Russia will prove relatively resilient to the oil-price shock and economic fallout from the coronavirus pandemic, benefitting from buffers built up through years of conservative fiscal and economic policies in response to international sanctions. As Scope Ratings says in its just released report, the economy will contract by 3.3% this year but return to moderate growth of 2.3% in 2021. The country’s longer-term growth potential remains a tepid 1.3% a year, considering how unlikely the prospects are for major structural economic reforms.
“For now, however, Russia, which we rate BBB/Stable, looks comparatively resilient,” says Jakob Suwalski, lead analyst on Russia at Scope. Oil prices, pushed to below $34 a barrel by the price war with Saudi Arabia and the collapse in demand amid worldwide lockdowns triggered by the pandemic, are below sustainable balanced budget levels for all oil-exporting countries, including Russia, which remains heavily dependent on energy exports.
“However, the decline in the ruble, losing nearly 20% of its value against the dollar since January, has limited the damage to Russia’s foreign exchange reserves from the oil and coronavirus shock, demonstrating the newfound advantage Russia has via a free floating exchange rate regime: oil-related expenses are mostly denominated in rubles while oil revenues are in US dollars, which creates a natural currency hedge,” says Suwalski. “More significant is how much more resilient to oil price declines the Russian economy has become during the past six years as the Kremlin has had to adjust monetary, fiscal and economic policy to international sanctions conditions, resulting in a higher degree of self-sufficiency alongside preparations for a rainy day.”
Past austere fiscal policies now enable the country to withstand severe shocks. On 3 April, the Russian government announced that it is revising its budget for 2020 to prepare for oil prices at $20 a barrel. “We expect a deficit of around 3% of GDP for this year and Russia to increase its domestic borrowing significantly,” says Suwalski.
Another advantage Russia has in the context of the COVID-19 pandemic is its reliance on the export of basic goods – here, the country’s industry is comparatively less exposed than other countries’ to global industrial shutdowns and major supply-chain disruptions – alongside energy, for which the Russian oil and gas sector benefits from well-established and efficient distribution networks. Due to financial sanctions against Russia, the Russian banking sector has become less integrated with global markets, with foreign debt continuously declining since 2014 alongside a higher reliance on Russian deposits.
In addition, Russia has improved its official reserves and debt position.
Foreign reserves rose to $570 bln in February 2020 from $433 bln in 2017, equal to five times the amount of short-term external debt or 33% of GDP, up from 27% in 2017. Russia’s de-dollarization strategy in recent years along with its build-up of gold reserves has further strengthened the government’s balance sheet against shocks, while external debt is relatively low at 28% of GDP at end-2019, down from 32.5% at end-2017.
“Russia’s ample reserves, the government’s cash holdings and a high level of liquid assets held in a rainy-day fund underpin our Stable Outlook for the sovereign’s creditworthiness,” says Suwalski.