13/2/15: Data: Don't Bank on Sanctions Triggering Political Change in Russia

A very interesting insight into the interaction of politics and economics in public perception of political power distribution and public satisfaction with political life from the Pew Research: http://www.pewglobal.org/2015/02/12/discontent-with-politics-common-in-many-emerging-and-developing-nations/

Here are some numbers:

Political satisfaction in Russia in the above chart is quite telling and coincident with public approval ratings for the Government (though these are always lower than the approval ratings of President Putin). In fact, Russian public satisfaction with political situation is the highest in the entire sample of countries. The data covers Spring 2014, so it is somewhat dated and does not reflect subsequent economic and geopolitical developments.

In the context of Russia and Ukraine, the above chart maps public perception of the power of oligarchs. Not surprisingly, Russia comes out much more favourably than Ukraine. Notice that Russian perception of power concentration in the hands of the wealthy is on par with Asian median. As chart below shows, Russian perceptions of power concentration in the hands of the wealthy is actually consistent with Higher Income countries median at both ends of the opinion spectrum.

And for the last, a fascinating plot of relationship between economic environment and satisfaction with political system:

Again, note Russia's position in the above, which appears to be statistically below the correlation line, implying significantly higher satisfaction with political system component to be unrelated to economic environment/conditions than sample average.

All of the above reinforces the argument that in Russia's case, economic environment is much less important in driving public attitudes toward political system than in other countries, which, of course, reinforces the argument that economic sanctions and economic warfare against Russia are unlikely to deliver the results expected under the traditional assumptions of the close links between economic performance and political satisfaction. In other words, don't bank on sanctions and/or economic hardship triggering regime change in Moscow. At least not in the short- to medium-term.

24/12/2014: House of Rubles: Bulgaria's Capital on Ruble Crisis

Here is an article in Bulgarian Capital on the subject of the Russian currency crisis, with comments from myself: http://www.capital.bg/politika_i_ikonomika/sviat/2014/12/19/2442567_kushta_ot_rubli/. My original comments in English:


1. What triggered the acceleration of the rouble crisis and why the drastic raise of the interest rates didn't help?

In a currency crisis, raising interest rates usually has little effect on currency valuations because the motives for dollarisation or a switch away from the domestic currency rest outside the scope of deposits and savings.

Russian crisis has been driven by rapid collapse of oil prices and by the growing demand for dollar and euro liquidity from banks and companies forced to repay foreign borrowings due to lack of access to the foreign credit markets.

Several larger Russian firms, facing billions of dollars of debt redemptions in Q4 2014 have moved into the market in the last 10 days, buying up dollars and using ruble loans from the Central Bank to fund these purchases. In addition, new estimates that came out last week showed Central Bank of Russia witnessing accelerated rate of capital outflows suggesting that Q4 outflows will match those in Q1 and that the total volume of outflows will total $134 billion, matching 2008-2009 crisis peak. This triggered a run on the Ruble that started on Monday and continued through Tuesday. Tuesda run was further exacerbated by the dollarisation of the household deposits, with many Russian households rushing to convert Ruble savings into dollars and euros.

In a way, 10.5 percentage points hike in interest rates enacted by the Central Bank added fuel to the fire. Firstly, it signalled to the markets that capital outflows are reaching crisis proportions. Secondly, it increased the demand for loans from the households trying to secure credit before rates rise even higher, and also drove more companies and households toward conversion of their deposits into dollars.

In the short run, the interest rate hike also led to a more aggressive shorting of the ruble, especially by algorithmic trading programmes, by acting to suppress supply of dollars out of Russian deposits into ruble trades, while leaving external supply of dollars available for backing shorts unaffected. The short-term nature of such strategy was evident in the abrupt reduction in net short positions in the market.


2. What options do Russian authorities have now to deal with the situation? Will Russia need to use capital controls?

So far, Russian Central Bank spent around USD10 billion on foreign currency interventions (through the first two weeks of December). The ministry for finance further openly committed to injecting additional USD7 billion. Simultaneously, the CBR adopted measures to ease balance sheet pain for the banks. The CBR also dramatically expanded its repo operations. All of this had an effect of calming the markets down - the effect witnessed on Wednesday.

However, the underlying causes of the crisis remain unaddressed and the current reprieve can be temporary, unless the CBR and the Russian Government adopt more drastic measures. One measure that will be effective in dealing with the underlying drivers of the crisis is limited capital controls. These can reduce dollarisation of the domestic household and corporate deposits and also restrict, in part, outflows of funds abroad. However, the second problem - mounting weight of debt redemptions by sanctions-impacted banks and companies - requires a different solution. One possible solution could be freezing redemptions for entities directly covered by sanctions, allowing ill up of interest to avoid outright default. Both measures are what we can term the 'nuclear' solutions and to-date the Russian Government has balked at adopting them. However, the Government is already applying pressure on Russian companies to stop hoarding foreign currency. The Government is also diverting 10% of the Russian National Pension Fund receipts toward supporting domestic banks.

Should the crisis regain momentum, even the 'nuclear' - in economic terms - options are going to be on the table.


