Blogginlägg av Marcus Svedberg

I have been arguing that the elections (parliamentary and presidential) would not change the political situation in Russia in any fundamental way in the short term but that the increasingly assertive middle class represent the best hope for real change in Russia in the medium term.

I was partly right because the formal political set-up has not changed (United Russia won a majority in the Duma and Putin is still expected to become President) and the middle class could now become an engine of change. But it all happened sooner than expected and something did change the week after the parliamentary election on 4 December. The protests and vocal discontent with the ruling elite in general and Prime Minister Putin in particular suddenly became a political force too strong to be easily dismissed or repressed by the Kremlin. 

This force has been described as urban, middle class, young, and frustrated with the ruling elite. All that is probably true but that is also where the easy categorization ends. There is no single organization or leadership but rather a mix of groups with different interests that have united through social networks on the internet based on what they don’t like.

It is therefore difficult to predict how this frustration will play out. But given the fact that the protests so far have been larger than expected and calmer than feared, there is reason to believe this force will not go away anytime soon. Indeed, new demonstrations are scheduled on 24 December.

This should be welcomed as it will put pressure for free and fair elections, more plurality and increased transparency. But given the absence of a single organization, leadership or ideology behind the protesters, it is difficult (although not impossible) to see how this force can challenge the current leadership.

Putin and United Russia are, after all, popular (albeit not as popular as the official election results suggest) among a large share of the Russian population after more than a decade of rapid economic growth and increased stability. Some of the leaders behind the protests have been suggested as potential rivals to Putin for the presidency and an oligarch announced his candidacy this week. More names may appear in the near future but I doubt anyone will have the capacity to unite the protesters and become a serious challenge to Putin in March. 

The political situation in Russia has become more complex and uncertain, but there is also reason to believe things will change for the better even though it is too soon to speculate exactly how things will evolve. In the meantime, I believe one should be careful in comparing this with the color revolutions in Eastern Europe or with the uprisings in the Middle East.

I believe the inevitable change in Russia will follow its own logic, but I dare to say that it has started.     
 
 

It seems like both the Communists and the right-wing nationalist LDPR did better than expected by receiving 19.8% and 11.4% of the votes, according to exit polls, which is significantly better than the 11.6% and 8.1% they got in 2007. But the fact that a Just Russia, which originally was created as a fake competition to United Russia, received 12.8% of the votes, up from 7.7% in 2007, was a big surprise since they were more or less written off a few months ago.

The actual numbers may be changed when the official results are announced and United Russia will probably get their own majority since the votes cast for parties not passing the 7% threshold will be distributed proportionally to the four parties that passed the bar. My guess is that United Russia and Just Russia together will get more than 300 seats, which translates into a two thirds constitutional majority.

United Russia should in any case be able to continue to rule but the election results show that the electorate is growing increasingly impatient and frustrated with the ruling elite.

It is believed to be easier to reduce the lending or even sell the banks in Eastern Europe rather than raising fresh capital. Western European banks are active all over the world but the focus on Eastern Europe comes because of the high foreign ownership concentration combined with high loan-deposit ratios, which suggest that entire Eastern European banking sectors are dependent on credit flows from Western Europe. The fear has been exacerbated by a recent initiative by the Austrian Central Bank limiting the credit of Austrian banks operating in Eastern Europe.

I believe deleveraging is a risk for the region but not necessarily as big or as general as commonly perceived. First of all, most banking sectors in the region rely on domestic funding today. The loan-deposit ratio has been brought down to around 100% on average and is under 100% in most of the larger economies.

Second, it is less a matter of deleveraging but rather a cap on new lending. The cap on Austrian banks’ lending, for instance, only deals with news loans where the credit exceeds 110% of deposits. Eastern Europe did, as a matter of fact, stop the growth of new loans from Western Europe three years ago so this is not really a major issue.

Third, the fear is that less foreign credit will have a negative impact on growth. That could happen but the impact is not likely to be very big since the growth forecasts have already been revised down substantially for the most exposed economies, the demand for credit is not very big and foreign lending is not crucial for growth at this stage, except in a few frontier economies like Albania and Armenia.

Selected banking indicators (latest available)

Sources: EBRD, BoAML, East Capital

This is not the time to be complacent and I am concerned about the negative spill-overs from the Eurozone, but I also think it is important not to misunderstand the linkages.

The threat of bank deleveraging may have a clear negative impact on markets with the unhealthy combination of high foreign ownership and high loan-deposit ratios – including Croatia, Romania, Hungary and some of the smaller economies on the Balkans – but less likely in markets like Russia and Turkey where domestic banks dominate and the loan-deposit ratios are below 100%. Moreover, the banks in the region tend to be well capitalized with capital adequacy ratios in the mid-teens.

We have been predicting (and hoping) that Russia would overcome the remaining obstacles this fall and finally join the world trade organization after 18 long years of negotiations. The last issue on the table was related to customs monitoring between Russia and Georgia, which proved very difficult to agree upon after the conflict back in 2008, but the parties have now reached a compromise agreement after talks in Geneva.

The exact details are unclear and a formal decision will probably be announced in a couple of days, but this should clear the way for an approval of Russian accession in a WTO meeting on 15 December.

This is obviously very positive news for Russia and its trading partners. Analysts, including myself, have grown weary over the years since the accession has been postponed so many times.

WTO accession is one of those win-win deals and the World Bank has estimated that GDP will be 3% higher in the medium term and 11% in the longer term in Russia (or roughly 1% per year) as a result of accession, primarily through gains in the services sector but also through improved market access abroad. The main upside may, however, be on sentiment as one of the Russian “discount factors” is removed.