The impact of Covid-19 in Russia and Eastern Europe | COVID-19 Series | LBS

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The impact of Covid-19 in Russia and Eastern Europe | COVID-19 Series | LBS

welcome everyone to the London Business School wheeler Institute for business and development covered 19 series we will continue our discussions zooming into varios emerging and frontier economies and today we are both happy and honored very glad to welcome Sergey Judith in our Ovid 19 series Sergey thanks for taking the time and joining us a Sergey is one of the most prolific and important economist it has done very important work on the economy of Russia of China of transition economies more generally he served as director of the new economic school in Moscow a Russia’s premiere School of Economics and over the past couple of years it has been a professor of economics at CN spoo although he took a guess a long sabbatical serving as chief economist for the European Bank for Reconstruction and Development although now his back took his more academic life Sergey has worked on a plethora of issues corporate governance corporate finance the economics of growth my favorite work of his regards the industrialization of the Soviet Union the Chinese Republic under Stalin and Mao most importantly he has also worked on the financial sector he has been at the board of Russian banks in he combines an in-depth knowledge of the structure Eastern Europe the Russian economy with a much more hands-on and practical experience so without any further view let me just welcome Sergey thanks for taking the time Sergey ok and I would like to ask the first question just give us an overview of what’s happening in emerging markets and protein economies nowadays and then secondly how these emerging markets crisis or origin of crisis unfolds in Russia thank you very much at least for inviting me it’s a great honor to be on this series yes emerging markets are facing a big challenge right now so unlike developed countries they don’t have fiscal space and death so they cannot just say I’ll spend 10% of GDP or 20% of GDP to stand up to this crisis some of them have limited ability to borrow some of them actually do have rainy day funds and Russia is one of those countries Russia is about 10 15 % doesn’t well depends how you count in the oil fund it’s actually true as well for Kazakhstan and Azerbaijan they also have some word chests if you like but in general the challenge is very different between developed and developing economies where developing countries have this problem that they would like to respond to the crisis they need to respond because they’re our health systems are actually not as strong as those in developed countries but they don’t really have the cash and if those countries which have the cash are the countries which export oil and oil prices as you know have really tanked so in the early 2020 world prices were at the level of 60 $70 per barrel to data at 25 and actually in March there were weeks when all prices became negative and in early April certain oil prices reached zero when you think about those issues and you know that your expert commodities oil you really should be scared and this is not surprising because the coded driven economic recession the global recession is not just a normal global recession it’s a global recession where the sectors that buy oil that is Airlines and and cars and protein all these sectors are hit disproportionately and so even if global GDP contracted by three percent or even five percent the biggest challenges for those sectors so demand for oil today is something like minus 30 percent relative to what it used to be so oil exporters are hit a lot and of course Russia is one of them in Russia get very bad well I really want to zoom into Russia and what’s happening in nowadays so our understanding or at least my understanding is that many interactions health crisis the huge drop in commodity prices especially oil so what do you think how should the response of Russian authorities fiscal and monetary policy should be so on monitor in monetary terms monetary policy in Russia has been exemplary so Russia has moved to flexible exchange rate around 2014 and since then Russia is doing inflation targeting in a

