Vera Berdnikova, Mark Okin
For the first time in recent history, the global economy has faced a crisis of this magnitude. Today almost all countries of the world are already affected by a pandemic to one degree or another: borders are closed, quarantine is imposed, entire sectors of the economy are stopped. As much as we would like Russia to be a safe haven, hopes for this did not materialize.
To top it off, the country was hit by a collapse in oil prices, which in other circumstances would have been a serious challenge in itself. The first estimates of the upcoming recession of the Russian economy have already appeared, following the general recession. According to the head of the IMF, Kristalina Georgieva, the global economy expects a recession at least the same as during the global financial crisis of 2008-2009. or even worse.
Depending on the severity and duration of the quarantine, the potential reduction in GDP can reach 5-10% per year. If the isolation period is prolonged, then we can see a reduction in world GDP of 10% or more in one year. Already there are forecasts promising an increase in unemployment in the USA to 25-30%. According to financier Andrei Movchan: "These figures are similar to the Great Depression, only compressed in a short period of time."
As you know, desperate times require desperate measures. Guided by this principle, governments of different countries have unveiled unprecedented measures to support the economy. Along with social benefits aimed at helping certain groups of people, huge amounts of money are allocated to support the affected companies. The leader in this matter is the United States, which approved financial assistance and a package of stimulating measures for a total of $ 6.2 trillion. (28.9% of GDP). In the UK, business was provided with government guarantees and other forms of support totaling £ 350 billion, or 15% of GDP. Volumes of state support in Italy, Spain and Germany reach from 11% to 23% of GDP. Even developing countries such as Brazil and Chile allocate 1.7% and 4.7% of GDP respectively to support business. The list of measures adopted by Russia against the background of the global one looks fussy. During an online summit with G20 leaders, President Putin said the government would provide a total of 1.2% of GDP to support the economy.
Deferred tax payments and lower insurance premiums, according to Alfa Bank, will cost the budget 300-400 billion rubles, and enterprises will still need to prove that they deserve this support. Judging by the Federal Tax Service’s explanations, only organizations from the approved list of the most affected sectors, which showed a decrease in revenue by more than 20% compared with the same reporting period last year, can receive tax deferrals. In addition, when postponing the deadline for paying taxes for more than 6 months, it is necessary to provide a bank guarantee or a pledge of real estate as collateral. Even such an attractive measure, at first glance, as a reduction in insurance premiums from the payroll, in fact, will not bring tangible relief. Both the tax deferment and the reduction of the tax burden for stopped businesses are useless - there is still no revenue, there is nothing to pay.
The taxation of deposits proposed among other measures has nothing to do with supporting the population, supporting businesses, or urgently filling the treasury - the first revenues will go to the budget only in 2022, when the situation with the pandemic and recession is already resolved in one way or another. The inclusion of this item in the “anti-virus” package is difficult to evaluate otherwise than trying to push an unpopular measure out of the blue.
If help does not come
The main blow as a result of mass isolation occurred in hospitality and entertainment enterprises, tourism and educational (offline) industries, fitness and beauty industries, and transport. In the blink of an eye, businesses lost their solvency: revenue fell to zero, forcing them to stop paying counterparties, lay off or send employees on unpaid leave. Following the first victims, other industries began to fall, dominated by a catastrophic decline in demand. The situation was aggravated by the depreciation of the national currency as a result of the collapse of oil quotes.
The introduction of vacations has led to a further decline in consumer activity. So far no one can say with certainty how long isolation will last. According to the forecast of the Chamber of Commerce, due to the economic consequences of the coronavirus, up to 3 million small enterprises may go bankrupt, 8.6 million people will be at risk of job loss, which is 11.8% of the total employed population of Russia. Moreover, estimates based on official statistics do not take into account citizens working informally, i.e. a real blow to the population will be even more disastrous. If according to the data for the 3rd quarter of 2019 in Russia there were 17.6 million people below the poverty line, then as a result of a large-scale jump in unemployment, this value can double. Then the country will be on the verge of a humanitarian catastrophe.
The wave of bankruptcies will lead to structural changes in the economy. According to the head of the Audit Chamber, Alexei Kudrin, over the past 10 years, the state’s share in the Russian economy has grown by 10% and reached 47–48%. Due to coronary crisis, this trend may sharply increase. If the volume of state support remains at the current level, then the private sector will lose from 30% to 50% of enterprises. Provided that most state-owned companies continue to operate, their share in a short period of time will grow by 10-15%. Increasing nationalization of the economy will lead to a decrease in the efficiency and development potential, which are so necessary for overcoming the recession.
