Prudent fiscal, monetary and currency management have fully restored Russia’s investment-grade credit status despite sanctions, but low growth, weak governance and vulnerability to geopolitical risk remain obstacles to further improvement. Europe’s Scope Ratings says low public debt, a fiscal policy focused on rebuilding buffers, structural budgetary improvements and continuous cost control have all helped to build up substantial cash reserves totalling an estimated 17% of GDP in 2019. They provide greater room for fiscal manoeuvre needed for the Russian government to support the real economy.
The improvements in public finances have combined with the Russian economy’s increased resilience to external shocks: for example, international currency reserves stood at $540 bln in October 2019 – equivalent to five times short-term external debt – up from $470 bln a year earlier. Together, they explain the steady improvement in Russia’s creditworthiness in the past two years. Scope upgraded Russia’s credit ratings to BBB from BBB- on 17 January. The Outlook is Stable.
“Russia’s economic policy framework has achieved its primary goal of macroeconomic stability, with budgetary and current account surpluses. What it has not done is increase the economy’s growth potential,” says Jakob Suwalski, Scope’s lead analyst on the Russian Federation. “Russia’s sluggish growth acts as a core constraint on the sovereign’s credit ratings,” Suwalski says.
Following low growth estimated at 1.2% in 2019, Scope expects the economy to gain traction in 2020 and grow by 1.8% as looser monetary policy and some fiscal stimulus support domestic demand. Even so, with Russia’s current economic structure and institutions, medium-run growth remains subdued in the range of 1.5%–2.0% a year.
“Russia’s economic problems may appear similar to those of the world’s advanced economies: weak productivity growth, low investment and demographic headwinds from an ageing population resulting in a shrinking labour force,” says Suwalski. “But one big difference is Russia’s development level, reflected in its low GDP per capita of $11,200, giving extra urgency to boosting low productivity, given the steady decline in the size of Russia’s labor force.”
According to the most recent data published by ROSSTAT, the Russian population declined in 2018 for the first time in a decade by almost 100K to 146.8 mio. Labor resources are being stretched already. Russia’s unemployment rate is at historical lows, running at 4.5% in November 2019.
Russia struggles to attract the domestic and foreign investment needed to kick the economy into higher gear. Weak application of the rule of law, particularly in the enforcement of contract and property rights, deters investment and limits competition in Russia, which in turn weighs on business confidence. The economy is chronically short of new investment even as US sanctions have tightened.
“Constitutional reforms just announced by President Vladimir Putin are likely to underscore concerns about governance,” says Suwalski. “The main outcome of the reform would be a reshape of the balance of power in the country’s political system, with suggested key amendments weakening the next Russian presidency in 2024 via new checks on power.”
In response to the weak economy, the Kremlin is counting on a state-led, mainly budget-financed investment program of 69 federal-level projects with an overall cost estimated at $65 bln annually, or 4% of GDP, to boost the economy without large-scale debt-financing.
“The potential contribution to Russia’s growth will depend on the execution of these projects, some of which are already delayed,” says Suwalski.