Russian government adopts a third economic stimulus package, calls for rescue plans by June 1

Russian government adopts a third economic stimulus package, calls for rescue plans by June 1
The Kremlin has adopted a third economic stimulus package to reduce the damage that the current crisis will do / bne IntelliNews
By bne IntelliNews May 12, 2020

Russia's President Vladimir Putin has ordered the government to draft a National Recovery Plan by June 1, jointly with regional authorities and business unions, drawing a roadmap of repairing the coronavirus (COVID-19) pandemic damage, Putin said in a televised address on May 11.

The plan will have to be focused on the recovery of economic activity, as well as recovery of employment and incomes of the population, the Kremlin website announced.

The non-working days that lasted throughout April and extended until the end of May holidays will not be prolonged beyond May 12, Putin said, leaving to regional authorities to determine the exact plan on further lockdowns.

As reported by bne IntelliNews, so far the government has rolled out two economic support packages, worth RUB3.1 trillion ($42.1bn) or 2.8% of GDP, and is preparing a third package. Minister of Finance Anton Siluanov has argued that as the government is not cutting budget spending this year despite the slump in oil prices, the actual amount of state support is at 6.5% of GDP.

Most recently Siluanov has outlined a base-case scenario of a 5% GDP contraction in 2020 and the government could borrow 1.5-2% of GDP (RUB4-4.5 trillion, or $53bn-60bn) in 2020 to finance the 4% budget deficit.

The government has already moved to sure up the health of the country's most important companies and released a list of 1,151 “strategically important” companies that are entitled to state support that span the gamut of economic activity and include both private and publically owned companies – almost all big employers.

What is new in the latest programme is the increased focus on small and medium-sized enterprises (SMEs) that are likely to suffer the most from the impact of the lockdown, as they have less in the way of reserves.

The Russian government will allocate over RUB80bn ($1.1bn) to SMEs affected by the epidemic, RBC business portal reported citing a decree signed by Deputy Prime Minister Andrei Belousov.

The second package specifically supported the SMEs and employment among small enterprises, but was largely seen as not enough by the analysts.

Previously the support pledged was seen as insufficient, as it makes only the companies that maintain over 90% of their staff versus March 2020 eligible for support. The decree signed by Belousov maintains the same criteria and estimates that 970,000 companies are eligible for state aid.

The cost of the crisis

April’s lockdown has cost the Russian economy up to 2% of its GDP growth this year, or about $150mn per week, and growth wasn't going to be that strong to start with, the Central Bank of Russia (CBR) said on May 6.

The stop-shock to economic activity showed up very dramatically in the IHS Markit Russia Service Purchasing Index (PMI) data released on May 7 that crashed to an 18-year low of only 12.2 and the composite index, that includes manufacturing, dropping like a stone to 13.9 – the lowest levels on record and well below the 50 no-change mark.

This crisis is already worse than those in 2004, 2008 and 2014 and on a par with the financial meltdown in 1998 that lead to a 7.5% GDP contraction and destroyed the top tier of Russia’s banking sector, not to mention sending inflation and poverty soaring.

Russia took about four years to recover from that crisis. The question this time round is what can the Kremlin do to shorten the recovery time for this crisis? The officials in the Kremlin must be very frustrated, as Russia got off to a good start this year, with the economy putting in 1.5-2.0% of growth according to the CBR's report on its monetary policy released this week.

Much has been made of Russia’s huge reserves of some RUB12 trillion ($157bn) in the National Welfare Fund (NWF) as of April 1, which can cover any budget revenue shortfall for the meantime, but how long the fund will last has become a hot topic of debate.

In March Finance Minister Siluanov boasted the fund could last a decade. He then walked that claim back about a week later to something like 4-6 years. And he downgraded again in an interview with Vedomosti this week, suggesting the fund would last only two years before being exhausted.

As bne IntelliNews has written elsewhere, the fund is now believed to be enough for three years, provided the Kremlin does not use its reserves money for anything other than covering a budget. But clearly the government also needs to stimulate the economy if it is going to get up off its back quickly.

The Kremlin regards keeping a very large amount of cash in the reserve fund as a strategic must, so it is extremely unlikely that the NWF will be spent down to nothing.

But things are getting so bad that the government is looking for other sources of funds to boost spending and one of its best resources is Russia’s extremely low levels of debt.

One option is to allow the budget to run a deficit and a very modest 0.5% deficit was already written into the current three-year budget before the crisis started, to create more funds to invest into the 12 national projects. But as the Kremlin also sees a large budget deficit as a strategic weakness, the deficit is unlikely to be increased further.

Instead, Russia plans to double state borrowings, as it expects at least a 5% fall in GDP this year, Siluanov told Vedomosti this week.

Budget revenues are expected to fall by RUB4 trillion from a total of RUB20 trillion planned, with reduced revenues from oil and gas accounting for RUB1.5 trillion of this by themselves. That will leave the budget with a 4% deficit that can be covered by the NWF. Russia ran a budget surplus of 1.8% of GDP last year and had been anticipating a 2020 budget surplus of 0.8% of GDP before the crisis hit.

The Ministry of Finance will use some money from the NWF to pay for non-budget related items, such as supporting the social sphere, but it also clearly intends to keep this spending to a minimum. And last month, the ministry used NWF funds to buy a controlling stake in Sberbank from the CBR, leaving about RUB9 trillion of liquid assets in the fund.

“We do not want to spend much from the NWF, it would not be right to spend it in two years,” he told Vedomosti.

Instead the Ministry of Finance plans to raise between RUB4 trillion and RUB4.5 trillion rubles ($54.4-$61.2bn) in debt this year, most of it from the booming domestic debt market – a bit more than double the ministry’s usually annual borrowing from the local debt issuances. Before the coronavirus outbreak, Russia planned to raise 2.3 trillion rubles in ruble OFZ bonds and up to $3bn in Eurobonds this year.

Russia’s domestic bond market has been flourishing since it was hooked up to the global financial system, when it joined Clearstream and Euroclear in 2012. Foreign investors now account for a third of the bondholders on the domestic market and remain overweight despite the shocks the Russian economy has received.

Ramping up the help

The Kremlin’s reaction to the crisis has been marked by extreme caution. While the US almost immediately cut interest rates to zero and followed up with a $2 trillion aid package and the EU was also fast to promise a €1 trillion lifeline, Russia’s response has been underwhelming.

But that is starting to change now as the severity of the crisis begins to be a bit more predictable. On April 28, Putin ordered the government to prepare more economic aid measures that will be rolled out in the coming weeks.

Prime Minister Mikhail Mishustin was already working on re-tasking existing budget spending to help boost the recovery, until he got sick himself, and that work will continue. But the plan is now to add even more money to the pot.

The previous two packages of measures to support the population and entrepreneurs focus on SMEs from the most affected sectors and include: a six-month deferral of rental and tax payments, excluding VAT, and also a RUB12,130 ($162.9) stipend each month per employee for payment of salaries if the firm keeps 90% of its staff on. This package came into force on May 1.

At the same time the population can apply for a deferral of loans and borrowings for six months if their income declines by at least 30%. Those who lost their jobs after March 1 and applied to employment service in April - June will receive the maximum unemployment benefits of RUB12,130 per month, which is equivalent to the minimum wage. Sick pay was also increased to the level of the minimum wage.