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Russia

Promises, Promises

During the 2012 presidential campaign, Vladimir Putin sought to dampen popular opposition to his return as president by making some very expensive promises, the cost of which will not be affordable without comparable increases in state revenues, the main source of which is income from the production and sale of oil and gas. In his state of the nation address to the Federal Assembly in December 2012, the president declared that an economic model that depended heavily on oil and gas was no longer viable, and stressed the need to adopt a new model based on the promotion of small and medium-sized enterprises, the expanded use of advanced technologies, and the development of the skills required to support the growth of high-paying jobs.

From the perspective of foreign investors, Putin is sounding all of the right notes, but the song is a familiar one. The need for reform has been a consistent theme of Putin’s rule, but the president has just as consistently failed to follow through.
There have been some indications that perhaps this time promises will be followed by action. In late November, a government committee approved changes to investment rules that, if implemented, would significantly reduce administrative barriers to expanded foreign investment in strategic sectors. However, the proposal barely scratches the surface of what will be required if Russia is to come close to achieving Putin’s goal of ranking among the top 20 countries for investment climate.
Moreover, a recent pension reform highlights the potential for short-term fiscal requirements to produce policies that contradict the government’s stated medium-term goals. Critics warn that the changes to the pension system will undermine efforts to deepen domestic capital markets, which will be essential if Russia is to become less dependent on volatile short-term investment.
The detention of high-profile figures on suspicion of corruption and new legislation that requires officials and their family members to disclose their wealth could indicate that the president’s promises to crack down on corruption are sincere. However, Putin’s commitment aside, the rot has spread so wide and so deep it is unrealistic to think that much headway will be made. Factoring in the reality that a serious attempt to address the issue would create a risk of triggering a revolt within the bureaucracy and cost Putin the backing of powerful political allies, the outlook is all the more dim.

Forecast Summary

SUMMARY OF 18-MONTH FORECAST

SUMMARY OF 18-MONTH FORECAST United Russia
65%
Nationalist Coalition 20% Center-Left Coalition 15%
RISK FACTORS CURRENT
Moderate Same MORE MORE
Investment
Equity High SLIGHTLY MORE MORE SLIGHTLY MORE
Operations High SLIGHTLY MORE MORE SLIGHTLY MORE
Taxation Moderate SLIGHTLY MORE MORE SLIGHTLY MORE
Repatriation Moderate Same SLIGHTLY MORE SLIGHTLY MORE
Exchange Moderate Same SLIGHTLY MORE SLIGHTLY MORE
Trade
Tariffs Moderate Same MORE SLIGHTLY MORE
Other Barriers Moderate Same MORE SLIGHTLY MORE
Payment Delays Moderate Same MORE Same
Economic Policy
Expansion Low MORE MUCH MORE MUCH MORE
Labor Costs Moderate SLIGHTLY MORE MORE MORE
Foreign Debt Low MORE MUCH MORE MUCH MORE

SUMMARY OF FIVE-YEAR FORECAST

REGIMES & PROBABILITIES United Russia
55%
Nationalist Coalition 25% Center-Left Coalition 20%
RISK FACTORS BASE
Turmoil Moderate Same SLIGHTLY MORE SLIGHTLY MORE
Restrictions
High Same SLIGHTLY MORE SLIGHTLY MORE
Moderate Same MORE SLIGHTLY MORE
Economic Problems
Moderate Same SLIGHTLY MORE MORE
Moderate Same SLIGHTLY MORE MORE
* When present, indicates forecast of a new regime

For more information, check out the Russia Full Report!

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