BOFIT Viikkokatsaus / BOFIT Weekly Review 2020/13

Russia’s approved federal budget calls for brisk increases in spending this year. The government has announced it remains committed to those spending plans despite the budget’s turn into a clear deficit due to current low oil prices. No new state spending initiatives have been envisioned, while president Vladimir Putin mentioned in his speech on Wednesday (Mar. 25) certain budget measures which could change the situation somewhat.

Within the frame of approved total budget expenditures, some reallocation of spending is under preparation. An example is the creation of an economic support fund. To improve budget flexibility, the government will expand the rights of federal, regional and municipal authorities to apply no-competitive-bid procurements and reduce penalties for at least minor departures in procurement contracts. Certain social supports will be increased slightly, and persons affected by the coronavirus will have their sickness payments based on at least the minimum wage. The government is also prepared to issue more credit guarantees.

The government is oriented to increasing transfers from the federal budget to regional budgets if needed. The consolidated budget has initially been outlined to provide for spending increases that would be faster than inflation, but this may be hard to maintain with decreasing revenues to the federal, regional and municipal budgets, as well as social funds. Regions and social funds cannot make up for the revenue losses by taking on more debt. Instead, they are dependent on transfers from the federal budget. A pick-up in inflation will also erode spending developments in real terms.

The government’s concrete decisions for supporting the economy have so far have focused on a few segments. For example, air travel and tourism firms that operate in public-owned premises will be entitled to breaks on paying their rent. Troubled firms in these branches can get adjustments to bankruptcy procedures to help them avoid bankruptcy. Creditors would be prohibited from initiating bankruptcy proceedings against any troubled firm. Tax payments of small and medium-sized firms (SMEs) will be postponed excluding the VAT and wage-based social taxes which will be reduced from 30 % to 15 % for some substantial period. Micro-sized firms will get a break also on social taxes. Restrictions on exports will be increased and import duties eliminated on certain medicines, medical products and food items. Monitoring of prices will be enhanced. On-site inspections by government officials will cease temporarily with the exception of e.g. health inspections.

Given the experiences from the 2009 and 2015–2016 recessions, employment is given high priority. The government has charged authorities as well as regional and municipal leaders with preventing layoffs or dismissals considered unfounded. In this and support measures, special attention is attached to over 600 firms deemed “systemically” important to the economy, as well as company towns (monogorods). Still, the ceiling on unemployment benefits, which is low, will be raised by 50 %. To fight against the coronavirus, all workers will get a paid leave to stay at home from March 28 to April 5 with the exception of essential personnel working in healthcare, shops, banks, transportation, and public administration.

In the banking sector, the liquidity situation is relatively good as a whole thanks to abundant amounts of deposits of households and non-financial firms. For the time being at least, neither the Central Bank of Russia nor the government have resorted to sizeable measures as in the previous two recessions. For the time being, the CBR’s limited portions of liquidity provision have been sufficient. Banks have been given general reliefs on certain asset classes on their balance sheets such as booking the value of debt securities and equities. In order to support access to credit and debt restructuring for companies in the air travel, tourism, pharmaceutical and medical branches, as well as SMEs, banks will be granted interest subsidies as well as looser rules regarding e.g. loan quality, solvency ratios and booking loss provisions. The same applies to housing loans carried by households that slide into problems. In order to widen reliefs on debt-servicing, Putin proposed a break on servicing all housing loans and consumer credit, as well as bank debts owed by private entrepreneurs and SMEs.

A 13 % tax will be imposed on individuals for their interest income from large bank deposits, as well as income from extensive holdings of debt securities. A 15 % tax is scheduled for introduction on 1 January 2021 on interest income and dividends, excluding interest on various important categories of debt securities, transferred from Russia to certain foreign destinations.

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