COMMENT: RUSSIA VOTES: A known unknown

By bne IntelliNews September 21, 2011

Roland Nash of Verno Capital -

At some point in the next five months, it is likely that we will know the identity of Russia's president for at least the next six, and quite possibly 12, years. While the presidential elections in March 2012 will no doubt generate tremendous noise, the actual uncertainty is minimal. The only two plausible candidates, Prime Minister Vladimir Putin and President Dmitry Medvedev, are well known and can cause few surprises.

While markets at this stage would probably prefer the more western-friendly Medvedev, we believe that policy direction is likely to be similar under any realistic electoral outcome. As we explain below, stability and economic growth are the two main priorities for whoever is in power. Success in Russian politics requires the perceived strengths of both the more liberal-minded Medvedev and the more conservative Putin. Both candidates are therefore likely to appoint a prime minister who would reflect the perceived strengths of the other, producing a tandem of power similar to that which has existed since 2000. Even in the improbable event that a surprise third candidate is announced, it would be unlikely to result in a major change in policy priorities.

The parliamentary elections scheduled for December 4 will likely prove more competitive. The dominant incumbent party, the United Russia Party, is unlikely to win the super-majority it currently enjoys, and may struggle to gain a simple majority of seats. Other parties may be formed to benefit from the support of the Prime Minister and President. Duma elections may therefore prove to be rather more political than the presidential elections. Nevertheless, it remains probable that while the composition of the Duma might be different, its support of the President will be little diminished.

Although Russia's democracy is decidedly "managed", popular opinion matters. The key to Vladimir Putin's remarkable concentration of power since 2000 is his continued popularity. He has been able to deliver on economic growth and stability, although both have been shaken since 2008. As we illustrate in this note, the population is becoming increasingly fed up with the performance of government. Whatever the political landscape looks like, the next President will have to both improve government and ensure that living standards rise.

Markets may react to the headlines, but the removal of political uncertainty should create a positive underpinning to performance. Below we describe what we think is likely in both the presidential and parliamentary elections, and also look at what matters to Russian voters and how this is reflected in policy.

Choosing the president

While presidential elections are not until March 4, 2012, the overwhelming favourite will be whoever receives the backing of the state. In practice, that choice will likely be announced before the end of the year, possibly at the United Russia conference scheduled for September 23-24. At that point, barring a lot of noise and newspaper print, much of Russian electoral risk will be removed until at least 2018 and quite possibly 2024.

The only two realistic candidates at this stage are Prime Minister Vladimir Putin (age 58) and President Dmitry Medvedev (age 45). This reflects first and foremost the remarkable sustained popularity of both politicians, at least relative to any of the alternatives. While there has been some dip in recent months, the approval rating of both Putin and Medvedev is still around 70%/

The poll results should not, however, be interpreted as widespread satisfaction with the status quo. Russians are becoming increasingly frustrated with the way in which their country is being run. For the first time since Vladimir Putin became PM in 2008, more people disapprove of the government than approve.

So despite frustration with the way in which Russia is governed, Russians continue to support Putin and Medvedev, the two heads of government. This apparent inconsistency is not because of any naivety about the scale of the issues which Russia still has to address in our opinion, but rather out of cynicism about the prospects of anyone else doing any better. To see why, it is important to understand what are the concerns and issues of Russians in 2011.

The issues - all about economics

Despite the international focus on demographics, corruption and the Caucasus, the overwhelming concerns domestically are economic. Consistently, income, unemployment, and inflation have topped the list of what matters in Russia.

Given the focus on economics, it should be no surprise that the 2008 crisis and its aftermath have resulted in increasing dissatisfaction. After nearly a decade of strong economic growth between 1998 and 2008, the sharp downturn and slow recovery have caused people to become increasingly pessimistic about their economic future. Pessimism about the outlook for what matters most in Russia likely explains why the approval ratings of the government are falling. Russians are becoming increasingly frustrated with the inability of the government to deliver on economic prosperity.

