Russia: How Will Putin/Medvedev Fare Through A Recession?
The economic data from Russia continues to get worse, confirming my view that the country is headed straight for a recession in 2009. The latest comes from state-owned bank VTB, which released its Purchasing Manager’s Index-based GDP indicator on January 7. The reading implied that the Russian economy is already contracting, having collapsed to its worst performance since 1999 in the fourth quarter of 2008. In my view, negative growth is only the core scenario, with a systemic default crisis looming in the event of an accelerated deterioration of banking system confidence or another protracted leg down in global energy prices.
While the negative economic impact is clear, the political implications are much less so, though they are arguably even more significant from a regional perspective. Unemployment is surely set to spike as economic output declines and the natural result will be greater social instability. Thus far though, the reaction has been muted. Opinion polls released early in January show that support for Prime Minister Vladimir Putin and President Dmitry Medvedev has barely moved from its record highs.
That said, as the real macroeconomic effects of the Q3-Q4 financial crisis unfold in 2009, the political impact will surely be accentuated. Already, there have been demonstrations stemming from public dissatisfaction over government economic policy, the most notable being a protest in Siberia over the introduction of a tax on imported cars.
I am sceptical though, on the effectiveness of such actions in transforming Russia’s domestic political dynamics. It is important to note that the last economic crisis in 1998 did not result in a change in regime. Moreover, the current political structure has been transformed in the intervening years to empower the Kremlin further. The result is a noticeable political vacuum beyond the existing power structure. Simply put, there is no opposition within Russia that is in a position to take advantage of any elevated public dissatisfaction with the government, so don’t expect a revolution any time soon.
This is not to say that Moscow will blissfully ignore the recession without any fear of a political backlash. Public policy has already been shifting to an increasingly proactive role for the government in the economy and we expect a substantial fiscal stimulus with corresponding social expenditures to help mitigate the potential rise of popular dissent.
If anything, some of the most significant political impacts of a Russian recession will be felt beyond the country’s borders. While not a direct catalyst for the ongoing gas dispute with Ukraine, I do believe that the looming recession has heightened the urgency in Russia to achieve market-set gas pricing in all its export destinations. As a result, while not causing the crisis unto itself, the economic problems have elevated the severity and likely duration of the dispute.