How has the coronavirus crisis changed Russia’s public finances? Has the pandemic hit federal revenues? How did the state bank react to the pandemic? How has the crisis influenced this year’s budget? Invest Foresight discussed all these issues with Sergei Drobyshevsky, Director for Research at Gaidar Institute for Economic Policy, in an interview during the 2021 Gaidar Forum at RANEPA.
Public finance during pandemic
— The 2020 federal budget had been planned long before the pandemic. I have two questions in this regard. Was there anything special about the state budget for 2020? And what changes did the pandemic make to the government’s financial plans?
— Initially, we expected the 2020 budget to be the first real financial plan that would fully incorporate the major national projects launched in 2018. What we saw in 2018-2019, in fact, were preparations, while many expenditures planned under those big projects had been postponed. So we hoped 2020 would be the first year when government spending on the national projects would finally be carried through; among other things, that was expected to give a certain boost to the economy. Understandably, the pandemic did make some very serious changes. The government had to re-channel resources to support the population and the economy as part of anti-crisis packages in order to minimize losses from the coronavirus infection. This greatly changed the structure of federal spending and the entire scope of the government’s budget policy. Instead of a surplus, we closed the year with a considerable budget deficit, and an increase in sovereign debt that was definitely too sharp for our traditional budget policy, and so on.
— How much have the national projects lost? What happened to them after all?
— It is difficult to say how much they lost, because in 2020, the Government adopted new National Development Goals. All the national projects are now being adjusted. It is clear that the new national projects will partially replicate those started in 2018, with a few additions. But the former national projects are, well, they are history. They have never been actually implemented. In the current context, it is difficult to predict what would have happened if everything had gone as planned in 2018.
— How did the pandemic affect public revenue?
— The federal revenue primarily comes from oil and gas earnings plus foreign economic activity proceeds and the value added tax. The last two were hardly affected by the pandemic. But oil and gas revenues crashed dramatically. Russia’s budget has lost at least a third of its planned oil and gas earnings. Still, this is not so much the effect of the pandemic as it is the result of falling oil prices which began even before the pandemic, after the breakdown of the OPEC deal in late February and early March 2020.
Other sources of tax revenue are rather stable. Clearly, VAT is closely
linked to the GDP dynamic. Because our GDP has decreased only slightly, we lost
very little amount of VAT (again, factoring in the entire scale of the crisis) —
of course, also thanks to the efforts of the tax service and improved tax
collection. The losses for the federal budget were eventually minimal.
Regional budgets suffered much worse because they are more affected by lowering personal income and the revenues of small and medium-sized businesses.
— Do you evaluate the scope of support provided by the government due to the pandemic? Is it possible to compare the amount of help with similar relief measures in other countries?
— Absolutely. We evaluated the scope of government support provided through budgetary channels in 2020 several times. There are certain nuances: some of the measures are not only considered support during the pandemic but simply a new concept of social policy. Therefore, numbers may vary. Overall, we estimate that the support has been worth at least 2.9% GDP.
— Do you have any comparative data about similar contingency plans in other countries?
— Of course, we have data. The scale of support varies significantly from country to country, from 2–3% to 15% of GDP. But you need to understand that the current crisis is not exactly an ordinary economic crisis. It is a one-of-a-kind crisis caused by a pandemic. It could be compared to a war or a natural disaster. When it comes to a crisis, the logic of the more support the better the outcome for the economy does not work. On the contrary, revenue is falling regardless of relief measures but consistent with the pandemic, the lockdown and other non-economic measures and their impact on the economy. Governments must work out fiscal measures depending on the depth of the fall. That said, more fiscal measures do not necessarily alleviate the economic collapse. Quite the opposite. Extensive budgetary support has been associated with deeper recession in other countries. Therefore, despite the scope of Russia’s relief measures being relatively modest (many European countries allocated 10–15% of GDP), considering the fact that Russia’s GDP experienced a significantly smaller loss in 2020 than the GDP of such countries as France, Italy, Spain, Germany and the UK, I believe the scale of budgetary support is adequate. Perhaps the government could have provided more support. The more money is spent the better.
