Reforming the Russian Economy: The COVID-19 Crisis and Beyond
The impact of the recession on Russia at this particular moment in geopolitical history will impact its foreign policy trajectory in very specific ways.
As the economic impact of the COVID-19 pandemic unfolds, Russia has set June 1 as the deadline for forming a national economic body. recovery plan. The International Monetary Fund (IMF) estimates that the pandemic will cause the Russian economy to contract 5.5% before achieving economic growth of 3.5% in 2021. So far, the economic stimulus announced by the Russian government has rises to around 2.8% of GDP, prompting criticism of an inadequate response, with some economists calling for spending between Seven To ten % of GDP to deal with the crisis.
The economic cost of the pandemic
Following the containment measures imposed to deal with the growing number of coronavirus cases, the government estimates earlier this month showed that total economic activity had declined by a third since the start of the pandemic. Already unemployment has increased by 30 percent since the pandemic hit Russia, official statistics show, but the numbers would be grossly underestimated. This is due to the existence of a large informal sector estimated between 30 and 40% of the GDP.
Regions face the threat of ‘more budget deficits ”in two decades due to lost income due to the economic downturn and falling energy prices. It has been argued that support from central government will not be enough to bridge the gap. Efforts at regional level to contain the economic damage and open businesses have been made difficult due to the increase in the number of COVID-19 cases.
In addition to dealing with the consequences of a domestic slowdown, Russia will need to frame its stimulus plans amid a global recession and collapsing commodity prices due to reduced demand, resulting in a loss of revenues from oil and gas exports. Given the role that energy exports play in the Russian economy, weak demand and collapsing prices worry the Russian government.
Even after 2014, when Russia faced sustained Western sanctions, its overall impact on the economy worsened due to the drop in oil prices at the time. Although experts note that it is difficult to separate the impact of the two events, the effect of the sanctions is estimated to be comparatively less than that of the price of oil. shock. And that was at a time when oil prices were still at $ 80 a barrel towards the end of 2014, up from a high of around $ 115 in June. Now Urals crude is hovering at $ 35, lower than the $ 57 on the basis of which the Russian budget was prepared for 2020.
Fearing a prolonged period of low commodity prices, Russia is currently exercising great caution in using its $ 157 billion National Social Protection Fund. Established as a rainy day fund, it was set up to compensate for the loss of tax revenue from oil exports if the prices slip below $ 42 a barrel. There are strict rules regarding the spending of this Fund and the government has maintained to warn, despite calls for reservations to be used to give direct benefits to companies and citizens in difficulty. In addition to the social fund, Russia has built up substantial reserves and maintains a low public debt, which gives him the opportunity to complete his recovery plan in the coming days.
Many decisions will depend on whether or not oil and gas prices recover in the months to come. The IMF estimates that oil-exporting countries will face prices below $ 45 through 2023, and Russia has indicated that oil at $ 42 a barrel is a level that Russia is comfortable with. However, at this point, the costs of low commodity prices will be compounded by the loss of economic activity due to the spread of the pandemic nationally, “tighter global financial conditions and weaker external factors. demand. ‘ There is also uncertainty about when full economic activity will be restored and what changes should be made to existing business models in order to maintain workforce security while keeping the economy running.
The global recession comes at a particularly unfavorable time for Moscow, as the economy only started to stabilize in 2016 and modest signs of recovery were visible as energy prices edged up thanks to ” a soft exchange rate regime and significant foreign exchange reserves. But the pandemic has destabilized this fragile recovery of an economy that was already growing at a relatively modest pace. The growth projection for Russia before the pandemic was 1.8 percent for 2020, lower than the global growth projection of 2.9 percent.
The arguments in favor of structural reforms
This weak growth despite the strongeconomic Russia’s conditions – characterized by low debt, high reserves and a surplus budget – was blamed on a lack of ” reforms. ‘ Those understand slow economic diversification, strong state involvement in the economy, corruption, weak rule of law for the business environment and a declining population.
While these issues remain unresolved, the Russian government announced in 2018 national projects worth $ 400 billion focused on 13 main areas such as health, education, infrastructure, housing, demography, the environment, SMEs, exports, the digital economy, etc. Faced with a significant drop in foreign investment due to Western sanctions and in the grip of economic stagnation, these projects were to be the engine of economic growth in the years to come. But the slowdown, which will require public spending in several sectors to support the economy, has raised questions about the state’s ability to invest in these projects according to the previous plan.
In addition, these projects will have to go hand in hand with structural reforms if they are to have a positive impact on the Russian economy. As suggested by the head of the accounts chamber Alexeï Koudrine, it is necessary improvement“which would lead to“ income growth, an innovative economy and adequate state institutions. ”In addition to reducing its heavy dependence on energy exports, other suggestions focused on structural reform judicial reform, law enforcement reform, protection property rights, dealing with Corruption and the creation of a business and investment climate conducive to the promotion of entrepreneurship.
Foreign policy costs
Russian analysts have long been concerned about the country’s slow social and economic development, which stands in stark contrast to active decision-making when it comes to foreign policy decisions. As people’s personal incomes decline and the structural problems facing the economy are still unresolved, this has hampered the development of wide-ranging bilateral relations with Russia’s partners, who are keen to make deals. with economically stronger countries that can help achieve domestic development goals. In other words, as Sergei Karaganov noted, “Russia has a small market to attract allies and few Opportunities to “buy” them.
As emerging powers continue to gain strength, Russia will have to contend with the presence of economically strong powers in areas where it seeks to expand its influence – first and foremost, Eurasia. This disparity between “the ambitions of Russia and capacities’ remains a major concern, mainly in the economic field. At the center of his vision for Greater Eurasia is an economic body – the Eurasian Economic Union – to which Russia contributes 90% of GDP. A poor economic performance of the Union’s main economy will have a direct impact on its overall wealth. China has already become an important player in Eurasia and if it is able to further expand its presence in the region as the West grapples with a growing coronavirus crisis within its borders, Russia will need to assess the overall impact on its position on the ground.
In addition, a deepening economic dependence on China as Moscow grapples with the downturn will pose uncomfortable questions about where Russia will stand should US-China rivalry rise. Indeed, as has been noted, any risk of “geopolitical confidence misadventures‘exposing’ economic weakness’ is high.
A need for to diversify Relations with other regional powers to deal with the weaker economic position have been suggested as a way to keep Russian-Chinese relations on an equal footing, in addition to having the obvious advantage of strengthening the position. Russian in Eurasia. With this goal, Moscow has recently sought to galvanize its ties with other actors including India, ASEAN, Japan and South Korea. The impact of the recession on Russia at this particular moment in geopolitical history will impact its foreign policy trajectory in very specific ways. In order to establish itself as a key player in Eurasia, Moscow will need to strengthen its national economic strength – a prospect that requires far-reaching reforms that will affect the established power structures of the elite existing within Russia’s political and economic system. It remains to be seen whether the pandemic will provide the necessary impetus to carry out the necessary structural economic reforms in Russia.