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Creditinform Rus: consequences for the economy caused by the COVID-19 pandemic

It is fair to say with confidence that the quarantine and self-isolation regimes associated with the current pandemic have affected the world economy in the most negative way. Leaders of states limited economic activity by promising to provide support to affected entrepreneurs and individuals.

 

The Government and the Central Bank of Russia have been instructed to develop measures that will help businesses and citizens to overcome the consequences of a forced shutdown.

 

The shock from stopping activities was first experienced by SMEs. Even if the restrictions are being lifted in the mid-May not each business will be able to open and resume work. 1.5 months is a sufficient period for changing consumer preferences: customers have already switched to competitors in online stores or have redefined their priorities. The customer base is lost but most important is the fact that it is extremely difficult to restore disrupted supply chains. Shops selling consumer goods have a chance to recover as pent-up demand for goods and services of daily use is accumulating. Supermarkets and grocery stores as well as e-commerce will remain profitable. IT companies developing software for remote work, trainings and management of operational processes will grow.

 

Forced shutdown and the lack of real state support create the risk of entrepreneurs leaving for the shadow economy. During the time of self-isolation entrepreneurs will be convinced that there is no need to rent expensive premises, bear maintenance costs, pay salaries to non-operational staff and huge taxes. Entrepreneurs will optimize their business: they will stop using offices and will hire employees for specific tasks only. Due to widespread staff reductions, it will not be a problem to find qualified personnel in the labor market.

 

The shutdown across the country is launching a process that is dangerous with long-term consequences. It causes a colossal drop in energy consumption, which leads to a drop in profits for energy providers and all companies associated with this industry - from generating companies to sellers of electric machines. As a result, one should expect an increase in tariffs, which will negatively affect all industrial enterprises. Non-tax payments, such as excise taxes or business permits will increase as well. For a deficit-free budget of the Russian Federation the oil price should be at least 45 USD or more. In current conditions the simplest solution to eliminate the budget deficit is to increase mandatory payments.

 

There is a hope that artificially supply blocking and borders closure will give impetus to revise supply chains towards their reduction. Large enterprises manufacturing high value-added products will conclude that it is worth producing spare parts locally. Violation of contract obligations due to non-delivery on time from abroad of auxiliary products leads to the loss of reputation, customers and money. Localization is the only sure way to secure production by abandoning minor benefits. Cost will be less important than the reliability of supply. Russian suppliers will be able to receive orders from large metallurgical and chemical enterprises, from woodworking and automotive industry. New facilities will be created. Enterprises will expand the product line: the wider the range, the higher the competitive advantage.

 

But business will not recover in the same volume. Entrepreneurs will be careful developing new infrastructure because of a new eventual crisis fear. The number of fraudulent entities and businessmen wishing to solve their problems and enrich themselves through the trusty companies will increase.

 

Consumer demand will not recover as consumers lose their jobs. No domestic demand - no incentive to recover. Due to lower consumption freight traffic will decrease. Imports will decline due to the unfavorable exchange rate caused by the current oil crisis.

 

The entertainment and tourism industries will not reach the pre-crisis level soon as consumer preferences will shift towards the most necessary things.

 

Jobs in big cities will be reduced. Dismissed people will return to their hometowns. In summer and

autumn the seasonal work on sowing and harvesting could be a good chance.

 

Sales of apartments in huge apartment blocks in big cities in anticipation of demand from citizens arriving from regions will drop. At the same time the State plans to allocate 150 billion rubles to buy non-demanded residential accommodation.

 

Large enterprises will be the most stable. It is doubtful that the measures taken by the Government to support SMEs will compensate even to a small extent the damage from restrictive measures related to the COVID-19 pandemic - damage not only to entrepreneurs but also to the entire Russian economy. According to various estimates GDP will drop to 10%. The Central Bank of Russia and the Ministry of Economic Development are more optimistic and forecast a decrease of 1.5-2%.

 

After 2008 it took 2.5 years to overcome the effects of the crisis. The current crisis may be longer. Anticipating more serious consequences some countries put the viability of the national economy a priority and did not impose severe restrictions. Looking at the statistics of diseases COVID-19 today Sweden and Belarus are far from the forefront of the victims.

 

For the period of restrictive measures and overcoming their consequences, business needs to be exempted from taxes instead of tax payment holidays. Reducing the tax burden, reducing the number of inspections and eliminating the conflicting requirements of regulatory bodies could certainly help companies which are still operating.

 

Stay safe!

 

 

Source: Creditinform Rus

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