Russian economy expected to reach pre-pandemic level within two months

The contraction of the Russian economy in 2020 has been the sharpest in eleven years, but the pace of recovery is also exceeding expectations. However, the rebound is likely to lose momentum without structural reforms and investment.

The Russian economy will recover to pre-pandemic levels in the next few weeks, which is earlier than expected, says Reuters citing Deputy Minister of Economic Development Polina Kryuchkova. The ministry expects GDP to recover to levels of the fourth quarter of 2019 in June or July. “The recovery is exceeding expectations in terms of its speed and timing,” said Kryuchkova in an interview.

The country’s economy is recovering after a 3% contraction in 2020, which was the sharpest in eleven years. According to Kryuchkova, both consumer demand and industrial output are resurging even though oil production is hampered by the global OPEC+ agreement to curb output. Thus, the ministry considers that GDP growth may slightly exceed the latest forecast of 2,9% this year. This is still much slower than in 2000-2008 when the economy grew on average by around 7% per year spurred by rising oil prices.

However, in the longer run, Russia is likely to face risks to its exports because of global efforts to reduce carbon footprints. Among other risks, Kryuchkova named fragile domestic consumer demand and uncertainty about how the world abandons from soft monetary and fiscal policies driven by the fallout from the coronavirus crisis. Investment activity is also essential for the targeted growth in the future. “If no special measures to support investment activity, technological breakthroughs, are taken, a steady growth rate [in Russia] is seen at around 2%,” she said. Analysts agree that the current rebound can lose momentum due to a lack of structural reforms and investment. Capital investment, one of the main economic growth drivers, fell by 1,4% in 2020, as business activity was suppressed by the COVID-19 pandemic.

Meanwhile, Minister of Finance Anton Siluanov considers that the national economy is at risk of overheating, and state spending may spur already high annual inflation. “If we continue with increased spending, what will we get? Overheating. Elements of overheating are already visible — high inflation,” he said at the St Petersburg International Economic Forum. Inflation in Russia accelerated again in May and is expected to speed up further in the coming months, according to the Central Bank’s report published on 2 June.

By Anna Litvina

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