The worst appears to be over for Russia after the economy performed better than expected in Q2 at -8.5% YOY and oil prices have continued to beat expectations, buttressing the economy in H2 2020. Around 66% of the economy can continue to function and grow amid current COVID-19 conditions – the production of raw materials, food, social services, and construction – that will keep the Russian economy afloat through the continued global downturn.
Our Central and Eastern Europe analysts, Mark McNamee, Director for Europe Research, and Martin Belchev, Senior Analyst for Central and Eastern Europe, are keeping a close eye on the Russian economy to bring you the latest developments and insights on how to manage the shifting environment following the peak of COVID-19. Here is what we expect for the remainder of 2020 and moving into 2021.
When COVID-19 restrictions are fully lifted, we expect the Russian economy to recover quicker than others: the country is embedded in about 38% of the world’s supply chains in basic materials, making their exports easier to recover than other countries with complex high-added-value goods.
Credit costs are falling quickly with the lowest rates in post-Soviet history, and we expect them to fall further. Our analysts are currently watching if the private sector can take over from public support in Q4 with the expiration of fiscal support and the threat of US sanctions looming at the end of 2020 and into 2021. However, we see a strong macro position – the financial sector should not suffer from a liquidity loss.
Consumer confidence hit a historic low in Q2 but should rebound notably by Q4. Purchases of clothes and durables picked up after major drops since March. The economy is slowly moving away from a service-sector based economy with a lower share of quarantine-sensitive sectors such as hotels and restaurants, comprising less than 2% of GDP.
Overall, following a somewhat dismal Q1, we expect to see significant economic growth across industries beginning in 2021. While some industries will recover faster than others, overall demand will recover solidly by mid-2021. We expect manufacturing and consumer spending to see a strong return to pre-COVID-19 levels early in the year, while the hospitality and automotive sectors will continue to struggle through 2021.
We also expect weaker government spending in 2021. We see a higher share of the public sector contributing to GDP, which has become a positive indicator as 33% of Russian firms are at risk of bankruptcy when fiscal support ends. We expect this trend to continue in 2021.
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