discipline textbook way and has been doing a good job and so oil price goes down Russian ruble tanks competitiveness is restored so monetary policies is performed really according to a macro textbook now the fiscal policy is a bigger challenge so indeed Russian health system is not comparable to best global standards and so even in Moscow which is better funded there is a general risk and general feeling that hospitals are being overwhelmed now the mayor of Moscow has recognized that Moscow is going to be hit especially badly because Moscow is the best integrate the most integrated part of Russia the most integrated global Russian region and so it is actually the cluster of kovat 19 at the moment so Moscow’s hit hard but even in Moscow with better health care system there is a risk of overflowing the hospitals and in that sense it is a challenge now we independent economists recommend the Russian government to be generous and actually to spend rainy day fund in order not to overburden the hospital system you need to introduce Street lockdown but once you introduce strict lockdown of course people lose their incomes and all small businesses especially in Moscow lose 100% of their incomes and so the government is supposed to help those people help households help self-employed help small businesses in the government so far has not been doing that government has been save in the money and people like myself would criticize that decision and would say that Russian government should spend from six to ten percent of GDP which it has in the rainy day fund well the Russian government so far only announced a package of 2% of GDP in half of that is actually not given money but just postponing tax payments and so in that sense Russian government has not been generous and I think it’s wrong because when people have nothing to eat they eventually go out in the street simply because they have nothing to eat and that creates additional risks of a second outburst of the epidemic and so I’m I’m really worried and the epidemic today is Russia has been fortunate to be slow in picking up the epidemic because Russians don’t go to scale to French or Italian resorts as much as they used to when oil price was hundred or hundred forty dollars per barrel but still Russians Russians are very disconnected especially after sanctions from global economy and so because of that Russia is late Russia is Russia’s falling the epidemic with a months or months and a half relative to European tenants but today if you look at new daily cases of coronavirus Russia is second only to the United States every day we are talking today and they made fourth every day Russia hits 10,000 cases the deaths are not as scary at the moment we are talking about hundred death per day it’s a big number but it’s still lower than you would have an interviewer France in the worst days and you would have 500 or more but still it’s going up and in that sense Russia should be stricter on lock down more generous on supporting people who lose incomes and also throw a lot of resources into health care and unfortunately the Russian government has been less decisive and less generous then it should have been yeah you mentioned that you know when people don’t have to eat they don’t have to eat you know they go out and they try to work but we know actually from history that when world commodity prices were very low there is a correlation with civil war outbreak ability and I remember personally talking to a common friend Russian economy saying how come Gorbachev so quickly power and I remember him telling the world price of oil was bottom down and we know had another transition when we had President Putin rising to power effectively which also coincides with a drop of commodities Russian default of the late 90s so now another issue that I know that can work is you know how the political situation the social situation so it’s a great question because at this particular government mr. Putin’s government has never experienced oil prices as low so if you think about 2008-2009 oil prices went down to 37 dollars per barrel it looked very low but by today’s standards it will be just great because today’s prices are 2025 and in 2014 all prices came down but recovered quickly and in this sense there is a challenge and mr. Putin’s

approval ratings are coming down to the extent that some of those ratings are no longer published so for example there is this survey of whom would would you vote for if election takes place now and so mr Putin’s ratings eventually came down to something like 45 percent in December January but in February and March they stopped publishing those ratings because apparently mr. Putin is not as popular as before but there is a difference between mr. Putin and mr. Gorbachev so mr. Putin cannot afford to step down he’s done too much antagonizing people outside of Russia inside of Russia so he has to stick to his job in order to stay safe mr. Gorbachev also didn’t like to lose his office but he has been out of office for what 30 years by now and she is still alive and he travels around the world and he’s respected especially outside of Russia so he can safely he could safely step down there is a general feeling that people like mr Putin cannot step down and so this region will find in various ways to stay in office but it is facing the most difficult crisis in its lifetime and in the in the lifetime of what institution so so actually that’s a great point but you know moving forward and I guess with the caveat microeconomics I’m not really good at forecasting especially about the future yeah it’s like this quote of middles bore the famous physicist hey so how do you see developments unfolding in Russia so this is indeed very hard to forecast because in democracies at least you can forecast politics you know that presidents change but rules of the game and democracies are kind of staying stable in non democracies like Russia today the probability of leaders change leaders turnover is low but once this turnover happens everything changes because this is a parent personalistic regime and when mr. Putin is gone everything will be different and so in that respect it’s very hard to predict what post Putin Russia will be like and also the safest bat is status quo because these regimes don’t change everything so they’re very one class and mr. Putin has been running the country for 20 years now and so in that sense the best bet is the status quo which means mr. Putin stays in power Russia has a recession this year so the IMF forecast for this year is minus five hundred five percent decline in Russian GDP in 2020 and then recovery in 2021 Central Bank of Russia forecast from four to six percent recession this year things may actually be worse than that because Russian government as I said is not generous which means the shock of the lockdown will be more painful many businesses will just discontinue to exist will not recover after the lockdown and so the GDP shock will very painful and then oil prices will recover at some point maybe by the end of this year maybe by by the end of next year they are not likely to go back to 60 or 70 because air travel will probably not recover to pre-crisis level and so a lot of people will continue to give seminars online rather than travel to each other’s universities but also business people will travel less and in that sense oil prices are likely to recover two levels of 35 and 40 which means the regime will have to adjust somehow but the status quo is a very nasty recession this year and probably recovering next year and also readjustment to new reality when oil prices are no longer 60 or 70 but more like 35 and so that means that this region will be probably less internationally aggressive maybe there will be some hope for improving business climate but with mr. Putin in power for 20 years it’s very hard to cope that this regime will change and will suddenly become more friendly towards international investment you make this point because of the cooler Institute we’re particularly keen on the role of business and development so I wanted to ask you you know typically with these crises with focus or policy monetary fiscal government health policy of course but we have not been discussed much about the role of business so how do you see Russian businesses a adjusting to this secondly what’s the role of the big and successful semi

