Previous Quarterly Editions
Expropriation Risk: 63 64 65 63 Political Violence Risk: 34 36 40 38 Terrorism Risk: 62 60 59 57 Exchange Transfer and Trade Sanction Risk: 63 63 62 62 Sovereign Default Risk: 38 38 38 38
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Speaking at his traditional end of year press conference, President Vladimir Putin suggested limiting future presidents to a total of two terms. At present, the constitutional limit is two consecutive terms, but Putin himself has shown that this can mean serving two terms, stepping aside, and then returning for two more terms. The underlying message is that Putin, 67, intends to leave the presidency for good in 2024, rather than seek a constitutional amendment that would allow him to continue, although he has left the door open for an elder statesman role that would enable him to retain considerable power. Talk of the post-Putin period will be legitimate in political circles in 2020 but there is no sense yet of how he wants to handle the transition. If the parliamentary elections in 2021 are to be used to revive the Kremlin’s moribund United Russia party, or even to replace it with something else, then work will need to start soon. Meanwhile, 2019 has left a difficult legacy. There is little hope of faster economic growth on the horizon, suggesting economic discontent will grow. At the same time, the protests in Moscow during the summer over a city council election have shown that over-reaction to demonstrations makes the Kremlin appear weak rather than strong. They also revealed a new generation of young Russians who are no longer afraid to demonstrate against poor governance. Falling real incomes now pose the greatest threat to the government and were the main reason for United Russia’s bad showing in regional elections across the country during 2019. Official statistics show that 13.5% of the population are now below the poverty line, and many of those seeing their incomes fall are the type of state employees on whose support the Kremlin could previously rely. But the state of the economy gives the Kremlin little to work with by way of relief. Growth in 2019 was close to 1% and will be more than 2% in 2020, with the higher figure due mostly to increased spending on Putin’s 13 key national projects. Household consumption, which was hit by a rise in VAT in early 2019, will remain sluggish during 2020 as banks rein in credit. Regionally, Moscow continues to take a hard line on fuel sales to neighbouring Belarus, increasing prices for both oil and gas. Further afield, the Wagner group, a mercenary organisation controlled by a businessman involved in a range of Kremlin-aligned projects, now has men on the front lines in Libya, fighting insurgents in Mozambique, and supporting government forces in the Central African Republic. It is also offering political propaganda and security services to African governments. Originally established to provide deniable assistance to pro-Russian rebels in eastern Ukraine, Washington is increasingly alarmed by its use as a power projection tool by the Kremlin, and its activities could yet trigger more sanctions.
At the end of December, the finance ministry issued a list of state assets to be sold in a renewed privatisation drive for 2020-22. Some of the names are new, most notably VTB, the country’s second largest bank, as well as Moscow's Sheremetyevo Airport and satellite navigation agency GLONASS. However, others on the list such as shipping giant Sovcomflot, Russian Railways and Aeroflot were meant to be the star attractions in the previous and ultimately lacklustre privatisation push in 2017. It looks likely that only subsidiaries rather than parent companies will be on offer, and this time the government is positioning the push as being a means to reduce its role in the economy rather than to raise cash. The most promising prospect is the Transneft pipeline monopoly, which may attract interest from Russian oil companies that have resented its control over their export routes.
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Even more than usual, the parliamentary elections in 2021 will be run without real opposition parties while being used to legitimise the continuing status quo. With resentment evident even in normally compliant voters and its United Russia party unable to generate any enthusiasm, the Kremlin will resort to tightening restrictions on political opponents during 2020. Anti-corruption campaigner Alexei 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, is ostensibly to protect Russia from foreign interference but is widely seen as facilitating state surveillance and censorship. In December, the ‘foreign agent’ law that has been used to target NGOs operating in Russia was extended to include individuals, with the move primarily aimed at journalists employed by foreign media.
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In December, a gunman fired shots at Federal Security Service (FSB) headquarters in central Moscow, leaving one FSB officer dead and five people injured. The attack came one day before Russia’s ‘security services day’, but the gunman does not seem to be linked to Islamist or other radical groups. There have been no significant terrorist incidents in a major Russian city since the 2017 suicide bombing of an underground train in St Petersburg.
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In its fifth cut since June, the central bank reduced its benchmark interest rate to 6.25% in December, citing expectations that inflation will fall to 3% during the first quarter of 2020. However, the main aim is to encourage greater corporate borrowing to boost investment. The bank is also tweaking its regulations to encourage more lending to small businesses and the agricultural sector, and away from large state conglomerates. 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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The central bank’s foreign reserves ended 2019 at around 543 billion dollars, and the budget surplus should be close to 1% in 2020 as the government maintains a firm grip on public spending. The National Welfare fund, which collects part of the country’s oil revenue, reached 125 billion dollars in November, and could have assets equal to 7% of GDP by the end of 2020. This provides a valuable cushion but also makes it a tempting target to tap for infrastructure investment.
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