Deutsche Bank -

bne comment: looking at the various possible outcomes of the 2011 Duma elections, we believe that the most likely result (70-80%) is that things stay as they are, with Vladmr Putin staying out as prime minister and Dmitry Medvedev as president, whereas Deutsche Bank (like most commentators) believe the reverse will be true, with Putin returning to the presidency and Medvedev "demoted" to PM. The point of being PM is that Putin has hands on control of the day-to-day running of the country and also deals with the oligarchs on their specific investment plans, which is where he wants to be. To go back to being president would be to remove himself from this hands-on control. Ironically, everyone assumes that Putin wants to be president again as this would give more power. However, the opposite is true. Under the Russian constitution, it is the Duma, not the executive, that is supposed to run the country, so Putin is where he wants to be. As for the idea that Putin would leave government entirely in 2011, this is very unlikely. First, Medvedev is not ready to run the country, as so far he has done very little other than merge two time zones and start police reform. Second, there is no credible replacement to Putin as PM. One would have thought that if Putin intended to leave, he would have invested some time and effort into building up another candidate. Finally, Putin has made it very plain that his plan runs through to 2020 and only then would it be likely that he would think about stepping down.

The political outlook is favourable for 2011, but as always in Russia, not without risks. The key event should be the December parliamentary elections and the likely choice of the candidate for the presidential post within the Putin-Medvedev tandem, which is likely to be made at the end of 2011. At this stage, it seems the parliamentary elections together with the 2012 presidential race are discounted as mere formalities in Russia. But, in our view, there are reasons why these elections may in fact be no less significant than the choices made in the previous electoral cycle.

First and foremost is the longer duration of the new electoral cycle - starting from 2011, the term of service for Duma deputies will be extended from four years to five years; starting from 2012, the presidential term will be extended from four years to six years. One implication of the "longer electoral cycle" is that the parliamentary and the presidential cycle will become less synchronized. Secondly, the results of the parliamentary race may present important clues with respect to the longer-term propensity and the readiness of the political elite to allow for greater political competition, eg. mirrored by a two-party system.

Ultimately, however, the emergence of a two-party system is still a long-term political goal, while in the very near term most of the attention will focus on the choice of presidential nominee from within the tandem.

According to Levada Center, in October the popularity rating of President Dmitry Medvedev almost reached the level of support accorded to Prime Minister Vladimir Putin. Apart from the narrowing of the gap in the popularity ratings, there was also a notable catch-up exhibited by Medvedev in terms of the choice as a presidential candidate for 2012. The catch-up on the part of Medvedev is a direct function, in our view, of his stepped-up activism on the policy front in the second half of 2010. A crucial factor in September was Medvedev's key role in displacing Yuri Luzhkov from the post of Moscow's mayor - as we expected that brought some political support to Medvedev.

At this stage, we expect the following scenarios for the strategic choices regarding the 2012 presidential elections, which are most likely to be made in December 2011:

__ Putin as President, Medvedev as PM (50%)

__ Status quo: Putin remains PM, Medvedev as President (probability (35%)

__ Putin leaves the political scene, Medvedev as president (10%)

__ Emergence of "third force" (5%)

We think the return of Putin to the presidential post is the most likely scenario, and one, which we believe should not generate any significant changes in the markets. The positive scenario is for the status quo to remain for another six years, ie. for Medvedev to retain the presidential post for the 2012-2018 period, which would in turn provide significant scope for the liberal camp in the government to further increase its weight in the Kremlin. A negative scenario for the markets would materialize if Putin were to step down from the post of Prime Minister and exit the political scene altogether.

Throughout this year, some of the large-scale capital outflows that set in from the third quarter of 2010 and contributed so much to rouble weakness were ascribed in part to concerns on the part of the oligarchs that Putin's departure next year could lead to greater political instability and infighting between various groups in the political elite, including between the liberals and the hardliners. At this stage, however, we believe that such a scenario is unlikely, with a probability of just 10%.

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