Swedbank Baltic Sea Analysis No. 31 1 Mar 2012 RussiaA president returns – but dated solutions to neweconomic challenges. Vladimir Putin appears to be headed for victory in the first round of the presidential election on Sunday, March 4). There have been major demonstrations both for and against, but the opinion polls indicate that Putin will be returned to the Kremlin. Even if Putin’s position and mandate are weakened, he is likely to add another six to the 13 years he has already spent in power. The absence of a strong opponent is a sign of the Russian democracy’s weakness. Continued high oil price, strong private consumption and falling inflation should generate decent economic growth in the short term. The extensive election promises have increased the fiscal policy imbalances, however, and this limits the scope for reform policies. There is a risk that increases in defence spending and public sector salaries will be at the expense of important infrastructure investments, holding back economic growth in the medium term. Moreover, the fundamental problems in the Russian economy still remain. The business structure is still concentrated on natural resources. The lack of diversification is amplified by low competitiveness, a poor infrastructure and a weak innovation climate. Even though membership of WTO will increase competitiveness, Russian companies lack the resources to take on this competition. In a number of articles Putin correctly identified these problems, but his proposals rather point to a state-controlled capitalism, as in China, than to a well-functioning market economy. Without rule of law and independent media there is a continued risk of widespread corruption, and reforms that sustainably raise the welfare of the general population will be further delayed. Economic Research Department, Swedbank AB (publ), SE-105 34 Stockholm, tel +46 (0)8-5859 7740e-mail: email@example.com Internet: www.swedbank.se Responsible publishers: Cecilia Hermansson +46 (0)8-5859 7720 Magnus Alvesson +46 (0)8-5859 3341, Jörgen Kennemar +46 (0)8-5859 7730 ISSN 1103-4897
Putin on the way to victory – despite resoundingdiscontentThe latest opinion polls indicate that Vladimir Putin is headed for Putin looks set to win withoutright victory in the Russia presidential election on 4 March, over 50% of the votes inavoiding a second election round. Even though these polls should be the first election roundtaken with a pinch of salt, as many are not independent, Putin’selection campaign has intensified in recent months. This has amongother things entailed major pledges to important groups of voters,such as the military and the police, but also doctors and teachers.Putin has also promised major increases in defence spending. In thepast, pensions have been raised, and planned VAT increases havebeen postponed. Putin also has control of the most important mediachannels, and despite extensive protests by the middle classes in themajor cities it now seems that Putin will win by more than 50% of thevotes in the first election round, making a second round unnecessary.Election survey, Russian presidential election, 2012(Answer to the question: ”Who would you vote for if the presidential election was heldnext Sunday?”;%) 60 Putin V. 50 Zhirinovsiky V. 40 Zyuganov G. 30 Mironov S. Prohorov M. 20 Hard to answer 10 I wouldnt go to the polls 0 January 21, January 28, February 5, February 12, 2012 2012 2012 2012 Source: Russian Public Opinion Research Center.Apart from Mikhail Prohorov, the other presidential candidates are Few real contendersalready well-known by the Russian electorate. Gennady Zyuganov is against Putin, apart fromthe Communist party leader and is most popular with pensioners and discontent and apathypoorer groups in rural areas. He has stood in previous presidentialelections, and his party grew in support in the latest elections to theDuma. The ultra-nationalist populist Vladimir Zhirinovsky is also awell-known presidential candidate and his party also made gains inthe Duma elections. Sergey Mironov and his centre-left Fair Russiaparty is considered to be close to Putin and does not present anythreat to his re-election. As the liberal, independent Yabloko party’sGrigory Yavlinsky is not allowed to stand due to insufficient approvedsignatures for his candidacy, this leaves Prohorov as a relativelyyoung, well-financed opponent.Mikhail Prohorov, an oligarch who made his fortune in the nickel Prohorov – wealthy youngindustry, has promoted himself as a market-oriented and business- challenger whosefriendly candidate. His independence is also questioned, however, independence isand speculation that the present government is behind his candidacy questioned2 Swedbank Baltic Sea Analysis No. 31 • 1 March 2012
