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Russia's Economy Loses Momentum Amidst Covid-19 Resurgence

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Russia's Economy Loses Momentum Amidst Covid-19 Resurgence RUSSIA’S ECONOMY LOSES MOMENTUM AMIDST COVID-19 RESURGENCE; AWAITS RELIEF FROM VACCINE RUSSIA ECONOMIC REPORT 44 DECEMBER 2020 Overview RUSSIA’S ECONOMY LOSES MOMENTUM AMIDST COVID-19 RESURGENCE, AWAITS RELIEF FROM VACCINE SPECIAL FOCUS: RUSSIA INTEGRATES: DEEPENING THE COUNTRY’S INTEGRATION IN THE GLOBAL ECONOMY RUSSIA ECONOMIC REPORT 44 DECEMBER 2020 Russia Economic Report| № 44. December 2020 The cutoff date for the analysis and data used in this report was December 8, 2020 for parts 1 and 2. This report is produced twice a year by World Bank economists in the Macroeconomics, Trade and Investment (MTI) Global Practice. The team that prepared this edition was led by Apurva Sanghi (Lead Economist for the Russian Federation) and Olga Emelyanova (Economist, MTI), and consisted of Irina Rostovtseva (Research Analyst, MTI), Lucie Wuester (Consultant, MTI), Katerina Levitanskaya (Senior Financial Sector Specialist, FCI), Peter Stephen Oliver Nagle (Senior Economist, EPGDR), Collette Mari Wheeler (Economist, EPGDR), Damien Matthias Valentin Boucher (Consultant, EPGDR), Samuel Freije-Rodriguez (Lead Economist, POV), Mikhail Matytsin (Data Scientist, EPVGE), Anya Vodopyanov (Public Sector Specialist/ Economist, EECG2), and Alberto Leyton (Lead Public Sector Specialist, EECG2). The focus note on Russia’s participation in GVCs was produced by the World Bank team co-led by Apurva Sanghi (Lead Economist) and Ian Gillson (Lead Economist). The core team consists of Olga Emelyanova (Economist), Lucie Wuester (Consultant), Calvin Djiofack (Senior Economist), Jagath Dissanayake (Consultant), Deborah Winkler (Senior Consultant), Karen Muramatsu (Consultant), Irina Rostovtseva (Research Analyst), Laura Gomez-Mera (Consultant), Yue Li (Senior Economist) and Priyanka Kher (Private Sector Specialist). Peer reviewers included Sjamsu Rahardja (Senior Economist, EECM1, MTI) and Yaroslav Lissovolik (Chief Managing Director, Head of Analytical Department of Global Markets, Sber CIB, Russia). The team would like to thank Renaud Seligmann (Country Director for the Russian Federation), Sandeep Mahajan (Practice Manager, MTI Global Practice), Asli Demirguc-Kunt (Chief Economist, ECACE), Michael Lokshin (Lead Economist, ECACE) for their comments, advice and support. The team also would like to express their gratitude to the Department for the budget policy and strategic planning of the Ministry of Finance for the collaboration. The report was edited by Christopher Pala (Consultant). This report went to press on December 16, 2020. The cutoff date for the analysis and data used in this report was December 8, 2020 for parts 1 and 2. For queries, please contact Apurva Sanghi at [email protected]. TABLE OF CONTENTS ABBREVIATIONS AND ACRONYMS ................................................................................................................................... VII OVERVIEW ......................................................................................................................................................................... IX PART 1. RECENT ECONOMIC DEVELOPMENTS ....................................................................................................................1 1.1 Global activity: COVID-19 resurgence threatens to interrupt the incipient recovery ............................................................2 1.2 Russia: Russia’s GDP contracted in Q2 and Q3, with negative momentum expected through Q4 amidst rising cases and re-installment of restrictions .......................................................................................................................................... 6 1.3 Balance of payments: Pressures from lower energy export receipts, financial markets volatility and increased geopolitical risks resulted in capital outflow and ruble depreciation ..................................................................................10 1.4 Monetary Policy: The CBR paused its accommodative policy actions .................................................................................17 1.5 Financial sector: the Russian banking sector is weathering the pandemic, but the worst may lie ahead. .........................19 1.6 Fiscal policy: Countercyclical policy with deficit mostly financed through domestic debt issuance as revenues are being strained by the pandemic .................................................................................................................................... 22 1.7 Labor market: COVID-19 reduces employment, but policies seem to blunt impact on poverty .........................................26 PART 2. OUTLOOK: VACCINATION SPREAD IN 2021 IS EXPECTED TO PUT THE ECONOMY ON THE PATH OF SUSTAINED RECOVERY .................................................................................................................................................33 PART 3. RUSSIA INTEGRATES: DEEPENING THE COUNTRY’S INTEGRATION IN THE GLOBAL ECONOMY..................39 1. Motivation ............................................................................................................................................................................. 40 2. Russia’s participation in GVCs ................................................................................................................................................ 42 3. Opportunities for GVCs to drive Russia’s future economic growth .......................................................................................48 4. Policy recommendations for Russia to seize the gains from GVC opportunities ...................................................................53 References ................................................................................................................................................................................. 62 LIST OF FIGURES Figure 1: Almost all global commodity prices rose in Q3 2020, although with some divergence between commodities ..............3 Figure 2: In May, OPEC+ have implemented a historic production cut (change in OPEC+ crude oil production since January 2020) .......................................................................................................................................................... 3 Figure 3: Global industrial production and manufacturing PMI experienced an initial rebound ....................................................3 Figure 4: After stabilization of new daily COVID-19 cases, a resurgence of the virus began in Q4 2020 ........................................3 Figure 5: Global goods trade volumes improved but services trade remained depressed .............................................................4 Figure 6: Equity markets gradually recovered from earlier lows but experienced bouts of volatility .............................................5 Figure 7: Remittances inflows to EMDE regions are projected to face steep declines, particularly in Europe and Central Asia ....5 Figure 8: After relaxing stringency measures, the euro area was forced to re-introduce restrictions due to a surge in new COVID-19 cases ..................................................................................................................................................... 5 Figure 9: The recovery in China has been robust, particularly investment .....................................................................................5 Figure 10: The second wave of Covid-19 hit Russia in September ..................................................................................................6 Figure 11: Excess mortality has been relatively low in Russia, compared to other countries .........................................................6 Figure 12: In Q2, faced with domestic supply and demand, and terms of trade shocks, Russia’s GDP dropped by 8 percent, y/y............................................................................................................................................................. 7 Figure 13: Energy exports registered growth partly due to rebound in China and base effect .......................................................7 Figure 14: Compared to the EU-27, both industrial sectors and services sectors in Russia were more resilient to the shocks induced by the COVID-19 pandemic ........................................................................................................ 7 Figure 15: Negative momentum is expected in Q4 ......................................................................................................................... 8 Figure 16. An increase in general government spending was concentrated in health, social policy and support to economy categories .................................................................................................................................................... 8 Figure 17: PMI indexes point to more robust resumption of economic activity in Russia’s services than in other countries: .......8 Figure 18: The number of SMEs fell by 4.2 percent between October 2018 – 2020.......................................................................9 Figure 19: The current account declined sharply, mostly due to lower goods exports .................................................................11 Figure 20: Merchandise exports and imports value fell sharply in 2Q 2020 and 3Q 2020, y/y .....................................................11 Figure 21: Goods exports values remained below 2019 levels in the first three quarters of 2020.
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