Swedbank Baltic Sea Analysis No Dec 2011

Transcription

1 Swedbank Baltic Sea Analysis No Dec 211 Russia Political turbulence and significant economic pressures going forward Charges of cheating and manipulation in the December 5 parliamentary elections have led to major protests and a loss of confidence in political leaders. Putin is likely to be elected president next March, but with great uncertainty whether the road there will be paved with repression or a renewed commitment to modernizing politics and the economy. Declining support for Putin and Medvedev shows that promises of stability are no longer a winning political strategy. This could undermine Medvedev s future position as prime minister. The Russian economy is benefiting short-term from the election campaign and expansive fiscal policies that go with it. We expect lower growth in the next two years as the global economy slows and fiscal policy has to be tightened. As a result, we are revising our forecast downward to below 4% in 212 and 213. Relatively high oil prices will lessen the need for austerity, but the Russian economy remains vulnerable. The biggest risk comes from a combination of a rapid slowdown in the euro zone and declining global commodity prices. Political turbulence domestically is also a threat to the business climate. Russia is on the brink of membership in the World Trade Organization (WTO). Although Russian companies will initially see tougher competition, consumers will benefit and in the long term Russian competitiveness and growth potential will be strengthened. Business conditions continue to improve, but from low levels. In the last six years Russia ranks among the 25 countries that have made the biggest improvement in the ease of doing business, according to the World Bank s 212 Doing Business, confirming the progress also noted in Swedbank s Baltic Sea Index. Economic Research Department, Swedbank AB (publ), SE Stockholm, tel +46 () ek.sekr@swedbank.se Internet: Responsible publishers: Cecilia Hermansson +46 () Magnus Alvesson +46 () , Jörgen Kennemar +46 () ISSN

2 Duma election stability no longer an election winning strategy United Russia Vladimir Putin and Dmitry Medvedev s party lost nearly a fourth of its support in the parliamentary elections in early December, despite accusations of election fraud. Though it remains the largest party, it can no longer dominate politics as it has in the past. Perhaps the most important message was that the favoritism shown by authorities to United Russia did not produce the expected results and that Russian voters are realizing they have a greater impact on the political process. This could lead to a higher turnout in the presidential election in next March and give the campaign some real political significance. In other words, Putin may be forced to actually make a political case for his candidacy. Among the other parties, A Just Russia and the Communist Party made the biggest progress, nearly doubling the votes they received. A Just Russia is a social democratic party that previously supported United Russia and Putin. The Communist Party is the largest opposition party and heir to the Soviet Communist Party. The Liberal Democratic Party, a populist, nationalist party led by Vladimir Zhirinovsky, also increased its support, while Yabloko, the only liberal party in a Western sense, attracted fewer than 5% of the voters. With a cut-off of 7% to be represented in the Duma, only the four largest parties made it. United Russia, with nearly 53% of the mandates, thus retained a majority. Putin and Medvedev are losing support but the opposition in the Duma is fractured Duma election results (preliminary), 211 and 27 (% of valid votes) Liberal Democratic Party, 11.7 Yabloko, Patriots of Russia, A Just Russia, United Russia, Communist Party, 19.2 Source: Central Election Committee The election was followed by considerable protests, especially in major cities. There were widespread reports of election fraud, with the Organization for Security and Co-operation in Europe (OSCE) stating that it had seen frequent procedural violations and instances of apparent manipulations, including serious indications of ballot box Charges of election fraud led to major protests 2 Swedbank Baltic Sea Analysis No December 211

3 stuffing. The first spontaneous demonstrations in Moscow were estimated at around 1 people and were met by riot police and arrests. The protests have since grown in scope. In a statement, President Medvedev said he accepted the protests as a Democratic right, but at the same time characterized many of the protesters as confused. It is too early to say whether the protests are the beginning of a bigger movement that leads to more extensive political reforms. There are few direct parallels with the political turbulence in the Middle East, since democratic principles are more developed and ingrained in Russia. With increased centralization of political power, the growing influence of oligarchs and tight control over the media, the situation is more reminiscent of Ukraine prior to the Orange Revolution. At this point the discontent seems to be concentrated in large cities. The leading politicians are maintaining control over the government apparatus and have access to the state s considerable financial resources. In addition, many of the richest oligarchs are closely allied with United Russia and have little interest in political upheaval. There has been speculation that political concessions will have to be made, however. Since much of this discontent arose after Putin and Medvedev decided to swap positions as president and prime minister, signaling that the elections were basically meaningless, there is a possibility that Putin may be forced to replace Medvedev. Alexei Kudrin, the former finance minister known for supporting tight fiscal policies as well as his long relationship with Putin, has recently announced his intention to create a new liberal party. As it is hard to interpret Russian politics, it is uncertain whether the Kremlin is involved or Kudrin genuinely wants to create a political alternative. Many observers believe that it is a first step to position Kudrin as a future prime minister. The protests and discontent will have an effect on the presidential election. To date four candidates have decided to run: Putin (United Russia), Gennady Zyuganov (the Communist Party), Sergey Mironov (A Just Russia) and Mikhail Prokhorov (independent oligarch). Though it is considered unlikely that Putin will lose the election, this could affect the campaign and the promises made. There is a risk that Putin will counter the growing dissatisfaction with increased control and repression. This would move Russia even further from Europe s political tradition. The parliamentary elections showed, however, that Russian voters are no longer as interested in stability as a political alternative. Thus, there is an opportunity to resurrect the goal of modernization and liberalization Medvedev outlined in the last presidential election. But it is uncertain to what extent Putin believes this would give him the greatest chance of getting reelected. In the short term the political upheavals will not have a major impact on economic policy. We could see more proposals benefiting voters, but a relatively large stimulus has already been put in place. In addition to raising public sector wages and pensions, social insurance fees are being reduced from January 212. The need to please voters could mean that the tax hikes scheduled to be instituted at the same time to offset the loss of revenue will be put off until after the Need for further democratic reform Medvedev s political future may be in jeopardy Putin will probably win the presidential election, but in what way? Short-term election budget Swedbank Baltic Sea Analysis No December 211 3

