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The Price of Pandemic: How Much Russia will Lose Due to Coronavirus
April 14, 2020 16:32

The Russian economy, like many other economies in the world, is already “infected” with the coronavirus. But unlike many, ours was also struck by the price war virus in the oil market.

The rapid spread of coronavirus was opposed by the governments of most countries to unprecedented quarantine measures that would have negative economic consequences for the economy. But at the OPEC + meeting in Vienna by the joint efforts of Moscow and Riyadh, instead of a prudent limitation of oil supply, a price war was unleashed.

Formally, the parties did not agree on 100,000 barrels per day and dispersed, "slamming the door and breaking the dishes." The surprise for the Russian side was that the Arabs, unlike the “soft-body” Europeans, turned out to be quite strong. Russia refused an additional reduction to the previously approved OPEC + production limit of another 300,000 barrels per day.

As a result, the price will gravitate to $ 20 per barrel. Moreover, this will happen until the producers of shale oil begin to leave the market. The price of $ 20 for Russian companies so far exceeds the average cost of raising oil from the well (plus transportation costs), but it is already becoming dangerous for the stability of public finances if it lasts all year. Producers of shale oil will leave gradually, in addition, many of them have hedged prices at $ 50 per barrel until the end of August this year. During this time, Americans can put pressure on Riyadh so that the Saudis stop the price war, and this option is very likely.

Coronavirus for Russia so far represents less danger than for Western countries, but with a high probability we may still face its full-scale attack in the near future. The harm of this virus is not only that, being unusually virulent, it leads to a high percentage of deaths for the elderly and weakened people, but also in how it forces the authorities to respond to it. Today, the politicians of the leading world powers have demonstrated their readiness to bring down the world economy with unprecedented quarantine measures to curb the rate of infection and minimize fatalities.

China, which applied this approach, managed to stop the spread of the incidence, but, according to preliminary estimates, paid for it with a 10% reduction in GDP in the first quarter and at least stagnation in the second quarter. The strategy of European countries is designed to ensure that severe restrictions on movement, the shutdown of production and the service industry, etc., will work against the spread of the virus in a fairly short time — one, two, three months — and reverse the epidemic. But if this strategy does not work and the quarantine drags on, Europe and the United States will receive the deepest recession in economic activity, exceeding the scale of the recession during the 2008 crisis. This may lead to the abandonment of total quarantine measures, because after some time the cost of the consequences of the destruction of economies for the health and life of all, including those who are easily infected, will exceed the price that the world now wants to avoid in relation to risk groups.

It is clear that the markets are in a panic, and the financial authorities of world economic leaders are adopting broader financial measures than in 2008, flooding the financial markets with liquidity, financially supporting households and employees who have lost their jobs due to quarantine and companies of the most affected sectors of the economy.

Our economy is still more affected by the oil war. The Russian authorities have not yet announced quarantine on the model of China or the EU countries, and the ruble collapsed during the working week from March 16 to March 20 by 40%.

Even with an oil price of $ 60, an escape on such a scale within one year would be a sensitive blow to the balance of payments and the ruble exchange rate. What will happen if the oil price stays firmly fixed at $ 20–25 per barrel, it’s hard to imagine. A further weakening of the ruble will actually close the national economy from the outside world: a sharp increase in the cost of technologies, raw materials and equipment for domestic production will force companies to reduce purchases and raise prices.

Due to the fall in the price of a barrel to $ 35 over the course of this year, the budget will receive less (against the plan) 3 trillion rubles, the deficit will amount to about 1% of GDP, and it will have to be covered by transfers from the NWF. This can be expected if the epidemic declines by the summer and economic activity begins to recover, which will limit the loss of GDP by 1–2%.

If under the same conditions the price of a barrel stabilizes in the range of $ 20–25, then the budget deficit can be estimated at 5% of GDP. To finance it, almost half of the NWF will have to be spent, which will call into question the viability of the 2021 budget, and the reduction in GDP may reach 4–5%.

The most dangerous outcome of events that began with the arrival of spring can be expected in a situation where the epidemic is not overcome and quarantine restrictive measures remain for the whole year, while the price of a barrel of oil stays in the range of $ 20–25. However, such a scenario is unlikely compared to the previous two. The spread of coronavirus in Asian countries in 2020 and the spread of other known coronavirus epidemics indicate that the virulence of viruses is gradually decreasing. With quarantine measures, you can slow down the spread of infections before the epidemic begins to fade away naturally. Therefore, the post-epidemic recovery of the global economy is likely to begin this year. Along with this, there will be chances for rising prices for black gold and the strengthening of the ruble. If these assumptions come true, the world will pay for the epidemic with a recession in the range of 1-2%, and Russia - 2-3%, losing a third of the NWF. 

Author: Anna Dorozhkina

Tags: Coronavirus Russian economy Russian oil Russian international  

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