successful Greek Russian in the months quarters in years ago so in Russia it is suddenly becoming clear how developed and sophisticated Russian small business has become and now when the small business is going belly-up the outcry is huge exactly because people noticed how much was dependent on small businesses we didn’t have cash buffer but provided high-quality diversified sophisticated services so in it’s very sad what’s happening right now because a lot of very sophisticated companies may actually disappear now the other part of Russian business is Russian online business and that of course will continue to prosper and these companies are doing a good job and a lot of what they’ve built is now helping people to survive through the lockdown and that means FinTech payment systems delivery food and other goods all of the e-commerce all of that continues to function and it turns out that Russian companies have done a good job regarding that now if you think about international companies so Russia will remain isolated Russia will not suddenly reintegrate into the global economy because of its geopolitical standing sanctions and so on and so in that sense I won’t expect suddenly more openings for big international companies if you want to ask a question about big companies you really want to look into Russia’s neighbors rather than Russia proper and many stricken countries will welcome more international investment simply because this will be a devastating crisis for emerging markets there will be short for cash they will be short for capital and they will be interested in bringing in international companies and many of the emerging markets currencies will tank which means that this market sizes will be smaller so Ukrainian market will not be as attractive as it was just a year ago but Ukrainian labor will be cheaper than a year ago and the same applies to many syrup in countries so if you want to build a company which would export to neighboring high-income countries there is something that will emerge out of this crisis unfortunately because I would like to see Ukrainian wages to go up in dollar terms not down yeah so my last question is mostly related what one discussed so far I know that we have been doing some work on social media and media together also Katya so it is actually thing this is the time to really test this conjecture with some evidence of course social media propagate fake news perhaps you know if you were supporting politician a and I was supporting politician B you know perhaps you know there was like some Sunday standing of a or B was okay but now we’re talking about misinformation about health people care the most so given your war okay how do you think they see the political and economic situation will unfold in the years to come because the way I see that in you know given us are already at work together is that I see one kind of force pushing people oh now let’s try to see which is the reliable source a who is the expert oxidation for example when you drug development but then I see another tendency that now have been bombarded with health news and it is very easy for a populist social media to say oh look everything is official how do you think I think I think indeed we can be on the optimistic side that during a pandemic during the health crisis you have more demand for expertise and probably more credibility of experts because stakes are so high we are not talking about percentage points of GDP or or inflation or unemployment even we are talking about lives we are talking about thousands of lives and so you would think that listening to doctors would be a good idea and we also see that populist are not very competent we see that President Trump has made many major mistakes we also see that in the UK initially the government did not choose the optimal trajectory we see in Brazil major major problems due to lack of competence of president ball sauna and so we see how populist leaders are not doing a good job exactly because

populist narrative against expertise is against elite and elite and expertise for them it’s the same and so in that sense we can hope that after this crisis there will be more respect for experts and in that sense probably populace will lose some of the attractivity of their message on the other hand as you rightly said they’re extremely good and building a narrative so I won’t really just say that populace will give up and say sorry we were incompetent we’re wrong let’s trust the experts no they will try to spin the narrative and we already see that well president tram doesn’t get the increase in his ratings like many people would do in this rally around the flag kind of crisis where government approval ratings go up in many countries still he doesn’t have a major decrease and given how a disastrous present France policies have been on many counts it is striking to what extent is still reasonably successful in keeping his base with him and in that sense I think it’s not enough to win the war against the virus it’s also important to tell the voters how and why expertise matters how and why competence matters and you cannot just lie your way around this crisis you really need the work you need to know what you’re doing and so I think it’s still unclear what’s going to happen afterwards now one interesting political implication is I think this crisis will reinforce the support for the Green Party’s so when you mentioned my work on Internet penetration one of the things which we found a spread of Internet increased the support for populous but did not increase support for green parties because green message apparently is not as simple and it’s about respect for science it’s also about taking responsibility for the planet and this crisis may actually help the green parties who would say look we need to respect the nature otherwise climate change and imposing ourselves on the nature may result in pandemics like this and the second argument that green parties can use is look we just sacrificed 5% of global GDP or something like this because we wanted to save lives climate change potentially is going to cost a lot of lives so why shouldn’t we sacrifice some money to slow down the climate change it’s much harder to reject the argument like this because well we’ve just seen how governments stood up and said we are going to spend five percent of GDP 10 percent of GDP or in some country 7 30 percent of GDP to save lives and in that sense I think there are some potential implications for political landscape in Europe and globally Sergey thank you very much for taking the time with us on how busy you are things to look for enlightening us about Russia yeah thank you a lot for sharing your insights thank you very much yes yeah thank you very much it was great thank you