Saturday, May 9, 2020

9/5/20: Summary of Russian COVID19 Policy Responses

Based on the Finance Ministry estimates, Russian COVID19 measures will cost between 1 and 2 percent on GDP to the Russian Exchequer, as reported by BOFIT.

The impact combines both declines in government revenues and increases in expenditures. Much of the COVID19 measures costs, however, will come from reallocation of spending priorities away from yet-to-be-launched capital expenditures and, potentially, defence budgets.

In response to COVID19, Russian government deployed significant supports for:

  • SMEs, targeting primarily employment in the private sector. The government identified over 70 sub-sectors hardest hit by the social distancing measures imposed on the general population and provided funding to cover companies' payrolls as long as the companies retain the levels of employment at 90% or more compared to the start of March levels. 
  • Tax deferrals for SMEs and significantly impacted sectors (excluding VAT, excise, natural resources extraction taxes and export tariffs). 
  • Per BOFIT, "Federal, regional and municipal government real estate landlords are postponing rental payments for all SMEs and larger firms in hard-hit [sectors]. Private landlords renting commercial real estate (other than residential properties) have been obligated to defer payments of tenants in hard-hit branches. To help participating private landlords, regions are to grant them relief from property taxes."
  • The government effectively froze all new bankruptcy proceedings for the duration of the crisis measures.
  • Special social insurance payments for families with children, increased levels of benefits for the newly unemployed, and added supports for the pensioners were put in place. Pensioners can avail of a range of enhanced services and additional payments, although these vary by region.
  • Frontline healthcare workers have been allocated supplementary pay increases.
  • Federal government also suspended debt repayments by regional and local governments.
The Central Bank of Russia moved quickly to alleviate the immediate impact of the crisis:

  1. The CBR froze banks' asset valuations at the start of March 2020 levels to delay recognition of banks' losses and prevent a wave of loans defaults.
  2. "The general loosening of regulatory rules applicable by banks also covers e.g. loss reserves, credit quality and related collateral for a very large part of corporate and household loans granted, as well as their possible restructurings," per BOFIT.
  3. "Authorities have also set up separate deferral programmes for bank debt repayments that are supported by regulatory easing, government interest-rate subsidies and low-interest CBR loans to banks."
  4. "Deferral programmes are available for households that have suffered income losses of more than 30 %, as well as SMEs and enterprises in hard-hit sectors."
  5. CBR also cut interests rates, most recently on April 24th from 6.0% to 5.5%, bringing 2020 cuts to 75 basis points.

Per BOFIT note, "the state social funds will lose revenues as wage-based social taxes of employers will be halved to 15 % for SMEs. The move will give businesses relief this year in an amount equivalent to slightly less than 0.3 % of GDP."

The latest Russian economy forecasts via CBR come in at -4% to -6% for 2020 and +3 to +5% in 2021, implying slower than V-shaped recovery in real GDP. The forecasts assume oil price averaging USD27 per barrel over 2020, which is consistent with May-December average price of USD20 per barrel, or more conservative than prior assumptions. Notably, the CBR forecast implies that Russian economy will be running a current account deficit in 2020, for the first time since 1999.

As an aside, it is worth noting that the U.S.-Government funded RFEL has been out in force decrying alleged use of COVID19 as a pretext for, shock-horror, taxing offshore wealth. The proposal has not been approved by the Russian government, yet.

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