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Russian economy: COVID19 stress test

Updated: Nov 25, 2020

Policy Pulse - George Anjaparidze - 3 April 2020

Oil prices have plummeted by 72% in 2020 and have reached their lowest level in nearly two decades. Demand has been hit by the economic impacts of the coronavirus. At the same time, oil supply has surged. OPEC countries together with Russia and other oil exporters were not able to agree on additional cuts and have instead increased supply. The lower oil price has brought the Russian ruble tumbling, it is down 29% against the US dollar since the start of the year.

The impacts of COVID-19 on the Russian economy are likely to be significant and will continue to place a strain on public finances. In our central stress test scenario, we expect that a combination of a fall in revenues and need for higher government spending, will result in an annual funding gap of about $120 billion. We assume that oil and gas revenues will mirror the 72% fall seen in the oil price, which will lower total revenues by about 28% (based on preliminary 2019 data, aggregate oil and gas revenues made up about 39% of the federal budget). In addition, our scenario assumes that other government revenues fall by 20% and government spending increases by $17.8 billion (as announced yesterday).

The hard currency resources available in the National Wealth Fund as of 1 March 2020 would be able to finance this shortfall for approximately 12 months. If the impacts on COVID-19 linger beyond this time period, the Russian leadership may be left with little choice but to raid the foreign exchange reserves of the Russian Central Bank, which stood at a staggering $570 billion. Such an extreme move would undermine the independence of the Russian Central Bank. However, it would extend the ability of the Russian government to fill the COVID-19 funding gap for an additional 4 to 5 years.

The strategic implication of this analysis is that Russia is likely to remain in a position of relative economic strength during the COVID-19 pandemic. Despite being dependent on hydrocarbon resources, its vast foreign currency reserves give it sufficient buffers to manage the volatility arising from the COVID-19 crisis in the short and medium term.

Other countries in Eastern Europe and Central Asia, without significant financial reserves, particularly those dependent on remittance flows and tourism, may be more exposed to the impending volatility. This means the international community, working in concert with the IMF, World Bank and other international financial institutions, needs to prepare robust support packages that will give these countries the necessary resources to manage the expected volatility. Veritas Global is in the process of examining vulnerabilities and identifying potential policy solutions.


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