3. How close is Russia to a repeat of the 1998 crisis?

The 1998 crisis was very different in nature and causes, so the parallels to it are tenuous at best. In the 1998 crisis, Russian Government was carrying unsustainable levels of external debt and it was running huge deficits. The country external balance of payments was in a persistent deficit. None of these factors are present today. Russian Government fiscal surplus is in excess of 2 percent and devaluation actually improves the Federal Government position in the short term. Current account is in a surplus and even with oil going to USD50/bbl, current account position is well-supported in the short run by collapsing imports. The entirety of Russian Government debt redemptions for 2015 is just over USD2.8 billion.

On the other hand, Russian economy today is in the same structural cul de sac as in 1998. Core driver for growth - high energy and commodities prices - is gone and it is unlikely to return any time soon. Consensus forecasts suggest oil price averaging around USD80/bbl in 2015, so at the very best, Moscow can expect moderate improvement in pressures compared to current situation.


4. Is now a deep recession a certainty for Russia in 2015? And how much worse can things get?

It is most likely that the Russian economy will slip into the recession over Q4 2014 - Q2 2015. The only question is - how deep the recession can be. Based on USD60/bbl assumption for the price of oil, the Central Bank estimates that Russian economy will contract 4.5-4.7% in 2015. At USD80/bbl, the contraction is likely to be closer to 0.8-1%.

The former is a heavy toll on the economy, while the latter is relatively mild and consistent with Euro area experience in 2012-2013. And beyond that, 2016 is also promising to be a tough year. Russian economy desperately needs two things: investment for developing non-extraction sectors, modernising the capital and technological bases; and structural reforms, reducing red tape, corruption, arbitrary enforcement of laws, reducing bureaucracy and altering labour markets. It will be extremely hard to deliver investment boost in current financial conditions and in the presence of sanctions. It will be virtually impossible to deliver reforms with current power brokers' so heavily dependent on continuation of the status quo of power and wealth distribution. But, at least reforms are a function of internal will.

There are added risks to the downside of the above forecasts, however. If capital outflows remain at peak levels consistent with Q1 and Q4 2014, interest rates will have to rise even further. Meanwhile, devaluation of the ruble will require offsetting nominal increases in spending on pensions, social supports, as well as investment in imports substitution. The result will likely be even more severe recession than forecasted above.


5. Could the rouble crisis shake Putin's grip on power?

At this stage, it is very hard to imagine any significant shift in the power balance in Moscow. The reason for this is two-fold. There is no momentum for such a change in the electorate and amongst the elites. Most recent public opinion surveys show steady 80% and higher support for President Putin and similar broad approval ratings for the Government.

Economic hardship is something the Russian society endures when it is faced with geopolitical adversity. Sanctions, in a way, are reinforcing current balance of power in favour of President Putin. The Crimean Euphoria effect is now almost gone. Eastern Ukraine offers much lower support base within the Russian society, with roughly 60% of population approving Russian Government providing support for the separatists there. But the juxtaposition of Russia vis-a-vis the West is now forming the main basis for President Putin's popularity. Whether we, in the West, like it or not, Russians do feel that their interests are not being served by cooperative engagement with Nato and the West. And much of the fault for this antagonism is based in both sides actions and rhetoric.

In addition, Russia lacks viable alternative to the current power balance. Existent opposition is even more vested into nationalist rhetoric and represents more extreme positions both in economic policies terms and geopolitical outlook. Opposition currently visible outside Russia has no support base within Russia. It is a power vacuum, absent the current Presidency. And, frankly, I cannot convincingly say that external opposition offers anything other than Putinism 2.0. The head of state change is not equivalent to structural reforms and so far, democratisation rhetoric from the Western-based Russian opposition is shallow, unbacked by any serious proposals for reforms and offering no alternatives to the 'power vertical' systems put in place from ca 1995 on, from the late Yeltsin era through today.

That said, if the crisis persists beyond 2015, we are likely to see growing pressure on the President and the emergence of potential challengers. Whether they will offer any serious prospect of reforms, while providing pragmatic road map for stability and governability is another question altogether.


6. What is more likely now - the economic agony to make the wounded Russian bear even more belligerent, or to force Putin to soften his position and to seek lifting of the sanctions?

In my view, the current situation is very volatile and highly unpredictable. We can certainly hope that the crisis is going to move both Russia and the West toward reconciliation of their respective positions. We need a constructive dialogue across a range of geopolitical issues. And we need Russia to be a strong, but cooperative participant in this process. The core point here is that it takes two to tango. The West needs to moderate its position on sanctions and Nato, Russia needs to be offered a way out of the Ukrainian crisis, while Ukraine's independence and territorial integrity must be preserved. Russia, in return, must step away from brinksmanship in both Ukraine and vis-a-vis Nato. The former is a disastrous strategy that will not deliver on Russian longer-term objectives and will continue to antagonise the Ukrainian population, moving the country away from any future good will-based cooperation with Russia. The latter is a tragedy waiting to happen - close calls in fly-bys between Russian military aircraft and civilian airlines in the Baltic Sea region are the proof of this.

