The Covid storm clouds are gathering over Russia’s economy
Ivan Tkachev looks into where the Russian economy is most vulnerable to the fallout from Covid-19
At the time of writing, most official economic data on the Russian economy in April has already come to light. April was the month when the Covid-19 pandemic was rampant, and Russian oil prices hit their lowest levels since the late 1990s. A whole set of operational indicators is available too, allowing us to make a rough estimate of the May figures as well (electricity consumption, Russian railways cargo turnover, Bank of Russia data on the dynamics of payments made to various industries, etc.). But what do these datasets really tell us? How reliable are they?
If taken at their face value, these data show that the crisis in the Russian economy was not as deep as expected. According to the Russian Ministry of Economic Development, the most integrated indicator, i.e. the real GDP, fell by “only” 12% in April after growing by 0.8% in March. Vladimir Putin formally announced a non-working regime throughout the country for the whole of April and early May. Industries that account for approx. 56% of gross value added in the economy were put on hold, either completely or partially, while 44% of manufacturing plants continued to operate (i.e. mining, oil refining, metallurgy, power generation, food processing, pharmaceuticals, and some other industries, which is why most of them did not experience much decline). According to economists’ predictions, the decline in real GDP in April would be closer to 20%.
Other indicators in April and May showed mixed dynamics but, according to official data, there was no failure on all fronts. According to Rosstat, the industrial output index fell by a moderate 6.6% in annual terms, which was less than the predicted decline of up to 10%. Cargo transport by the monopolist railway company fell by 5.9% year-on-year in April, and slightly less in May: 5.4%. The unemployment rate rose markedly in April, to 5.8% from 4.7% in the previous month. Even with the rise, this figure is still low, especially compared to the pessimistic forecasts of some economists. Contrary to initial concerns about a price leap from a weakening rouble, annual inflation stood at 3% for May (below the Bank of Russia’s target of 4%). This opened the way for the key interest rate to be decreased to a record low at the next Central Bank meeting. Meanwhile, the rouble is almost back to its early March figure, observed before oil prices collapsed; the price of one Urals barrel rose to nearly USD 40 a month, a level which can accommodate the Russian budget.
However, some indicators, primarily related to consumer demand, showed a double-digit decline. Retail trade sales nosedived in April by 23.4% versus April 2019. This proved much worse than the market consensus of around -18%. Versus March, it was down 27%. Sales of non-food products collapsed by 36.7% year-on-year. This deep decline in retail comes from a temporary closure of retail stores and social distancing. For example, stores for non-food products suspended their operations in late March. Online shopping did not compensate for this. The share of this segment in total retail turnover in Russia does not exceed 5% (compared to 12% in the USA and 37% in China).
Even with supermarkets staying open, retail sales of foodstuffs also sank in April by 9.3% year-on-year. Less affluent Russians started to economise on food, spooked by income declines. After weak growth of about 1% in 2018–2019, real disposable income dropped again (by 0.2%) in the first quarter of 2020, when the crisis was emerging. The stagnation of household incomes since 2014 is a sensitive issue for the Kremlin and the government. Plans to reverse this trend have failed. Real incomes by the start of 2020 were 7% lower than the pre–sanctions levels in 2013. Even if we take the official, rather optimistic forecast prepared by the Ministry of Economic Development, stating that real incomes will fall by 3.8% in 2020, they will already be 11% below the 2013 levels at the end of this year. Forecasts prepared by independent economists, meanwhile, are starker. Take the Higher School of Economics, which expects real incomes of Russian citizens to fall by 8–12% in 2020, depending on the scenario. Here, the gap versus 2013 will reach a critical level of 15–18%.
The first crisis with rising unemployment coupled with a decline in income
There is nothing surprising in the falling incomes of Russian citizens. The only question is how far companies will cut costs with lay-offs or salary cuts. Previous recessions in Russia proceeded with hardly any increase in unemployment (largely because it was artificially suppressed). Adjustments to the economic conditions came mostly through pay cuts. If the crisis remains short-lived, companies will again seek to maintain employment, but with pay cuts. However, this crisis is likely to be long-standing. The epidemiological restrictions will not be completely lifted until at least 2021 (plus there is still the risk of a ‘second wave’). So, an increase in unemployment cannot be avoided this time. “The coming crisis may be the first one when a truly large-scale lay-offs are involved,” economists from the influential Centre for Macroeconomic Analysis and Short-term Forecasting (CMASF) wrote on 31 May.
The official unemployment rate for April, according to the International Labour Organisation methodology, stood at 5.8% of the workforce (up by 0.8 million people, or 23% compared to March) and is likely to continue growing. CMASF expects the unemployment rate to leap to 8–8.3% by 2021. Besides, starting from March, almost 3 million Russians (4.1% of the total workforce) were put under a part-time unemployment regime — i.e. downtime, part-time work or unpaid leave. Most of these workers have lost their salaries or wages. These are official data. The real picture of the labour market is likely to be worse. One reason: Russia has a large informal labour market, accounting for more than 20% of the total workforce, or 14.5 million at the end of Q1. It is much easier to sack people and cut their salaries under such informal arrangements.