Stability first

While pocketbooks dominate voter preference on a day-to-day basis, the over-arching concern of Russians since the late 1980s is stability. In the 1990s, Russia lived through a decade of instability. There were two bouts of hyperinflation, three currency collapses, two defaults, several banking crises, and a precipitous drop in living standards. The constitution was changed twice, the parliament regularly attempted to impeach the president, there were six different PMs, and an attempted coup. Boris Yeltsin shelled the government from the turret of a tank and was physically incapacitated for most of his last two years in power. By the beginning of 1996, his approval rating had dropped to 6%.

It was only in 2001, one year into Putin's first presidency, that more Russians believed they lived in a "quiet" country than lived in a country that was "explosive". It was only in 2007, a year before the crisis, that more Russians believed they lived in a "quiet" country than in a "tense" country.

Role of the state

The combination of the desire for economic improvement within an over-arching concern for stability perhaps explains the ambiguous attitude of Russians to the role of the state in the economy. While there is little naivety about the inefficiency and corruption in government, Russians would still prefer a larger role for the state in the economy. Nearly one-third of Russians believe that those surrounding Putin are more concerned with personal material interests than with problems in the country. Of the five people popularly believed to be most wealthy in Russia, four are politicians. Yet at a time of crisis like 2008, there is a clear desire by the population for an increased role of the state in the economy.

Russia does not seem to share the particularly Anglo-Saxon belief that the best way to decrease inefficiency in government is to decrease government. Russians do not necessarily believe that left to its own devices, the market will improve living standards. Given the experience of the 1990s, there seems to be a strong desire for the state to play a larger role in the economy. Moreover, the relative weakness of Russia's democracy means that people do not expect government to be as responsive to majority opinion. With their track record of economic growth, Putin and Medvedev are perhaps still viewed as best able to improve the government without igniting instability.

Stability vs. Growth

The long-term objective of much of government policy is to restore Russia to what it considers its natural position as a major global power. In the modern world, it is widely understood in government that the main source of power is a large economy. Equally, there is a strong general understanding across government that the only way to deliver long-term economic growth is through the private sector allocating resources; the Soviet experiment proved that a state-run economy can't deliver the necessary growth. The technocrats charged with creating economic policy fully understand that for the private sector to deliver growth, the weight of the state must be reduced. But because of the experience of the 1990s, the country as a whole does not fully trust the private sector without state involvement.

Balancing the popular desire for a strong state with the equally popular demand for economic growth, which only the private sector can deliver, explains much of the apparent conflict between the Kremlin and government. It also explains why it helps to have two people running the country with apparently different objectives. One is able to address the issues of the majority of the Russian population, while the other is able to reassure the business and investment community. When there are two competing national objectives, it is beneficial to have two heads of power. Whether Medvedev or Putin will be president, it is likely that they will share power with a PM who reflects the conflicting demand. If Putin becomes president, we should expect a liberal PM; and if Medvedev is president, a more conservative PM.

Who will be president?

As should be clear from the above, on the big question of who will be Russia's next president, we are largely ambivalent. We do not expect much change in the direction of policy under either outcome. But markets clearly will trade on the news, probably in a negative direction if Putin is announced as the candidate, and probably positively if the candidate is Medvedev.

We suspect it will be Putin. He is the country's popular choice for president, there is no legal or constitutional barrier to him running, and he clearly has the organization behind him to make his bid for presidency the least destabilizing of any candidate. Whether Putin becomes Russia's next president, therefore, is really up to him. As with politics anywhere, it is usually a good bet to assume that relatively young, healthy, popular politicians do not voluntarily step away from power.

Relationship between president and PM

The power-sharing between Russia's two most powerful politicians has varied greatly over the last two decades. Originally, under Russia's first constitution, the majority of power was firmly with parliament, leaving both the PM and president dependent on the Duma. Frustration at the inability to enact rapid reforms pushed Boris Yeltsin, Russia's first president, to go to the people and force a change to the constitution in 1993 to one in which power was more firmly in the hands of the executive branch.

