/ world today news/ After the upheavals and trials in 2020, the Russian economy should grow stronger and more confidently. At least such assessments are now expressed by most economists. What are these forecasts based on, to what extent will economic growth depend on oil prices, and when will Russia’s real GDP return to its 2019 level?
The Russian economy showed even greater resilience in 2020 than a number of Western countries, notably the US and the EU. Russia’s GDP will decrease by only 3.6%, while in a number of EU countries the economic decline will be around 9%. After the collapses in the spring, by the end of the year the Russian economy was revived, its recovery should continue in the new year.
The economic situation in Russia in 2021 should be more optimistic than in the current year, says the head of Sberbank German Gref. According to his forecast, the growth rate of Russian GDP in 2021 will amount to plus 2-3%, when the price of oil starts from 50 dollars per barrel, while the ruble is expected to strengthen. The EBRD expects Russia’s GDP to grow by 3% in 2021 on positive oil prices.
“GDP growth of 2-3% with a Brent price of $50 can be called realistic, and on average, until the end of 2021, the Russian economy can grow even by 3.3%. This will be facilitated by reducing the impact of the pandemic on consumer and business activity, including through mass vaccination. Naturally, higher oil prices will also support the Russian economy,” says Dmitry Babin, an expert.
Paradoxically, the US, China and Japan will indirectly help the Russian economy grow.
These countries channeled around 8% of world GDP to support their economies. Plus, the OPEC+ deal supports demand and prices at 6-10% of global demand. This exceeds the expected damage to the global economy from restrictions due to the coronavirus, said Alexander Osin, an analyst. According to him, such great support creates the most favorable and strong potential for growth in the last 25 years, including for our economy.
On the other hand, the Russian Central Bank also created prerequisites for the growth of the Russian economy. In fact, this is the first crisis when the Bank of Russia did not increase the main interest rate, killing lending, but, on the contrary, significantly reducing it. Loose monetary policy led to faster growth in the real money supply – by 12.4% on an annual basis, Osin says. In other words, the Russian economy is pumped with money. And that creates the potential for Russia’s GDP to grow by as much as 4-6% in 2021, the analyst said. This is the main positive outlook.
However, Sergey Ermolaev, associate professor at the Department of Economic Theory of Plekhanov State University, does not expect the growth of the Russian economy to exceed 2.5%. Greater growth, he says, is possible only with an unusually rapid recovery of the world economy, an increase in oil prices above $50 a barrel and an increase in private consumption. But according to his forecast, oil is likely to fluctuate in the range of $40 to $60 per barrel. In order for the economic recovery to be faster – plus 3% and more – two conditions must be met, according to analysts from investment company Finam. First, to increase oil production. Its cuts in the OPEC+ deal took 2% of GDP this year, analysts estimate. This factor turned out to be the second most important for the economy after the “severe” quarantine in the spring. Second, the consumer behavior model of the population must change – from an orientation to saving to an orientation to consumption.
Babin believes that the Russian economy in this has protected itself from a more serious decline even through less severe restrictive measures to fight the pandemic than the rapid recovery of the price of oil above 42.4 dollars per barrel. And this is important: this price is included in the budget of the Russian Federation, and thus the budget becomes deficit-free. Indeed, in the end, the budget was still in deficit, but the reduction in production within the framework of the OPEC+ agreement played a role in the case – and a corresponding decrease in revenues from oil and gas exports.
As for monetary policy, the key interest rate is likely to remain close to the 4% target in the new year. “Low growth rates in real personal income next year, after a deep decline in 2020 (by 5%, we estimate) will hold back prices,” notes Finam. Soft monetary policy will remain relevant and the Bank of Russia should expect a rate hike no earlier than 2022.
The regulator could raise the interest rate in 2021 only if two factors combine, experts say. First, inflation will be higher than the target of 4% – 4.5-5%. Second, if there is a sharp V-shaped acceleration of economic growth. Then the rate will have to be increased to 5-5.5%. But that alternative scenario seems unlikely now.
“In the next two years, the main risk could be a significant acceleration of inflation in the world and in Russia. This could theoretically turn into an economic shock scenario. But we estimate the probability of such a shock based on the historical statistics of crises in the Russian Federation, traditionally at the level of 20%, “says Osin.
Still, there are factors that could prevent even a small growth in the Russian economy in the new year. For example, if the commodity market declines again and oil does not reach $50 per barrel. This could happen if mass vaccination or its outcome (against the emergence of new strains of the coronavirus) suddenly turns out not to be as quick and successful as now expected, Babin says. “If the vaccination begins to have an effect only closer to the fall of next year, then there will be little time for active economic growth,” Ermolaev agrees.
Of course, Russia cannot escape geopolitical risks, as well as the threat of new sanctions. “The new US president is taking a tough stance on Russia. Already at the beginning of next year, we can hear the relevant rhetoric, as well as observe the new sanctions initiatives of the Biden administration. And if the Democratic Party gains control of the upper house of the US Congress, it will be easier for the Biden administration to approve anti-Russian bills,” says Dmitry Babin.
This threat will prevent the strengthening of the Russian currency. “The ruble is currently undervalued by about 10% compared to current oil prices. That is, with a reduction in the geopolitical risk premium in Russian assets, the dollar may be worth 67 rubles. But unfortunately, it is difficult to expect a reduction in this risk in the coming year. In addition, the introduction of new sanctions may slightly increase this risk, putting pressure on the ruble,” says Ermolaev.
Therefore, it is not so easy to predict when Russia will eventually return to pre-crisis levels of economy and household income. But with a conservative forecast for the growth of the Russian economy, the recovery of real GDP to the levels of 2019 will take a year and a half, according to Alexander Osin. This means that it will happen, if not by the end of 2021, then by the middle of 2022 for sure.
Translation: V. Sergeev
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