Political risk will remain elevated through the rest of 2012 as popular discontent with Vladimir Putin and the political system over which he presides continues to grow. However, no large-scale political instability will threaten MNCs in Russia and FSG expects that the business climate will remain little changed after Putin returns to the presidency.
Putin maintains broad popular support which, despite alleged election irregularities, was reflected in his victory in the presidential elections with 64% of votes.
Putin’s agenda is focused on continuity of current government policies. As a result, any political or economic reforms introduced after the elections will likely be too superficial to satisfy the middle class and we expect popular discontent to remain elevated through the rest of 2012.
Frontier Strategy Group View
MNCs should anticipate some political and economic liberalization, particularly among regional authorities, after Putin returns to the presidency. However, we expect any new reforms to have limited positive effect on the business climate in the country.
In the short term, Russia may see increased investor uneasiness paired with ruble depreciation and capital outflows, as the elections will be followed by protests. However, we expect the situation to stabilise and investor confidence to return by 2H 2012.
Putin is neither willing nor capable of delivering the reforms demanded by the Russian middle class. Over time, this will erode Putin’s legitimacy and power base. To avoid large-scale political change that may threaten their personal wealth, Russia’s political elite may decide to sacrifice Putin in a partial political liberalization that would see him replaced before his six-year term as president ends. This scenario is particularly likely if there is a major external economic shock, such as a sharp decline in energy prices.
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