Previous Quarterly Editions
Expropriation Risk: 64 65 63 67 Political Violence Risk: 36 40 38 36 Terrorism Risk: 60 59 57 55 Exchange Transfer and Trade Sanction Risk: 63 62 62 64 Sovereign Default Risk: 38 38 38 40
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The global pandemic reached Russia at a time when its economy was already under pressure, with sluggish growth seemingly entrenched and real incomes falling. The combination of COVID-19 and lower oil prices has now ended any hope of even a moderate economic revival this year. The initial response from President Putin to the virus was to reassure the country that early measures to limit cross-border travel would largely insulate Russia, but as the scale of the crisis became evident it was regional governments that acted first. Moscow mayor Sergey Sobyanin, whose city was clearly the most affected, quickly came to represent a more robust approach to the crisis that put Prime Minister Mikhail Mishustin's buck-passing threat to punish regional governors for failing to tackle COVID-19 into a particularly poor light. In late March 2020, Sobyanin closed the city’s non-essential shops, parks and cafes and ordered those over 65 to stay indoors. This contrasted sharply with Putin’s announcement of a week of paid leave across the country with no shutdown of public spaces. The president responded by putting Sobyanin in charge of a State Council working group on COVID-19, possibly in an attempt to neutralise him. Putin’s problems extend beyond the immediate impact of the virus. The most pressing has been the collapse of oil prices in March 2020 as Saudi Arabia accelerated production just as global demand was falling as a result of the virus crisis. Moscow’s first instinct was to sit tight and watch low prices drive smaller producers out of the market in an effort to preserve its own global market share, which has now fallen behind that of the United States. As such, it initially refused to join an OPEC-led production cut but quickly found that the costs associated with COVID-19 made the loss of tax revenue from low prices unsustainable. With oil prices brought up above 30 USD a barrel, the government had more scope for measures to soften the economic impact of the virus. In early April 2020, President Putin decreed an extra family benefit of 66 USD a month for every child aged under three, payable for three months in the first instance, but continued to hold back from direct financial assistance for businesses, concentrating on tax breaks instead. However, it was already evident that more would be needed and Alexey Kudrin, the influential head of the Audit Chamber, called for current spending plans to be boosted from less than 1.5% to 7-8% of GDP and financed by tapping the oil-fuelled National Wealth Fund and increasing Russia's debt. In mid-April 2020, a new package of measures worth some 13 billion USD was unveiled, much of which consisted of help to companies in the form of tax rebates and subsidised loans in return for retaining their employees. It is not yet clear what impact the virus emergency will have on President Putin’s own position. In March 2020, after years of steadfast denials of any intention to continue in office after 2024, President Putin suggested that one consequence of recent constitution changes might be to ‘re-set’ the two-term limit on the presidency and allow him to run again. The political system will make this happen if Putin is serious, but an additional term may well become a focus for the widespread but currently diffuse resentment at the state of the economy, particularly if the Kremlin’s handling of COVID-19 is called into question. The protests in Moscow last summer revealed a new generation of young Russians who are no longer afraid to demonstrate against poor governance.
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The reversal in March 2020 of a constitutional provision binding Russia to international legal commitments has added to concerns about the government’s attitude to foreign investors. The change makes Russian legislation superior to international law for the first time since the Soviet era and is clearly intended to protect the state from politically unwelcome rulings and costly damage awards. Moscow will use the change to justify ignoring decisions it does not like while still claiming rights in international jurisdictions whenever it feels it may benefit. An early use may be to justify rejection of February’s 2020 reinstatement by the Appellate Court in the Netherlands of its 2014 ruling that Russia must pay an award of 50 billion USD in relation to its seizure and sale of assets belonging to the Yukos oil company. Even if it limits instances of non-compliance to a few politically charged disputes, the effect will be to make Russia look untrustworthy on a range of international agreements. Moreover, the move will be seen as part of broader isolationist efforts that include nationalising the internet and banking transfer systems.
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The Kremlin’s plan to run the parliamentary elections as usual in 2021, meaning without real opposition parties, may not be so easy in the light of COVID-19. If the government response to the crisis is seen as poor, then turnout will be embarrassingly low. In the meantime, the Kremlin will continue to tighten restrictions on its political opponents. Anti-corruption campaigner Alexey Navalny, the opponent it most fears, is already suffering a new round of harassment as hardliners around Putin move into the ascendency. The new law centralising the routing of internet traffic, which came into force in November 2019 ostensibly to protect Russia from foreign interference, is widely seen as facilitating state surveillance and censorship
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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. In December 2019, a gunman fired shots at Federal Security Service (FSB) headquarters in central Moscow, leaving one FSB officer dead and five people injured, but he did not have links to Islamist or other radical groups.
After five cuts in the second half of 2019, the central bank left its benchmark interest rate unchanged at 6% in March 2020 while promising a cut of 50 basis points or more at its April 2020 meeting to help with the COVID-19 situation. At 2.8%, inflation was still well inside the bank’s target of 4% in March 2020, making further cuts easier. The central bank also has access to funds from its recent and complicated inter-governmental sale of 50% of Sberbank, the country’s largest lender, to the finance ministry.
The central bank’s foreign reserves stood at around 545 billion USD at the start of the year, but this looked stronger amid expectations of a budget surplus than it does now. With a significant rise in the deficit now inevitable, the National Wealth Fund, which is funded from the country’s oil revenue, looks likely to be tapped heavily. At the beginning of March 2020, before prices fell, it contained 123 billion USD or the equivalent of 7.3% of GDP.
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