But there was a high level of uncertainty: neither we nor the government knew how serious the second wave could be. I don’t think that we can be 100% sure that there will be no new shocks related to the pandemic and that no additional support will be required. I believe that the government, having spent as much as it did, still retains a margin of safety, and this is a totally correct and sensible policy.
— Did the anti-crisis assistance become a window of opportunity for the regions in terms of interaction between the regional and federal budgets?
— I don’t think so. In order to change something, it is necessary to change the mechanisms of the redistribution of taxes, powers, etc. at the legislative level. In 2020, the regions did receive unprecedented opportunities and independence as part of measures to combat the pandemic, but not in the financial sphere. In 2020, the situation required emergency measures, and the regions were provided with them. But I believe that in 2021, everything will go back to the pre-2020 model.
Pandemic and monetary policy
— In your opinion, was the pandemic a cause of inflation?
— I think it wasn’t, actually. Rather the opposite. The pandemic affected demand, since people did not have a physical opportunity to purchase goods, except for pre-lockdown panic-buying in late March. In this sense, the pandemic actually had an anti-inflation effect. Almost no analyst, including us, predicted the surge of inflation that we saw in the fall and early winter. The Central Bank didn’t foresee it either. A rise in inflation, in our opinion, is related mostly to the falling ruble and surging prices. The falling of the ruble was not related to the pandemic, but to the increased risks of new economic and financial sanctions as well as the global revision of currency risks in countries with developing markets. And again, it happened not because of the pandemic, but due to the assessment of their financial stability and growth prospects in the post-Covid world.
— Did the pandemic force our Central Bank to adjust its monetary policy?
— The Central Bank, while somewhat putting its reputation at risk, conducted a policy that really could support the population, banks and enterprises amid the pandemic and a strong negative shock caused by the falling oil prices in March-April. The softening of monetary policy in the beginning of the year despite the negative oil price shock was a measure almost all countries adopted. This past summer and early fall, when a certain easing of restrictive measures took place, the Central Bank’s interest rate cut allowed for a relatively fast restoration of consumer demand due to reduced price for consumer and mortgage loans. An opportunity also arose for supporting small businesses and real sector enterprises, which were offered reduced loan costs as well. This all allowed the Russian economy to respond to part of the deferred demand, which started occurring last April and May, as early as in 2020. Lower loan costs proved advantageous for both citizens and enterprises.
2021: a year of transition
— Speaking of the 2021 budget, what are its core characteristics?
— In any case, this year’s budget is transitional. On the one hand, this is a budget that has been adopted following the start of the implementation of new goals of national development and new national projects. On the other hand, work has only started to create a definite scope of measures and projects necessary for achieving these development goals. This is the reason this year’s budget cannot entirely be considered a development one. Obviously, it is partially affected by the anti-crisis measures introduced in 2020. Part of these measures will expire in the spring of 2021, and certain measures ended in late 2020. This all affects the budget structure in 2021 as compared to last year.
So this budget is special; it is hard to analyze it as a new format of the budget policy. We are aware that following the last year’s budget expansion aimed to support the economy and citizens, this year we have to implement a tougher policy, if only due to the abolition of the anti-crisis measures. Yet, we understand that the 2021 budget cannot fully include expenses for new national projects. Also, when the work was underway to draw up the budget for this year, we could see risks of new possible negative shocks that still persist, which may require new anti-crisis measures. When drawing up the 2021 budget, the Government has to consider a possible necessity for making adjustments to respond to any challenges.
— Does that mean Russia actually cannot afford a three-year budget now?
— A three-year budget has been adopted — but I believe that the 2022-2023 budget obviously cannot be representative in the current conditions. In the fall of 2021, depending on the situation around the pandemic and the world economies, budgets will be substantially revisited. I hope that by the late fall we will be able to forget about the risks and the necessity for pandemic-related anti-crisis measures entirely, and will view the budget economy as a tool for developing the Russian economy in line with the goals set by the President.
By Konstantin Frumkin