Previous Quarterly Editions
Expropriation Risk: 65 63 64 65 Political Violence Risk: 35 34 36 40 Terrorism Risk: 62 62 60 59 Exchange Transfer and Trade Sanction Risk: 65 63 63 62 Sovereign Default Risk: 38 38 38 38
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President Putin faced unexpected and sustained demonstrations over the summer as protesters called for opposition candidates to be allowed to stand in Moscow’s municipal elections in September. Although the city council is relatively unimportant, with turnout at the last election barely 20%, some 25 independent candidates were disqualified by the elections commission. Three demonstrations, one in July and two in August, took place with permission and attracted 50-60,000 people. However, other unauthorised protests were met by a heavy-handed response from police and security forces and resulted in more than 2,000 arrests. While condemning the illegal gatherings, Putin appeared to hedge his bets slightly by shifting some of the blame for the unrest onto Moscow’s mayor. But he will have been worried both by the persistence of the demonstrators and by the clumsy way in which candidates who looked likely to win were excluded from a minor election. In the event, opposition candidates took five of the 45 seats and the Communist Party 13, possibly thanks to opposition-led tactical voting. He will also be concerned by the way in which Alexei Navalny, one of those behind the demonstrations, is broadening his anti-corruption campaign to connect with a wider, if not fully articulated, discontent with the government’s handling of the economy. Real wages are static or falling as the economy continues to struggle. After annual growth of 2% in 2018, this year’s first quarter growth was just 0.5% before recovering to 0.9% in the second. These disappointing results suggest that annual growth may not reach the lower end of the central bank’s already reduced target range of 0.8%-1.3%. If a weakening rouble forces the bank to reverse its recent interest rate cuts, growth may be pushed back closer to zero. At the same time as the formal economy is stagnating, the informal economy is growing. This offers a safety net for those who cannot be accommodated by the formal sector, and often plugs gaps in the retail or services sector that it cannot fill. But as more economic activity takes place out of the reach of the formal tax system, the base for taxation and social security payments narrows, forcing the government to raise the amounts paid by a shrinking number of taxpayers in order to meet increasing needs for expenditure. This shadow economy, cash-in-hand and unlicensed, now involves two-thirds of the population in some capacity and is becoming a major challenge for the government. Pushing too hard to bring shadow activity back into the formal sector risks driving it further underground while fuelling political resentment. But allowing too much could put government revenues, already seriously stretched, under intolerable strain. To complicate matters, consumer credit continues to grow at a double-digit rate as real incomes decline. Outstanding bank loans to households reached a record 245 billion dollars in July, up by a third in just eighteen months, with most loans being used to sustain living standards. More positively, agricultural output continues to increase, holding down domestic prices and increasing the value of exports.
The government plans to route up to 95% of Russian internet traffic through domestic servers by the end of next year in an attempt to block access to foreign networks. The Kremlin says that the move is intended to counter external attacks on Russian infrastructure, rather than serving as a firewall to isolate Russian users from the outside world, but it will also be used to stop ‘subversive’ behaviour. To comply with the law, network operators must install government-approved tools that allow monitoring of traffic leaving or entering a network. The effect of US sanctions has seen China replacing Western exporters not only as one of Russia’s main suppliers of consumer electronics, IT equipment and vehicles, but also of food, particularly fruit and vegetables.
TREND ▲ OUTLOOK ▲
The decision to permit three demonstrations over the summer against the exclusion of opposition candidates from Moscow’s municipal elections was accompanied by an unusually heavy crackdown on unauthorised protests. This was particularly the case on July 27, when more than 1,000 arrests were made. However, it was notable that the police, which answer to the mayor’s office and the interior ministry, were reluctant to engage with the protesters. Instead, it was members of the National Guard, which reports directly to the Kremlin, who were using baton charges to break up the demonstration, suggesting different approaches at senior levels as to how the protests should be handled. As the Kremlin looks ahead to Putin’s scheduled departure in 2024, the debate about how to balance conciliation and force when responding to protests has the potential to become a major dividing line among the leadership.
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There have been no significant terrorist incidents in a major Russian city since the 2017 suicide bombing of an underground train in St Petersburg. However, attacks by Islamist extremists on Chechen security forces remain an issue both for the region and for the Kremlin, whose confidence in Chechen President Ramzan Kadyrov may be running out.
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In its third such cut since June, the central bank reduced its rate by 25 basis points at the start of September to 7.0%, citing the fall in consumer price inflation from 5.3% in March to 4.3% in August, which puts it comfortably within this year’s target range of 4.0-4.5%. The bank has made clear that it hopes to make further cuts in an effort to encourage growth, but any new weakening of the rouble may force it to hold or even reverse course. Foreign sanctions remain a drain on the economy, but the Trump administration is resisting congressional efforts to push forward with new sanctions initiatives.
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Central bank figures showed that foreign reserves reached 530 billion dollars in July. The bank also indicated that it is continuing to reduce the proportion of dollars in its currency reserves. Last year, 22.5% was held in dollars, down from 42% a year earlier, while 15% was in yuan, up from 1% a year earlier. In March, Russia raised three billion dollars in its largest Eurobond issue since 2013, taking advantage of its return to an investment-grade credit rating with all three major rating agencies.
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