Previous Quarterly Editions
Expropriation Risk: 63 65 65 63 Political Violence Risk: 34 33 35 34 Terrorism Risk: 66 65 62 62 Exchange Transfer and Trade Sanction Risk: 58 58 65 63 Sovereign Default Risk: 38 38 38 38
TREND ▼ OUTLOOK ▲
Although President Vladimir Putin was re-elected with a large majority in 2018, widely held grievances about economic hardship continue to present challenges for his government. The six-year economic stimulus package unveiled in May faces many obstacles and, even if these are overcome, it cannot deliver a swift political pay-off. High-profile cases of incompetence and corruption continue to sap citizen confidence in government at all levels, and the president’s extraordinary popularity following the annexation of Crimea is beginning to fall back as he is increasingly linked to government failings. This is leading to greater Kremlin reliance on the United Russia party, with Putin attending its annual conference in December for the first time since 2012. However, it too is losing popularity and is likely to get an overhaul before the 2021 legislative elections so that it can absorb more of the anti-establishment sentiment. Meanwhile, Putin himself has started 2019 by stressing personal and family wellbeing rather than political issues. At the end of December, he made sure to be at the site of a deadly apartment block collapse in the Urals city of Magnitogorsk just hours after it happened, with senior officials in tow. The Kremlin-level response reflects an awareness of how badly the shopping mall fire in Kemerovo in March 2018 was mishandled by local officials and how much that added to the public’s negative views of government. Growth is not expected to rise above 2% before at least 2020, and the chief worry for the Kremlin is that this limit may prove the result of structural factors rather than international sanctions. The government benefitted in 2018 from the higher oil prices that Russia itself helped to orchestrate by organising global production cuts. Together with improvements in revenue collection, this allowed for a small budget surplus, but spending pressures are mounting. The January rise in VAT from 18% to 20% will reinforce general resentment while further depressing consumer spending. Central bank figures show that private capital outflows from Russia reached 67.5 billion dollars in 2018, up 168% on the 2017 figure, largely on concerns about further US financial restrictions. One positive trend for the Kremlin is its effective coordination with Saudi Arabia in the use of production cuts to stablise oil prices. The warmth of the relationship between President Putin and Saudi Crown Prince Mohammed bin Salman (MBS) was heavily emphasised at the December G20 summit and, despite its close links to Washington, Saudi Arabia looks likely to be an increasingly important source of investment in the energy sector. Meanwhile, trade between Russia and China rose by 27% in 2018 to exceed 100 billion dollars for the first time, with the main trends being Russian imports of electoral goods and exports of oil, coal, and timber. Broad agreement on geopolitical issues will help smooth the way towards further bilateral trade, but Russia will increasingly be the junior partner.
Russian oil output is at record highs largely thanks to capital investments made before 2013. However, the energy ministry sees output peaking in 2020-21 and then falling with the rapid depletion of west Siberian reserves. This is leading the government to make tax changes in 2019 that are designed to encourage the development of less profitable fields. For the same reason, it is likely to show greater flexibility towards medium-sized private oil firms that can access smaller reserves more viably. Rosneft and Lukoil, both of which saw their incomes double during 2018, will seek opportunities to expand abroad. As the government’s large investment programme is putting pressure on its own efforts to maintain tight fiscal controls, it will increasingly look to the business sector to step up investment in order to avoid further tax increases.
The nationwide protests in 2018 against the government’s proposed pension reforms resulted in the retirement age for women being raised from 60 to 63, rather than 65. This showed both the government and the electorate that people can produce a change in policies that affect them directly. The Kremlin is probably right to assume that this will not translate into wider support for the anti-corruption movement developed by Alexi Navalny, but it does suggest more problems if further US sanctions translate into significant job losses.
TREND ► OUTLOOK ▼
Attacks by Islamist extremists on Chechen security forces remain an issue both for the region and for the Kremlin, whose confidence in the ability of Chechen President Ramzan Kadyrov to maintain calm may be running out. However, there have been no significant terror incidents in any major Russian city since the suicide bombing of an underground train in St Petersburg in April 2017.
In December, the central bank raised its key interest rate slightly to 7.75% amid the twin concerns that the VAT increase in January will feed through into greater inflation and that renewed purchases of foreign currency may hit the rouble. The central bank appears confident that it can bring the inflation rate below its 4% target during 2019 even if it rises in the early months. With the EU refraining from additional sanctions following the Russian seizure of Ukrainian naval vessels in November, no substantial expansion of European sanctions is expected. The US Treasury lifted sanctions on the Russian EN+ group, which includes aluminium producer Rusal, at the end of January, but pressure from Congress will ensure that this is a rare deviation from a continuing strong line on sanctions.
Oil and gas revenue that accrues when the oil price is above 40 dollars a barrel goes into the National Welfare Fund, and this should reach 3.6% of GDP in 2019 and perhaps 7% in 2020. As the fund can be tapped to help pay for infrastructure projects where budget finances are inadequate, the government generally has little need of new borrowing. However, suggestions that the price which triggers transfers to the fund should rise to 45 dollars could see the fund’s utility reduced. When the government does go to the bond markets, as it did successfully in November, it is increasingly likely to use a euro denomination.
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