Investor Q&A: Russia’s New Politics

We have had a lot of interest in our recent note, Russia’s New Politics (January 4, 2012). Meanwhile, campaigning has started in earnest after the long January winter break. We review some key investor questions and latest developments in Russian politics as we approach the March 4 presidential elections.

Q1: Has anything changed? Putin’s polling numbers are up, he looks set to win easily in the first round, and a first round victory implies few constraints on his decisions on appointments and policy. The Putin era looks set to continue.

A1: Despite staying in power, we see Putin’s potential future presidency requiring more effort to maintain support and more restricted by election commitments. Putin’s poll rating has improved, with Levada giving him 42% on January 13 (Levada is polling people this week) and VTSIOM giving him 52% on January 14. This puts him close to a first round victory (>50% of votes).

Nonetheless, we see two important changes. First, Putin is having to work for victory. The bounce follows the active Putin/Medvedev response in the second half of December to the protests against alleged falsification of the Duma elections. This suggests a significant ‘floating electorate’ whose allegiance is not fixed.

Second, Putin is setting out more detailed commitments, which will guide and constrain any future Putin presidency, notably in a series of articles setting out his programme, starting with an article in Izvestiya (January 16) on challenges, including the need for evolutionary reform, a more advanced economy and increased social trust, and an article inNezavisimaya (January 23) on nationality. These commitments will, we think, commit him to an accelerated programme of economic and political reform, similar to the modernisation programme set out by President Medvedev through 2011.

Q2: Why would Putin dissolve the Duma? He has said that such a matter is for the courts, not a political decision, and to change his position now would look like weakness, as well as being an unnecessary risk of losing control of the Duma and risking gridlock.  

A2: We see the case in which Putin becomes president, accelerates reforms but chooses to work with the current Duma (‘managed democracy’) now as the higher probability outcome. However, we think that Duma dissolution remains a genuine possibility, since it was the key demand of the December opposition protests, and this demand has now been taken up by the three Duma opposition leaders running against Putin (Zhirinovsky, Mironov and Zyuganov). We therefore see the cases in which Putin becomes president and dissolves the Duma, either securing a majority for reform (‘goldilocks’) or not securing a majority for reform (‘gridlock’), as medium probability outcomes.

We see two circumstances in which Putin might change his mind and agree to a dissolution of the Duma. First, in the event of a weak first round performance, he may decide to agree with some of the opposition demands to secure a second round victory. However, he has other options, such as offering key opposition leaders a role in government and policy adjustments, which may be more palatable than dissolving the Duma. Second, and in our view more likely, once he is president he may decide from a position of strength to meet a key demand of the opposition and dissolve the Duma, as a way to reach out to the extra-Duma opposition and bring them into the political process.

Q3: Would Putin be severely damaged if he failed to achieve a first round victory? What might change if the presidential election went to the second round?

A3: The Putin campaign is focused on winning the election in the first round, and so he has not speculated on any changes if the election does go to a second round. However, if he did not win in the first round, we would expect Putin, in line with his pragmatism, and his objective of being a national leader, to reach out to some portion of the electorate which did not vote for him in the first round.

In theory, he could do a deal with any of the other candidates, and promise them some appointments in the government and agree to some of their policy demands, in return for their support in the second round. In practice, we think he would be most likely to do a deal with the liberal candidate (Prokhorov), since that would be more in line with a programme of accelerated reform, and a way of reaching out more directly to the social group which supported the protests against falsification of the Duma elections.

Q4: Is Mikhail Prokhorov – now expected to be the only non-Duma candidate in the presidential elections – really an opposition candidate, or does he have tacit support from elements of the government? 

A4: It still remains unclear if the veteran liberal politician Yavlinski will be barred from the election by the Election Commission on the grounds that too many of the 2 million signatures he had to collect to support his candidacy were falsified.

Assuming Yavlinski is excluded, the businessman Prokhorov would be the only presidential candidate who is not a leader of a Duma party. Some opposition leaders, including Yavlinski, have said that Prokhorov is a Kremlin-supported candidate who is only participating in the election in order to legitimise it. And Prokhorov also said at his campaign launch in Kazan that he did not endorse the opposition slogan ‘Russia without Putin’, which is an odd position for somebody representing the extra-Duma opposition.

Nonetheless, circumstances and the divergence between Prokhorov’s policies and official policy make us believe he is to some extent an opposition leader. Prokhorov blamed his abrupt dismissal as leader of the Pravoe Delo party in September 2011 on Mr. Surkov, then deputy head of the presidential administration, and he joined the second opposition rally on December 24. On policies, Prokhorov has proposed a number of heterodox policies, including calling for Russia to join the EU, and suggesting the appointment of Mikhail Khodorkovsky as Prime Minister if elected.

Q5: Is there substance to all the talk of reform and tackling corruption? Real reforms to tackle vested interests are difficult and costly, and there is no near-term reward for implementing them. Once the elections are over, whatever commitments are made, Russia is likely to slip back into stagnation.

A5: While stagnation is a possibility, we have three reasons why it is not our base case.

First, we do see some significant reforms in recent years – the raising of energy prices to market levels, the higher level of public disclosure by officials, the 60/66 reform of oil taxation, WTO entry.

Second, since his speech accepting the United Russia candidacy for president, Putin has endorsed the commitment to raise investment to 25% of GDP and growth to 5-6%.  We see this as only plausible on the basis of an acceleration of economic reforms including a more rules-based governance system and improvements in the investment climate to attract more investment.

Third, Russia’s new politics are the politics of an emerging middle class, who are not as dependent on the state. They therefore form a more independent and objective constituency, who assess the performance of the state by the quality and efficiency of services provided. This creates a constituency for reform.

Q6: What role in former Finance Minister Kudrin playing in the opposition?

A6: We expect Kudrin to build a political career creating a liberal party in the future but not to play an active role in opposition during these presidential elections. Former Finance Minister Kudrin’s appearance at the December 24 protest meeting and endorsement of the meeting’s demands enhanced the credibility of the protest meetings. His proposal to the meeting to act as an intermediary with Putin, with whom he maintains cordial relations, was not, in the end, taken up. The opposition groups agreed a list of demands, but did not delegate authority to negotiate to any individual.

Looking ahead, Mr. Kudrin has reportedly decided that he would like to try being a politician, and in particular to help establish a credible liberal party, probably on the base of the existing Pravoe Delo (Right Cause) party. However, he is not playing an active role in the presidential election, and in fact distanced himself from Mr. Prokhorov’s suggestion that he might be Prime Minister.


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