Previous Quarterly Editions
Expropriation Risk: 65 65 63 64 Political Violence Risk: 33 35 34 36 Terrorism Risk: 65 62 62 60 Exchange Transfer and Trade Sanction Risk: 58 65 63 63 Sovereign Default Risk: 38 38 38 38
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First quarter growth of just 0.5% was disappointing, given that 2018 saw growth of 1.9% in the first quarter and 2.7% in the fourth. The drop can largely be explained by the impact of higher VAT rates on domestic demand and the slowdown in capital investment as construction work for the FIFA World Cup and Crimean bridge was completed. However, with the additional spending that the government promised in its six-year national development plan announced in May 2018 yet to make an impact, the government may have to reduce its growth forecast of 1.3% for this year, which is already low compared to 2.3% in 2018. As real incomes fell slightly last year, relatively low interest rates have fuelled a boom in borrowing that is concentrated among those who are not well placed to take on more debt. The government and central bank are working on tighter controls for borrowing, but a combination of falling incomes and rising indebtedness poses longer-term problems for the Kremlin. Although US Secretary of State Mike Pompeo travelled to Sochi in May for talks with President Vladimir Putin, apparently with instructions from the White House to take steps towards a rapprochement, Washington and Moscow remain far apart on international issues ranging from Iran and Venezuela to Syria and Ukraine. However, no change in the sanctions situation appears imminent. Despite US fears that Moscow would attempt to undermine its sanctions regime on Iran, Russian oil companies have not attempted to fill the vacuum left by departing US and European firms. With Russia supporting OPEC efforts to curb global production in order to support prices, they have instead joined the exodus. Rosneft left in December despite signing a strategic investment agreement for projects in the hydrocarbon sector in 2017, and Lukoil has abandoned well-advanced plans for a new oilfield development contract. In April, the government increased its efforts to boost agricultural exports, pledging to spend 36 billion dollars on a programme intended to see annual food export revenues reach 45 billion dollars by the start of 2025. Driving the shift from prompting import substitution to supporting exports is the need to mitigate the depressing impact of recent record harvests on domestic grain prices; China is a major target for increased sales. The government is relieved that other foreign car companies have not so far followed Ford’s decision in May to stop manufacturing cars in Russia. New requirements on foreign manufacturers to increase local sourcing may have been a factor, but sales growth is currently concentrated at the affordable end of the market and this does not look likely to change in the medium term.
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With President Putin signing the 'sovereign internet law' on May 1, the government is moving ahead with the architecture that will allow it to block foreign access by routing up to 95% of Russian internet traffic through domestic servers by 2020. The Kremlin says that the move is intended to counter external attacks on infrastructure, rather than serving as a firewall to isolate Russian users from the outside word, 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. A test of the ability to disconnect Russian users from websites hosted abroad is expected before the end of the year. International IT firms are already required to keep data on their Russian users on servers inside Russia, but the major global cloud services providers do not have data centres in Russia.
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It is already a crime to express ‘obvious disrespect’ for the Russian state or ‘spread fake news’ online. However, responses to earlier government moves in this area, including last year’s unsuccessful attempt to prevent use of the Telegram messaging app, suggest that tighter internet laws may have the effect of mobilising anger among otherwise apolitical Russians. This was shown by the unexpected strength of protests in April 2018 against the Telegram ban and again in March 2019 when a demonstration against the internet sovereignty bill drew 15,000 in Moscow. The creeping authoritarianism of internet controls looks likely to accelerate given Kremlin awareness of the rising level of general public discontent that is evident in falling popularity ratings for Russian politicians and institutions and the increase in protests on local issues from corruption to location of landfill sites.
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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.
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In its regulatory role, the central bank is continuing efforts to clean up the banking sector. Bank assets grew by 10% last year, although this was partly due to the rouble losing 20% of its value during 2018. It has been relatively stable in recent 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 has lifted sanctions on the EN+ group, which includes aluminium producer Rusal, but pressure from Congress will ensure that this is a rare deviation from Washington’s strong line on existing sanctions.
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In March, Russia raised three billion dollars in its largest Eurobond issue since 2013. The sale followed quickly on from the one-billion-dollar Eurobond issued in November and appeared to be linked to worries in Moscow that Washington could be considering tough new sanctions on Russian sovereign debt. However, the timing also reflected favourable factors such as investor appetite for high-yield bonds and Russia's return to an investment-grade credit rating with all three major rating agencies. Even if oil prices fall back closer to 60 dollars a barrel, the National Welfare Fund that is fed by oil revenues should continue to grow.
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