepreneurs – Rs.300,000 (US$4,115)
  • Consumer loans for individuals – Rs.250,000 (US$3,430)
  • Loans for credit cards – Rs.100,000 rubles (US$1,370)

Each Federal region of Russia has its own regional list of enterprises that play an important, systemic role for the economy of the regions and will not be fully closed. The priority is to ensure their sustainability, maintain employment, and seek targeted solutions.

Current projections by Russia’s Center for Macroeconomic Analysis and Short-term Forecasting indicate negative 20% of GDP for Q1 2020 and up to 15 million unemployed.

According to the consulting company Finexpertiza, a week of self-isolation costs Russian businesses Rs.123.3 billion rubles. A full month of temporary closures will cost private sector businesses Rs.530 billion  rubles. One months of self-isolation in April will cost Russia 1.5% – 2% of annual GDP. Business losses in terms of unrealised income are estimated at Rs.917 billion a week and Rs5.5 trillion a month, which is 5% of GDP.

Businesses have asked the State to provide cheap loans and tax holidays. Tour operators, hoteliers, airlines, restaurateurs and other industries are asking for help, whose turnover has fallen sharply due to the fact that people are sitting at home. The authorities have announced certain support measures, but small-medium business community believes that they are not enough. Entrepreneurs are preparing to fire employees.

Federal unemployment benefits will be paid on the upper bar – Rs.12,130 within three months (from April to June). If there is a minor in the family where the parent lost his job, an additional monthly payment of Rs.3,000 per child shall be paid.

In Moscow, those who lost jobs due to coronavirus, the unemployment measures will allow to obtain compensation in amount of Rs.19,500 rubles (US$220) starting from 9th of April till 30th of September (where Rs.12,130 rubles is from the federal allowance, and Rs.7,370 rubles from the Moscow city budget). The period of the application is simplified online and should not take longer than 3-5 days.

Russia will be under pressure from quarantine measures in the EU – the EU countries account for 43% of Russia’s foreign trade. In addition, the regime of self-isolation in Russia means the closure of all entertainment venues, restaurants and shopping centers. Alfa Bank analysts forecast unemployment in Russia at 5% by the end of the year.

At the end of March, the index of business activity in the services sector of Russia fell to 37.1 points from 52 points in the middle of the first quarter. IHS Markit, which calculates the index, explained that demand for Russian services fell at the fastest pace after the financial crisis.

There is no doubt that April will be the most disastrous month in the Russian economy in modern history.

In mid-March, authorities announced that Rs.300 billion rubles would be allocated to eliminate the consequences of the coronavirus. At a meeting with President Putin on April 1, Prime Minister Mikhail Mishustin announced that Rs.1.4 trillion had been reserved for this purpose.

At the same meeting, the head of the Accounts Chamber, Alexei Kudrin, said that most likely, it would be necessary to spend 5% of GDP or higher, that is, from Rs.5.5 trillion to support the economy. The economist believes that Kudrin’s assessment is at the lower end of the anticipated need.

Western countries take the approach” no matter what it costs us “and are ready to spend 10-15% of annual GDP. In Russia, so far the amounts indicated are an order of magnitude less.

In case of loss of the main source of income, 42% of Russians will be able to pay expenses without the help of loans only for one month, a survey of the NAFI analytical center showed. The results of the study show that most Russians did not make savings and did not have the necessary financial cushion in case of job loss. Today’s crisis will force a significant part of citizens to apply for loans. This is especially true for vulnerable categories. Another survey commissioned by Rosgosstrakh Life and Otkritie Bank showed that 63.6% of Russians have no savings at all.

Experts at the HSE Institute for Social Policy in the study predict a decline in payments to social funds in connection with the expected cuts in salaries, rising unemployment and falling real incomes of Russian citizens. Payments to the Pension Fund, as well as social and health insurance funds, already began to decline in March 2020. Depending on the development of the situation, the number of workers in Russia may be reduced by 2.6-10.2 million, the payroll will also decrease as will taxable income for the treasury and State budget.

In the most positive scenario, payments to state funds will collapse by Rs.200 billion (2.5% of contributions in 2019), and in the most negative scenario, by Rs.2.3 trillion (30% of contributions).

Potential Recovery
According to bank economists, in a positive scenario, the global economy will quickly recover, and Russia’s GDP will grow by 1.5% in 2020, while the Ruble will rebound to 75 against the US dollar by the year end. However, this basic scenario assumes that Russia’s GDP will fall by 0.8%, and the dollar will be 79 rubles. In the basic scenario, the bank assumes that the quarantine will last 2 months, after which the slow recovery of the world economy will begin (based on Renaissance Capital’s economic analysis).

The bank’s negative scenario suggests a 2.5% decline in the Russian economy and an increase in the exchange rate to 82 rubles per dollar. The underlying forecasts of other analysts are generally similar. Standard & Poor’s predicts economic decline of 0.8% in 2020. The economic downturn will lead to an increase in bad loans from 8% at the end of 2019 to 15% at the end of 2020. The accumulated capital, state assistance and weakening regulatory requirements will allow banks and other organizations to withstand stress (based on S&P analysis).

According to Alexei Kudrin, Chairman of the Accounts Chamber, even in a fairly moderate version, the fall in GDP this year could be from three to five percent. “But the situation may be similar, as it was in 2009, when GDP fell by almost 8%,” he said at a meeting with President Putin on April 1.

If the global economic recovery begins in the third quarter of 2020 and is accompanied by an increase in the price of oil and other Russian export goods, then most likely the economic growth this year will be slightly higher than zero. This appears more likely as a truce has now been agreed between Russia and Saudi Arabia to fix the price of oil.

However should the negative effect of the spread of coronavirus turns out to be deeper, and foreign government support programs are not effective enough, then the National Wealth Fund will require significant additional funding, but even with this a decline will be at least 3%.

The Russian government is counting on a quick quarantine. The Russian authorities believe that the shock state of the world economy will not last long, and in the second half of the year a quick recovery will begin. Alfa bank believes that protection from a deeper failure in the structure of the Russian economy, where the share of small and medium-sized enterprises is small; that Russia is a net importer of services and its financial sector does not suffer from a liquidity crisis and from rising interest rates. On the positive side, Russia is one of the least-indebted countries in the world, has the world’s fourth highest foreign reserves, and possesses 30% of global natural resources. It is fiscal prudence and sound management in the face of sanctions and Covid-19 that will see how quickly Russia can rebound. At present it is hard to call.

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Russia Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Eurasia, including China, Russia, India, and the ASEAN nations, assisting foreign investors into the Eurasian region. Through our membership of the Leading Edge Alliance, we also have partner firms throughout Africa and have numerous Russian and African clients. For enquiries please contact us at russia@dezshira.com or visit us at www.dezshira.com

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