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Covid’s second wave: Can Russia’s economy cope?

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Economics Editor at RBC

Ivan Tkachev on why the authorities changed their strategy for fighting COVID-19

So far, the Russian authorities have avoided the expression ‘second wave of the coronavirus pandemic’. But regardless of what to call it, a higher rate has been observed in Russia since early autumn. From 9 October onward, the country has been beating its daily record for the number of newly reported COVID-19 cases every day (the previous high was observed on 11 May). On October 25th, the daily number of newly confirmed cases was 17 347, a figure three times higher than just over a month ago. By October 21st, 317 people reportedly died of COVID-19 in Russia that day, the highest daily toll on record.

Questionable statistics

Officially, coronavirus mortality in Russia remains low with a case-fatality ratio of 1.7%. By comparison, the rate is 2.6% in Turkey, 2.8% in the USA, 3.8% in Spain, 7.1% in the UK, and 10.2% in Mexico (data from Johns Hopkins University). Virus fatality figures for Russia in the university’s database are based on the latest updates provided by the special coronavirus headquarters established by the Russian government. The same data are published by the World Health Organization. More detailed and accurate data are published monthly by Rosstat (the Federal State Statistics Service). They show a higher COVID-19-related mortality rate of up to 4.6% (the last update was for April–August).

The difference in the estimates because the coronavirus headquarters counts only those cases where the coronavirus was identified as the main cause of death and where no more examinations are required. Rosstat publishes updated figures which include medical evidence from autopsies, with a lag of about a month. Rosstat statistics classify cases where the virus was identified as the main cause of death and where COVID-19 was not recognised as the main cause of death based on autopsies. The ratio between these two categories is approximately 60% to 40%. Obviously, if a person has underlying health problems, a physician can identify one of the diseases as the main cause of death. Rosstat data for April–August puts the mortality rate from the coronavirus as the main cause of death was 2.7% in Russia. The RBC estimates the rate of coronavirus-related deaths (regardless of whether COVID-19 was the main cause of death or not) at 4.6%.

There is no evidence of direct tampering with Russian COVID-19 mortality statistics. Nor is there evidence that Russia’s regions could have taken such steps on the basis of instructions from the national authorities. However, this cannot be ruled out. Russia has a history of election fraud and statistical manipulation to reach targets set by the presidential ‘May decrees’, for example, which received wide media coverage. At the same time, if there is such a misuse of statistics, it is less pronounced now than it was in the spring. This may partly explain the higher recent morbidity and mortality rates compared to April–May. ‘Underreporting or overreporting under the threat of punishment or out of a desire to demonstrate effective work is to some extent characteristic of most [Russian statistical] indicators’, the sociologist Olga Molyarenko commented in a column in the Project online publication last month. Molyarenko studies the misuse of Russian statistics. In September, the Russian healthcare regulatory authority (Roszdravnadzor) admitted that ‘some COVID hospitals reported nearly 100% of deaths as COVID-19 fatalities while others reported almost zero deaths from COVID-19’.

Of course, regional physicians and officials must have a rational incentive for statistical fraud. For example, they may fear that the national authorities will perceive relatively high regional morbidity and mortality rates from the coronavirus as proof of the ineffectiveness of disease control and prevention measures and the treatment of patients. Or they may underreport these cases so that there is no reason to introduce new quarantine restrictions which curtail economic activity and reduce regional tax revenues (especially when the national authorities suggest that an economic lockdown should be avoided).

In January–September, Russian regions’ revenues decreased by 7% year-on-year. Expenditures grew by 18% due to an increase in spending on healthcare and economic stimulus measures. Some regions also complain that the Ministry of Finance is not allowing them to fully offset losses. In other words, there are administrative restrictions of the money regions can spend on fighting COVID-19 and its economic impact. Why show real statistics on morbidity from COVID-19 if you cannot spend as much as you need to fight it? This month, the Ministry of Finance may have acknowledged the problem and promised to ease financial restrictions on Russia’s regions.

The authorities are trying to avoid another lockdown

The uptick in coronavirus infections since late September has not yet triggered stricter national movement restrictions like those of spring. Yet, during the first wave of the epidemic, Vladimir Putin delegated to Russia’s regions the authority to take measures against the coronavirus. The regions have been exercising these powers ever since. As reported by the media, 34 out of 85 Russian regions have already reintroduced restrictions. However, they mostly address remote working and self-isolation on the part of the elderly. Having given it some thought, the central authorities have stepped away unless the number of confirmed cases becomes critical. It is hard to say what figure the Kremlin and the government perceive as critical.

