Double Shock of Oil Gambit, Virus Upend Putin’s Growth Plans

(Bloomberg) -- Until just a few weeks ago, Russian President Vladimir Putin was promising Russians their stagnant incomes would finally pick up along with the economy this year. But his oil market gambit and the fallout from coronavirus have all but demolished those hopes.

As crude suffered its worst weekly collapse since 2008 following Russia’s bitter breakup with OPEC, economists slashed their growth forecasts. Even if oil stays roughly where it is now, the economy might not grow at all this year, Alexey Kudrin, a former finance minister who now runs a government oversight agency said last week.

“The Russian economy is experiencing a double shock this year from oil and the virus,” said Sofya Donets, an economist at Renaissance Capital in Moscow. “If the epidemic follows the European scenario, a recession is inevitable.”

Oil Slumps to Lowest Since 2016 as Demand Collapse Triggers Rout

Putin appointed a new pro-spending cabinet in January headed by Prime Minister Mikhail Mishustin, who promised that people would “feel the difference” in their lives as soon as possible. On Monday he said the government has set up a 300-billion ruble fund ($4 billion) to assist businesses and citizens affected by the virus and will allow affected industries to pay taxes late.

Russia has only registered 93 cases of coronavirus so far, with no reported deaths, but the economy will be hurt by any signs of recession in the European Union, a major trading partner. The virus fallout could have an even bigger impact on the economy than low oil prices, Finance Minister Anton Siluanov said Saturday, according to RIA Novosti.

He said the budget could post a deficit of as much as 1% of gross domestic product this year instead of the 0.8% surplus earlier forecast by the government. State companies will get a six-month extension on paying dividends, the Vedomosti newspaper reported Monday.

The government will be cautious about new stimulus to keep the ruble from plummeting further, First Deputy Prime Minister Andrey Belousov said Monday, according to Tass. While the government will prioritize support for the most vulnerable sectors, the economy isn’t in crisis, he said.

Citigroup Inc. cut its growth estimate to 1% from 2%, while Renaissance Capital reduced its estimate to 1.5%, down from 2.6% a week ago. Goldman Sachs Group Inc. cut its forecast for Russian by 0.3 percentage points to 1.2%.

The ruble is the third-worst performing currency among emerging markets this month, losing about 10% against the dollar. Oil prices dropped about 39% in that period, and were trading near $31 a barrel on Friday.

Ruble Leads Currency Losses as Oil Heads for $30: Inside Russia

Russia needs oil prices of around $40 a barrel to balance its budget. An average oil price of $25 a barrel would tip the economy into recession, according to a “risk scenario” published by the central bank last year.

What Our Economists Say:

“If crude slides further or Russia suffers a major outbreak of its own, all bets are off -- our risk scenario shows the economy shrinking by about 1% in 2020.”

--Scott Johnson, Bloomberg Economics

After six back-to-back interest rate cuts in the past year, the central bank may halt easing when it next meets on Friday, according to Goldman economist Clemens Grafe. In its final statement before a self-imposed black-out week the central bank said that inflation may rise faster toward 4% than earlier expected due to the market turmoil.

“We think the risk of emergency hikes remains relatively low, as long as oil prices do not fall to below $30 a barrel,” Grafe wrote. “The ruble hasn’t overshot its fair and would likely weaken should oil prices fall further.”

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