Overview
An eye-catching State of the Nation address
This year, President Vladimir Putin’s State of the Nation address captured greater attention than usual. The speech not only promised faster economic growth but was also promptly followed by the resignation of prime minister Dimitry Medvedev and his cabinet.
The resignation was less of a collective protest against the president’s policy priorities than a carefully orchestrated move directed by Putin himself. The president enjoys wide-ranging powers and seems firmly in control of the Russian state. He is also considerably more popular than his former prime minister Medvedev. It is plausible therefore to assume that Putin is sacrificing his prime minister and cabinet to deflect criticism over the economy’s weak performance away from himself.
Extra spending, but within limits
The new cabinet is likely to have a stronger mandate to spend public money on social benefits and infrastructure projects, though not to a degree that would threaten the country’s entrenched fiscal conservatism. The new prime minster, Mikhail Mishustin, comes from a technocratic background, having previously served as head of Russia’s tax department. Other key positions within the Russian cabinet are equally likely to be filled by technocrats, rather than by populist individuals keen to overhaul Russia’s fiscal policymaking.
Putin’s transition
Putin’s address also hinted at his intentions when his fourth, and theoretically final, presidential term comes to an end in 2024. In his speech, he set out a number of constitutional changes that would weaken the future presidency. While there is a chance that Putin will try to stay on as president, he may well decide to step into a different role.
The changes he is proposing could lay the groundwork for a nominal transition of power that allows him to give up the presidency but remain in a highly influential political position. Ultimately, Putin’s motives are not yet clear. But a similar form of presidential succession has been playing out in neighbouring Kazakhstan in recent years.
Outlook for Russian assets
In the nearer term, Russian asset prices should not change much in response to these recent developments. While government spending is likely to increase somewhat, fiscal and monetary conservatism and domestic political stability are expected to remain policy priorities. But, in the longer term, as we get closer to 2024, investors may wish to monitor Russia’s domestic priorities more closely.
President Putin has been in power for a long time, and an eventual transition may bring both risks and opportunities. On the one hand, it could create an opening for better relations with the West and more favourable conditions for foreign investors. On the other, any dilution of presidential powers would make it harder for Putin’s successor to address the key impediments to Russian GDP growth: corruption and inefficient state-owned enterprises.
For now, the transition to a technocratic government may help improve Russia’s external credibility, at least in the financial markets. Favourable macro fundamentals, including twin surpluses and low inflation, are likely to keep the rouble well supported, providing geopolitical tensions do not ramp up and the oil price remains above $50/barrel.
