Russia Shot Itself in the Foot With the Corona Hysteria, but the Economic Fallout Will Be Far Less Than in the West
In relative terms there will actually be a convergence
In a global comparison, Russia’s corona epidemic response has been very strong. The best and most foolproof indicator is the fatality rate. Russia has experienced the lowest Covid-19 mortality among all countries in the Northern Hemisphere, significantly lower than nearly all Western countries. Presently the fatality rate in Russia is 10 per 1 million, compared to 684 in Belgium, 544 (Spain), 483 (UK), 481 (Italy), 386 (France), 274 (Sweden) and 211 (USA).
Russia’s initial decisive response helped reduce the spread. The Russian healthcare system proved superior to most other countries in terms of adequate facilities, medical devices and protective gear. Russia increased capacity nationwide by refurbishing existing hospitals and constructing 17 new ones in record time (4-6 weeks). The country also ramped up domestic production of medical necessities, including personal protective equipment. By May, Russia’s production capacity was enough to cover 100% of domestic needs. At the time of this writing, Russia has not yet exhausted its hospital capacity (even at the virus’ epicenter in Moscow).
Another commendable facet of its response has been the rapid roll out of testing. In absolute numbers, Russia (4.5 million tests) is second only to the US. In per capita terms, Russia has conducted one-third more tests than the United States and is now on par with Germany.
Most countries have almost exclusively tested only severely ill people who have been admitted to hospital. Russia, on the other hand, is currently the global leader in contact tracing. As a result, many outwardly healthy people have been tested. Two weeks ago, the Russian epidemiology authority reported that 60% of all those who tested positive in Moscow were asymptomatic. Later it was reported that 95% of all those who tested positive were either asymptomatic or only with mild symptoms, similar to a common cold.
Lately, there have not been any new reports on the proportion of severely ill vs. those showing mild symptoms among people tested.. The author assumes this is due to the government’s efforts to motivate people to follow the stay-home orders strictly during the last ten days of the lockdown, coinciding with the traditional Russian May Day and Victory Day holidays. Due to the extraordinary warm and sunny weather, the government faces an increasing challenge to keep people at home. However, today the Swedish government reported that a staggering 98.5% of all infected people in their country were asymptomatic or mild. Presumably, this would also apply to Russia.
Preliminary, the government has promised to start gradually loosen the lockdown restrictions starting from May 12. Most seem to think it is about time. The comparison of Russia’s infection with the global count would just not seem to motivate that Russia keeps the restrictions in full force anymore.
Russia’s economy proves strong in a global comparison
With the corona crisis taking its toll around the world, Russia’s economy looks relatively strong in a global comparison. This should not come as a surprise to anybody who has been following our Awara reports on the Russian and global economies. In a seminal report with the ominous title With Global Recession Looming, Russia Looks Strong — which garnered across various platforms over a quarter of a million readers last August – we at Awara predicted the global crisis. Everything pointed to it even before corona. he meltdown we are seeing in some of the Western countries is entirely due to the dreadful shape of those economies, which has been becoming increasingly evident. Only massive amounts of QE cash injections and central bank bond purchasing at zero or negative rates kept the economies superficially afloat.
In this report, we also pointed out all the relative strengths the Russian economy possessed and which would help to mitigate the effects of the global crisis on the Russian economy.
To quote our earlier seminal report:
“The debt saturation point has been reached, therefore this time it will be different, the central bankers have lost their magic wand and won’t be able to renew the debt binge and extend it with one more decade. Instead, there will be a day of reckoning.
Governments and corporations will have to put their act together and let the market weed out the failed entities. Those who cannot carry the debt, will have to shed it. There will be bloodbath with defaults, bankruptcies and massive unemployment. – Perhaps a revolution here and there. – There will be no choice, deleveraging must happen.
Now, whether this system will come crashing down or just slowly die as it trundles downhill will not matter all that much. It will eventually die either way. Most people would prefer the slow motion option, but only with the crash would a cure come. Whatever, it has become increasingly difficult to stave off the crash and this time around, the financial markets would take the real economy down with them big time.”
We also reported about Russia’s advantage:
“The question then is, who would be left standing? Naturally, those who are less leveraged. Now, scroll back to have a new look at the above charts on government and household debt. Find the position of Russia there? That’s right. Russia is the country with – by far – the least debt, both public and private.“
“Having after 2014 following sanctions been cut off from the Western debt orgy, even Russian corporations are shielded against a possible Western debt apocalypse.”
Subsequent events have proven that Awara was absolutely correct in everything referenced in that report about Russia’s extraordinary financial and economic We recommend all who have a stake or who want to explore the opportunities on the Russian market, to go through the solid set of arguments in this Awara report.
