Russia’s economy is on the mend.
The latest economic data shows that the worst of its slump might be coming to an end, after taking a hit from rock bottom oil prices and sanctions.
But that doesn’t mean the country’s leader, Vladimir Putin, will be stepping back from the geopolitical stage.
According to Victor Szabo, a senior investment manager at Aberdeen Asset Management, Putin will have to distract attention away from a shrinking economy to gain the support of citizens in the 2018 elections.
And the best way to do that is to find an enemy to fight, something Szabo characterised as the “bread and circuses” approach to political success.
“There have been no real wage increases for two years for public sector workers,” Szabo said in London on Tuesday.
“You have to find an internal enemy or an external enemy. The problem is there isn’t really anyone left internally so you have to look externally,” Szabo said.
The unanswered question is who and where. Russia could open up a new front in the “proxy war against Turkey” in Azerbaijan or Armenia, but to “predict where the next event will be is very difficult,” Szabo said, adding that Moldova, Georgia, and South Ossetia might also be candidates.
Putin has kept the world guessing as to his next moves, after unexpectedly pulling Russian forces from Syria earlier this year.
“The only predictable thing about Vladimir Putin is he’s unpredictable,” Szabo said.
But, while the economy is suffering — shrinking 3.8% in the fourth quarter of 2015 year-on-year — it could be a lot worse.
Aberdeen has invested in Russian debt and the country “has done the textbook right steps to adjust the economy to external shocks,” Szabo said. Policymakers reacted to declining oil prices by tightening rules on imports, helping to protect the country’s current account balance.
So, while the value of exports have plunged with the oil price:
The current account balance as a percentage of GDP has actually improved:
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