Presidential Transition Begins In Russia. Should Investors Worry?

During his annual address to the National Assembly on Wednesday, President Vladimir Putin dropped a bombshell. Halfway through his speech, he announced a constitutional reform reallocating some of the presidential powers to the parliament and other institutions. Later in the day, the cabinet led by Dmitry Medvedev resigned. Putin announced the Head of State Tax Service Mikhail Mishustin as his nominee for the Prime Minister’s position.

Transition Process Could Offer Clues on Putin’s Future

Unexpectedly, the process of transition of power has begun four years ahead of the next Presidential election, scheduled for 2024. Putin proposed to amend the Constitution to eliminate the loophole that allowed him to come back to power in 2012 following the four-year Medvedev’s presidency. The announcements may hold a clue to his future title post-2024: following the latter’s resignation as PM, Putin offered Medvedev a newly-created position of a Deputy Head of Security Council. Perhaps post-2024, Putin will remain the Head of the Security Council and thus retain control over Russia’s security apparatus and foreign policy. In this case, Russia would follow the model of transition set by Kazakhstan last year, where ex-President Nazarbayev chairs the Security Council following his resignation.

Putin’s constitutional proposals pave the way for reduced concentration of power in the president’s hands, a positive development. The parliament would receive more control over the composition of the government, while the Constitutional Court would be entitled to review new legislation before the president signs it. The amendments will therefore introduce new checks and balances into Russia’s political system, which should be viewed as a good sign.

Russia’s Economy Could Benefit

The dismissal of Dmitry Medvedev and appointment of Mikhail Mishustin as the new PM is also positive for Russia’s economy. During the current presidential term, successful implementation of the National Projects was set as the main task of the cabinet. In 2019, delays in allocation of budgetary funds to the Projects caused an unexpected fiscal tightening, which contributed to a deceleration in economic growth. By appointing Mishustin, Putin is sending the signal that he wants the job done. Mishustin is an experienced technocrat and a successful manager and has no obvious political affiliations. As the Head of Russia’s Tax Service, Mishustin built one of the best digitalised tax collection systems in the world.

In the ensuring media storm the first part of Putin’s address went almost unnoticed. It contains new fiscal measures that could help reduce child poverty and provide a fillip to domestic demand. Putin promised new targeted support to poor families with children which will cost the budget RUB 400-450bn in 2020, equivalent to about 0.4% of GDP. Russia can easily afford the new measures given that this year’s budget targets a surplus of 0.5% of GDP. Given the current domestic demand weakness, there is no reason to fear these measures will stoke inflation.

The decision against using tax cuts as a means to revive domestic demand is also good news. If implemented, cuts to personal income tax rate that had been actively discussed would have dented local budget revenues.

While some of Putin’s announcements could have positive implications for Russia’s economy in the short to medium term, it is too early to draw absolute conclusions. Mishustin pledged to retain the budget rule which diverts all extra oil revenues received above the cut-off price to the National Welfare Fund. However, he also hinted that the cut-off price for Urals (set at $42.4/bbl in the 2020 budget) could be raised. A substantial increase in the cut-off price could prompt negative reaction from investors and rating agencies as it would make Russia’s public finances less immune to external shocks.

Watch for Further Announcements On Cabinet Positions

In the coming days, investors should keep an eye on announcements regarding the composition of the new government. For sovereign debt investors, the key issue is whether First Deputy PM and Finance Minister Anton Siluanov will retain his position. If Siluanov is not re-appointed to both positions, this could signal a less conservative fiscal policy.  Another key figure to watch is Maxim Oreshkin who occupies the post of the Minister for Economic Development in the outgoing cabinet. In the last few months, Oreshkin has criticised CBR policies and advocated making the regulator partly responsible for economic growth. If he is elevated to the rank of Deputy PM, markets may become concerned over future CBR independence.

Tatiana Orlova is a macroeconomist and strategist, and the founder of Emerginomics Research. She has been covering Emerging Markets since 2001, and has pursued various roles on the sell-side across RBS, Nomura, ING & Credit Suisse.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)