Can 2015 be the year when we see some positive changes in these directions? I certainly hope so. But the indications are, we will see escalation of the crisis, before we see resolution being put forward.

6/8/2012: Russian reforms: Atrophy or Revolution?

Journal of Democracy has 5 articles covering various aspects of the political grass-roots transformations undergoing in Russia (link here):


In "Putinism Under Siege: Implosion, Atrophy, or Revolution?", Lilia Shevtsova argues that the "Putin's regime is clearly now in decline, but it is unclear whether the death knell has sounded for the "Russian System" - a combination of personal rule, the merger of power and assets, and a self-perpetuating stalinist-militarist model. One can conclude, however, that the Russian system cannot be reformed from the top and that real transformation will come only through pressure from citizens."

I am not so sure, this wishful thinking - ranging from rather over-reaching definition of the "Russian System" (which does include the first two of the features outlined in the article, yet hardly resembles a stalinist-militarist model at all) to nostalgia for some sort of a populist, bottom-up transformation (which never happened in the history of Russia before, and given the dire quality of opposition is not about to happen either) - is either a realistic assessment of the near-term (predictable or forecastable) future or a desired path to transformation.

But the article does point to some interesting changes in social dynamics that have led to recent protests and are exposing the dire need for modernization and reforms in the system as well as the fact that since 2006 Russian leadership has had an awfully hard time in attempting to deliver any real change on core political and social changes:


"Discontent with Putin’s regime among educated urbanites has been building for some time as people have witnessed the cynicism, brazen corruption, official high-handedness, and general stasis on display in their government. By the last part of Putin’s second term (between 2006 and 2008), the foundations of his implicit deal with the country were starting to erode. The most active and dynamic sectors of society wanted more than the Kremlin’s offer of stability based on looking to the past and staying within the narrow bounds of old myths about Russia and the world. People began to tire of the notion
that they should be content so long as the authorities let them make a living in return for staying out of politics and recognizing the authorities as having the final say on questions of property ownership, making corruption an essential lubricant when frictions appeared."

"But there inevitably came a moment when Putin’s formula for “social peace” no longer satisfied much of the populace. Too many had come to see that this pact could guarantee them neither opportunity nor prosperity nor even basic security. Moreover, Putin lacked any sense of the kinds of social improvements that might give young people a leg-up in life and a chance to better themselves. The financial and economic crisis of 2008—and the way that Putin and his team reacted to it by guarding their own wealth and that of the oligarchs close to them—cast into especially high relief the flaws in Putin’s model."

So far - plausible, albeit over-rhetoricized account.

The article real failings are in the projections for the Putin 2.0 and gradualist reforms paths, which, the author feels, cannot deliver significant enough change. At this stage, the arguments are purely speculative, based on "why didn't Putin do so before?" reasoning which ignores both the core objectives of pre-2006 path (consolidation of power and stabilization of fragmented institutions) as well as the need for transition to Putin 2.0 regime.

Again, on has to read the entire article in the context of attempting to remove over-extending rhetoric from the fact.

"The authorities’ tactical maneuvers and the myths spread by Kremlin propagandists can no longer stave off a crisis that has already begun. [In my view, this is correct, albeit the word 'crisis' is hardly properly descriptive of current events - the word 'pressure' comes to mind as more apt]. The alleged adaptability of the “Russian system” has been exposed as an illusion—cosmetic changes can no longer hide a more fundamental rigidity. The system guarantees Russians neither personal security, nor
economic well-being, nor a sense of civic dignity. The system works only to satisfy entrenched interest groups at the expense of society at large; the “golden parachutes” that the elites maintain in the form of
assets stored in the West prove that even they do not believe in the sustainability of the current political order. [Well put, in my view... but not warranting subsequent:] The paradox is that propping
up the status quo is speeding up the system’s decline, but attempts to update this status quo without liquidating its basis (personalized power) threaten to cause system breakdown."

In my opinion, the status quo is degenerative. However, change of the status quo requires a long period of building effective, functional democratic opposition. Not a 'personal cult 2 displacing a personal cult 1' system that is currently the only feasible alternative were another equivalent to Putin found somewhere. This process can only be carried out with simultaneous co-existence of the current consolidated regime and constant pressure on this regime to reform. The recent protests have shown this much: there is no alternative to Putin 2.0 transformation for the embryonic democratic forces - which have offered no real policies alternative or leadership options to the current regime, and for the regime itself - which cannot be assured of normal and functional transition of power. In other words, Russia currently has no alternative to the gradualism in transformation. To the author, this means that neither transformation, nor gradualist approach to it are feasible. To me it means that both are inevitable in the long run.

In other words - it is neither Atrophy, nor Revolution that await Russia in the near term future. It is a gradual re-shaping of the Kremlin rule accompanied by the maturing of the democratic alternatives. We better brace ourselves for a much longer term process than the ones we experienced in Russia since 1988. And that is a good news.

I will be blogging on the remaining articles in the issue in time, so stay tuned.