The effects of COVID-19 on business in Russia
In 2020, the COVID-19 pandemic took over the entire world, bringing most international travel to a stop and freezing some of the world’s largest economies. Russia was no exception.
Russia’s struggle with the COVID-19 pandemic began later than most other countries. At the end of March, the number of cases in Russia was still only around a thousand. The country quickly closed its borders, halting most international travel. Despite early preventative measures, the number of new cases steadily increased throughout April and May. It reached a peak of about 12,000 new infections per day on May 11th. Since then, the daily rate of new cases has fallen, but the overall number of cases is still on the rise.
At the moment of writing, the number of confirmed cases of coronavirus infections in Russia exceeded 681,000 in total. In total, 10,000 people have died in the country from COVID-19. Since the beginning of the epidemic, 451,000 people have recovered. Government agency Rospotrebnadzor also claims that over 16 million coronavirus tests have already been carried out.
On a path to reopening
May 12th ended the period of non-working days in Russia, which lasted more than six weeks. The President enacted this measure to allow the government to build up the necessary medical infrastructure and prepare the country for reopening. After May 12th, all regions began to partially remove restrictions.
In Moscow, the epicenter of the outbreak, some additional preventative measures were put in place in May. Throughout May, Moscovites could only travel around the city if they had specific permits registered with the government. May saw the largest increase in cases. While every other region began to loosen restrictions, Moscow remained under strict quarantine.
From June 9th, Moscow began to gradually remove all restrictions for citizens including the self-isolation regime, the mandatory use of passes, and the requirement of wearing masks in public. Whilst the needs of the economy and successful preparation of medical infrastructure were factors, it is very likely that the vote on the constitutional amendments also played a significant role in the government’s decision to reopen.
Overall, while there are still some regulations in place, the country is on its way to reopening. In June, businesses such as restaurants and cafes began to function, reopening fully on June 23rd. How fast and efficient Russia will be in coming out of quarantine is uncertain. The whole process will likely take until the end of the summer of 2020. Russia has already resumed international travel on the 1st of August 2020 for a selected list of countries. Moreover, on August 10th President Putin has announced that a vaccine is found, however very little is known about it and there seem to be very few clinical trials if any. The latest updates in the number of cases are also questionable as the drop in new confirmed cases contradicts the common sense of statistics and the rate at which the virus was spreading beforehand. However, from the direction the Russian government has decided to take it seems that there will be no slowing down on a path to reopening.
The impact on businesses
The pandemic has seriously affected the economy. Most industries experienced a decline, and the wave of uncertainty during the non-working period took a heavy toll on small and medium-sized enterprises (SMEs).
One of the sectors that has suffered the most is transportation and travel. With borders shut and quarantine measures, there is virtually no travel. Both the aviation and tourism industries have come to a halt. Ground transportation has suffered as well. Experts predict that railway losses will amount to about 66 billion rubles. This is even more than the expected losses of public urban and underground transport (55 billion rubles). Based on Moscow Exchange data, the transportation sector industry index hit its low in April when it decreased by 32.6 percent since the beginning of the year.
Oil and Gas
Problems in the transport sector exacerbated those of another sector – oil and gas. Since the beginning of the year, the Russian oil and gas industry has faced multiple challenges. The pandemic has only worsened the situation as the drop in demand for fuel has brought down oil prices even further. Oil has fallen more than double in its price since the start of 2020, from $68 to $30 per barrel. It has come back since and at the moment of writing this article is hovering around $40 per barrel. However, the pandemic has clearly had a negative effect on the industry and the oil industry index has dropped 31.3 percent since the start of the year.
SMEs also struggled during the pandemic. One of the biggest challenges for these companies was dealing with employees’ salaries and having to lay off some of their workers. Due to the lack of government support at first, many SMEs like cafes, restaurants, and small hotels suffered severe losses. Sixty-nine percent of entrepreneurs believe that the coronavirus pandemic will have a severe negative impact on the Russian economy. This is taken from the results of a survey conducted by the NAFI analytical center. All participants were individual entrepreneurs and owners of SMEs. In total, 1508 senior employees of enterprises in eight federal districts partook.
Here are some other responses:
- 85% of respondents reported that the financial performance of their enterprises has worsened.
- Companies with up to 100 employees suffered the most.
- Almost half of all respondents (43%) believe that the situation will take at least a year to return to normal.
- 73% of the surveyed entrepreneurs said that they are in need of state support because of the pandemic.
- The majority of entrepreneurs (66%) believe that delaying or cancelling the payment of taxes would help them.
- 34% of respondents favored providing subsidies and financial support, and 21% favored granting a loan without interest or on favorable terms.
- Among the support measures, respondents indicated the introduction of rental (20%) and credit holidays (18%) and the reduction or cancellation of mandatory contributions to the Social Insurance Fund (10%).
Is it all bad news?
