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Has Russia chosen the wrong guy once again?

Issue Date - 30/04/2012
With inflation cooling down to a post-Soviet record-low of 3.8% and real wage growth improving, some may wonder why is there an expectation of growing opposition to Putin during his upcoming Presidency? His reluctance to implement structural reforms coupled with his refusal to openly tackle rampant corruption in Russia could be contributing factors – but election fraud in the recent elections, surely not

Almost six months ago (on September 24, 2011), while addressing his party’s members at a congress, Russian President Dmitry Medvedev proposed that his predecessor, Vladimir Putin, should stand for the presidency in 2012. Clearly, this wasn’t a bombshell by any quarters; in fact, the announcement was quite expected. But that day, post the announcement, two things were more or less certain – Putin would win the elections and the opposition would protest the results. The definiteness in the above certainties was not because Putin was expected to win the March 2012 Presidential elections through fraudulent practices, but ironically because he was expected to win despite such practices. In other words, Putin’s popularity had held strong at such high levels over the past few years and especially as of recent times, that even international observers had expected quite a reduced form of ballot fraud.

It isn’t that Putin himself wasn’t aware of his massive popularity. His decision to allow the installation of more than 182,000 web cameras at 91,000 odd polling stations and admittance of thousands of independent, international election observers during the March 2012 elections should have convinced even critics that the man was changing. This is not to say that irregularities did not occur – a Chechnya polling station even documented a 107% voter turnout – but Putin’s final overall vote tally of about 64% matches closely with exit polls conducted by multiple agencies (like Public Opinion Foundation and All-Russian Public Opinion Research Centre) that forecasted that Putin would obtain around 58-59% of the polled votes. If at all Putin’s supporters abused the election process, to be fair, it couldn’t have mattered beyond a few handful of percentages in the final tally. And one really would be strongly given to believe that Putin would not have undertaken underhand election practices for such a puny advantage.

It’s abundantly clear that Russians en masse are supporting Putin’s candidature, more for the way he has stabilized the country from the pits it had reached in the 90s Yeltsin era, than for his dictatorial prances. Then why is there an expectation of growing angst in the upcoming Putin presidency? Like we said, election fraud surely can’t be the reason.

And even peddling Russia’s ‘impending economic downfall’ as the reason may, on the face of it, sound quite eccentric – while Russian real wage growth has returned to near double-digits (9% y-o-y in January 2012), inflationary pressures too have cooled down to a post-Soviet record-low of 3.8% in February. With 4.3% y-o-y increase in GDP in 2011, Russia’s economy has broadly even recovered from the global economic crisis. But a deeper look, and some questions around Russia’s remarkable growth, led clearly by ‘black gold’ (oil accounts for nearly 20% of Russia’s GDP, over 66% of its exports and 50% of its government revenues) surely start gaining locus standi.

Although Russian economic growth came in at 5% y-o-y in Q4 2011 and registered 4.3% growth for all of 2011, it is still way below the 7% average clocked by the economy from 2000-2008 and is much lower than growth rates seen in China and India. Further, the economic growth was bolstered by a jump in oil exports in the last quarter of 2011 (see chart). The good news for Russia is that oil prices have only moved north since the economic crisis (on March 1, 2012, Russia’s benchmark Urals crude exceeded $125 a barrel, the highest since July 2008). The bad news is that the nation that has proven oil reserves of 79 billion barrels representing 6% of the world total and 45% of non-OPEC reserves is critically overexposed to oil prices, where even a slight disturbance in global oil prices could destabilize the nation beyond control.

One shouldn’t forget that such a scenario has occurred twice before. First in 1998, when the devastating Ruble Crisis hit its shores on August 17, 1998. Second, more recently in 2008, when the price of Russia’s benchmark Urals crude fell 77%, which not only caused an 11% peak-to-tough decline in Russian GDP, but also saw the economy witnessing a capital exodus.

The stark difference between the Russian economy ‘with oil’ and the one ‘without oil’ drives the nail much deeper. While the overall federal budget posted a surplus of 0.8% of GDP in 2011, the non-oil deficit was 9.6% of GDP.

On the other hand, growth in Russia is likely to stay dynamic through the rest of the first half of 2012 as household consumption (which accounts for about 50% of Russia’s GDP by expenditure and accelerated to 6.4% y-o-y in 2011 from 5.1% in 2010) will get additional support from increased military salaries and pensions and making a cut in the social security tax.

Moody’s Analytics expects the Russian economy to lose some steam as the year progresses, and predicts a GDP growth of about 3.6% in 2012.

But then, the more Putin promises in government spending, the higher the oil price needs to be to balance the budget. Along with that comes a political issue too. Scott Anderson, the New York based Sr. Economist at Wells Fargo Securities tells B&E, “Higher oil prices will not give Putin much incentive to follow through [with reforms], while vested interests will make the path to reform difficult.” In fact, since Putin announced $260 billion of spending programmes during the election, plus a defense programme totaling $763 billion, the oil price needed for balancing 2012’s budget is likely to be around $140 a barrel (rising continually thereafter) – a really big number to achieve. But if the US bombs Iran, oil prices will only go upwards.

But there’s another issue that’s strangely not yet caught global media, and that is dangerously increasing levels of capital outflows from the nation. Capital outflows from Russia totaled $84.2 billion in 2011, the second-highest figure since 1994 and a big jump from the $33.6 billion that exited Russia in 2010. In fact, the trend continues in 2012 – capital outflow from Russia amounted to about $17 billion in January 2012 alone. Although Russia is running an external surplus and retains a large stock of forex reserves ($505.40 billion as on March 22, 2012), it can only accommodate a moderate level of capital flight. Add to this the fact that Moody’s Analytics expects the fixed investment growth in Russia to fall from 5.2% in 2011 to 2.9% in 2012, and you may just have the start of some disastrous implications. Add all that up, and you have a significant probability of real per capita income falling in 2012-13.


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