LONG READ: Something for everyone in Russia's National Plan for Economic Recovery

LONG READ: Something for everyone in Russia's National Plan for Economic Recovery
The Kremlin has been very cautious in rolling out an economic stimulus package to deal with the coronacrisis, but the new plan calls for 10% of GDP spending and tax breaks
By Ben Aris in Berlin June 7, 2020

Russian Prime Minister Mikhail Mishustin presented President Vladimir Putin with the government’s new National Plan for Economic Recovery (NPER) plan last week to help the economy get back on its feet following the double hit of an oil price shock and the coronavirus (COVID-19) epidemic.

BSC Global Markets chief economist Vladimir Tikhomirov released a report on the details of the plan that has “something for everyone,” part of which is reproduced below.

On the whole the government remains very conservative, as rather than throw money at the problem it is keen to keep its power dry, but the plan does contain significant stimulus spending and targets aid for the most vulnerable in society and the sectors that have taken the pain of the crisis in the face.

The duration of the plan runs over 18 months, after which the government hopes that the worst effects of the coronacrisis will be past. This is an optimistic scenario, as most crises typically linger for four years on average. Indeed, Russia only really recovered from the previous oil price shock of 2014 in 2018 and the after-effects of the 1998 crisis went on for even longer.

But as bne IntelliNews reported, as the May numbers come in there is mounting evidence that this crisis has done less damage than was at first feared, although the hit the economy has taken is still very painful.

The plan

The plan consists of 9 sections and 500 concrete programmes, all of which should be implemented between July 2020 and December 2021.

The total cost of NPER is estimated at RUB5 trillion ($72.8bn); together with already announced support measures by the federal government this will boost federal aid to RUB7.2 trillion, or 7% of GDP. The Finance Ministry estimates that an additional RUB3 trillion, or 3% of GDP, would come through easing of fiscal policy on federal and regional levels; thus it puts the gross volume of state aid to the economy at c10% of GDP. There will be three stages in the plan's implementation: adaptation, recovery and active growth.

The government’s prime goal for social policy is to stabilise income trends, increase employment and liberalise/deregulate labour relations. As small businesses are among the hardest hit by the crisis, a special section of the NPER specifically targets SMEs through offers of tax relief, grants and subsidies, as well as easing of regulatory and control procedures. Also, NPER contains a number of specific measures of support to sectors of the economy that were most hit by the crisis: i.e., airlines, the tourist industry and hospitality services.

There is also a section covering help for investment, the digital economy and import substitution. These parts of NPER largely repeat the goals already set in the respective national projects. The government wants to boost economic growth through following its previous investment plans, increased placements of state orders with local producers and intensification of steps aimed at raising the efficiency of public administration via an accelerated transfer to digital services.

The primary risks to implementing NPER, according to the government, are a delayed spike in unemployment, a more significant decline in per capita real income and domestic demand, a reduction in corporate investment plans, and rising volumes of non-performing loans (NPLs) in the banking sector.

However, there is also a real risk of bureaucratic delays in implementation of the plan and distribution of state funding that has already afflicted the implementation of the 12 national projects last year.

While the country's economy seems to be coming through the crisis relative well, there is also a risk of Russia's recovery being dragged down by a global recession caused by the oil shock and a second wave of the pandemic.

Something for everyone

The government’s new NPER was drafted on 1 June and was formally presented to President Putin by PM Mishustin on 2 June. Putin ordered the Cabinet to start implementing NPER on 1 July. The document will be finalised within the next 3-4 weeks – final touches might include additional proposals from the ministries as well as from the business community. It is expected that the NPER will help put Russia back on a sustainable growth track within 18 months – by December 2021, most of plan’s objectives should be fulfilled.

The initial government response to the crisis has been extremely conservative: the Cabinet and the Kremlin tried to shift the burden of protecting the economy and the population to businesses and local governments. It was only a month after the start of the crisis that federal authorities started to realise that deteriorating social and economic situation will require much more direct aid from the state.

"The Cabinet is still aiming [to protect] its finances through limiting the volume of its anti-crisis spending. Floating estimates of the gross volume of state support to the economy put that at up to 10% of GDP, but such calculations usually include projected losses in public revenue from the lockdown and existing limitations on business activities – the government will incur such losses in any case, with or without a special plan," says BSC Global Markets' Tikhomirov.

"According to PM Mishustin, direct budget spending on NPER will total RUB5.0 trillion over 1.5 years, or approximately RUB3.5 trillion in one financial year. However, a close look at this number reveals that almost half of it is actually pre-planned – not new – spending: the NPER includes funds that were allocated for spending on national projects well before the pandemic spread in Russia. As a result, pure new spending on anti-crisis measures in the NPER could total only RUB2.5 trillion or slightly more – c2% of Russia’s GDP based on the latest estimate from the official forecast,” Tikhomirov adds.

In addition to prudent plans for spending the government has attempted to use this plan as a vehicle for accelerating the implementation of some unpopular tax reforms, which were in the making long before the current crisis and in practice have very little relation to it.