"Winter has come"
While the business is desperately giving SOS signals, authorities are in no hurry to increase the proposed meager amounts of support. Obviously, Russia has certain difficulties in allocating resources. Firstly, the country cannot actively occupy world markets in view of the sanctions restrictions, and secondly, oil and gas budget revenues have sharply decreased. Despite this, the country has accumulated significant gold and currency reserves in the amount of 551.2 billion US dollars and the National Welfare Fund - 123.4 billion US dollars. US Saved for a "rainy day." So this same "rainy day" has come: a total stop of business and the threat of impoverishment of the population arose against the backdrop of a sharp collapse in oil prices and international sanctions. Moreover, even the notorious pessimists could not assume the coincidence of so many negative factors. There is no doubt that right now it is necessary to use all the resources in order to survive during this “ideal storm”.
Russia has an undeniable advantage that needs to be used - this is the delay obtained. We are not the first to encounter a pandemic and its economic consequences. Many countries have already formed and partially tested their own packages of anti-epidemic and economic measures. Based on their experience and taking into account the mistakes made, we can quickly implement the best practices.
The depth of the fall, the duration of the recovery period, as well as the future competitiveness of the country's economy in the world community will be determined by the measures to combat the cataclysm that the state will take now. The larger, faster and more decisive these measures will be, the faster stabilization and restoration will take place, which will definitely affect the country's position on the world stage in the long run.
What to do?
In the media and social networks, a discussion arose about the required measures to save the economy. Many economists and business representatives have already proposed their options. One way or another, they are aimed at solving the following main tasks.
First, provide liquidity in the economy. The enterprises, having lost revenue, ended up with empty settlement accounts and the inability to pay off their counterparties and employees. In order to avoid a full-scale crisis of non-payments, it is urgent to provide them with money. Long-term interest-free lending with a deferred repayment period under state guarantees, repurchase of bonds issued by an enterprise under a simplified procedure, and other possible methods are also suitable. It is important that the funds quickly and without bureaucracy reach every enterprise, regardless of the scope and scale of activity.
Secondly, support the business by reducing the fiscal burden and other expenses. Just giving money is not enough. This will not save the business, but only delay its death. In conditions of sharply reduced revenues, enterprises will no longer be able to cope with the previous level of costs and will not be able to return the funds provided to them. Business is already in full swing reducing its costs, but a significant part of them is determined by the state. Therefore, it is important to declare tax holidays (and not deferment) for all types of taxes for a period of at least six months, reduce insurance premiums (as proposed by the President). In addition, it is advisable to ensure a reduction in utility and rental payments, compensating for the lost income of management companies and landlords.
Thirdly, to avoid a humanitarian catastrophe. According to the NAFI analytical center, more than 60% of Russians do not have any savings, and 21.2% of respondents said that their savings would be enough to survive no more than a month. Under the conditions of the “non-working days regime” extended until the end of April, a significant proportion of the population may be without means of subsistence. To avoid severe social upheaval, irrevocable payments should be made immediately, following the example of other countries.
And finally, support collapsed demand. The fall in consumer demand will be partially offset by direct payments to the population and the provision of liquidity to the business. In addition to these measures, as financier Grigory Guselnikov suggests, the government should immediately increase budget expenditures for the 2nd quarter, advance all public expenditures and contracts for approved budget expenditures by the end of 2020, and also force all large state-owned enterprises and private commodity companies to do the same the most.
It becomes obvious that it is no longer about how much the budget will lose today, but how much you need to lose today so that the country's economy has a chance of recovery in the foreseeable future. The state must by all means and means protect the business as its strategically important asset. One way or another, the pandemic will end, but whether enterprises will survive to this great moment and whether jobs will be preserved depends on today's actions.
The measures proposed by the Government are categorically insufficient. If nothing else is done, then the country will lose up to 50% of private business and will be on the verge of a humanitarian catastrophe. To avoid this, it is urgent to introduce an additional package of measures, the volume of which will be comparable with the level of other countries - at least 10-15% of GDP .
Perhaps the most difficult for the public administration system will be to implement the required mechanisms with a minimum of bureaucracy and restrictions so that the widest possible range of citizens and enterprises can use them in April of this year.
The measures of the next few weeks will determine the future of the country for decades to come. So procrastination will be no less destructive than inaction. It is already obvious that the people who are at the helm today will go down in history, and what baggage depends on the decisiveness of their actions.
About the authors:
Okin Mark Vladimirovich - e- conomist, expert in the field of budgeting, managerial accounting and financial analysis, Freelance lecturer at the Institute of Higher Education and Research at the Higher School of Economics, co-author of the course “Analysis of the Bank's Financial Condition”
Berdnikova Vera Petrovna - economist, expert in the field of financial analysis, budgeting and methodological support of banks, Freelance lecturer at the Institute of Higher Education and Economics of the Higher School of Economics, co-author of the course “Analysis of the Bank's Financial Condition”