has generated suspicion and undermined his chances of a successfulcampaign. The biggest threat to Putin is, thus, growing dissatisfactionamong the middle class in the larger cities, and thereby a weakmandate for Putin to tackle the difficult, but necessary reforms.Putin is back as presidential candidate after four years as prime Putin’s time in power canminister. Prior to that, he was president for two terms between 2000 be as long as a quarter ofand 2008. An important reason for the escalating protests, especially a centuryin Moscow, is the belief that Putin and Dmitry Medvedev, the currentpresident, who is not standing for re-election, have manipulated theconstitution; and that Medvedev’s election four years ago was merelya smokescreen to pave the way for Putin’s return. With the presentconstitution’s six-year election terms, winning both this and the nextpresidential election could put Putin in power until 2024Putin has presented his election platform in a number of newspaper Putin still puts state controlarticles. He points to corruption, insufficient innovation and limited firstcompetitiveness in the Russian economy as the biggest challenges.Modernising Russia and its economy was a message previouslypromoted by Medvedev when he was president, but these reformshave proved to be hard to put into practice. Even though Putin speaksof liberalising the economy, and the importance of reducing corruptionand strengthening property rights, he also makes it clear that thereare limits to how far the state should step back. Referring to Chineseand South Korean experience, he welcomes foreign direct investmentin selected industries, but also signals that he prefers a state-controlled investment policy. When companies are privatised thestate will also retain control in strategically important areas, such asnatural resources and the financial sector. Russian reform policy thusbalances between, on the one hand, recent years’ experience thatincreasing state control easily leads to growing corruption, and on theother hand the “shock therapy” after the collapse of the Soviet Unionthat led to major losses from the sale of state property.In his election campaign Putin recently promised major increases in Election promises of thespending on the military and the police, as well as pay increases for traditional variety can be adoctors and teachers. These follow on previous increases in pensions threat in the long termand other social transfers. This may give Putin enough support toexceed the 50% threshold, but even with sustained high oil pricespublic finances will be under pressure, which can undermine Putin’sposition and support, especially if the global economy continues tofalter.Moderate growth in the short term – stagnation in themedium termStrong domestic demand contributed to continued growth in the fourth No cyclical rebound inquarter of 2011, and in 2011 overall the Russian economy grew by Russia4.3%. This is marginally higher than our forecast 4.2%. Especiallyretail trade expanded, supported by relatively low unemployment, at6-6.5%, and receding inflation. Together with large electioncampaign-related increases in public transfers, this boostedconsumer confidence and purchasing power. Companies are morehesitant, however, and investments increased more moderately. Netforeign trade also dampened economic growth in 2011.Swedbank Baltic Sea Analysis No. 31 • 1 March 2012 3
Economic growth and inflation, 2005 - 2011(Annual percentage change, quarter) 20 GDP 15 Inf lation 10 5 0 -5 -10 -15 2005 2006 2007 2008 2009 2010 2011 Source: Ecowin.Inflation has continued to drop this year, reaching 4.2% in January, Moderate growth prospectswhich is the lowest rate since the collapse of the Soviet Union. To in the short termsome extent declining inflation is a consequence of the authorities notraising taxes and tariffs, as is otherwise customary at the turn of theyear, which is probably due to the approaching presidential elections.The world market price for oil rose to 110 dollars per barrel (Ural) andthe rouble strengthened to a degree, after weakening significantly inmid-2011. This leaves the Russian authorities with some economicpolicy room, and the central bank has continued to lower the keyinterest rates, while both private and business lending continue toexpand. Together with a rising oil price and rather more positive worldeconomic outlook, although not in Europe, this implies that our growthforecast from December 2011 of 3.9 % for 2012 and 3.7% for 2013 ison the low sideOil price and exchange rate, Jan 2005 – Jan 2012 45 160 Oil price (Ural, US$/b) 43 140 Ruble basket (EUR, USD, rs) 41 120 39 100 37 80 35 33 60 31 40 29 20 27 0 25 2005 2006 2007 2008 2009 2010 2011 2012 Source: Ecowin.4 Swedbank Baltic Sea Analysis No. 31 • 1 March 2012
