Stability above all

Georgy Bovt on Russia’s economic outlook and 2022–2024 draft federal budget

Having declared paid non-working days in the country in early November, the Russian authorities have quickly withdrawn from this quasi-lockdown. The vast majority of regions limited themselves to a paid week off work, although it had been previously stated that it would take at least two weeks to disrupt the chain of contagion. There is a clear reluctance to ‘freeze’ the economy. Will it work?

The immediate price for the workplace shutdown turned out to be insignificant for the Russian budget: subsidies for community-focused non-profit organisations, small and medium-sized businesses, and compensation for banks. First Deputy Prime Minister Andrey Belousov tentatively estimated the losses from the November measure, akin to a lockdown for the Russian economy, at 60 billion roubles, and proposed measures to support business. In particular, a loan programme to support affected businesses was resumed (at a potential cost of 40 billion roubles), as was a programme calling for lump-sum payments in the amount of the minimum wage (12,792 roubles) per employee as long as employers kept the number of their employees at or above 90% – this is another 27 billion roubles. Frankly speaking, this is not much for the Russian economy. Besides, words have not yet become deeds. In practice, business will have to fight for every penny with the tax authorities, who are notorious for their stinginess and bureaucratic nagging.

Judging by a survey conducted by the Russian Union of Industrialists and Entrepreneurs, there was a lot of scepticism among businesses about the availability and efficiency of previously introduced support measures that were widely touted by the government. The awareness of such programmes was quite high (95% of respondents), and the most popular measure was the payment of one minimum monthly wage per employee. However, more than 40% of companies surveyed noted that they did not qualify for this assistance, although they needed it. Slightly more than half of respondents answered that they ‘did not plan to apply for subsidies’, and as few as 5.3% of respondents either planned to apply for this support measure or had already applied for it. Only 14% of businesses had applied or planned to apply for an interest-free loan for urgent needs to maintain employment in SMEs (36% of respondents wanted to apply but did not meet the criteria). Measures such as changing the terms of loan agreements – suspension of payments for SMEs from the most affected sectors, or a simplified subsidised loan procedure for SMEs or obtaining a loan to replenish the working capital of companies that are too big to fail – were desired by about one third of respondents. However, those willing to apply did not meet the conditions and requirements. About 60% of companies were not going to apply for these support measures.

Overall, Russian businesses were largely dissatisfied with the effectiveness of the financial support package offered during the pandemic. Almost a fifth of respondents (18.1%) assessed available solutions as ‘very poor’, while a quarter of them assessed them as ‘poor’. According to 37.2% of businesses, the system of financial support measures looked poor, but everything possible was being done. Positive answers were given by 19.1% of respondents. And although most of the financial aid measures were aimed at helping small and medium-sized companies, small businesses were more likely than others to answer that the measures were ‘very poor’. Extremely negative opinions about the system of financial aid were shared by 26.1% of small enterprises. In the case of medium-sized enterprises, the answer ‘very poor’ was selected by 17.1%, while 12.5% of large enterprises were highly dissatisfied with the financial aid measures.

The lockdowns introduced in Russia in 2020 cost the economy much more than the ‘mini-lockdown’ introduced in November 2021. Thus, according to some estimates, the downtime in the second quarter of 2020 generated losses of 7%–7.5% of GDP (8–8.5 trillion roubles out of a nominal GDP of 106 trillion roubles), or 82–84 billion roubles a day. Overall, a third of Russian businesses became unprofitable as a result of the pandemic; their total losses exceeded 1.65 trillion roubles, while 1.16 million small and medium-sized businesses closed.

However, paradoxically, the Russian budget (we are talking about the federal budget here) did not suffer that much against this backdrop, not to mention the country’s piggy-bank, i.e. the National Welfare Fund (NWF), where the excess profits from oil sales are accumulated. In 2020, the federal budget was executed with a deficit of 3.8% of GDP (4.1 trillion roubles), thus exceeding the expectations voiced in the middle of the year. The authorities also assumed that budget deficits would continue until 2024. At the same time, in the pandemic year of 2020, the size of the NWF almost doubled: from 7.77 trillion to 13.55 trillion roubles. That is, at a time when the leading world economies were spending trillions of dollars, euros and yen to support their economies, driving the size of their budget deficits into double digits, not a single rouble was spent for these purposes from Russia’s ‘rainy-day piggy bank’. Moreover, contrary to previous government projections, the federal budget will have a healthy surplus in 2021. Thus, every cloud has a silver lining for the federal authorities. At the end of the first nine months of 2021, the federal budget surplus was about 1.4 trillion roubles. And it is likely to reach 2 trillion roubles by the end of the year. This looks like a rejection of fiscal stimulus to the economy in favour of the accumulation of reserves. Apparently, the current situation is not that hopeless after all.

The overall outlook for the Russian economy looks rather modest at the moment. In any case, no breakthrough after the decline in 2020 is in sight. Thus, according to the overwhelming majority of forecasts, Russian GDP is predicted to grow by 4%–4.2% by the end of 2021. In 2022, a slowdown of 2.6% is expected, to be followed by a drop of 2%, although the Ministry of Economic Development forecasts 3% growth next year, as does the IMF (3.1%).

Against this backdrop, the government’s budget proposed for 2022–2024 is characterised by enviable penny-pinching, i.e. continued accumulation of funds in the hands of the federal authorities (budget plus NWF), as well as abandoning large-scale measures to stimulate the economy (no quantitative easing whatsoever) or social programmes intended as a demand stimulus.

