Restrictions being lifted, but outbreak is killing wealth, say experts

Global investors are withdrawing from Russian markets due to the negative impact of the novel coronavirus, and country’s consumers continue to remain highly pessimistic, experts said.

However, Russia is lifting its coronavirus restrictions gradually. In Moscow, the wearing of masks on the street will not be obligatory from Monday.

And it seems that economic and social activity is returning to normal, but experts say international investors are scaling back their presence in Russia.

Over the past week, $90 million has been pulled out of equity funds alone, and the same trend has been noted on the bond market, which lost $70 million compared with a $30 million influx in the previous week.

The business daily newspaper Kommersant said the recovery of the Russian market in the spring had allowed investors to make significant profits, but, the general lack of stability around the globe due to the COVID-19 pandemic has hit investor appetite for risk.

Possible sanctions

The situation is also being undermined by the possibility of new sanctions against Russia, Kommersant said.

Separately, data from the Emerging Portfolio Fund Research, or EPFR, shows a noticeable drop in interest in the Russian market from international investors.

According to Bank of America and BCS Global Markets, which count on the EPFR’s data, for the week ending July 1, investors withdrew $90 million from equity funds (including global funds) invested in Russian shares, more than 4.5 times higher than the week before.

Also, more than $70 million was pulled out of the Russian bond market, compared to a $30 million inflow in the previous week, said Alfa-Capital’s portfolio manager Dmitry Dorofeev.

Dorofeev said many investors feared a second wave of the pandemic, and a possible return of anti-coronavirus lockdowns.

Region Asset Management’s head of assets Alexei Skaballanovich said a second wave of the virus was likely to hit “developing countries where medicine is not that advanced and where a negative effect may be stronger”.

At the same time, market players said that Russia is in a special position, with the virus seemingly under control and with companies allowed to return to operation, he said.

However, Skaballanovich also talked of new anti-Russian sanctions that under discussion in the United States.

Dmitry Kosmodemyansky of Otkritie Asset Management was also concerned about the sanctions. He said New York Times report about alleged Russian actions in Afghanistan had affected the behavior of market players.

Although experts do not expect that the new sanctions will become a reality, this factor has affected the profitability of Russia’s state bonds.

In the domestic markets, Russia may not see a positive turnout in the second half of 2020. The COVID-19 pandemic in Russia seems to be on the wane, but consumer pessimism remains high, a poll by the Russian Presidential Academy of the National Economy and Public Administration, or RANEPA, suggested.

Russians are expecting the situation in the country to deteriorate in the near future, and they are skeptical about their financial situation and prospects, so that the rise in consumer pessimism could cause a severe consumer crisis, the poll found.

The daily newspaper Nezavisimaya Gazeta said RANEPA experts based their estimates on the fifth wave of monitoring of more than 2,000 people on their social situation and behavior during the pandemic.

The experts said more than 70 percent of those polled thought that the pandemic would significantly affect the country’s economy. However, 18 percent of the respondents said the effect would be moderate.

Financial prospects

Russians were more worried about their financial prospects, with more than half of those polled saying they expect their financial situation to deteriorate in the near future. Around 73 percent of those polled feared that their financial circumstances would worsen significantly or moderately, and 14 percent thought it would not deteriorate significantly, while 11 percent saw no threat to their finances at all.

“The crisis, the coronavirus pandemic and the quarantine restrictions have had a negative effect on the population’s outlook and their view of the current situation in Russia and around the world, and of their current situation,” economists with the Center for Macroeconomic Analysis and Short-term Forecasting said.

Deputy head of the economic theory department at the Plekhanov Russian University of Economics Irina Komarova said the lifting of quarantine restrictions would help improve the situation, but the positive changes would take a while to take effect.

“The reason is the public’s exacerbated financial situation. The official data on real disposable income only exists for the first quarter of 2020, and it is 0.2 percent less than in the corresponding period last year. However, the decrease in the second quarter may be more significant. According to official predictions, in the second quarter, the real income of the population may drop by 6 percent.”

This year, Russians have undergone two shocks: the devaluation of the rouble and the quarantine that led to a rise in unemployment, said Alexander Razuvayev, head of the Alpari analytical center.

“We have not overcome those shocks, which affects consumer behavior. People spend less, thinking that tough times are ahead. This is a strong factor causing a recession. Any shock to the economy is reflected by a drop in consumption.”

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