We then followed up on that August report with a brief in January called As Global Growth Stalls, The Russian Economy is Gathering Momentum. That was just after corona had become a global scare. In this report, we acknowledged the possibility that the corona crisis could wreak havoc in the global economy. But allowing for this scenario, we stressed that Russia would anyway fare substantially better than most of the world, and in particular, better than most Western countries on average. All the points made in the January economic brief still remain valid for a better understanding of today’s situation.
Skyrocketing debt, but not in Russia
Russia’s strengths are many. The extraordinary low level of government (national) debt forms the rock solid fundament of the country’s economic edifice. By the end of 2019, Russia’s national debt-to-GDP was 12.9%. This is a fraction of the debt levels of the old developed countries of the West. In the US, the national debt was way above 100% by 2019, when state and municipal debt is added to the official figures. (That in accordance with the global standards, which the US has not been following). With the already announced corona bailouts and stimulus, with the shortfall of tax revenue and additional debt and a lower GDP as the base, the US debt level will shoot above the 130% level. Hereby, Russia, is expected to add 3% to its national debt.
All major Western countries have at least 3 times as much debt as Russia and many – for example, Italy, France, Spain – are in a similar debt crisis as the US. It is expected that most, if not all countries will follow the US lead with skyrocketing borrowings. These different debt trajectories will only increase Russia’s comparative advantages.
Being in this favorable situation, Russia has ample room to dip into a budget deficit, especially after two years of solid surpluses. Presently it is expected that Russia could manage the crisis with a mere 3.5% budget deficit in 2020. That’s a level, which has been the norm in the West even during the “good years.”
Following the enormous economic crisis in the US, experts are predicting a record $3.8 trillion budget deficit, a staggering 18.7% of GDP. Most European countries might not go as high as the US in jacking up the deficits, though an average of at least 10% is to be expected.
GDP decline – far too early for definite predictions, but Russia relatively better off
We think it is far too early to make any predictions on countries’ actual GDP 2020. There are too many unknown factors. What is the level of permanent destruction and bankruptcies caused by the corona responses across the globe? (Quite a lot). Will the corona unemployment turn structural and long-term? (We think, to a big degree, yes). What has been the real level of destruction of disposable income and asset values, eroding of savings? (Huge). How long will restrictive measures stay in force? (At least leisure and travel, especially international will mostly remain shut until the end of the year). Will international trade and investments rebound? (Not, just by waving the magic wand of calling off the corona measures). Will beggar-thy-neighbor currency and trade wars raise their heads? (Yes). Will the US go out with full-blown trade war and sanctions on? (Looks so).
It is impossible to estimate the long-term economic effect of all these questions on the global economy and any given country in particular. Therefore, we think it is best to refrain from giving numeric predictions. We are however on much firmer ground to assess how countries will do relatively to each other. For this purpose, we may look at the GDP forecast given by the rating agency Fitch. Fitch predicts (April) that Russia would incur a 3.3% GDP cut, this while their predictions are much worse for Western countries, Fitch expecting eurozone GDP to decline by 7%, US GDP by 5.6%, and UK GDP by 6.3% in 2020.
We would in fact expect a bigger GDP decline for those countries and perhaps for Russia as well, though with a major advantage for Russia.
When estimating the Russian GDP decline, one has to bear in mind that the fossil fuel sector makes up a much smaller portion of the GDP than commonly believed. According to the latest figures from the World Bank, we estimate it as forming 9% of the economic output. Furthermore, GDP growth is calculated based on production volumes rather than prices, and the former is not expected to significantly decline. We estimate that Brent oil would cost $35 per barrel by the end of this year.
No galloping inflation this time. Rate cuts expected
Not only the Russian government is financially solid, but also corporations and households. Household debt in Russia is also the lowest among major countries. At the same time, Russians have – proportionally – much more savings than for example Americans. Furthermore, there is no reason to expect Russian unemployment to rise beyond 9%. We estimate that most probably it will not exceed 7% by year-end. Meanwhile, unemployment already has shot up to 20% in the US.
Russia also has in store for the hard times the possibility to slash interest rates, hardly an option for Western countries who already are at zero or negative rates. Already in April, the Russian central bank cut the key rate by 0.5% to 5.5%. As inflation has not picked up, we see room for further rate cuts down to 4% within the next half year.
In all the financial crises Russia has experienced since 1990, the big problem was always the galloping inflation. This time however, inflation didn’t budge beyond a small initial shock. The difference is the incredible story of Russia’s solid finances and the amazing success of its important substitution policies. Import substitution is what Russians call the efforts to bring in manufacturing and food production onshore. This process was intensified after the West imposed sanctions on Russia in the wake of the Ukrainian crisis. As a result, Russia now is virtually self-sufficient in food and even exporting a surplus. Russia has also come close to self-sufficiency in medicine. Overall, Russia has by far the absolutely smallest share of imports relative to the total economy among all major countries. So far, critics of Russia have focused on the relatively smaller level of export of manufactured goods, while they failed to realize the importance of the vastly more significant domestic autarky.
