COVID-19 and Russia’s Looming Debt Cliff

COVID-19’s “second wave” is pushing back economic recovery all over the globe, giving rise to predictions of massive recorded drops in GDP this year followed by a robust recovery in 2021 and decent growth rates after that. Official economic forecasts in Russia notably mirror those projected global trends. The Ministry of Economy estimates a 2020 decline measuring 3.9 percent of GDP but rebounded growth of 3.3 and 3.0 percent in 2021 and 2022, respectively (Economy.gov.ru, accessed November 25).

Leaving aside the question of how much Russian government statistics for this year may have been doctored (see EDM, May 18, 26), official estimates of economic growth in 2021 and beyond themselves look rather fanciful for two important reasons. First of all, Russia has largely squandered its overall gro­wth potential due to decades of economic overregulation and a worsening investment climate. Since 2009, the Russian economy has grown (assuming the 2020 drop lines up with expectations) by a me­re 7.1 percent, or 0.57 percent annually. The respective figures for the United States over this same period are 16.6 per­cent and 1.29 percent per annum (Worldbank.org, accessed November 25). But second of all, Russia’s economy will lack any means for growth beyond 2020 due to the particularities of the government’s response to the so-called “corona-crisis,” which will end up producing more macroeconomic problems than it managed to address.

The key feature of Moscow’s anti-crisis policies was the unwillingness of the government to provide substantial direct assistance to people and businesses. In the US, such adopted packages amounted to 12.4 percent of GDP; in the Eurozone, they reached al­most 15 percent; and in Japan, government assistance totaled up to 20 percent of GDP in 2020 (Weforum.org, April 10; The Japan Times, April 6). In Russia, according to optimistic assessments, the overall stimulus package stood between 2 and 3 percent of GDP (RBC, April 8). Even more importantly, the Russian stimulus included a distinctly small pool of money earmarked for direct payments to individuals: 325 billion rubles ($4.3 billion) for families with children (unchanged from the pre-pandemic budget), up to 100 billion ($1.32 billion) as special unemployment benefits, 90 billion ($1.19 billion) distributed to doctors and nurses treating COVID-19 patients, and around 80 billion ($1.06 billion) granted to owners of small- and medium-size companies (TASS, December 26, 2019; Rossyiskaya Gazeta, RBC, May 19, 2020). Altogether, these payments amounted to around 0.5–0.6 percent of GDP, making them rather small and insignificant.

But at the same time, the Russian government encouraged both businesses and consumers to take on new loans: corporate debt increased by around 14 percent between the start and third quarter of 2020, in­debtedness of private individuals rose by 9.8 percent, and mortgage lending ballooned by almost 30 percent (with a record 4 trillion rubles, or $53 billion, distributed in new mort­gages) (Regnum, November 11; RBC, October 9). All this borrowing was fueled by various government programs, including subsidized mortgages (6.5 percent annual rate). Moreover, the government announced the postponement of tax pay­ments for small and medium businesses, worth around 700 billion rubles ($9.26 billion), social security payments up to 450 billion rubles ($5.95 billion), as well as other fines and penalties. The regional authorities did their best to freeze rent payments for shops and small offices (RIA Novosti, March 24), pressuring landlords to reschedule rents. So, while the Russian stimulus measures helped business save up to 2 trillion rubles ($26 billion), overall perso­nal and corporate debt rose another 7 trillion–8 trillion ($93 billion–$120 billion)—an important reason for why Russia’s economy experienced (officially) a relatively modest decline in 2020.

In both the US and the Eurozone, governments racked up debt while individuals and businesses gai­ned (either directly or from the resulting surges in stock and asset valuations). But in Russia, the increase in public debt—expected to reach 6.7 trillion ($89 billion) rubles, or around 6.5 percent of GDP, this year (RBC, September 16)—was accompanied, nearly symmetrically, by a growth in government reserves: the National Wellbeing Fund added 5.6 trillion rubles ($74 billion) from January thro­ugh October (Minfin.gov.ru, November 9). The Russian state is almost debt-free (its obligations will come to 21–22 percent of GDP by 2023), while US public debt already broke the 135 percent mark this summer) (Stlouisfed.org, September 30). So in 2021 and beyond, the US economy will, with significant probability, rebound due to growing disposable incomes, a booming stock market and excessive private savings made in 2020. Whereas, the Russian economy will likely stall: those bu­sinesses that managed to survive the crisis will suddenly face an enormous tax bill following the expiration of the payment holiday; the service sector will have to cope with depressed de­mand caused by a growing share of personal incomes devoted to debt servicing; and the corporate sector will need to try to reschedule its debts to banks and ot­her finan­cial institutions.

The striking difference between the Western and Russian strategies of coping with the pandemic crisis lies in the cost of debt both systems generate, as well as in its management. In the US, the Treasury issued plentiful low-yield bonds, most of which were acquired by the Fed (Stlouisfed.org, November 27). The Treasury is set to pay interest to the Fed, and the latter will send much of those proceeds back to the federal budget (Federalreserve.gov, January 10), drastically easing the debt service and freeing up more consumer spending. In Russia, on the other hand, the government encouraged people and businesses to borrow while rescheduling its own claims for the coming years—thus, leaving little or no room for the economy to grow after the pan­demic is over. The widely anticipated “recovery growth” (vosstanovitelnyy rost) in Russia is unlikely to emerge since both people and businesses will soon face in­creased debts and tax arrears. The Russian leadership in 2020 acted as it traditionally does: implicitly proclaiming that there is no such thing as “people’s” money since all money belongs to the state (gosudarevy dengi) (Kommersant, June 20, 2018). But this will impose a huge burden on the national economy.

That is not to say that one should expect the Russian economy to crash outright in the next couple years. But the country can expect to see its overall decline continue unabated (see Jamestown.org, March 2017) as the current era of economic stagnation enters its second decade—exceeding in length not only the downward trend of the of the 1990s but also the disastrous period sparked by World War I and the Russian Civil War.