Russia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Abundant natural resources (oil, gas and metals)
- Diversification efforts
- Floating of the rouble since November 2014
- Market size and skilled labor force
- Macroeconomic stability: strong public and external accounts that ensure resilience to external hazards
- Digitalisation and innovation capacity
- Dependence on hydrocarbon prices
- Declining demographics
- No trade agreements beyond the neighborhood
- Dependence on foreign technology
- Weak infrastructure aggravated by the lack of investment
- Heavy social security contributions (30% of salaries) favoring informality
- U.S. and European sanctions hinder offshore field development and innovation
- Institutional and governance weaknesses (insolvency treatment, property rights, corruption)
In 2021, the Russian economic recovery will be relatively modest. The government refrained from introducing nationwide lockdown measures in order to protect the economy, which is partly the reason for Russia's comparatively mild recession in 2020. However, Russia has been hit hard by the COVID-19 pandemic and was the fourth most affected country globally in terms of cases as of early December 2020. The second wave of the pandemic hit Russia severely, with daily new cases outpacing the peak in April. Households benefited from fiscal stimulus with the program of subsidized mortgages at an interest rate of 6.5%. Nevertheless, private consumption will not bring a substantial boost for the economy in 2021 due to falling real disposable income and a low savings rate. Indeed, real disposable income contracted by a record 8.4% year-on-year in Q2 2020 and unemployment increased to 6.1% (a nine-year high). These figures do not include Russia's large informal sector, which accounts for about 40% of total employment and with many workers not eligible even for the limited social benefits available. Moreover, the risk of new Western sanctions following the alleged poisoning of opposition politician Alexei Navalny resulted in a weakening of the rouble. The currency could again depreciate, especially if the oil market rebounds slower than expected. Investments will rebound in 2021, but their growth is likely to be weak because of uncertainty and SME’s lack of access to financing, despite lower interest rates (the policy rate has been slashed by 175 basis points to 4.25% in 2020). The government has also delayed its flagship USD 360 billion National Projects program by four years to 2024. The program was originally launched in 2018, but made only little progress and was delayed again in 2020 due to the COVID-19 crisis. It is dedicated to roads, education and health, and aims to increase growth potential and reduce poverty (14% of the population lives below the subsistence level and 65% is assisted). Although oil prices are expected to gradually increase in the course of 2021, investments in the energy sector will be weak.
Solid public finances despite the pandemic
The fiscal stimulus in response to the pandemic has been relatively modest (about 7% of GDP spent in 2020-2021, which includes guarantees and tax deferrals), despite ample fiscal space thanks to a budget surplus and low public debt figures recorded in 2019. Moreover, the government has also built-up liquid reserves that are worth over 7% of GDP since 2017 in the National Wealth Fund. The budget balance, which turned into deficit in 2020, will improve slightly this year. Revenue measures include higher corporate taxes in the oil industry, increased mineral extraction taxes on metals and chemicals, changes to a flat personal income tax, a tax on interests from bank deposits over RUB 1 million, as well as a hike in the excise tax on tobacco. The oil price remains crucial for the Russian budget, with the break-even price required to balance it set at USD 42.4 per barrel. The updated fiscal rule was introduced in 2018 and it reduced the break-even crude oil price, which was at USD 110 in 2013. Nonetheless, the economy’s dependence on the oil and gas sector remains high. It accounts for about a quarter of GDP, 63% of exports and 35% of federal revenue. Sanctions that restrict investment and the export of some technological equipment to Russia, as well as the gradual depletion of mature fields, will limit Russian oil production.
Changes in the government
Vladimir Putin, who has been in power for 17 years, began a new 6-year presidential term in May 2018. His popularity has been eroded by the pension reform. Weakened approval ratings led to the sudden resignation of the government, including the prime minister Dmitry Medvedev, in January 2020. Mikhail Mishustin, the former head of the federal tax service, became the new prime minister. In July 2020, a nationwide vote ratified constitutional reforms proposed by President Putin. It concerned promises of increased state support for citizens and, most importantly, an amendment allowing President Putin to run for the presidency again in 2024 and stay in power until 2036. Moreover, changes also include giving presidents lifetime immunity from prosecution. A second cabinet reshuffle, put forward by Prime Minister Mishustin and then approved by President Putin, was announced in November 2020.