This success of domestic production is what put an end to Russia’s vicious inflation cycle. Earlier, when Russia was dependent on foreign imports and energy exports, the ruble plummeted and prices shot up during a crisis. This is not the case anymore.
Oil price won’t break the bear’s back
This time even the sharp plunge in oil prices did not break Russia’s back. There have even been speculations that Russia has not been trying especially hard to prevent the rumored tripartite oil price war between itself, Saudi Arabia and the United States. The influential oil and energy news source Oilprice.com reported in March that Russia could well cope – thanks to its built-up reserves and financial solidity – with oil prices as low as $25 per barrel up to 10 years from point of view of keeping the countries budget afloat and foreign reserves intact. Meanwhile, experts deemed that the Saudis would barely last 2 years.
Anton Siluanov, the minister of finance, estimated in late April that the money in the sovereign wealth fund will suffice to see the country through to 2024 according to the present situation assessment. The balance should be 7 trillion rubles ($90 bn) at the end of the year. The minister expects that the total cost of the corona response would be only 6.5% of GDP. (We assume, this means over next two years). The main source of funding the crisis response would consist of borrowings.
No blanket bailouts and money printing
Although business associations and the financial press have been criticizing the government for insufficient support in response to the crisis, we think it is good that the government has been cautious in this regard. The European governments have announced massive packages; the ECB has opened up an unlimited tab for bond purchases; the US government is doling out trillions; and the Fed was at $6 trillion bailouts and QE last time we checked. Russia, on the contrary, has not announced any blanket bailouts or QE monetary easing and bond purchases. All that big business has received so far is a paltry $10 million in tax deferments. The government is readying a program for them. Anything paid out however, in form of loans or other financing, will be considered case-by-case. Most importantly, the government has announced that only companies that refrain from mass lay-offs will be eligible.
So far, there has been more direct support for SMEs, most importantly with a 50% reduction in employer’s social contribution. Direct support has also gone to front-line sufferers of the corona restrictions, enterprises in non-food retail, restaurants, bars, leisure, sports etc. In general, the relief provided to those is rather inadequate and unfortunately, many of those companies are expected to go bankrupt.
The support to households has been twofold. Most importantly, employers have been forced to bear the cost of the stay-home regime, as the government mandated that they have to pay full salaries during this period. Dismissals, furloughing and reduction of pay was outlawed, although there are reports that many have proceeded to do so anyway. However, all such actions can be contested in court. [Actually this sounds even worse than the American way. Businesses (including small ones I assume) are punished twice. First, they’re not allowed to earn, but they’re still forced to pay out wages (for what work??). Who in their right mind is ever going to open another business under such a regime?]
Russia relies on market mechanisms
Russia mainly and correctly relies on market forces to take it out of the crisis. This is only possible because Russia is still one of the few countries in the world that still runs a market economy.
Russia of all countries in the world is in the unique position to conduct a classical countercyclical fiscal and monetary policy on all fronts. (It’s classical according to theory, but as far as we know, first time ever applied in practice). It means dipping into a budget deficit in hard times after having secured surpluses when the going was good. It means using reserves from the sovereign wealth fund, to fund public works. It also means slashing the interest rates, when it is needed to ease monetary conditions and stimulate the economy.
Russia now the world’s fifth largest economy ahead of Germany
With corona dominating the news, the business media entirely missed the latest IMF GDP figures for 2019, made official on April 22. The PPP conversion now showed that Russia had passed Germany as the world’s fifth-largest economy. The other stunning fact was that the Chinese economy is now one-third bigger than the US. Note also, once the UK will be deducted from the EU totals, India alone will be very close to overtaking the EU in economic size.
We stress that the PPP conversion is the only sensible way to measure the relative size of countries’ economies. The PPP measures the real output of goods and services, whereas the nominal GDP only measures how expensive one country is relative to another. We have explained the difference between PPP and nominal GDP in this article. If anybody still wants to take comfort in the nominal figures in an attempt to cling on to a lost world, then, by all means, do carry on, who are we to stop you?
Most importantly, these figures show a trend, which cannot be denied. Note, these are not adjusted for debt levels. If we would do that – reduce the artificial GDP portion achieved through wasteful (non-productive) debt – then Russia would come out even far better. Actually, we have earlier done such an exercise on reducing debt from countries’ GDP and the results were shocking. You can access that report here.
At the end, we are sure that due to the corona crisis Russia, China and India will extend their relative GDP leads.
Therefore, our advice: Go East, corporations, young and old.