Reigniting growth is major challenge for Russia

The COVID-19 crisis has been exceptionally challenging for economies of Central and Eastern Europe. Fresh pandemic-related economic restrictions in the region will link to negative Q4 2020 quarterly growth in many cases. Going forward, recovery should pick up by the early spring of next year as the winter wave of virus gradually abates, Scope Ratings GmbH notes in its recent 2021 Central and Eastern Europe Sovereign Outlook. The agency expects uneven recovery in CEE reaching 2019 output levels by only after 2021 in most countries.

Enhanced economic resilience over recent years has made CEE economies better positioned to cope with global crises such as the severe recession of 2020. The new long-term EU budget presents a major opportunity for EU CEE countries to boost investment. The agency expects a sluggish economic rebound in Russia in 2021 following a softer contraction in 2020 than in other major global economies. The Russian economy is supported by greater self-sufficiency, solid external and public-sector balance sheets, and a flexible FX regime

Next year, deficits across CEE region will narrow but remain outsized — from about 3% in Bulgaria and Russia to above 8% in Turkey and Romania. In the case of Russia, still-modest levels of public debt provide fiscal space in support of recovery, important ahead of 2021 parliamentary elections. The federal ruble denominated bond market (OFZ) continued expanding from RUR 8.9 tln in early 2020 to RUR 12.8 tln ($171 bln) as of November 2020 due to demand from domestic investors.

Scope Ratings expects CEE central banks to mostly maintain an accommodative stance next year. Additional rate cuts from the Central Bank of Russia are not precluded, given space for easing amid a benign inflation outlook. The foreign-exchange reserves of CEE central banks are cushions against future stresses in exchange-rate markets, with reserve levels close to or exceeding an IMF adequacy threshold of 100% of short-term external debt in most economies of the region. Russia’s reserves cover almost five times outstanding short-term external debt, providing an abundant buffer to absorb external shock.

The highest-productivity countries of the region, the Czech Republic and Slovenia, have raised productivity to around 75% of the euro area average, while Russia’s productivity is around half the euro area average.

Russia’s overall outlook is rated by Scope as BBB/Stable with sluggish recovery but strengthened external-sector resilience. Reigniting growth remains a major challenge for Russia. In 2021, growth of 2.5% is anticipated, supported by recovery in oil prices. Further monetary easing could also abet recovery, given a benign inflation outlook — with consumer price growth currently near a 4% target. This year, the economy is projected to contract 4.5%, somewhat softer than that in many other major countries. This owes to the Russian economy’s structure, including a smaller role for services sectors and small and medium-sized enterprises, as well as a more substantive role for the state sector, the latter requiring less policy support; and economic policies of recent years that have led to a higher degree of self-sufficiency entering this crisis and lower exposure to disruption of global supply chains, building up on substantive fiscal buffers and lowering (still-high) economic sensitivities to oil price changes. Macroeconomic stability is supported, moreover, by a flexible exchange-rate regime and an improved fiscal framework in recent years, which strengthen budgetary flexibility and foreign-exchange reserve adequacy. These factors have enhanced the economy’s capacity to withstand external shocks, including mitigating the impact of some tightening of US sanctions under the forthcoming Joe Biden administration. At the same time, geopolitical risks related to the Ukraine conflicts, exposure to political instability in Belarus, and possible intensified sanctions weigh upon external financing flexibility, investment inflows and growth prospects. More profound structural reform to raise weak medium-run growth potential (estimated at 1.5%) is unlikely to arrive soon. Growth remains structurally curtailed by adverse demographic trends and a weak business climate, with difficulties present in achieving diversification away from the dominant role of the oil and gas sector in the economy. The postponement of the ambitious National Development Plan including key infrastructure projects, as one consequence of this year’s crisis, will further weigh on growth potential. In addition, a significant winter wave of the virus and associated impacts on global oil demand, and an expansion in oil production as agreed by the OPEC+ from January 2021 onward amid structural oversupply of oil, will weigh on crude prices, Russia’s budgetary revenue and longer-term investment into its energy sector. Scope expects, however, fiscal consolidation in Russia from 2021 going forward to accommodate for lower-for longer oil prices. Policy continuity with regards to prudent fiscal, monetary and foreign-exchange policies is anticipated, which supports macroeconomic stability. As a result, the general government’s debt-to-GDP ratio is set to increase modestly in 2020 to around 20%, but stabilize thereafter medium term, supported by sizeable government cash deposits and low foreign-exchange risk in sovereign debt obligations.

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