Consequences for the economy caused by coronavirus-related measures

вестник 07.05.2020

It is fair to say with confidence that the quarantine and self-isolation regimes associated with the coronavirus 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 private individuals.

The Government of Russia 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 economic cessation.

The shock from stopping activities was first experienced by small and medium-sized enterprises. Even if the restrictions are lifted by mid-May, not everyone 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 priorities. The customer base is lost, but most importantly, the supply chain is extremely difficult to restore. Shops selling consumer goods have a chance to recover, as pent-up demand for goods and everyday necessities is accumulating. Supermarkets and grocery stores, as well as e-commerce, will remain profitable. IT companies developing software for remote work, training and managing production processes will grow.

Forced suspension of activity 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 an expensive premises, bear the costs of its maintenance, pay salaries to support staff and huge taxes. Entrepreneurs optimize their business: they liquidate offices and will hire staff to order. Due to widespread reductions, it will not be a problem to find qualified personnel in the labor market.

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

It is hoped that artificially blocking supplies and closing borders will give impetus to revise the supply chains towards their reduction. Large enterprises manufacturing high value-added products will conclude that it is advantageous to produce components in their country. Violation of obligations under the contract due to non-delivery on time from abroad of auxiliary products of low redistribution 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 reliability of supply. Russian companies will be able to receive orders from large metallurgical and chemical enterprises, from the sphere of woodworking and automotive industry. New facilities will be created. Enterprises will expand the product line: the wider the range, the higher the competitiveness.

But there will be more negative consequences. The business will not recover in the same volume. Entrepreneurs will not develop infrastructure for business, because they do not know when a new crisis will come, therefore they will be careful. The number of fraudulent companies and “businessmen” wishing to solve their problems and enrich themselves through the honest working companies will increase.

Consumer demand will not recover, as consumers lose their jobs. No domestic demand - no incentive to recover. Imports will decline due to the unfavorable exchange rate.
Due to lower consumption, freight traffic will decrease.
The entertainment and tourism industries will not reach the pre-crisis level any time 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, they will be able to find seasonal work on sowing and harvesting. Huge residential complexes built for citizens arriving from regions will be without buyers. At the same time, the state plans to allocate 150 billion rubles to developers, for which it will be able to buy unclaimed housing.

Large enterprises with state support will be the most stable. It is doubtful that the measures taken by the Government to support small and medium-sized enterprises will compensate even to a small extent the damage from restrictive measures related to the coronavirus - damage not only to entrepreneurs, but also to the entire economy of the country. 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 deferred payment. Reducing the tax burden, reducing the number of inspections and eliminating the conflicting requirements of regulatory bodies could certainly help still working companies.