- Putin will most likely win the elections, but a low turnout may impact the legitimacy of Putin’s government
- Large-scale protests and arrests of protesters by the government may have a destabilizing impact on the market
- Putin will remain focused on macro stability and fiscal consolidation
- No momentum for structural reforms or privatization
- Potential transition of power in 2024 will increasingly lead to Kremlin infighting in the coming years
In cooperation with Barry Jongkees, Intelligence Specialist, ABNAMRORussia-Watch_Elections-Putin-versus-Putin.pdf (408 KB)
Putin is fully expected to win the election…
On 6 December 2017, Russia’s President Vladimir Putin announced that he would be seeking re-election in the 18 March 2018 presidential election. The result appears to be a foregone conclusion due to his enduring popularity, the lack of viable alternatives and the fact that the Kremlin may be expected to use all means at its disposal to influence the outcome in Putin’s favour. One example is the barring of prominent opposition figure Alexei Navalny from contending due to a suspended court conviction that some claim was politically motivated. The remaining opposition candidates are either tacitly supported by the Kremlin (such as Ksenia Sobchak, the daughter of Putin’s former mentor), or longstanding politicians without a strong platform or public appeal.
…but the Kremlin remains concerned
In the absence of any meaningful competition, Putin is effectively running against himself. More than an electoral contest, this election is therefore widely perceived by political analysts as a referendum on public support for the president. The government has therefore sought to generate high voter turnout; the official Kremlin goal is ensuring that Putin gains 70% of the votes with a turnout of at least 70% (the so-called 70/70 goal). High voter participation would reinforce Putin’s legitimacy and weaken the hand of opposition figures and protest activity. Yet polls suggest that Putin may struggle to attain these thresholds. Although he remains genuinely popular and many Russians continue to support the president in the absence of a better alternative, voters have become indifferent to elections due to the absence of any genuine contest. The very low turnout (below 50%) at recent legislative and state elections underlines this trend.
Protests may lead to market disruptions…
Russia witnessed some of the most prolonged and large protests since the end of the Soviet Union after reports surfaced of electoral fraud by the ruling United Russia party in the December 2011 legislative and March 2012 presidential elections. We expect that small-scale protests calling for an election boycott will persist over the coming days and could intensify following Putin’s re-election. The outcome of the 2012 elections, in the first instance, had a positive effect on markets (yield of Eurobonds and the Russian stock market rose), however, the arrest of 500 protesters triggered a significant downward correction the stock market. In other words, negative disruptions on the financial market are rather triggered by protests and the government’s reaction to these protests than by the Presidential elections outcome.
…but discontent over structural issues could present an enduring challenge
A more pressing concern for the Kremlin is the emergence of protests in reaction to systemic problems, which are likely to be more protracted than temporary event-related protests (as illustrated by protest data above). Sizable protests broke out in several hundred cities across Russia in June 2017. A primary driver was growing discontent with corruption and self-enrichment by the elite. But socioeconomic factors also play a role. While the economy is recovering on the back of higher oil prices, real disposable income growth has been negative since 2014 (despite low inflation in 2017).
Furthermore, Russia scores low on quality of life indicators. For example, life expectancy for men is 66, while the average life expectancy in Europe (including Eastern Europe and the Balkans) is 75. While concerning due to their structural nature, the broad range of issues also underlines just how fragmented the opposition is. These protests will not, however, have a significant impact on government stability while Putin remains in office, particularly as voters are apathetic and currently see no viable alternatives to his rule.
With Putin’s presidency secured, we see no big policy changes ahead
Given the certain continuation of Putin’s presidency and in the absence of major market disruptions surrounding the elections, we expect the Russian economy to further recover in 2018. In the second half of 2017, growth accelerated on the back of higher oil prices (see Russia Watch: Discipline will help growth). For 2017 as a whole, growth increased by 1.8%, an acceleration after the negative growth in 2015-16, and we expect it to increase to 2% in 2018. With higher oil prices, positive growth prospects, another six-year term for President Putin and no additional painful sanctions expected in the foreseeable future (see: Emerging Europe watch: Main risk in Emerging Europe), we believe the government will use this momentum to cement macroeconomic stability. In addition, it will build fiscal buffers and opt for further fiscal consolidation in order to withstand future economic shocks.
