Russia's Second Wave Raises Risk of Economic Scars

(Bloomberg Opinion) -- Russia has done better than expected in the face of a pandemic and unprecedented oil crisis. That relative stability masks weaknesses that will impede its ability to recover fast, even if it can limit the cost of a second wave.

Coronavirus cases are surging again: Russia reported nearly 11,000 new infections on Monday, the most since mid-May. Only around a third were in Moscow. Officials are hoping lockdowns can still be lighter than last time to limit economic pain. Experience, though, suggests that could also draw out the human and financial damage. This, at a time when fading fiscal support, lackluster oil prices, protectionism and geopolitical ructions further darkens unimpressive long-term prospects.

It's an uncomfortable reality for the Kremlin, which needs to secure a win in nationwide parliamentary elections next year, the last before a presidential vote in 2024. With a slow convalescence ahead, President Vladimir Putin's promised prosperity looks distant.

Russia's $1.6 trillion economy went into the crisis with robust foreign reserves, a wealth fund now worth nearly $180 billion and low debt. It contracted a respectable 8% in the second quarter. Bloomberg Economics forecasts a roughly 4% drop this year, far better than officials expected back in March.

One reason is that with its large state-owned enterprises, Russia is less exposed to industries that ground to a halt at the height of shelter-in-place orders. The hotel and restaurant sector tumbled nearly 57% in the three months to June, while culture, leisure and entertainment fell by more than a quarter, as did other services — but that added up to less than 1 percentage point of the total drop, according to ING Groep NV.

Russia's lockdown may also have been less draconian than it seemed, and it was lifted quickly in June ahead of a vote on constitutional changes that could keep Putin in power until 2036. 

While businesses didn't all grind to a halt in the spring, the outbreak remained at a plateau of more than 4,000 new daily infections through the summer. The latest spike may not look as worrying as outbreaks in, say, Spain when taking into account population size. But Russia's surge is broad. It was already threatening a recovery weeks ago, as infections began to rise and shoppers stayed home. Retail and auto sales fell more than expected in August. 

Polls show Russians are more concerned about jobs than they have been in years. Incomes were below 2014 levels even before the current crisis, and have fallen since. Unemployment hit 6.4% in August. Again, less dramatic than elsewhere, but the number of registered jobseekers still doubled between March and mid-May. As worrying, but harder to measure, is the increase in underemployment.

Other problems loom at least as large for the Kremlin, however. Uncertainty overseas stretches from clashes between Armenia and Azerbaijan, which have hit the ruble, to November's U.S. presidential ballot and the threat of fresh sanctions. Oil prices are going nowhere.

The result is an unusually conservative approach. It's not clear if stimulus measures such as cheap loans and extra unemployment benefits will be renewed, a potential blow to the very consumers that kept Russia going in the first virus wave. Moscow is borrowing in local currency and raising taxes on mining companies to plug the budget deficit, rather than dip into its rainy-day fund.

There are a few reasons for optimism, including Moscow's promised vaccine. The adoption of remote work is a potential boon for a country of Russia's scale. There's been an increase in e-commerce too.

Yet the economic structure that helped spare Russia at the height of the crisis, combined with political torpor, will hold it back while others bound ahead. Even after the events of 2020, there is little appetite at the top to unpick the conundrums that might spur real growth — say, reducing the state's footprint in the economy, cutting back dependence on oil and gas or reversing protectionist policies. Since 2009, average annual growth has barely exceeded 1%. Absent efforts to change the underlying dynamic, that's the long-term trend the country will return towards. 

One gauge of concern will be the timing of the legislative election currently due in September 2021. That could be brought forward.

If only the economy was as pliant.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the U.K., Italy and Russia.

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