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Russia’s Scenarios: Sure Things and Uncertainties

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Russia/CIS Riskwatch - Issue 12 - June 2017
Russia’s Scenarios: Sure Things and Uncertainties



There was a deluge of predictions in recent weeks around what will happen to Vladimir Putin’s Russia when his current term in power expires in March 2018. Let’s try to analyse how several important uncertainties might shape Russia’s future by focusing for now on factors we know with a reasonable amount of certainty.

 

What we (almost) know for sure:
  1. The Russian economy will stagnate, or at best, show faint growth for another year or two. There is growing consensus that Putin will not initiate any structural reforms of the Russian economy, no matter how often the topic is publicly discussed. Last year, the Russian president ordered three such draft programmes at once – from former Finance Minister Alexei Kudrin’s liberal Center for Strategic Research, from the conservative Stolypin Club together with business ombudsman Boris Titov, and from the Russian Ministry of Economic Development. After each of these very different programmes were presented to him earlier in June, Putin ordered them merged into one, a move that only reinforced the doubts that he was at all serious about reforming Russia’s economy and governance system. What’s more, Russia’s political and business elite does not seem to want economic reforms. After all, 70% of Russian GDP is created by the state and state-run companies, according to the 2016 estimate by the Federal Antimonopoly Service, and any attempt to dismantle this model bears serious risks to its influential beneficiaries. Instead, top public officials compete in coining contentious and sometimes non-legal bills and regulations aimed at expanding and cementing state control.
    The Russian commentariat agrees: When it comes to the economy, most Russians’ outlook is pessimistic. Putin’s persistently high approval ratings stem either from apathy, or from the knowledge that things could actually be a lot worse.
  2. Vladimir Putin will be re-elected in March 2018.
    As has been the case in previous elections, attempts to challenge the incumbent order will be demonised by the government and its loyal media outlets. Official moves to quash the protests will be presented as protective of national sovereignty and security. Anti-corruption whistleblower Alexei Navalny would have won only 1% of the vote if the presidential election were held “the next weekend” in April 2017, according to a May 2017 poll by the Levada-Center, an independent Russian think tank. 48% of respondents said they will vote for Putin.
    Navalny is cast in the public eye as an enemy of the state; he was even likened to Hitler in a recent online video on a pro-government media website. Political analysts agree that while Navalny has proven adept at bringing thousands of protestors into streets across Moscow, he will not be able to mount a successful campaign if authorities block official recognition of his political party.
  3. Russia’s stance on Ukraine and Syria will not change in the near future.
    With sluggish economic growth forecast for the foreseeable future, foreign policy achievements – or what the Russian leadership describes as such – become instrumental in helping maintain the domestic legitimacy of the Putin administration. In Ukraine, the Kremlin argues, it prevented NATO from coming closer to the Russian border. In Syria, Moscow is demonstrating, even if in a limited manner, the geopolitical ambitions of a proper superpower, interfering in conflicts far from home.
    For Putin, there is no turning back in Ukraine – that would negate the red line he drew and on which he staked his foreign and domestic policies for the past three years.  What’s more, there’s no pressure to backtrack – Russia has absorbed the world’s disapproval (e.g. sanctions) without any damage to his presidency. In Syria, Moscow can change its stance, but not without a quid pro quo from the West. For now, there is none, and there won’t be for a while, particularly in light of US sentiments toward Russia. Moreover, the cost of maintaining the status quo in Syria is negligible for the Kremlin: the death toll among Russian servicemen is low, as is the cost.
  4. Western sanctions against Russia will continue as US President Donald Trump avoids provoking another round of damaging questions about his alleged ties to Russia and aggravating his shaky position at home. The truth of the matter is that Russian-US ties – while important – are not important enough to merit much outrage from the business community in the US. Contrast this with the much louder frustration from the European business community, which would like to see the sanctions eased. But European countries are governed by pro-EU leaders who are ostensibly not Putin sympathisers.

So much for what we already know. The challenge is to identify and explore gaps between and beyond these factors – the critical uncertainties. This is where risk genuinely resides.


The main uncertainties:

  1. A domestic power vacuum. Putin recently has been demonstrating much more interest in international affairs. He is disengaging from the management of the country’s internal matters. This loosening of the so-called power vertical (the system of strict top-down control) creates opportunities for what can be described as informal ‘pockets of power’ in federal and regional governments. Most often, these newly emboldened players are controlled by people from the law enforcement and security services, but this is not always necessarily so. So the question is: How competent, active and strategic will the actors be who fill the void, and to what extent will their agendas be helpful or harmful for business?
  2. Provocation/distraction? In the run-up to his re-election, Putin may make a bold public gesture to send a clear message to his national and international audiences and to reverse what he sees as the domestic trend toward apathy. Putin’s international audience is already accustomed to his periodic piques. But this time, if Putin once again decides to raise stakes in the confrontation with the West, what will it look like? Will it be limited to rhetoric, or will it result in new policies? Who will implement these policies, and how? And what response would we need to expect? 
  3. And perhaps the murkiest of all: Putin’s social contract with the Russian people might crumble. This uncertainty foresees the collapse of the agreement made with the Russian people at the outset of the Putin presidency: “I’ll make you wealthier and stay out of your private lives. In exchange, you stay out of politics.” When oil prices plummeted in 2014, the deal was tweaked: “I may not make you as wealthy as I initially promised, but you will live in a global superpower.” But the state started to inject itself increasingly into private lives, from injecting ideology into school programmes to intimidating theatres and exhibitions. So the question now is, how long will the population endure this and how will they react once it is “too much”? Will these conflicts inflate to an extent that threatens local, regional and even national stability?

The final challenge – particularly acutely for the international business community – is to answer these questions in a way that is durable and robust. This may not be possible. Russia faces a dynamic political and economic environment influenced by factors of varying intensity. Control Risks is closely monitoring these developments, analysing them through several sets of lenses (including the ones described above), and is well prepared to provide critical counsel on these topics to clients in a variety of formats at any time.

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