Stability and fiscal consolidation have been at the core of Putin’s economic policy
Over the past years, Putin has put a lot of effort into lowering inflation and ensuring government finances are in good shape. He largely succeeded, as inflation fell to 2.5% in 2018 (year-end), which is under the central bank’s target of 4%. Meanwhile, the budget remained largely in check. Public debt is low at 12% of GDP. In light of these improvements, S&P upgraded Russia from junk to investment grade at the end of February on the back of its improving macroeconomic stability. Fitch had already assigned Russia a BBB- (investment grade) rating. Moody’s still rates the country junk, but with a positive outlook, and will likely upgrade Russia later this year.
Still, the ‘fiscal job’ is not finished and issues linger below the surface…
A lot of work still remains to be done to build robust fiscal buffers. Over the years, the Reserve Fund and the National Wellbeing Fund have been depleted. While they had combined assets of over USD 200bn in 2008, this was just above USD 65bn in 2017. A newly implemented fiscal rule directing directs the Ministry of Finance to use additional oil and gas revenues (arising out of oil prices above USD40/bbl) to buy foreign currency is a step in the right direction. This effectively means that increased fiscal leeway won’t be used to fund additional government expenditures but will be allocated to the newly created Sovereign Wealth Fund (a merger between the old Reserve Fund and National Wellbeing Fund), thus building fiscal buffers. The SWF currently stands at around USD 85bn. That said, not all assets in the SWF are liquid. It also includes subordinated deposits at local banks and infrastructure investment. Furthermore, while the total amount of the SWF may sound impressive, it only represents around 5.5% of GDP while other oil-producing nations have wealth funds that account for several times their total GDP. We believe that Putin’s focus will be on increasing the total assets and that he will shy away from using funds from the SWF for other purposes.
… as assumption for the fiscal budget are too optimistic
Furthermore, the new 2018-2020 budget envisages a reduction in the fiscal deficit to 1.3% of GDP in 2018 and targets a deficit below 1% in the years thereafter, with expenditures to decline faster than revenues. However, achieving this target will not be easy. Firstly, there will likely be contingent liabilities, as there may be additional costs associated with the nationalization of three private banks that faced bankruptcy in the second half of 2017 (Bank Otkritie, B&N, and Promsvyazbank with total assets of 5% of GDP). Secondly, the budget is based on a very favourable ruble rate. Oil and gas are sold in dollars, but revenues for the state are in rubles, which effectively means that a ruble appreciation would decrease state revenues. We have calculated that, taking into account the current USD/RUB of 56.7, this would decrease crude oil revenues from 5.8% of GDP to 5.1% of GDP.  Thirdly, as pension reforms are slow and the budgeted amount for pensions in the coming years is below the actual expenditures in 2017, we expect a shortfall.
No momentum for better business environment nor progress in privatization
In Putin’s latest state of the union, he said that the top priority is to improve the welfare of the people of Russia. He argued that Russia must renew the employment system, increase modern high-paying jobs, strengthen local government and the judiciary, create a competitive market and be open to new ideas and initiatives. This is also why some analysts state that, given that Putin is entering his last term, momentum for structural reforms will increase. We do not agree. This is not the first time Putin has mentioned these issues and in the previous 18 years that he has been in power, he has showed little appetite for such reforms. Russia continues to suffer from weak checks and balances, corruption and nepotism. This is also illustrated by the recent restrictive actions toward independent media and further constraints on genuine political participation.