In recent days, several high-ranking national officials have agreed that there is no need for strict restrictions like the ones introduced in April and May, when companies were shuttered and citizens were put under stay-at-home and self-isolation orders. On 13 October, Anna Popova, the head of Rospotrebnadzor, announced that an economic lockdown had not been considered. Deputy Prime Minister Tatiana Golikova said on 14 October that the epidemiological situation in Russia was ‘relatively manageable’ and did not need national restrictions. The Deputy Chairman of the Security Council, former Prime Minister Dmitry Medvedev, expressed his view that border closures were not an effective means of combating the virus. At the same time, the government announced that it would resume air travel with Serbia, Japan and Cuba, after flights to Turkey, the UK, Switzerland and other countries had already returned. In other words, the authorities are sending strong signals to society that the severe restrictions imposed in the spring were, if not an error, not as reasonable as was previously believed.

The new ‘anti-COVID narrative’ of the Russian authorities can be summarised as follows: during the first wave, experience in combating infection was accumulated; the healthcare system has adapted; ‘hospital capacity’ (to use bureaucratic jargon) is enough even given the worst-case scenario. A temporary spike in morbidity was predictable, partly due to seasonal cold weather; citizens need to follow epidemiological requirements, including wearing masks outside and keeping a social distance (and in the case of non-compliance, fines and other coercive measures will be used). A message will be conveyed to the masses that the situation is under control; that a functional vaccine is round the corner; and that citizens themselves are responsible for observing the basic rules for protection against the coronavirus.

President Putin recently announced the registration of a second Russian vaccine. Trials involving volunteers are underway. Mass vaccination of the population could begin in 2021. It is likely to be voluntary. Still, knowing the propaganda potential of the state-owned media and the often ‘voluntary but mandatory’ nature of such initiatives which are imposed on employees of state-owned enterprises and public institutions, one can expect the broadest possible coverage of the programme.

New Moscow model

Moscow is the main testing ground for anti-coronavirus policy. The capital accounts for about a quarter of confirmed cases and registered deaths from COVID-19 in Russia. In early October, according to the Vedomosti newspaper, Moscow City Hall was considering several scenarios, including the toughest one, a return to the regulations requiring individuals to have a digital pass to move around the city, which was in effect in the capital from April to June. Moscow Mayor Sergei Sobyanin began by announcing the resumption of compulsory self-isolation for people over 65 and the requirement that at least 30% of the employees of companies in the capital work remotely. Moscow schoolchildren were sent on a two-week vacation (instead of the traditional one week). Many expected that students would not return to schools after their vacation and would be taught online. However, Sobyanin offered a trade-off: students in grades 1–5 would be taught in schools while students in grades 6–11 would be taught through e-learning for at least two weeks.

Moscow is demonstrating that the approach to fighting the coronavirus is becoming more flexible and targeted: restrictions protect the most vulnerable groups (pensioners, people with chronic diseases), are differentiated depending on the epidemiological risk (high school students are more exposed to the risk of infection; that is why they stay home), were introduced almost immediately after their announcement for a relatively short period of time (which can be extended if necessary) and can be lifted as quickly. The model applied in the capital can be replicated in other regions. Besides, the authorities have realised that remote working did not have a major impact on efficiency. In Moscow, based on data from the local Rosstat department, up to 43% of employees are employed in sectors that make working from home possible.

Why did the authorities change their strategy?

The national authorities’ unwillingness to go back to strict restrictions and regions’ selective approach to such measures come down to one thing: the Russian economy will not survive another lockdown. As early as mid-May, Medusa wrote that government officials, including First Deputy Prime Minister Andrey Belousov personally, heads of state-owned corporations and influential businesspeople lobbied for the lifting of quarantine restrictions, since another two months of such a burden on businesses and the population ‘would have amounted to the country’s entire [annual] budget’. Vedomosti reported in early October that Moscow authorities are trying not to ‘devastate business in the fight against the coronavirus’.

