COMMENT: Looking for a stability mechanism as Putin era ends

By bne IntelliNews November 1, 2007

Chris Weafer of UralSib -

The momentum to persuade Russian President Vladimir Putin to stay for a third consecutive term has intensified again. Putin remains firm that he will not allow the constitution to be altered, so it is difficult to see how the campaign will succeed. But the issue does highlight that the ending of Putin's presidency - an eight-year period when the value of the economy grew five-fold and the stock market (RTS) rose by 1,150% - is a cause of concern for people in Russia just as much as it is for investors.

Opinion polls, which are now emerging in deluge fashion, reflect that people will support any transition mechanism that ensures both a continuation of stability and of the policies and factors that have led to the improved environment existing in Russia today. For most people, that means Putin staying in a high profile and powerful role. There is still no clarity as to what the actual mechanism to facilitate this would be, but for the investment case that matters less than the assurance that there will be such a mechanism.

The Russia-EU summit in Portugal in October threw up no surprises. The only major deal was the raising of Russia's steel import quota. The meeting did, however, take place against a backdrop where both sides appeared to indicate that compromise on several major issues is possible. The completion of the consortium that will start the Shtokman project - a gas deposit which will be very important for the EU's energy security in the early part of the next decade - just prior to the summit was in keeping with that. Investors will now hope for evidence that a follow-up on the other issues will now take place and that pragmatism will balance out political emotion.

Campaign for third term

The campaign to persuade Putin to stay on for a third consecutive term hasn't died away, rather it has been reinvigorated. Last week there were several large-scale rallies in cities across Russian calling for Putin to agree to a new mechanism that would allow him to remain, despite Putin being adamant he won't support a change in the constitution. The de-facto leader of the campaign is the speaker of the upper house of parliament, Sergei Mironov. Last week he said that the campaign is not off the agenda and he is examining possible mechanisms that would allow a third consecutive term without breaching the constitution.

In the past week there have also been rallies in Chechnya (with a slogan "let's give a third term to Putin") and Tver. In Tver, the organising committee called "For Putin initiative group of citizens." Similar rallies have taken place in at least half a dozen cities and more are planned. With the election period now in full swing, the main issues are: who will replace Putin and what role will Putin have with, or around, the new administration?

Behind that is a widely held belief that the next administration will be only an intermission until Putin returns to the Kremlin; hence the campaign to skip the bit in the middle and stick with what has worked. The widely reported possibility of infighting between opposing groups at the top of the administration only serves to bolster public resolve that maintaining the status-quo is preferable to the possibility of instability. In a poll, 57% of people (up from 53% two weeks ago) said that if the elections were held next week - and the president was to stand - they would vote for Putin.

Opinion polls are being conducted with increasing frequency, with many of them focused on Putin's role after the March election. There are, in fact, so many polls that their efforts to try and find a subtle variation of the central theme are becoming almost confusing. The main message from all polls, however, is clear: people approve of Putin's tenure as president and they would prefer him to stay. In saying that, they will support whatever interim role he takes and the interim government structure, but in the main, they expect Putin to return as a future president.

A poll by the Public Opinion Foundation (FOM) shows that 83% of people are now aware that Putin will head the United Russia list at the December 22 Duma election; this figure is up from 61% about two weeks ago. Of those polled, 54% said that they also approve of Putin's plans (albeit the majority are not too sure of what they are), while only 4% expressed a negative view. At the same time, and apparently in conflict with the desire of people who want Putin to stay, a survey by the Levada Center shows that people are against the concept of "personality cult leadership", although the majority do not see Putin in this light. The majority see Putin as a stabilizing figure doing a very good job, rather than a cult figure. There are 22% of those polled who said they did see a personality cult already in place (up from 15% in April, and 10% 18 months ago); another 27% said that they do not yet see a personality cult, but accept that one is possible. The number of those polled who did not see any sign of a cult following is 38% (down from 57% in March last year). Therefore, while the majority are still not worried about such a development, more and more people are beginning to acknowledge that one may exist.

The most recent opinion poll was carried out by the Levada Center. Assuming Putin doesn't stand, the results are as follows:

1) Dmitry Medvedev 26% (down from 30% last month)

2) Sergei Ivanov 25% (a drop from 34% last month)

3) Vladimir Zhirinovsky 19%

4) Viktor Zubkov 13%

5) Gennady Zyuganov 12%

Of course the critical factor is that surveys show that a majority of people will vote for the person that Putin discloses he will vote for. Asked by a journalist in Sochi last year if he would back a candidate, Putin answered that while he is against nominating a successor, he has the right as a citizen to choose his favourite candidate and he will make that choice known. The full list of presidential candidates will be known by the end of December and that is when Putin may informally make his preference known (informally but a headline in the media one nano-second later). Hence, the current opinion polls are not really indicative, as Putin's choice will have an immediate and probably dramatic effect.

Duma elections - heading for two parties?

According to Prime Tass, the Central Election Commission has registered 11 parties to contest the Duma election. Three out of the original 14 were refused, including the Green Party. Also excluded from the Duma election was the party of ex-prime minister Kasyanov. The Central Election Commission also said the total number of people eligible to vote in the December 2 elections is 107m, or 74% of the population. Amongst the changes to the election process this time (the most important of which is that the raising of the minimum threshold share of the vote for parties to be allowed take any seats in the new Duma to 7% from 5% last time) is that voters will be invited to their respective polling stations in advance of election date to make sure they are properly registered, etc. The other news concerning the Duma elections is that the number of OSCE observers invited to monitor the election process will be reduced to a few dozen, while over 400 attended the December 2003 elections.

The most recent opinion poll for the Duma elections show support for United Russia to have risen to 68%, up from 55% in September, according to the Levada Center. The Communist Party will poll at 17%, down from 18%; we do not think any other party can presently expect to clear the 7% minimum threshold. Support for the LDPR is reported at 6%, down from 11%, and a Just Russia's share is at 4%, down from 7% in September.

Does it matter for investors if only two parties actually form the next Duma? For the next presidential term the answer is no. The most important factor is that the government is assured of parliamentary support for getting its legislation passed and that it controls the various committees. Even if all four of the major parties passed the threshold (none of the other seven parties stand any realistic chance of passing the 7% threshold according to the polls), the LDPR and A Just Russia would also be likely to vote for the government on all key issues. The only real difference is that the floor of the Duma will be a much quieter place if only two parties are represented. But given the leader of the LDPR, Vladimir Zhirinovsky, has been polled at 19% in recent presidential polls, we should assume his party will perform better.

Russia-EU summit - as expected

The Russia-EU summit in Portugal went pretty much as expected last week. And while there were few deals actually agreed, the tone of the meeting was much better than that of the May summit in Samara. The only major deal signed was that which allowed an increase in the quota of Russian flat and long steel products imported into the EU. In 2006, the quota was 2.4m tonnes, while this year it is set at 2.9m tonnes and will rise to 3.03m tonnes. The EU depends on Russia for 15% of its steel imports.

While there was no substantive progress on the other contentious issues, such as energy cooperation and the continuing ban on Polish meat, there were indications that previously intransigent positions have softened a little and offer the prospect of deals to resolve these issues before Putin leaves office next May.

Chris Weafer is Chief Strategist at UralSib

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