After the collapse of the Soviet Union in the 1990s, there was rapid privatization of state-owned companies. As only the wealthy Russians (the ‘old oligarchs’) profited from this, buying up companies far below their actual market prices, Putin’s party reversed the process through forced nationalization programmes. Currently, state-controlled entities account for almost three-quarters of Russia’s GDP. As Kremlin-friendly ‘new-oligarchs’ currently reign over Russia’s biggest companies, productivity efficiency has not improved due to the lack of competitiveness. Already years ago, several economic advisors, argued for privatization in order to create more competition. So far, however, these plans have been lying idle (see table below) and we do not expect any progress. Russia’s business system is dominated by a small group of Putin’s inner cycle, who have little interest in reforming the market or giving competitors more room. In other words, the vested interests of the political elite are too entrenched for significant changes in the current economic model. Stability and security (both in economic and social terms) are paramount for Putin, while structurally reforming the economy would undermine his own powerbase.
Looking further ahead, potential transfer of power may create uncertainty…
Once elected, Putin will serve another six-year-term until 2024, when he will turn 72 years old. Given his age and the fact that he is constitutionally banned from running for a third consecutive term, there is growing speculation as to whether a type of power transition will take place over the coming years and what this might look like. In the event of a transition, Putin may want to appoint someone he trusts (and can control) to ensure his own security and wealth following his resignation. Indeed, this is how he came to power under President Boris Yeltsin in 1999, initially as his prime minister and later as president. A key indicator of a potential succession may therefore be Putin’s choice of prime minister. It is widely believed that the unpopular Dmitry Medvedev will be replaced after the election.
Key names that have been mentioned as potential successors (this is not an exhaustive list) include Defence Minister Sergei Shoigu, former FSB director and Secretary of the Security Council Nikolai Patrushev, Moscow mayor Sergei Sobyanin and Putin’s former chief of staff Igor Shuvalov (although his unpopularity makes his candidacy less likely). Of the three likely choices, Shoigu appears to hold the best cards. He has a long political track record, maintains his own power base in the military, is popular among the public for the military’s engagement in Syria, and frequently holidays with Putin. Meanwhile, Patrushev is part of the dominant Siloviki faction of security and intelligence agencies in the Kremlin, which might further his case. Sobyanin lacks his own network and influence, and does not have great public appeal, both of which might make him attractive as a pliable candidate for Putin to control behind the scenes.
… and we expect Kremlin infighting to become more frequent
There is much at stake in the event of a transition. Most of those close to the Kremlin acquired their positions and wealth due to Putin’s patronage, therefore factional infighting will become increasingly public, frequent, and significant in the coming years. This is underlined by the unprecedented arrest of sitting Economic Development Minister and known (relative) liberal Alexei Ulyukayev in 2016. Some have speculated that the move was orchestrated by former Deputy Prime Minister and current Rosneft CEO Igor Sechin. Potential symptoms of this competition could be an increase in politically motivated court cases or investigations, forced asset seizures or even assassinations. In addition, the Kremlin may eventually have to engage in a targeted anti-corruption campaign to placate rising public discontent. This may well lead to a further deterioration of Russia’s investment climate as foreign investors are keen to avoid becoming caught in Kremlin intrigue (see: Emerging Europe watch: Main risk in Emerging Europe).
Putin could decide to stay on after 2024
Putin, so far, has given no indication that he is planning to step down, and he may well conclude that the risk of stepping down is too great for himself and his inner circle. Instead, he may opt to keep informal power as prime minister after 2024, as he did with Medvedev in the past. Alternatively, the government may attempt to change the Constitution to enable Putin to run for a third term, although Putin has rejected this notion in past speeches.
If Putin does decide to stay on after 2024, this increases the risk of unplanned succession in the event he unexpectedly passes away. Policymaking in Russia has become increasingly de-institutionalized and centred on informal relationships with the president over the past years. A sudden and unexpected end to this system of governance is likely to lead to short-term uncertainty as the elite scrambles to fill the vacuum in the absence of strong institutions that outlast the current leader.
 Calculations based on recent export figures of 5.2 million b/d and accounting for the new fiscal rule USD 40/bbl.
 Sergei Guriev, former rector at the New Economic School in Moscow – Arkady Dvorkovich, deputy prime minister of Russia – Alexei Kudrin, former minister of finance.