Previous Quarterly Editions
Expropriation Risk: 63 63 65 65 Political Violence Risk: 36 34 33 35 Terrorism Risk: 68 66 65 62 Exchange Transfer and Trade Sanction Risk: 60 58 58 65 Sovereign Default Risk: 39 38 38 38
TREND ▲ OUTLOOK ►
Having convincingly won re-election for another six-year term in March, President Vladimir Putin must now reconcile campaign promises with an economy that is still under pressure. In August, the Kremlin was forced to back down over its unpopular pension reform effort. After much debate that ultimately suggested a lack of conviction, Prime Minister Dmitry Medvedev announced the changes on the opening day of the Russia-hosted FIFA World Cup tournament in an attempt to downplay their impact. Arguing that the pension funding mechanism can no longer cope with the current pension ages and stressing the need to act before the impact of an aging and longer-living population breaks the system entirely, Medvedev announced that from 2019 the retirement age for men would begin to rise to 60 from 65, and for women from 55 to 63. The process would be completed by 2028 for men and 2034 for women. Polls quickly showed that 85% of those aged 31-60 opposed the changes, and Putin’s own approval rating fell from 72% to 63% in the week after Medvedev’s announcement despite the Russian team’s strong start to the World Cup. Rallies held in dozens of towns and cities on July 1 showed how the pensions issue, almost uniquely, could unite a wide range of political constituencies from Alexey Navalny's anti-corruption movement to the Communist Party. Even the official unions organised protests against the reform and indicated a readiness to do much more. With a real risk that the pro-Putin United Russia party could do badly in the September regional elections, the president used a televised address at the end of August to reduce the new pensionable age for women from 63 to 60, so that it matches the five-year increase for men, and promised guaranteed annual pension increases that would raise pensions by more than 40% by 2024. Although the response to pension reform has not posed a serious political challenge to Putin's leadership, it highlights the difficulty that his government will face as it tries to drive through other social reforms needed to help the fragile economy cope with the effects of Russia’s unforgiving demographics. After two years of recession, the economy grew by 1.5% last year and should exceed 2% this year as external trade picks up, particularly gas exports to the EU, oil prices strengthen, and the World Cup stimulus contributes a noticeable boost. The 2014 multilateral sanctions, which Washington tightened last year, continue to limit access for the country’s leading banks and energy companies to Western equity and debt markets as well as extractive technologies. However, there is no sign so far that even the US sanctions affecting aluminium giant Rusal in April have translated into sufficient internal pressure from oligarchs and other figures around the president to produce a change of policy on issues like Crimea or cyber activities.
TREND ► OUTLOOK ▲
Threats by Russian regulators to prosecute Google for interfering in September’s regional elections, on the grounds that Kremlin critics like Alexey Navalny have their own YouTube channels, is mostly a response to US claims of Russian electoral interference. It is also largely impractical because Russia is so integrated into global internet systems. When the authorities banned the much smaller messaging app Telegram in April, it disrupted web traffic across Russia and the authorities are still trying to identify technology to shut Telegram down. A more significant move may be the new cybersecurity convention that Russia will propose to the UN later this year which is expected to argue that the uncontrolled flow of information across borders via the internet is a threat to national sovereignty and should be regulated by each country individually.
Nationwide protests against the pension reforms showed both the Kremlin 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 Navalny’s anti-corruption campaign, but it does suggest problems for the Kremlin if further US sanctions translate into significant job losses at major employers like Rusal.
TREND ▼ OUTLOOK ▲
Four coordinated attacks on Chechen security forces on August 20 were clearly timed to disrupt the upcoming Eid al-Adha holiday marked by the local Muslim population. Claimed by the Islamic State group, they were the fourth major terrorist incident in the region in 2018 and took place in amid greater criticism of Chechen President Ramzan Kadyrov. 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.
TREND ▲ OUTLOOK ▲
The US sanctions related to the Skripal incident in the UK came into force in August. They prevent financial institutions that receive US government backing from providing loans and credit guarantees. A second and more stringent round in November, would involve a ban on most bilateral trade and include US efforts to obstruct the granting of loans by international financial institutions and the exclusion of Aeroflot from US airspace. When this second round was announced in August, the rouble dropped a further 7% against the dollar but the central bank has held off from supporting the currency in the hope that will recover unaided. However, central bank chair Elvira Nabiullina has acknowledged the impact of sanctions, and the bank raised its interest rate by 25 percentage points to 7.5% in September, the first rise since 2014, in response to rising inflation and the pressure on the rouble.
TREND ► OUTLOOK ▼
Although Russia’s debt to GDP ratio rose from 10% in 2016 to 12% in 2017, it is not expected to grow much more this year. With S&P reinstating Russia’s investment grade in February and Gazprom’s successful Eurobond issue in March it was clear that, even at the height of diplomatic tensions, Russia could still access the markets. However, further US sanctions may again curtail access to international borrowing. With oil prices recovering, central bank reserves continue to rise toward a target of 500 billion dollars.
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