January 15th, 2014

Russia is one of the 2014 Top-10 Political Risks

Last week Eurasia Group, an international consulting firm, published its annual Top-10 Political Risks report for 2014. According to the company’s analysts, Vladimir Putin’s capricious policies drive the country’s risks up as his popular support has largely declined, while Russian economy is stagnating.

The report names Vladimir Putin as “the single most powerful individual in the world,” but at the same time notes that Russian president has developed taste for the risky “bolt from the blue”. Controversial deal with Ukraine and sudden release of Mikhail Khodorkovsky from prison are just two most recent examples. As Eurasia Group predicts, more surprises are to be expected in 2014, some of which might “be positive for markets, others—quite negative.”

Russian President is facing a grim 2014

There are two main developments in Russia that should raise investors’ concerns: Putin’s shrinking support base and decrease in the country’s economic growth. According to the recent Levada polls, 31 percent of Russians mostly disapprove of the president’s policies—the highest number  in the last 12 years. In its end-of-the-year report, Russian Ministry of Economic Development stated that the country’s GDP growth in 2013 was at 1.4 percent (corrected down from the previous forecast that estimated GDP growth at 1.8 percent). The ministry’s forecast for 2014 was also corrected down from 3.0 to 2.5 percent.

It is noteworthy that Russia recorded an average annual growth rate of 7 percent between 2000 and 2008. After the 2009 recession, the country’s economy rebounded for a while but slowed from 4.3 percent growth in 2011 to 3.4 percent growth in 2012. The economic picture for 2014 remains grim, and “Russia’s investment climate will suffer from greater policy unpredictability.”

“The implications of an all-powerful leader with a shrinking support base and a flair for the unpredictable are worrisome,” warn Eurasia Group’s analysts. “Policy has already become more erratic and lacking in strategic vision.” The latter is illustrated by Putin’s bid to grant the Investigative Committee, run by Aleksander Bastrykin, a well-known loyalist, freedom to pursue tax cases against businesses, or by the the unexpected dismemberment of RIA Novosti—Russia’s state-owned, but still professional news organization to be replaced by another state-controlled agency called Rossiya Segodnya (Russia Today) that would provide a tighter grip over public information. At the same time, as Eurasia Group reports, “disciplined monetary and fiscal policies are offset by all the more retrograde moves,” “the technocratic elites are grumbling, [but] Putin isn’t yet listening.”

Another development that needs to be taken into consideration is an increasingly unpredictable and assertive Russian foreign policy that will also generate risks. As domestic situation deteriorates, Putin will try to advance his stance internationally, “including playing hardball as necessary to maintain Russia’s geopolitical influence.” As Eurasia Group predicts, “Putin’s Kremlin might lurch toward China, pull even harder on Ukraine, or take a more defiant position with the EU on human rights or energy issues.”

Finally, developments at the global energy market deserve investor’s special attention, as they will have direct impact on situation in Russia. Eurasia Group also put “Petrostates” as one of its 2014 Top Political Risks. The moment to watch is mid-year when the U.S. Iranian deal is expected to take place. If the agreement is reached and Iranian sanctions are lifted, oil supply coming from Iran can bring down oil prices to $80 per barrel. As a result, as the reports puts it, “Venezuela and Russia are likely to experience the most acute troubles, given a combination of institutional weakness and sinking popularity of their leaderships.”

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