Representatives of the authorities are talking about the ‘social focus’ of the budget while, in fact, federal budget spending for ‘social items’ is decreasing. For example, healthcare spending will see an 8.6% decrease (up to 1.25 trillion roubles), and spending on social policy will see a 6% drop (5.84 trillion roubles).

Speaking of priorities, about 18.5 trillion roubles (nearly a quarter of total expenditures) will be spent on social services in the narrow, literal sense of the words over three years. National defence (almost 11 trillion roubles) comes next in terms of spending. Then, about 10.5 trillion roubles is earmarked for economic development. National security and law enforcement is the fourth-largest spending category (8.7 trillion roubles). Thus, judging only by open-source – not classified – information, spending on security, defence and law enforcement agencies comes to the fore.

An analysis of the proposed budget provides quite a clear picture of how the government sees the country’s further development. The new budget is not so much a budget for an ‘economic leap’ as it is a budget for survival and preservation of stability under difficult external circumstances. It makes it possible to avoid abrupt transformations in the economy inside the country (i.e. structural and institutional reforms) that could lead to political destabilisation due to the inherent uncertainty of short-term results.

The Russian state is seeking to concentrate as much leverage and as many resources in its own hands as possible, as it distrusts all subjects of economic activity, both businesses and regional entities. It is carefully tightening its belt, except for defence spending, as if getting ready for hard times in advance. The overall reduction of government spending will reach 1.5% of GDP as early as in 2022, despite the huge budget surplus.

The Russian government assumes that, firstly, the Russian economy will grow at a very moderate rate, i.e. 3% on average over the next three years. Secondly, in order to conceal the fact that the growth rate in Russia will be lower than the global average (contrary to the president’s instructions that it should be higher than the global average), the projection for the global rate was lowered instead. According to the draft budget, the projected global rate of growth will reach 6% and 4.6% in 2021 and 2022, respectively, and will subsequently return to its pre-pandemic level of 3.3% and 4.6% in 2023 and 2024, respectively. Thirdly, the draft budget contains an ultra-optimistic projection for inflation in Russia – no more than 4.2% (currently the inflation rate is about 7%).

In turn, the moderate growth rate of Russia’s GDP will predetermine the moderate growth rate (or stagnation) of Russians’ prosperity. For Russians to get richer, GDP should grow by 5% a year or more. Such growth is not in sight. So far, favourable foreign economic conditions keep the government’s hope alive that it will be possible to avoid the traditionally strict dependence of social policy spending on economic growth. Apparently, the government is betting that the announced spending on social policy can be maintained without GDP growth of more than 3%. Hence, until 2024, the disposable incomes of the population will moderately increase, i.e. by 2.4% annually on average (2.4% next year and 2.5% in 2023–2024). Steady economic growth is promised. Obviously, the government does not intend to stimulate incomes by handing out helicopter money. However, even these rates of income growth look too optimistic.

Surprisingly, the authors of the draft budget assume that revenues will grow faster than the economy itself. It is estimated that, as early as next year, budget revenues will increase by at least 5.2%, to more than 25 trillion roubles. Tax receipts will increase by 1.382 trillion roubles, while total budget expenditures will increase only by 263 billion roubles (to 23.694 trillion roubles). The budget surplus, which will amount to 1.3 trillion roubles (1% of GDP) next year, will be used to replenish the NWF, which over the next three years will almost double from its current 14 trillion roubles to approximately 23.2 trillion roubles. More than half of the income of nearly 76.3 trillion roubles over the next three years, i.e. 40.2 trillion roubles, will be collected through taxes. VAT revenues will see the biggest increase. But revenues from personal income tax are also expected to spike. This year revenues from personal income tax are planned to reach 81.3 billion roubles, whereas nearly 187 billion roubles is expected next year, and 203.7 billion roubles in 2024. This has to be achieved through more effective tax collection measures since personal income will not increase at the same rate.

Revenues from corporate income tax will grow at a rate almost twice that of the economy. Thus, in 2022, these revenues will increase by 8.1% compared with the current year, by 4% in 2023 (compared with 2022) and by 5.6% in 2024 (compared with 2023). That is, the estimated growth of revenues from corporate income tax will far exceed the growth rate of the economy as a whole.

That the Russian economy will grow is doubtful given such a tough budget policy against the backdrop of a difficult investment climate, the high key rate, stagnant (or barely increasing) incomes of the population and slow growth of consumption. The budget does not include any mechanisms (e.g. tax incentives) to stimulate investment against the backdrop of an increasing tax burden on companies. The state sees itself as the main driver of modest economic growth; by taking funds from companies and citizens, it is going to spend them on, among other things, the implementation of national projects that will cost about 8.8 trillion roubles in total over three years. However, the performance of many national projects has to be improved, as it is far behind plans.

The government’s proposed budget further reinforces fiscal centralism to the detriment of fiscal federalism. The regions will get less money, including for stimulating regional economic growth. The federal centre is trying to collect as much money as possible to distribute itself, based on the traditional approach that only Moscow can dispose of this money without embezzlement. For example, the collection of revenues from the mineral extraction tax on ferrous and non-ferrous metals and mineral fertilizers will be further centralised in the ratio of 83% to 17% in favour of the federal budget vs. the regions. Up until now, the regions have received 60% of the mineral extraction tax and expected more freedom in distributing the tax revenues collected for these commodities. However, the federal government does not support such discretion. Among other things, this is probably why it believes it is necessary to cut top-down fiscal transfers, including those for social needs, by 6.2% next year (to 1.02 trillion roubles).

In general, the new budget is to maintain stability in all its forms and manifestations. As the saying goes, a bird in the hand is worth two in the bush. And no doubt these are strong hands.

Photo: Scanpix