At the same time, the fiscal-policy imbalances are becoming more Less scope to dampenpronounced, and today Russia does not have the same opportunities cyclical fluctuations andto dampen a cyclical downturn as it did after the 2008-09 crisis. Then, high growththe Russian government could use major fiscal reserves and asubstantial stimulus package to stabilise the economy, despite a largedrop in oil prices and accelerating capital flight. The stimulusincreased the budget deficit significantly, however, and excluding oilrevenue it has exceeded 10% of GDP since 2008. At the same time,the reserve fund has shrunk, and the generous election promises willnow also exert further pressure on fiscal policy. Without austeritymeasures, the budget deficit (including oil revenue) is expected toincrease from 1.3% in 2011 to approximately 5% in 2016. Evenbefore the election promises were made an oil price of around 110dollars per barrel was required in order to balance the federal budget.This means that fiscal policy must be tightened in coming years,pushing down growth. Otherwise, Russia again risks rising inflationand escalating budget deficits. Meanwhile, growth in payroll andtransfer expenses is crowding out other more growth-promotingexpenditure, such as investments in public infrastructure.Fiscal balances, 2004 - 2011(Per cent of GDP) 50 40 30 20 10 0 -10 -20 2004 2005 2006 2007 2008 2009 2010 2011 Overall balance Overall balance (excl. oil) Revenue Expenditures Source: IMF.In structural terms, the Russian economy is characterised by high Reforms must bedependence on raw materials, major state involvement in business strengthened with inde-and industry, and weak productivity growth at company level. The pendent authorities andratio of exports to the overall economy is also significantly lower than mediain other growth economies, especially the BRIC countries. To boostthe Russian economys growth potential, besides stable economypolicy and public investments, reforms are also needed to strengthencompetitiveness and the investment climate. Even though Putin, andbefore him Medvedev, has often pointed to these areas, and as suchgets the analysis right, it is also very important that the advertisedreforms are actually implemented. In these respects it is important tostrengthen the rule of law and to give the courts more independence.The role of the media is also vital to increasing transparency andaccountability. So far, Putin has not given any clear signals that he isready to take this path.Swedbank Baltic Sea Analysis No. 31 • 1 March 2012 5
Gross domestic product, BRIC countries, 2000 - 2011(Index 2000=100, purchasing power parity) 400 350 China India 300 Russia 250 Brazil 200 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: IMF.After a period of major economic fluctuations and political turbulence High oil prices lock RussiaRussia again faces long-term growth challenges. The economic in its dependence on rawdevelopment has lagged behind other growth economies, and without materialsextensive reforms there is a risk of permanent stagnation. Putinidentifies the right problems, but points to solutions that will lead tocontinued state control of the economy, rather than more dynamicprivate sector development. A major new oil price dive may beneeded in order to release the Russian economy from its dependenceon oil. Magnus AlvessonEconomic Research DepartmentSE-105 34 Stockholm Swedbank Baltic Sea Analysis is published as a service to our customers.Telephone +46-08-5859 7740 We believe that we have used reliable sources and methods in firstname.lastname@example.org preparation of the analyses reported in this publication. However, wewww.swedbank.se cannot guarantee the accuracy or completeness of the report and cannotLegally responsible publishers be held responsible for any error or omission in the underlying material orCecilia Hermansson, +46-8-5859 7720 its use. Readers are encouraged to base any (investment) decisions onMagnus Alvesson, +46-8-5859 3341 other material as well. Neither Swedbank nor its employees may be heldJörgen Kennemar, +46-8-5859 7730ISSN 1103-4897 responsible for losses or damages, direct or indirect, owing to any errors or omissions in Swedbank Baltic Sea Analysis.