“One such move was the decision to introduce income taxes on interest on bank deposits, which was rapidly rubber-stamped by the parliament back in April. The other move is the inclusion in NPER proposals for introduction of minimum hourly payments and short-term labour contracts. These initiatives will not make [the] life of many Russian businesses easier. On the contrary, once implemented, they will reduce cash payments and force many SMEs to start reporting full payrolls, eventually leading to a significant rise in tax collection,” Tikhomirov says.

But the plan also includes some genuine innovations. It seeks to ease public procedures via the digitalisation of many services, and it aims to streamline administration processes and ease regulatory and tax burdens for many local businesses. Also, NPER calls for a proactive approach to distributing public funds via placement of state orders with local producers, continuation of some long-term investment projects and provision of direct aid to segments of the economy that were most affected by the crisis.

Drilling into the details

The plan calls for direct federal spending and uncollected revenue of RUB5 trillion; the bulk of the rest comes from federal expenditures on other budget items, primarily national projects on infrastructure and road construction, which was included as part of the plan.

The main spending items include infrastructure (RUB2.2 trillion), support for SMEs (RUB1.3 trillion), import substitution (RUB1.1 trillion), state procurements of machinery and equipment (RUB1 trillion), measures of social support to the population (RUB0.7 trillion), support for various sectors of the economy (RUB0.5 trillion) and fiscal aid to the regions (RUB0.4 trillion).

NPER sets a list of concrete macro targets that the government aims to reach by the end of 2021. These include:

  • GDP should return to growth at 2.5% year on year by YE21
  • Return to ‘sustainable growth’ of real incomes, real wages should be rising by 2.5% y/y
  • Poverty should fall below 2019 level of 12.3% of the population
  • Unemployment rate should decline to below 5%
  • Retail sales should grow by 3% y/y, while growth in volume of paid services to the population should reach 2.5% y/y
  • Manufacturing industry should return to growth at 3% y/y
  • Numbers of SMEs in high-technological areas should grow 10% y/y and employment levels in this segment should return to those seen in 1Q20 (15.3mn people)
  • Fixed investment volumes should be growing at 4.5% y/y
  • Volume of Russia’s non-commodity exports should be growing by no less than 5% y/y

The above targets are based on the Economy Ministry forecast. The ministry expects that Russia will pass the low point in its growth dynamic in 2Q20 (a fall in GDP of no less than 9.5% y/y and a decline in real income of 6% y/y). However, some key targets set in NPER are more conservative than the estimates of the Economy Ministry – i.e., goals set for real wage growth, retail sales and investment lag those listed in the May version of the new official forecast.

Three implementation stages and changes to the social sphere.

The plan will be implemented in three stages, which will correspond to the gradual lifting of the coronavirus (COVID-19) restrictions and be fully complete in 2021.

The three main stages of NPER implementation are as follows:

  • Adaptation stage: July - September 2020. Cabinet will concentrate its efforts on stabilisation of real income growth and containment of recessionary trends in the economy. The government expects that by the end of this period up to 70% of Russian regions will be at Phase 2 of the removal of restrictions imposed as a result of the spread of the pandemic.
  • Recovery stage: October 2020 - June 2021. Government expects to see economic recovery begin with GDP and real incomes posting growth in y/y terms. By end-June 2021, most Russian regions will remove all quarantine restrictions, with no more than 20% of regions still in Phase 3 of quarantine.
  • Active growth stage: July - December 2021. All quarantine restrictions will be lifted, economy and social area will be showing sustainable growth rates of around 2.5% y/y.

Maybe the most significant parts of the plan are those dealing with the social sphere. Many of the other parts of the plan are just a reworking of the implementation of the 12 national projects in the new context, but the spending on society and the changes to the labour code in particular are all new.

The government’s prime goal on social policy is to stabilise income trends, boost employment, and liberalise and deregulate labour relations. The measures include a mix of already announced decisions (such as payouts to families with children and an increase in unemployment benefits) as well as new initiatives. Among the key planned moves are:

  • New system of sick leave payments. Will be introduced from 1 January, 2021 and be based on direct payouts from the state to the people instead of the current system, where such payouts are made via employers.
  • Minimum hourly pay. Currently Russia does not regulate such payments. The new rules will be introduced from 1 October, 2020 and will set a minimum hourly wage for those employed on a casual or short-term basis. The new system should close the loophole in the legislation that allows employers to under-report actual payrolls and, accordingly, to save on payments of social taxes to the budget.
  • One-year renewable contracts. Government hopes that the introduction of such a clause in Russia’s labour laws will significantly cut the ‘shadow economy’, where wages are paid in cash and employees have absolutely no job guarantees or retirement packages.
  • Remote jobs. It is planned that from 1 July, 2020 additions to Russian labour legislation will regulate this new form of workplace arrangements, making it possible to work from home full or part-time. This will also cover public employees.
  • Creation of ‘social treasury’. This new mechanism of public administration will oversee the flow of all social payouts made by the state. The aim is to significantly boost accountability and efficiency of state social aid. In addition, the government intends to review the financial status of recipients of public aid by introducing clear-cut rules that will determine the status of a family and income tests for the purposes of receiving social aid from the state. It is planned that such rules will be in place by December 2020.

