Russian President Vladimir Putin is walking a fine line on a number of foreign policy fronts. Photo: AFP/Grigory Sysoev/Sputnik

Economic fallout will impose additional pressure on Russia’s small and medium-sized enterprises (SMEs) and the business landscape might look drastically different after the Covid-19 pandemic. But the recession and a bygone era of high oil prices will deliver a harsh reality check that could force Russian companies to abandon existing growth models and strive for enhanced efficiency. Such shifts could reload habitual business patterns and catalyze disruptions akin to the 1990s that lay the foundations for a new and more open economic model.

During the past two weeks Russia’s official statistics have recorded the biggest jumps in coronavirus infections since the beginning of the pandemic. Although the total number is still lower than in many Western nations, official statements suggest that the country might be only at an early stage, and Johns Hopkins University predicts that the pandemic will reach its peak in the beginning of May.

Weeks or months of no work and isolation accompanied by impacts of the global recession and low oil prices could trigger an economic slump, which might pose the biggest challenge to businesses since the Russian default of 1998.

Despite Russia being more prepared to withstand economic shocks and major corporations showing few signs of panic thanks to the isolationist policies during the past six years and massive financial reserves of more than US$550 billion, most of the forecasts look dim. Fitch announced that Russia’s economy will likely decline by 1.4% this year, while the Kremlin’s own predictions are that in the worst-case scenario the economy will contract by as much as 10%, and the central bank stated that a idled workers during April alone will cost 1.5-2% of gross domestic product.

The Russian government recently admitted running stress tests for 646 so-called systemically important corporations in case economic activities are frozen until late June or longer and oil prices remain below $20 per barrel. Although the analysis is designed to identify weaknesses and outline counter measures, it sends a message to the market that the state could intervene if the virus outbreak is too disruptive.

Possible actions might echo the bailout of major enterprises that the Russian government introduced as a response to the financial crisis of 2007-08, which helped to ameliorate negative social impacts and prevent massive unemployment. But this time the state is unlikely to intervene on the same scale unless it identifies direct threats to macroeconomic stability.

Low energy revenues might be Russia’s new reality and spell trouble for many businesses. Currently there are around 6 million registered SMEs in the national registry and various estimates claim that the number could shrink by a third by the end of the pandemic.

During a recent address, President Vladimir Putin announced more support for small businesses by granting a six-month deferment on insurance premiums and taxes, except for VAT (value-added tax), and ordering the government to draft an additional relief program. Such measures, however, might not be sufficient, and it is clear that Putin, a staunch supporter of fiscal conservatism, is unlikely to embrace the path of many Western nations and introduce massive stimulus plans.

The economic outlook, however, also conveys opportunities. During the past years Russia experienced meager growth, and multiple forecasts pointed to prolonged stagnation accompanied by a declining workforce and lagging labor productivity. But the collapsing oil revenues and growing roles of technologies, which might be even bigger by the end of the pandemic, could likewise reveal companies that are better prepared for the slump.

For instance, despite a run of global institutional investors across emerging markets, Moscow’s stock exchange in March registered twice as many accounts as the monthly average and added more than half a billion dollars in shares. The result does not seem to be merely reflecting Russia’s popularity among market speculators of all stripes, which has always been the case, but the corporate policy of the past years of attracting individuals that has delivered around 3 million new accounts.

In the banking industry, analysts are already proclaiming online banks as the long-term winners from the crisis. In that regard, Tinkoff’s case, which managed to compete with state-owned behemoths even in the good times, is particularly telling.

Retail is the sector particularly impacted. While born-online Ozon and WildBerries thrive, traditional retailers are on the verge as shops close, and the recent example of Sportmaster is illustrative. But there are traditional retailers that started transformations ahead of the crisis, among them is, a major non-food retailer, which has managed to boost its e-commerce business. With a resilient debt profile and timely cost optimization to withstand the impacts of the fallout, it will likely increase its e-commerce presence.

With many businesses struggling to stay afloat, more will strive to increase foreign trade while enjoying the competitive advantage of a devalued ruble. This might undermine existing policies of isolationism and trigger greater openness accompanied by internal operational shifts.

Sibur, Russia’s largest petrochemical company, was known for its diversification efforts long before the crisis. Being one of Europe’s largest suppliers of liquified petroleum gases, it chose to develop competencies and invest in the value-added petrochemicals business, thus making its business more sustainable and resilient to energy prices.

Although the 1990s have been portrayed throughout the Russian media as the years of rapid decline and endemic instability, the market reforms that were conveyed and the growth of entrepreneurship foreshadowed the economic miracle of the 2000s, with annual average growth rates of around 7% lasting until 2008.

Equipped with massive financial resources and volumes of accumulated goods, Russia will not face economic turbulence of the same scale, and yet recession and declining incomes could galvanize a substantial shift of habitual business models that might have the same lasting impact.  

Dimitri Frolowscki

The author is a political analyst and independent journalist. He is a consultant on policy and strategy and has written about Russia’s foreign policy.

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