Short-term economic stabilization contrasts with slow reform and climate challenges

A carbon tax recently proposed by the EU, Russia’s largest trading partner, could potentially have a huge impact on the government budget which is heavily dependent on oil and gas exports.

The strengthening of public finances and the accumulation of foreign exchange reserves have so far enabled the Russian economy to resist the imposition of international sanctions and the Covid-19 crisis relatively well.

Russia’s production levels have already recovered close to pre-pandemic levels. GDP is expected to grow 4-4.5% for calendar year 2021, revised upwards by 3% according to our June 2021 forecast, before growing 2.7% next year.

Greater economic stability has been achieved, however, by avoiding addressing structural weaknesses

However, greater short-term economic stability has unfortunately coincided with a lack of awareness of the longer-term structural weaknesses of the economy.

The real disposable income of households fell by almost 10% between 2013-2020. Russia’s growth prospects over the next decade are low, at 1.5-2% per year, despite already relatively low per capita income.

Structural reforms aimed at tackling underinvestment will prove crucial to increasing longer-term growth prospects, while global climate policies make focusing on environmental issues a high priority.

The implementation of national investment projects has been slow

The government’s implementation of $ 360 billion in domestic investment projects has so far been slow. As of August 1, only half of the planned annual budget allocations had been implemented. Delays in implementation weigh on the long-term health of the economy.

Tax vulnerability to western environmental legislation

The carbon intensity of the economy and the government’s dependence on energy exports for revenue make budgeting vulnerable to Western environmental legislation. Russia is the world’s fourth-largest carbon emitter, accounting for around 4.7% of global CO2 emissions.

Russia’s exports to the EU will be significantly affected by the proposed carbon tax, designed to accelerate the EU’s shift to a low-carbon energy mix and which could help reduce demand for fuel-based products fossils.

The potential cost of an EU tax is still small relative to the overall size of the Russian economy, at around half a percent of Russia’s annual GDP, but this cost could nonetheless increase if the EU extends the tax. to include oil and gas.

Russia will gradually integrate climate-related issues into economic policy-making as new regulations come into force in key export markets. In response to the EU, we see Russia potentially combining legal challenges to the planned carbon tax with offers of environmental policy cooperation with Brussels to avoid the full impact of EU policies on its exports.

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Levon Kameryan is Senior Sovereign and Public Sector Rating Analyst at Scope Ratings GmbH.

This item was originally posted on FX Empire

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