Executive Search in Russia – 2021 Outlook

Near Term Forecast Bleak in Russia

The pandemic has deeply disrupted livelihoods, with the fall in working hours equivalent to the loss of nearly 500 million full-time jobs in 2Q 2020 alone. It is expected to push 110 to 150 million people into extreme poverty in 2021. The resurgence of COVID-19 is casting a shadow over the global recovery as countries are forced to re-tighten social-distancing measures, but confidence has been boosted by news that several COVID-19 vaccines have shown high efficacy rates in clinical trials.

COVID cases rose sharply in the euro area – Russia’s largest trading partner – in the fourth quarter and have imperiled the nascent economic recovery as authorities in several countries maintain, reintroduce, or tighten pandemic-control measures.

The Russian economy contracted 8% in Q2 and 3.4% in Q3. This was expected to continue in Q4 with a resurgence of the pandemic.

However, countercyclical fiscal policy, accommodative monetary policy, pre-crisis, sizable macro-fiscal buffers, and targeted social policies put in place to attenuate the effects of the crisis on poverty, have helped contain its impact.

Social policies put in place earlier this year — such as increase in the maximum level of unemployment benefits and a series of family allowances and pension benefits — are compensating the severe impact of the crisis on employment and disposable incomes. However, the crisis has increased unemployment in all regions but with most job losses concentrated in only a few economic activities (manufacturing, construction, and retail / hospitality services).

Given Russia’s relatively low public debt, sizable macro-fiscal buffers, and expected persisting negative output gap, we argue that Russia has some fiscal space to allow it for a more gradual consolidation. Russian regions have been affected to varying extents, based on their exposure to the pandemic, pre-existing conditions, and the type of regional activity.

Yet, at the current pace of fiscal consolidation, regional transfers are set to drop more than 10% in real terms in 2021-2022, compared to the 2017-2019 pre-pandemic average. A more relaxed pace of consolidation will allow for further increases in spending on social support and to maintain support to regions in real terms till the crisis tides over.

Russian Economic Outlook

Russian economic growth is projected at negative -4 percent in 2020, a less severe contraction than the forecast of September. The revision reflects the better-than-anticipated economic performance in Q3. Consumer and business confidence are expected to improve assuming a vaccine deemed safe and effective is rolled out; this would pave the way for a gradual rebound at 2.6% and 3.0% in 2021 and 2022, respectively.

However, a more adverse scenario suggesting a sharp growth in new COVID-19 cases continuing in the second half of 2021 could further weigh on economic activity. In such a case, GDP in 2021 is projected to grow by 0.6%, with consumer and investment demand affected more deeply, and to increase by 2.8% in 2022.

Special Focus: Deep-Dive Analysis of Russia’s Participation in Global and Regional Value Chains

Key policy recommendations fall into three areas: trade policy reforms to reduce trade costs and promote participation and upgrading in Global Value Chains; measures to enhance the role of domestic and traded services in the economy; and facilitating FDI and spillovers through improved institutional and regulatory quality and reduced restrictions.

There are opportunities to drive Russia’s long-term economic growth, by deepening and expanding Russia’s participation in manufacturing and services global value chains. In turn, these opportunities could help promote Russia’s National Goals aimed at developing exports of high-tech manufactured and agricultural goods, creating jobs in these sectors, and speeding up Russia’s technological development.

Contact the Author Natalia Prokhorova at natalia-prokhorova@cornerstone-group.com 

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