MOSCOW, Nov 1 (Reuters) - Russia is one of the world’s most lucrative emerging markets but is heavily dependent on energy and commodity exports, plagued by corruption and its political stability rests largely on the authority of one man, Prime Minister Vladimir Putin.
Russia is the world’s biggest energy producer and remains heavily reliant on oil and gas exports, which make up 65 percent of exports, despite Kremlin calls to diversify the economy. They are also a key source of budget revenue.
Any sustained fall in the price of Russia’s benchmark Urals crude below next year’s budgeted average of $75 per barrel would hit Moscow financial markets, crimp growth and erode Putin’s popularity before a March 2012 presidential election in which he is widely expected to run.
Gross Domestic Product (GDP) is expected to grow about 4 percent this year, a rebound after the 7.9 percent decline in 2009, Russia’s worst annual contraction in 15 years.
Russia posted a budget deficit of 5.9 percent of GDP in 2009 and if oil prices remain around current levels of $75 it is forecast to be 5.4 percent of GDP this year.
Russia’s Finance Ministry wants to be in the black by 2015, but social spending rose sharply in the 2008-9 economic crisis and is likely to be ramped up further ahead of the election cycle that begins next year with congressional polls.
Putin’s ruling United Russia party does not share his personal popularity, and much additional public spending may be needed to keep its current two-thirds parliamentary majority.
Under current spending plans, the budget would only be balanced at an average price for Urals crude of about $95 per barrel, according to investment banks.
Finance Minister Alexei Kudrin said in October that the budget next year would only be balanced at a Urals price of $109 per barrel.
Investors snapped up $5.5 billion of Russia’s first sovereign Eurobond in more than a decade this April, but their appetite could wane if oil prices fell, the very time when Russia could need cash.
Russia may place sovereign euro-denominated Eurobonds next year, Deputy Finance Minister Dmitry Pankin said in October.
To help raise cash, Russia has plans to sell $59 billion in state assets, the most ambitious privatisation plan since the rigged sales of the 1990s. It is not clear how much appetite investors have for Russian assets, particularly if only minority shares in state-controlled firms are on offer.
What to watch:
-- Prices for oil, gas and metals. Chinese demand is key.
-- What Putin and President Dmitry Medvedev say about spending ahead of the 2012 election, or about potential borrowing.
-- Comments from Finance Minister Alexei Kudrin, a fiscal conservative, on additional sources for budget revenue, such as borrowing or asset sales.
-- Government approval of the privatisation plan.
Putin is Russia’s most powerful politician and dominates the political system, despite stepping down as president in 2008 to become prime minister, technically a more junior post.
Putin is the dominant member of what Russian officials call a ruling “tandem” with Medvedev, a longtime associate, whom Putin tapped as his successor when a constitutional limit of two consecutive terms kept him out of the 2008 presidential race.
Many analysts and diplomats expect Putin to return to the Kremlin in 2012 and believe Russia will be stable while he is in control, but say reliance on one individual does not bode well.
Putin has a unique ability to arbitrate between the competing factions or clans in the Russian elite and is respected by all of them. Kremlin-watchers do not see any other individual commanding the same authority or respect.
What to watch:
-- Clarity from Putin on his presidential election plans, though a formal statement is unlikely until nearer the time. Clarity could come after the 2011 parliamentary election.
-- Any real signs of discord between Putin and Medvedev could provoke a constitutional crisis, though there have been no indications of major policy differences to date.
-- Putin, 58, looks physically fit and follows a demanding travel schedule apparently without problem. Any concern about his health or fitness to rule could spark major turbulence.
RULE OF LAW, CORRUPTION
Western executives say the biggest barriers for business in Russia are alarming levels of official corruption, mounds of red tape and the lack of consistent rule of law.
Medvedev has repeatedly singled out endemic corruption as one of Russia’s most serious problems but admitted in July that his administration had made almost no progress in fighting graft since he was sworn in as president in May 2008. [ID:LDE69P12D]
Many businesses operating in Russia say corruption and bureaucracy have actually worsened during his tenure.
Berlin-based NGO Transparency International rated Russia joint 154th out of 178 nations in its corruption perceptions index, along with Cambodia, Kenya and Laos. It was Russia’s lowest ranking since the index began in 1995. Last year Russia was ranked 146th.
Russia is perceived to be more corrupt than any other member of the G8, G20 or even peers such as India, China and Brazil, which were ranked at 87th, 78th and 69th respectively, Transparency said.
Companies ranging from IKEA, the world’s biggest furniture retailer, to fund managers such as Hermitage Capital Management say they have fallen foul of corrupt Russian officials.
What to watch:
-- Dismissals of senior Kremlin or government officials for bribe-taking are highly unlikely but such a step would represent a dramatic escalation in the official war on corruption.
-- Polls on perceptions of corruption and what they show about the situation in Russia.
-- Major projects by foreign investors. Any high-profile exits from Russia by corporate investors would signal a worsening of the situation; equally big new projects might suggest the country is turning the corner.
ATTACKS BY INSURGENTS
Twin suicide bombings in Moscow’s metro system on March 29 killed 40 people -- the deadliest attack in the capital in six years -- and sparked fears that Islamist rebels from the north Caucasus could unleash a wave of attacks in Russia’s heartland.
Islamist rebels who want to create a sharia-based state along Russia’s southern flank claimed responsibility.
The self-proclaimed leader of the militants, a Chechen rebel named Doku Umarov, has vowed to attack economic infrastructure such as the pipelines that feed Russia’s economy.
What to watch:
-- Markets shrugged off the Moscow bombings and subsequent attacks within the North Caucasus, but further strikes on Russian cities or against economic infrastructure such as pipelines or power stations could unsettle investors. (Reporting by Guy Faulconbridge, editing by Ralph Boulton)
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