Alexei Vedev on Russian Economic Outlook in 202

Over the past few decades, the pandemic has become a major shock to the global economy and most economies of developed and developing countries. The IMF and the World Bank estimated global GDP decline at 3.4% in 2020, that is, a great deal more as compared, for example, with the 2009 crisis. From January through September 2021, Russian GDP growth was related to the low base effect, but even during that period the economy succeeded in recovering to the 2019 level. At the same time the inflation rate sped up and most forecasts of price rises in 2021 were repeatedly revised upwards. However, the rate of inflation is expected to slow down starting from the year 2022 (Omicron, a new variant of the coronavirus infection is one of the factors which may cause early slowdown because of falling demand).

The labor market is recovering after the crisis, wages are growing and the number of job openings per an applicant has increased. A further decrease in the rate of unemployment is expected. Investment activity is reviving and from results for 2021 it is expected to show growth in real terms relative to 2019. From 2022, investment growth will outrun economic growth owing to implementation by state-run companies of investment projects in accordance with the government’s plans.

Overall, the key risk to the Russian economy is the recurrence of stagnation. Even GDP growth of 4.7% in 2021 means that average growth rates in 2020–2021 will be below 1%, that is, in line with the last decade trajectory.

As the world keeps overcoming the consequences of the global coronavirus pandemic, pandemic-related risks will persist in 2022, too, because of new potentially more dangerous mutations of the virus and low rates of vaccination both in Russia and other countries.

Lots of developing countries (Russia is not an exception) have already experienced the strain of an increase in interest rates. Borrowing costs for corporate and sovereign issuers have increased and are likely to keep on growing in 2022; needs in funding will remain high, too. Though soft financial conditions still remain a favorable factor, the volatility of financial markets and portfolio investment flows pose serious risks to the economy.

The corporate sector will find itself in a complicated situation next year. While some companies have restored their financial standing, other keep struggling to survive and depend on government support. Solvency risks will remain high for small and mid-sized companies and even large ones next year.

Despite recovery, some sectors’ financial vulnerability remains high. If we take real sector companies, recovery remains uneven across sectors and sizes of companies. In 2022, solvency risks will persist in sectors which were hit the hardest by the pandemic (for example, transport and services), as well as for small companies.

The extended period of extremely soft monetary conditions required for underpinning economic growth may lead to the overvaluation of assets and increase financial vulnerability. Some warning signals, for example, higher risks and growing vulnerability in the sector of non-banking financial institutions point to deterioration in stability. If left unchecked, these vulnerabilities may overgrow into structural problems which endanger mid-term growth.

In 2021, capital influx prospects for emerging markets improved owing to continued recovery and sustainable global appetite for risk. Monetary conditions are still adjusted with negative effective rates taken into account. However, there is a risk that real rates may increase considerably. A sudden change in developed countries’ monetary policy may result in dramatic tightening of financial conditions; such a situation will affect capital flows and intensify pressure in Russia.