Russia Stimulus Seen Falling Short Despite $123 Billion Plan

(Bloomberg) -- Facing the worst recession in more than a decade, Vladimir Putin plans to roll out a spending plan to rival stimulus packages in other major economies.

The Russian president’s government says the plan envisions support equivalent to a 10th of annual economic output. But analysts from Bloomberg Economics and some of Wall Street’s biggest banks say the level is actually much smaller.

“Many countries are supporting demand to make the recovery easier, but Russia isn’t doing that,” said Oleg Vyugin, a former senior official at the central bank and Finance Ministry. “Russia has capacity to help more but the government doesn’t want to take risks since oil prices are unpredictable.”

The Economy Ministry’s figure reflects the huge swing in Russia’s budget from a surplus last year to a deep deficit this year, a move that’s driven mainly by the plunge in prices for oil, the country’s main export. Strip that out, and estimates of the actual stimulus range from as little as 1.3% to no more than 6.8% if loan guarantees and other indirect spending are included.

The Economy Ministry defended the 10% of GDP calculation as an accurate reflection of the scale of government assistance in a response to questions on Monday.

After initial stimulus plans were criticized as modest compared to other countries, officials ordered up a more ambitious-sounding program, according to three people close to the government, who asked not to be named because discussions are private. The result is the National Economic Recovery Plan, which will be presented to Putin on Tuesday.

The draft envisions total spending of 8.7 trillion rubles ($123 billion) over the next two years, with 2.5 trillion allocated toward stimulus in 2020. It adds measures including loans and tax cuts. Spending on health care increases 50% on Russia’s original 2020 budget and about 100 billion rubles is allocated to adult education this year.

“Fiscal stimulus remains relatively muted,” Vladimir Osakovskiy, an economist at Bank of America Corp. in Moscow, said in a report. “Given that some of the new spending initiatives could be pushed forward to 2021, the announced net fiscal stimulus could be limited to around 1%-1.5% of GDP.”

Analysts at Citigroup Inc. estimate that the stimulus measures total about 6.8% of GDP, while Renaissance Capital in Moscow puts the number closer to 6%. The Institute of International Finance says direct fiscal stimulus is only about 1.3% and Bloomberg Economics says crisis spending is 3.5%.

Caught between an economic slump from the virus lockdown and a drop in budget revenues after the plunge in global oil prices, the Kremlin has been reluctant to open up the coffers too quickly. Though oil has recovered from record lows last month, prices of Russia’s Urals blend of crude are still well below the $42 a barrel needed to balance the state budget.

What Our Economists Say:

“With the budget under pressure, Russia’s fiscal response has been overly cautious. Authorities are catching up, offering more direct payments to offset lost income for households and businesses, but the delays are likely to leave scars on the economy.”

--Scott Johnson, Bloomberg Economics

The economy may shrink 13% in the second quarter, the worst contraction in recent history, and growth may drop as much as 5.8% this year, according to estimates from Bloomberg Economics. Elina Ribakova, deputy chief economist at the Institute of International Finance, estimates that the planned stimulus will only give a net boost to growth of about 2 percentage points this year.

The virus scuppered Putin’s plans to finally boost living standards in Russia after years of austerity as he laid out a strategy to extend his rule. Instead he’s having to boost spending just to soften the blow from a plunge in incomes and jump in unemployment.

“The support to citizens during the quarantine and after is very important during this crisis,” said Konstantin Sonin, a professor at Moscow’s Higher School of Economics. “In the worst case scenario, the economy will fall into a depression similar to the end of the 1990s. They need to spend more.”

©2020 Bloomberg L.P.