Dmitriy Frolovskiy

Coronavirus pandemic’s hit to Russia’s economy should prompt structural reform

While projections suggest the pandemic will not hurt the Russian economy as badly as feared, stagnation and inefficiency continue to hold back its growth

The Kremlin should institute deep structural reforms to boost growth and avoid a worsening deficit, but there are few signs it will change its domestic policies

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A woman takes a selfie in front of the Kremlin and St Basil’s Cathedral at sunset in Moscow on April 19, 2019. Declining oil prices and a global recession have raised fears about the sustainability of Russia’s economic model. Photo: AFP

Dmitriy Frolovskiy

Published: 4:30pm, 29 Sep 2020Updated: 10:22pm, 29 Sep 2020

Russia’s economy is doing better than many anticipated, but its medium-term trajectory still looks bleak. Declining oil revenue, crackdowns on investors and threats of new sanctions contribute to gloomy forecasts with marginal chances for improvement.

Even before the pandemic, economic growth had been sluggish. In 2019, Russian authorities pledged to accelerate economic expansion and announced state spending of roughly US$400 billion across six years in key areas such as infrastructure and education.

The ambitious plan driven by notoriously inefficient state investments was received with scepticism, but it was still a positive step that could have re-energised the stagnating economy. The government reported that gross domestic product grew 1.3 per cent in 2019, down from 2.5 per cent a year earlier.

Although Western sanctions that wiped out more than 6 per cent of Russia’s GDP since 2014 were still in place, the country had a budget surplus of 500 billion roubles (US$8 billion) in 2019 as well as low inflation and unemployment. It also accumulated massive reserves that allowed it to boost investment without growing debt.

At the beginning of the pandemic, the government boasted foreign currency and gold reserves of US$563 billion. Covid-19 changed the calculus, though.

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Declining oil prices and a global recession raised fears about the sustainability of Russia’s economic model. After the collapse of the Opec+ deal, the rouble fell to a four-year low against the US dollar.