SMEs

The next most important aid targets small and medium-sized enterprises (SMEs), which have taken the worst hit from the coronacrisis, so the plan singles out specific help for this sector.

  • Tax relief in 2Q20. This support move has already been announced by the Cabinet. It allows SMEs from the ‘most-hit’ sectors of the economy in 2Q20 to skip payment of all taxes to the budget, except for value-added tax. The budget will lose RUB180bn in revenues as a result.
  • Public grants and direct aid. Also announced, this initiative allows SMEs to get public loans at 2% interest to support the payroll and write them off if they retain no less than 90% of the workforce by 1 April, 2021. Such loans will be capped at a level of minimum public wage per employee (RUB12,130 per month). The preliminary cost of this move to the budget is estimated at RUB155bn.
  • Cuts to and removal of indexation of payroll taxes in 2020-2021 for SMEs. This rule will apply only for those companies that pay fixed payroll taxes. In 2020-21, payroll tax will be cut from 30% to 15% – costing the budget RUB349bn this year and RUB496bn in 2021, as per Finance Ministry estimates.
  • Compensation of pandemic-related costs. SMEs can apply for such compensation to local and federal government.
  • Access to instant payment system of CBR. The Central Bank of Russia (CBR) has temporarily removed all charges for payments in its system; government and CBR will facilitate access by SMEs to such a system so companies could save on costs.
  • Temporary liberalisation of bankruptcy procedures for SMEs. The current clause in bankruptcy legislation that does not allow a business owner to start a new business for 5 years after he has declared bankruptcy will not be enforced in 2020-21.
  • No tax checks until the end of 2021. The government has announced a moratorium on all checks of business activities for SMEs by tax officers until end-2021. During this period, the Cabinet plans to shift the larger part of tax and other documentation to digital format, which should help to improve efficiency both in business and public areas.

Boosting investment

Finally, the most money will be spent on boosting investment into the Russian economy. This remains the Achilles heel of the Putin administration. Russia has lots of money and many profitable businesses, but their owners remain reluctant to invest in growth and development. While equity investors are loving the super-high dividends that listed Russian companies pay, the high dividends are symptomatic of the problem: owners would rather take the cash than reinvest and, in theory, get even richer. As bne IntelliNews has argued elsewhere, Russia is suffering from a crisis of confidence amongst its business elite.

The rescue plan attempts to address this problem. In terms of proposed funding, investment is by far the largest part of NPER. However, apart from some projected changes in regulations in this area, the new programme does not contain any new spending proposals. Rather, it simply repeats some of the key items that were already included in the government’s national project on infrastructure.

In the area of investment, the new programme includes the following:

  • Continued implementation of national projects – on road construction and infrastructure. According to NPER, total spending in these areas is estimated at RUB2.2 trillion in 2020-21 and particularly will include, among others, the Moscow-Kazan and Novosibirsk-Kazan highways, modernisation of federal infrastructure, completion in 2021 of construction of the Central Ring Road around Moscow, and a 50% increase in cargo capacity of the Baikal-Amur and Transsib railways.
  • Full introduction of new mechanism to protect, encourage investment. A federal law on protection of investment was passed in April 2020, but still lacks a system of guarantees to large investors in infrastructure and mechanisms for partial compensation of costs of credit used to fund such projects. The government wants to finalise these laws in July-Oct 2020.
  • Regulatory improvements. The Cabinet promises to further liberalise procedures in the construction business and land allocation.
  • Residential construction. The key move here is to support demand through subsidising mortgages through ensuring that average interest rates on home loans stay below 8% as well as via direct subsidies of rates by the state to the tune of 6.5% for mortgages on new homes. In addition, the Cabinet has announced that it will spend RUB30bn in 2020 to fund the completion of frozen projects in the residential construction area.

And all the rest

NPER has a special section dealing with the digital economy. In many aspects, this part is a repeat of the national project on digital economy. Its stated goals are to accelerate technological developments in the economy and to achieve higher labour productivity via the implementation of modern communications and digital services.

In NPER, the government aims at boosting growth rates in the economy via a significant increase in the demand for locally based services and products. The state should lead this change through placing a large proportion of public orders and procurements with domestic producers. According to NPER, federal and regional governments as well as SOEs should lead this process.

Under NPER, the government has identified the ‘most-hit’ sectors of the economy that will require additional direct aid from the budget. Apart from financial support, these sectors will also be in a privileged position to win tenders for state orders. Also, companies from these sectors will receive state guarantees for any new loans.

The list of ‘most-hit’ sectors is short and includes:

  • Russian airlines – Government intends to spend RUB23bn to compensate COVID-incurred costs and almost RUB140bn in state guarantees on loans
  • Tourist industry – From 1 January, 2021, tourist companies will pay a lower value-added tax rate of 7% instead of 20%, costing the budget cRUB12bn
  • Hospitality services – Government will cover 50% of interest payments on loans and will postpone payments on principal for 6 months – from July until December 2020

 

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