4 election. In the longer term the issues of pensions, healthcare and education have to be addressed. There has been little discussion of them in the election campaign. Slower growth after the election risks are piling up The Russian economy has continued to grow at a decent pace during the first three quarters of 211, averaging slightly over 4% at an annual rate. Domestic demand in the form of consumption and investment has been the biggest contributor to growth. Real wage increases have been positive since the beginning of the year and unemployment has trended lower. The World Bank has shown that household spending in Russia is highly dependent on unemployment (Russian Economic Report, the World Bank, September 211). The Russian labor market is adapting to an economic chock mainly through wage changes. This means that households consider lower wages to be temporary, while an increase in unemployment is perceived as permanent. When wages are cut, households are therefore more likely to dip into their savings and when the unemployment rate goes up they tend to cut back on spending. With a relatively stable job market, household spending has been an important driver of growth and retail sales have continued to expand at an accelerating pace. Unemployment is an important factor in consumption Unemployment, real wage growth and retail sales, (Unemployment and annual growth, %) 2 1 Annual change in % Retail trade 2 Real wages 1 Unemployment rate (rs) Jan-5 Oct-5 Jul-6 Apr-7 Jan-8 Oct-8 Jul-9 Apr-1 Jan-11 Oct-11 Sources: Ecowin and Rosstat Percent of labor force The labor market and household income have been supported by expansive fiscal policies. Since 27 the budget deficit (excluding oil revenue) has grown from about 3% of GDP to about 13% in 21. High oil prices have facilitated an expansive fiscal policy. As a result, the reserve fund, which is supposed to compensate for falling budget revenue if oil prices drop, has not increased significantly despite an average oil price of $111/barrel as of November 211 (compared with $79/barrel in 21 and $62/barrel in 29). At the same time spending on pensions and wages has risen as a share of total public expenditure. These forms of permanent spending are difficult to slash in the short term, which will make it hard to switch fiscal gears High oil prices facilitate expansive fiscal policy 4 Swedbank Baltic Sea Analysis No December 211

5 after the election. Furthermore, there is a growing risk of an escalating budget deficit if oil prices quickly fall. Currency reserves, budget deficit (excl. oil) and price of oil, (US$ billion, % of GDP and $/barrel) Reserve Fund 29 Non-oil budget deficit 21 Oil price ($/barrel) 211p US$ bn Percent of GDP 2 2 q1-8 mar-9 sep-9 mar-1 sep-1 mar-11 sep-11 Sources: Ecowin and Rosstat. With inflation falling in 211 the Russian central bank has been able to keep policy rates unchanged. Slower price increases are mainly the result of falling food prices, however, and when the effect of last year s poor harvests fades at the same time that public spending continues to expand during the first half of 212 prices could start increasing again. In addition, the credit expansion to households and businesses continues. Lower price increases and a weaker ruble have also, made Russia more competitive this fall. There is a risk that inflation picks up during next spring, but this is moderated by a slowdown in the global economy. Thus it is likely that the Russian central bank will take a wait-and-see approach in coming months before revising monetary policy. In an uncertain economy, monetary policy remains unchanged Inflation, real exchange rate and the ruble Index Change in % 9 Rubel basket (monthly, USD, EUR, rs) -5 Real exchange rate Inflation (annually, rs) 8-1 Jan-5 Oct-5 Jul-6 Apr-7 Jan-8 Oct-8 Jul-9 Apr-1 Jan-11 Oct-11 Sources: Ecowin and Rosstat. Swedbank Baltic Sea Analysis No December 211 5

