Russian Central Bank head Elvira Nabiullina holds a press conference via video link in Moscow. Photo by Sefa Karacan/Anadolu Agency via Getty Images.

Russian Central Bank head Elvira Nabiullina holds a press conference via video link in Moscow. Photo by Sefa Karacan/Anadolu Agency via Getty Images.

The Kremlin’s economic response to COVID-19 has been modest compared to many of its rivals. Although the government is under increased pressure to spend its ‘rainy-day fund’, it believes that doing so will ultimately undermine the fiscal stability underpinning its geopolitical sovereignty.

Since its 1998 default to the International Monetary Fund (IMF), Russia has been reluctant to take on sovereign debt. The 2008-09 global financial crisis, followed by the shock of the 2014-15 oil price crash and sanctions, prompted the Kremlin to boost its efforts for economic sovereignty through rouble devaluation and import substitution.

Since 2016, reserves have been rebuilt and the country now enjoys $550 billion in gold/forex and 10% of GDP in the National Welfare Fund, designed to cover budget deficits during periods of low oil prices. But fiscal sovereignty has come at a cost.

Russia cut spending to align with lower oil prices, meaning it can balance its 2020 budget at a fiscal break-even point of $42 per barrel. This has impacted growth, which came in at a mere 1.3% in 2019, down from 2.5% in 2018. Hydrocarbon exports continue to account for the bulk of Russia’s exports, leaving Russia’s budget revenues susceptible to a global downturn.

Huge oil price fluctuations

This brings into question the wisdom of withdrawing from the OPEC+ agreement in March, effectively launching an oil price war as the world stood on the verge of a pandemic. Alongside the drop in global demand induced by COVID-19, this resulted in huge price fluctuations of Urals crude before rising back into the $35-$40 per barrel range in early June.

Russia’s finance minister Anton Siluanov claims the National Welfare Fund (NWF) can feed the budget at present oil prices for up to six years, but that assumes limited spending and consistent revenues from other non-oil parts of the economy.

Russia has already seen а 1.9% contraction in GDP for the first four months of this year, and the Central Bank predicts a 6% contraction for the whole of 2020. Economic measures – including handouts to families with children, increased unemployment benefits, tax vacations, rent and credit deferment options, and some direct payments – have been modest.

Bloomberg estimates the combined stimulus amounts to just under 4% of Russia’s GDP, but the Economy Ministry argues the number is closer to 10% when considering loan guarantees and tax breaks - primarily to large firms deemed ‘systemically important’ to the Russian economy.

Small and medium-sized enterprises (SMEs), making up one-fifth of the economy, have had it much worse. Beyond loan and credit deferments, any businesses continuing to employ 90% of their workforce are eligible for modest payments of 12,130 rubles ($163) per employee per month.

But by the end of May, only 10% of businesses have received emergency coronavirus support, while 60% doubt they will emerge from this crisis at all. If true, this will certainly increase the share of large, state-owned companies in the economy.

As lockdown eases in Moscow, Russia’s regions now face the brunt of the crisis. The Kremlin devolved political authority for managing the crisis to the regional level, but economic assistance has been slow. Informal arrangements between the government and regional oligarchs shows businesses filling the gaps in state spending. But some regions are keen to ease their lockdowns early to get the economy running again, despite the risk of a second wave.

The government is under increased pressure to change its ‘fiscal rule’ to free up NWF reserves with the simple argument that there is little point in having a rainy-day fund if you are not prepared to use it. A fourth economic package is designed to invest 7.3 trillion rubles ($106 billion) over two years to boost social support, infrastructure, and increased support for regional budgets and SMEs. These include an extended moratorium on inspections through the end of the year and changes to bankruptcy laws.

Russian economic guru Alexei Kudrin argues Russia could use this crisis to embark on ‘visionary’ reforms, such as reduce hydrocarbon dependence, promote political decentralization, and economic liberalization. These changes combined with reforms to the judicial and foreign policy spheres could reduce the costs of doing business and spur investment.

One group of liberal economists, including Sergei Guriev, called upon the Central Bank to launch a program of quantitative easing (QE) and distribute large cash payments directly to Russian citizens. Doing so could offer a much-needed reprieve to citizens and help stimulate business activity as lockdowns start to lift.

So far, Russia’s most influential economic technocrats are less than enthusiastic. Central Bank head Elvira Nabiullina has resisted calls for direct payments, preferring more traditional tools such as rate cuts.

Siluanov has rebuffed calls to change the ‘fiscal rule’, noting in a revealing interview that Russian borrowing costs are substantially higher than those of developed countries. Spending down the state’s reserves would make future borrowing more expensive and lead to spending cuts in Russia. Debt levels are low and must stay that way to maintain macroeconomic stability and avoid a ‘debt spiral’.

In the meantime, Russia’s massive reserves remain attractive to international investors. The Kremlin may feel partially vindicated by their cautious approach, but the long-term impacts of a slow response may dampen the recovery even further.

For the last 20 years, Russian economic elites have benefited greatly from a highly centralized decision-making apparatus, and this centralization combined with a fiscal surplus have been key features of Russia’s attempt at economic sovereignty, which in turn gives it ability to create geopolitical waves. This has worked well for Vladimir Putin, and coronavirus has – so far at least - been unable to change these mantras.