There are still no official data on the scale of the real wage decline in April. Then again, 32% of Levada Center respondents reported a reduction in wages for themselves or their family members at the end of April. By the end of May, the HSE survey showed that 45% of respondents had either lost their income completely or had suffered a significant paycut. Extra pressure on the income of Russian citizens comes from a retail lending drought. In April alone, according to the estimates of the Higher School of Economics, reductions in consumer credit drove consumers to withdraw around 400 billion roubles from their cash resources.
The recovery will be uneven
Both the Kremlin and the government are, of course, afraid of the deteriorating financial situation of their voters and of rising unemployment. This may explain the decision to vote on constitutional amendments on 1 July, i.e. in the midst of the crisis. The bottom figures of the economic downturn forecast for Q2: the Ministry of Economic Development expects the GDP to fall by at least 9.5% versus the same period a year ago. People may soon get tired of economic turmoil so the government’s ratings might decline. Citizens’ trust in President Putin has already fallen from 34% to 27% (according to VCIOM’s survey, responses to the open-end question “Which politician do you trust?”).
The anti-crisis plan devised by the authorities and adopted in early June sets aside 0.8 trillion roubles (0.7% of GDP) by the end of 2021 to support citizens (social benefits to the unemployed) and 1.4 trillion roubles (1.3% of GDP) to support small and medium-sized enterprises, including loans to pay salaries/wages and subsidies to keep employment. Even so, the business sector has complained that government support would not reach those who need it. Small businesses losing a huge share of revenues (and in debt) often find it more beneficial to close down than to pay full wages to their staff. It is a better scenario than holding out for partial and eventual reimbursement of these costs from the government; the programme of subsidies to small businesses in the affected industries is 12,000 roubles per employee — roughly a quarter of the average salary in Russia.
While the economy began opening up and economic activity returned in May, April is likely not the nadir. Some supply side indicators are likely to rebound. Other indicators, such as unemployment rates, real wages and incomes, are likely to struggle. Industrial production could have accelerated the decline to 9–10% in May, which hints at a deeper decline in energy consumption versus April (electricity consumption in Russia can be monitored daily via data from the System Operator of the Unified Energy System). Oil and gas production accounts for 31% of Russian industry. According to Rosstat, oil production in April rose by 0.6% in annual terms. Then, it collapsed by 15.5% in May since Russia reduced its production under the international OPEC+ deal.
The statistics do not paint a complete picture
Yet another global problem has become more acute during the crisis. Namely, the quality and reliability of Russia’s economic statistics. Timely, complete and reliable statistics are crucial in periods of crisis. Unfortunately, many indicators and the way they are published are raising concerns. Without reliable statistics, we do not fully understand the current condition of the Russian economy.
Let us look at some examples. The April estimate of the real GDP decline (-12% yoy) by the Ministry of Economic Development came as a surprise since there was a significant difference versus the nominal GDP decline by 27%. The reason lies in the GDP deflator, a coefficient that reflects price fluctuations in the economy. For the first time since 2009, this coefficient turned out to be negative, and not by a bit. It was minus 17%. The nosediving export prices for Russian oil in April saw to that. However, the Ministry of Economic Development did not provide any explanations. So deflator calculations remain in a black box. The GDP decline in April also cannot be seen as fully accurate because the Ministry computes it using at the dynamics of the so-called basic industries (mining, processing, construction, trade, transport). All these account for only 60% of the gross value added.
The Ministry of Economic Development has administrative access to Customs and Tax Service operational data on export, import and sales of commercial companies. Using those data, the Ministry recalculates its own economic activity index on a daily basis. In mid-May, the index showed a decline in activity by 21% versus the pre-crisis levels (compared with a decline by 33% in April), as reported by Minister of Economy Maxim Reshetnikov. This indicator would have been extremely useful for assessing the economic recovery. But, the Ministry decided not to publish it. It keeps it only for itself and the cabinet.
As reported by Reuters on 2 June, Rosstat, controlled by the Ministry of Economy, shifted the publication of statistical indicators to late evening after the beginning of the coronavirus crisis — even though they were usually released at 16:00 Moscow time. “Rosstat is banned from publishing data or required to shift the release timing at least,” said a Reuters source, pointing out that this is done to draw less attention to negative statistics. This author has also heard a similar version from journalistic sources, and does not doubt it. Despite Rosstat’s formal independence from the government, an unofficial directive came from its ‘PR Department,’ Reuters claims. If it is true, this undermines the credibility of official statistics. After all, if government officials can order Rosstat to publish statistics outside business hours, why shouldn’t they try to influence the figures? If this is so, we could see the existence of a parallel data world. As the tactic from the Soviet times went, according to legend: one set of statistics for the public, another for internal analysis by the Politburo.
In fact, it does not matter how much exactly GDP fell in April or May: by 10, 15 or 20 per cent. With a V-shaped recovery model, these losses would recoup fairly quickly, but not in Russia. The government has set a very conservative goal to bring the economy to a growth rate of 2.5% next year, after a 5% decline this year, which means that a return to pre-crisis 2019 levels is not expected before 2022. More vital is the long-term, hard-to-repair damage that the crisis will inflict on the economy. The authorities themselves have acknowledged that risks include further growth in unemployment and underemployment figures, falling household incomes and solvent demand, an increase in bad debts (which will affect the banking sector) and the unfolding chain of overdue payments in the economy. Such risks mean that the future of Russia’s economy will become unpredictable for the next couple of years.