6 Russia's economic prospects in the next two years have worsened significantly. GDP grew by 4.8% at an annual rate in the third quarter, driven by strong consumer spending and expansive fiscal policy. Now the global slowdown is bound to cool off the Russian economy again. Not least, the growing concerns about Europe s financial markets will affect Russian banks and capital flows, and exports to the euro zone are likely to weaken. Even if oil prices fall compared with 211, we expect them to remain relatively high, which will moderate the effects on the Russian economy from the global slowdown. Weaker growth prospects are partly offset by stable energy prices GDP growth and its components, (Annual growth and contribution, %) Q1 21 Q3 211 Q1 211 Q3 212 Q1 212 Q3 213 Q1 213 Q3 Final consumption Gross investments Net export GDP Sources: Rosstat and Swedbank. For the next two years we are revising our growth forecast for Russia downward to between 3% and 4% on an annual basis (see table on next page), compared with nearly 4.5% in our previous forecast. Household demand is expected to remain strong during the first halfyear of 212 before fiscal policy is tightened. Together with weaker global demand, this will hurt the labor market and income growth. With deteriorating global prospects and growing uncertainty, we anticipate that private businesses will reduce their rate of investment compared with the previous forecast, which can t be fully compensated by the public sector. Given the slowing economy, inflation pressures will remain weak in 212, supported by a modestly stronger ruble. In 213, when the price of oil, according to our forecasts, falls even further, we expect growth to decelerate further. Slower growth in the next two years 6 Swedbank Baltic Sea Analysis No December 211

7 Key macroeconomic indicators, (Annual change, %, unless indicated otherwise) proj. proj. proj. Gross Domestic Product Of which: Private Consumption Gross Investments Exports Imports Inflation (%, ave) Inflation (%, eop) Unemployment rate (% of labour force, eop, ILO) Current account (% of GDP) Fiscal deficit (% of GDP) Government debt (% of GDP) Rouble (basket USD/EUR) Oil prices (USD/b) Sources: Rosstat and Swedbank. Our forecast scenario is surrounded by significant risks, largely on the downside. The Russian economy is increasingly dependent on commodity markets and in particular energy prices. It has been estimated that Russia would need an average oil price globally of $11/barrel to balance its budget (Carnegie Investment Bank). This is nearly double the level estimated in 28. This means that a larger price drop for oil would require significant budget cut-backs and have major consequences for Russia's growth prospects. The commodity markets are tightly linked to global development, so a worsening sovereign debt crisis in Europe that spreads to the global financial markets would probably have a significant effect on Russian banks, with a risk of increased capital outflows. The domestic risks for the economy are largely attributable to political developments. There are significantly fewer signs of overheating than in 28, but at the same time political conditions are uncertain and an escalation of political protests could lead to increased repression, and thus less desire to invest both externally and domestically. Long-term growth prospects are cautiously positive Despite that economic development in the coming years is overshadowed by significant domestic and external risks, Russia has taken a number of steps to become more competitive in the long term. One of the first items on the agenda of the newly elected Duma could be ratifying membership in the WTO. Joining the trade group would open up a considerable market for foreign companies, with lower customs duties and obstacles to trade. Retailers in particular have significant potential, although markets tied to infrastructure investment are also huge. This will especially benefit foreign companies that can set up operations in Russia, while Russian companies will face greater competition and price pressure. The benefits for Russian consumers could be substantial, however. In the longer term it is likely that the greater competition and integration will also benefit Russian businesses through higher productivity and efficiency. At that point they will be able to take advantage of both their proximity to a large domestic market and opportunities to compete internationally. Significant negative forecast risks, of which the price of oil and sovereign debt crisis in Europe are the biggest Increased trade opportunities will benefit foreign, and eventually domestic, companies Swedbank Baltic Sea Analysis No December 211 7

8 Conditions for Russian business will also continue to improve. In its Doing Business 212 report, the World Bank ranked Russia among the 25 countries that have made the biggest improvements in the ease of doing business since 24. This is confirmed by Swedbank s Baltic Sea Index in the latest Baltic Sea Region Report (October 211). Although Russia still ranks among the least business-friendly countries in the world, progress has been made in a number of areas. Among other things, an electronic contract register has been introduced and obstacles to property sales and import restrictions have reduced. There is still plenty of room for improvement in terms of the business climate, especially as regards fighting corruption and energy supplies, as well as strengthening protection for investors. The business climate is also making progress Magnus Alvesson Economic Research Department SE Stockholm Telephone ek.sekr@swedbank.se Legally responsible publishers Cecilia Hermansson, Magnus Alvesson, Jörgen Kennemar, ISSN Swedbank Baltic Sea Analysis is published as a service to our customers. We believe that we have used reliable sources and methods in the preparation of the analyses reported in this publication. However, we cannot guarantee the accuracy or completeness of the report and cannot be held responsible for any error or omission in the underlying material or its use. Readers are encouraged to base any (investment) decisions on other material as well. Neither Swedbank nor its employees may be held responsible for losses or damages, direct or indirect, owing to any errors or omissions in Swedbank Baltic Sea Analysis.