The Russian economy contracted in quarter 2 by 8 percent and quarter 3 by 3.4 percent. This negative momentum is expected to continue in quarter 4 amidst the resurgence of the pandemic, according to the World Bank’s latest Russia Economic Report (#44 in the series). The report also says that fiscal, monetary and social policies put in place have helped contain the impact of the pandemic-induced crisis to date.
Russian economic growth is projected at -4 percent in 2020, a less severe contraction than the forecast in September. The revision reflects the better-than-anticipated economic performance in quarter 3. Consumer and business confidence is expected to improve assuming a vaccine deemed safe and effective is rolled out; this would pave the way for a gradual rebound at 2.6 and 3.0 percent in 2021 and 2022, respectively.
However, a more adverse scenario suggesting a sharp growth in new COVID-19 cases continuing in the second half of 2021 could further weigh on economic activity. In such a case, GDP in 2021 is projected to grow by 0.6 percent, with consumers and investment demand affected more deeply, and to increase by 2.8 percent in 2022.
Countercyclical fiscal policy and sizeable macro-fiscal buffers have helped contain the impact of the crisis. The general government deficit is expected to reach 4.6 percent of GDP in 2020, compared to a surplus of 1.9 percent of GDP in 2019. After a stronger fiscal stimulus in 2020, Russia’s fiscal consolidation in 2021-2022 will be deeper than in other emerging markets and developing economies and become a drag on growth.
“Given relatively low public debt, sizeable macro-fiscal buffers, and expected relatively modest pick-up in growth, Russia has some fiscal space for a more gradual fiscal consolidation,” said Apurva Sanghi, the Lead Economist for the World Bank in Russia.
The effects of the pandemic have touched various spheres of the Russian economy: the unemployment rate increased to 6.3 percent in October 2020, the highest in eight years. Approximately half a million jobs have been lost in each of three large sectors: manufacturing, construction, and retail and hospitality services between the second quarters of 2020 and 2019. The national poverty rate increased to 12.6 percent and 13.2 percent in the first and second quarter of 2020, respectively. The economic deceleration could have led to an increase to 14.2 percent in 2020: however, relevant adopted policies may fully offset the impact of the crisis on the poverty rate, with the 2020 rate is projected to be around or slightly below the level projected for the year before the pandemic.
This year, the report also assesses how regional and global value chains (GVCs) have contributed to Russia’s development over the past two decades as well as the potential for GVCs to drive future economic growth.
“There are opportunities to drive Russia’s long-term economic growth, by deepening and expanding Russia’s participation in manufacturing and services global value chains,” said Renaud Seligmann, the World Bank Country Director in Russia. “In turn, these opportunities could help promote Russia’s National Goals aimed at developing exports of high-tech manufactured and agricultural goods, creating jobs in these sectors, and speeding up Russia’s technological development.”
Russia needs to position itself within the context of the changes in GVCs that were already under way and were accelerated by the COVID-19 pandemic, like mega-trends towards automation, digitalization and obstacles to free trade. In this context, the report has developed several policy recommendations to overcome constraints towards furthering Russia’s integration into GVCs, including: trade policy reforms to reduce trade costs and promote participation and upgrading in GVCs; measures to enhance the role of domestic and traded services in the economy; and facilitating foreign direct investments and spillovers through improved institutional and regulatory quality, as well as reduced restrictions.