Given the relatively rapid lifting of restrictions in the summer, the Russian economy deteriorated much less in 2020 than other economies around the world. The Ministry of Economic Development estimates that the GDP drop in January-August was 3.6% year-on-year. According to the ministry’s current forecasts, GDP will fall by 3.9% by the end of the year — far more optimistic than most forecasts from April and May. According to Google, mobility in Russia higher than the average in developed and other emerging economies. As of 9 October, mobility trends for grocery shops and public transport stops and underground stations were almost at pre-crisis levels; workplace attendance was 17% below the baseline. In this sense, the Kremlin and the government have a safety cushion that allows for a larger economic decline in 2020, say, of 4.5%.

Surprisingly, the Ministry of Economic Development did not include the second wave of the pandemic in its autumn forecasts. These are used to map out the federal budget for the next year. Doubtless, the government has prepared other, more risky scenarios for internal use. The official forecast seems to have become a means of reassuring the public. Meanwhile, the Accounts Chamber of the Russian Federation stated that the second wave of the disease ‘was unfortunately here’ and warned that, taking into account the second wave, the GDP drop in 2020 could be 4.2%–4.8%. Alexei Kudrin has recently said that the government would probably have to revise both the macro forecast and the budget in early 2021.

The Central Bank of Russia cautiously admitted that the second wave might require a return to some restrictions. They will not be as strict as they were before, the bank noted, since ‘the healthcare system has accumulated experience’. The possible negative consequences for the economy from tightening measures ‘will be much milder than in April–May’, the Central Bank believes.

Russia’s budget is strained

The draft budget was compiled by the Ministry of Finance using a rather optimistic forecast of the Ministry of Economic Development. However, the Ministry of Finance has traditionally been conservative in its approach to budget drafting. Judging by the parameters of the 2021 budget, the Ministry of Finance acknowledges the existence of a second wave; revenues will not return to pre-crisis levels next year. Expenditures will still be above the levels typically seen in previous years. There are few reserves left for more budget adjustments. The Ministry of Finance has made a 10% reduction on most budget items. It has withdrewn the planned indexing of officials’ salaries in 2021 and introduced a 5% cut on the state armament programme. On the other hand, the Ministry of Finance increased tax cuts for large businesses and affluent citizens. Total economic stimulus could come in at 3.4% of GDP — modest by international standards. In fact, the authorities have not introduced new anti-crisis measures since June. They have limited themselves to implementing decisions taken during the first wave. Some measures that did not need extra funding (such as the moratorium on bankruptcy) were extended in October.

The only powerful asset the government has for dramatic deterioration of the situation is the Russian National Wealth Fund (NWF). As of 1 October, it had accumulated $117 billion in liquid reserves (funds deposited in the accounts of the Central Bank of Russia). However, the Ministry of Finance strictly adheres to a policy of using the NWF only to replace shortfalls in oil and gas revenues. In October, about $1.6 billion will be allocated for this purpose. So that rules out spending from the NWF to assist the population and businesses. If oil remains around $40–$45 per barrel and the Ministry of Finance has to draw funds from the NWF to compensate for the decrease in oil and gas revenues, the use of the NWF for other purposes is unlikely and will only be possible as a last resort.

Why might the second wave be more severe?

The attitude of Russians towards the pandemic could elicit more severe consequences from the second wave. At the end of September, President Putin admitted that Russians were tired of restrictions. ‘People are tired of masks, social distancing and especially isolation’, he said. Many people walk around without masks, and almost no one wears protective gloves. Besides, a survey conducted by the Higher School of Economics in September showed that ‘coronavirus scepticism’ is rising in Russia: 43.4% of citizens either do not believe the virus exists or consider its danger exaggerated. People in this group, represented mainly by men aged 30–60, are not going to get vaccinated after the vaccine appears. Nor are they going to self-isolate during the second wave. Such a high percentage of coronavirus sceptics jeopardises public discipline in following basic antiviral measures; it increases the likelihood of more infections.

The authorities’ reassurance that the national healthcare system is fully prepared to admit all patients with COVID-19 should also be treated with caution. While Moscow is likely to cope with the increasing number of seriously ill patients due to the deployment of temporary hospitals (although, according to media reports, the situation in Moscow hospitals is becoming harder every day), some regions already face a shortage of physicians for treating COVID-19 patients (Altai Krai and the Yamalo-Nenets Autonomous Okrug, among others). The root of this problem lies in the socio-economic inequality of Russia’s regions, including the disparity in the availability of medical professionals. For example, according to 2019 Rosstat data, this indicator ranged from one physician per 165 residents in St Petersburg (the best indicator) to one doctor per 401 residents in the Kurgan Oblast (the worst indicator), with an average of one physician per 269 people.

Photo: Scanpix