These statistics show that the economy has severely suffered as a result of the pandemic. However, with the easing of restrictions, there are some signs of positive change. Almost all sectors of the economy, except for transport, mining, metallurgy, and financial sectors, have grown since the beginning of May. Furthermore, several areas have benefited from the situation with the coronavirus. For example, the monthly revenue of the telecommunications and IT sectors is projected to increase by an average of 20–25%. Experts project that by the end of May, these industries will be earning an additional 66.3 billion rubles. Companies that provide mobile services (48.1 billion rubles) and broadband Internet access (11.5 billion rubles) will benefit the most.
Nevertheless, it is still too early to tell just how much of a toll the pandemic will take on the Russian economy. Some recent projections, like the Boston Consulting Group (BCG) analysis, suggest that the most likely scenario will include repealed waves of infections and, accordingly, a series of quarantines until 2021 and the advent of a vaccine. They project that in such a scenario of repeated quarantine cycles, Russia’s GDP will fall by 7–10%.
First package of state support for the economy
To combat this decline, on April 27th the Russian government rolled out a package of support measures for businesses. The government provided measures to support systemically essential enterprises, which employ a large number of people. The government considers “essential enterprises” to include organizations from the automotive, aviation, electronic, light, chemical, electrical and cable industries, machine tools, oil and gas engineering, energy, heavy, railway engineering, shipbuilding, timber industry, socially important goods industry, conventional weapons industry and the industry of ammunition and special chemistry.
These enterprises will receive loans to replenish working capital in the amount of up to three billion rubles at a rate of not more than five percent per annum. According to the Russian state, more than 1,100 companies will receive such support.
Second package of state support for the economy
The second package’s main emphasis focuses on support for SMEs. State support for SMEs in 2020 will include budgetary payments and subsidies, benefits, deferrals of mandatory payments, and tax breaks.
As part of the second package of state support for the economy, the government agreed to help SMEs by contributing to salary payments. Such companies will be provided with funds at the rate of one minimum wage for each employee. To be eligible to receive support, the employer must maintain jobs at a level of at least 90 percent of what they were before the pandemic. Yet, in most cases, the staffing level requirement would cost affected businesses more than the subsidies can compensate; some of the SME packages have been criticised as little more than a symbolic gesture.
To issue interest-free loans to small and medium-sized businesses, banks will additionally receive 3.5 billion rubles of state subsidies. According to the Ministry of Economic Development, the total amount of issued loans for the payment of salaries should reach 305 billion rubles. VEB guarantees 75% of such loans.
While the Russian government keeps emphasizing how much they have done to support the businesses suffering from the pandemic, many experts say that it is simply not enough. Much attention has been given to large corporations who work closely with the government, whereas SMEs had to weather the storm largely on their own.
Now that the shutdown is over and restrictions are completely lifted, businesses should start planning their reopening strategy and think of how best to mitigate the damage from the pandemic. The state of the economy has forced the government to revise its economic growth strategy. In the post-Coronavirus era, the authorities will need to increase the number of jobs, take a fresh look at the support for SMEs, and at the quality and frequency of its communication with the business sector.
According to the business expert Oleg Cherednichenko, the pandemic has shown how vulnerable and unprepared SMEs are in a critical situation and in the absence of a “financial safety net.” He has also stated that the speed of the response and the effectiveness of the dialogue between the state and business has increased significantly due to the urgent nature of the pandemic, and should continue with the same pace with the upcoming “new normality.”
Its global impact notwithstanding, the pandemic did highlight underlying problems that many Russian businesses face. Yet, new opportunities have also arisen.
1. Growth of innovation and entrepreneurship
This situation has had a strong impact on the mindset of many Russian businesses. Old-fashioned businesses that do not use digital platforms, outsourcing, or that lack flexible management structures, have suffered the most. Many of them have incurred significant losses and shut down due to their inability to adapt during the pandemic. We expect many companies to restructure their operations as a result. The shift towards more flexible business models and the restructuring of businesses can stimulate growth and entrepreneurship. Companies will now look at new solutions and processes that let them be more flexible and ensure there is not one single “breaking point” within their business operations.
2. Rise of outsourcing
Outsourcing is one such solution. This pandemic highlighted how outsourcing can provide a “safety net.” Through outsourcing some of their processes, companies keep the number of their employees to the minimum and have less in-house operations. The benefit of this, as exemplified by this situation, is that less impact will be felt by the central structure of the company. As outsourcing can be easily carried out from anywhere, it also allows businesses to keep functioning while working from home. Therefore, it is very likely to see Russian companies showing more interest in outsourcing after the pandemic.
3. Filling the vacuum
The effects of the pandemic will create a wave of bankruptcy, and many businesses will not be able to recover. While this is very unfortunate, it also will create opportunities for low-cost import substitution and exports of goods into Russia. Due to the low rouble and precarious employment situation, it will be easier than usual for foreign companies to fill the vacuum left by the pandemic. These niches will be very attractive to international companies who can quickly fill the market demand and get a foundation in Russia.
Overall, the pandemic has negatively affected Russian businesses and the economy. The quarantine shutdown was inevitable. However, although some industries suffered greatly, the current situation seems to be less damaging than some feared.
The number of cases is slowing down, and while the government support has not been sufficient, certain programs have helped. Life is now returning to normal, and the business world is slowly opening up. These are signs of positive change and new opportunities for companies to consider.