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Last week became a real disaster for the Russian economy. It involved three horsemen of the social apocalypse -- a steep surge of the COVID-19 pandemic in Russia, the collapse of oil prices due to the standoff with Saudi Arabia and its allies, and the slide of market indices around the world.
During an enlarged session of the Federal Treasury Board, Finance Minister Anton Siluanov admitted that due to the falling oil prices and the COVID-19 pandemic, Russia’s economy “is not going well.” According to him, this year, Russia's budget will face deficit. Therefore, the reserves of the National Welfare Fund (NWF) are likely to be used.Siluanov noted that the virus has affected such industries as transportations including air transportation, tourism and small businesses. Moreover, “a growing number of other sectors” might be affected, too. The purchases of high-priced goods, including cars are reducing.“Therefore, we are deflecting from the macroeconomic forecasts made for this year. Of course, this will adversely impact the budget. According to our estimates, given the current oil prices, the volume of oil and gas revenues alone will slim by almost 3 trln rubles ($39,007,800,000) compared by the expected figures.”In order to compensate for the shortfall of incomes, there is a plan to use the NWF, as it “set up for this purpose,” added Siluanov.Meanwhile, the so-called “perfect storm” has already begun in the world economy. It defines an especially bad situation caused by a combination of unfavourable circumstances. As a result, their total negative impact increases significantly.Investment banks Goldman Sachs and Morgan Stanley have announced the beginning of a global crisis. So far, it has been unclear only how long and severe the global recession will be. Analysts assume that by the end of 2020, the world economy will show no more than 0.9% growth. The growth of world GDP is predicted to be 1.25%.The S&P investment risk management agency predicts an increase by 1-1.5%. All experts interviewed by the agency agree that the decline will be no less serious than in 2008. At that time, the global crisis led to a 0.8% drop in global GDP.The beginning of the economic recession was caused by the outbreak of COVID-19. Against the backdrop of an epidemic, China reduced its oil consumption. This fact immediately led to the crash in the global oil market after Russia withdrew from the OPEC+ deal.China is a key link in global value chains. It is one of the world's largest suppliers of intermediate goods. Removal of this link has led not only to suspensions of production worldwide but also to increasing losses, job cuts and growing recession.At the same time, there was a steep drop in vessel chartering. The haulage of dry-cargo products such as construction supplies and hydrocarbons (oil and gas) came to a halt and the demand for them dwindled. The situation resembles the acutest phase of the global financial crisis. It is explained by declining economic activities in the wake of unprecedented measures to stop the spread of COVID-2019. Even recent epidemics or the terrorist attacks of September 11, 2001 did not lead to a dramatic decline of this kind.All indications show that the “Great Economic Recession-2020” is steadily turning into a perfect storm, and its tenth wave is still on the way. The crisis has not yet reached its peak.At an emergency meeting on March 15, the US Federal Reserve System (the Fed,) decided to lower the target range for the federal funds rate to 0 to 1/4 percent. As reported, it plans to keep this target range near-zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” The rate reduction was 100 basis points (1%.) It is the most significant single rate reduction made by the Fed during its entire history. In the last half-century, there were only three cases with a one-time decrease of over 50 basis points (22 January 2008, 18 March 2008 and 16 December 2008).In addition, for the first time since 2012, the Federal Reserve System established additional dollar swap-lines with the world's leading central banks (the Bank of Japan, the European Central Bank, the Swiss National Bank, the Bank of Canada and the Bank of England.) Transactions are to be activated immediately without specifying the upper limit. That is, as soon as it is sufficient if there is a liquidity shortage. The Fed also reduces to zero the reserve requirements for the U.S. commercial banks. This did not happen even during the Great Depression.“So, the Fed has confirmed a record-breaking lowering of the target range, unlimited REPO operations and swap lines with global central banks, the launch of QE 4 and setting to zero of reserve requirements for commercial banks,” Spydell (Pavel Ryabov,) a Russian popular economic blogger said in a comment on the Fed actions. “All the details will be announced later, but apparently it concerns a sum over $1.2 trln per year. It is unbelievable -- they have used everything they can use. A full set of actions. I don't even know what to call it. A tilt, a panic, an agony or what else? Anyway, this is an unprecedented and completely unique historic event. Panic is hitting market and scorching all around. It is absorbing more and more new assets that are swept away every day and leaving an indelible imprint of pain, disappointment and broken hopes.”Alexei Kudrin, chair of the Accounts Chamber of the Russian Federation, said that the prevention of a global recession is the main task of the Fed.“Reducing the target range of the U.S. Federal Reserve System to almost zero level supports the country's economy,” Kudrin wrote in his Twitter. “It is a sign to the whole world.”“The U.S. Federal Reserve System stays one step ahead,” Kudrin said. “It is supporting the U.S. economy. However, it is also a sign to the entire world economy. The prevention of a global recession is the main task.”In addition, Donald Trump's government offers two rounds of direct payments totaling $500 bln to the Americans in response to the economic consequences of the coronavirus outbreak.It is well-known that throughout its existence, the U.S. Federal Reserve System has been emerging from financial crises emerging from financial crises at the expense of other countries. Since the U.S. dollar is the world's reserve currency, the American government has been unloading its problems on others.It is also well-known that since post-Soviet times, the Russian government has always come out of economic crises at the expense of its own residents.As in this anecdote, a mullah (the Fed) beats Hoja Nasreddin, Nasreddin (the Russian government) beats a donkey, and the donkey (ordinary residents of Russia) understands nothing.Boris Borisov, a Russian economist and former member of the government of Donetsk People's Republic (DPR) says:“Under Brezhnev, oil cost $3 per barrel from 1965 to 1972. Today, taking dollar’s inflation into account, it would be about $15. The USSR economy grew by 42% in the time period from 1966 to 1970s (the eighth five-year plan), while industry grew by 51%.For example, the Bratsk and Krasnoyarsk hydroelectric power plants were built. AvtoVAZ [a Russian automobile manufacturer which is best known for its flagship series of Lada vehicle] was constructed and started producing cars. In total, there are about 2,000 new enterprises. Anyway, there will be a recession, declining living standards and “a fight against objective factors.” However, nobody is to blame, because oil costs $24 per barrel.”Borisov believes that in fact, there is no problem with the dropping prices. Over the last five years, on the average, only $64 bln a year has been legally exported from Russia. With oil exports of 248 mln tonnes (the estimates of 2919), we will lose about $30 bln due to the falling prices. This might be easily compensated by limiting the export of capital.It should be noted that in the post-Soviet times, the Russian government has never succeeded in stopping legal and illegal capital outflow abroad. Nor has it taken any large-scale measures to compensate its residents for the consequences of the economic crisis.The Russian officials assure us that the situation is under their control and there is no need for panic buying. For some reason, the words of Mikhail Zhvanetsky, a Soviet and Russian writer, come to mind: “...what are you, beasts, preparing?!” people screamed and changed into all clean clothes just in case...”