Under Boris Yeltsin, the role of the PM was as an intermediary between the Kremlin and the Duma. Without the support of the Duma, the president had to use constitutional threats and the persuasiveness of his PM to force through legislation. Under President Vladimir Putin, the PM was, like all other centres of power, little more than a rubber stamp against the all-powerful President. Under President Medvedev, the Prime Minister has been arguably the most powerful politician in the country. Certainly that is what the public believe.

The significance of the presidential elections therefore depends in large part on the relationship between the President and his Prime Minister. There are three factors which are most important in determining the relationship:

1. The Constitution

Under the 1993 constitution, the President has the right to fire the Prime Minister and to nominate his successor. A majority in the Duma must then accept the nomination. The Duma can refuse a nomination twice in succession. If the Duma refuses for a third time, the President must call new Duma elections. After a new Duma is elected, the President cannot call new elections for 12 months, potentially creating deadlock between the two powers.

2. The Duma

If a majority in the Duma supports the President, the position of the Prime Minister is greatly weakened. He can be hired and fired more or less at will. If, however, the Prime Minister is supported by a majority in the Duma, then the relationship is more balanced. The Prime Minister has the resources to create policy and the support of Parliament to implement it. While the President can veto legislation, it can be overturned with a two-thirds majority of Parliament and the Federation Council. If the President attempts to fire the Prime Minister, he risks the political uncertainty of elections and, ultimately, deadlock.

3. Personality

While Russia often fares badly on many so-called independent measures of democracy, interest groups outside of the executive and legislative branches play a major role in Russian politics. If either the Prime Minister or the President has independent support among some of the business elite, regional governors, the security services, the general population, the armed forces, the Orthodox Church, the judiciary, or the media, he is able to influence policy and his relationship with his counterpart at the head of the executive branch. All three of Russia's post-Soviet presidents have had success with a range of the interest groups in Russian politics, with Putin probably being the most broadly successful. His ability to court and control a wide range of interest groups is another reason he has been the most powerful Prime Minister in post-Soviet Russia.

Russia is often described as having an all-powerful presidency and when Vladimir Putin was President, this seemed largely true. All other branches of power were effectively under the control of the popular President, who also enjoyed the full support of the Duma. But at other times the situation is far more nuanced. If the Prime Minister enjoys the support of a disciplined majority party in the Duma, and if he is independently popular among both the population and elites, then power shifts towards government and the Prime Minister. The decision of Putin to run as President will therefore partly depend on whether he is able to secure a majority in the Duma elections.

Parliament - process and incumbents

Parliamentary elections are likely to prove considerably more competitive than those for the presidency. Rather like the government, the Duma is more closely associated with the day-to-day muddle of Russia's economy than the President, and therefore more liable to criticism. In particular, there is substantial dissatisfaction with the incumbent Party of Power, the United Russia Party.

Elections to Russia's lower house of parliament, the Duma, are scheduled for December 4th this year. As it stands, the current Duma is split into four parties ("fractions") and is dominated by the United Russia Party, which enjoys 70% of the seats. Three of the parties (United Russia, Liberal Democratic Party of Russia ("LDPR"), and Fair Russia) share as their principal strategic vision unwavering support of Vladimir Putin. The only real opposition party is therefore the Communist Party, which is seeing its support slowly wane over time.

Currently the term for elected officials in the Duma is four years. Constitutional amendments in 2008 extended the term to five years beginning with the Duma to be elected this year. The 450 seats in the Duma are assigned exclusively through the party list system. Anyone who leaves a party automatically forfeits his seat. Beginning in 2005, election to the Duma was determined exclusively through proportional representation ("PR"), with each party assigning seats based on the hierarchy of their party list. The position on a party list occupied by a potential Duma candidate is therefore important, and tends to generate significant internal competition. Finally, there is a 7% minimum threshold for a party to reach before it is assigned any seats in parliament3. The combination of a party list system, PR, and the 7% minimum threshold has concentrated seats among a small number of larger parties since 2005 (see Figure 12).

Duma Elections 2011: Likely Outcome

The politics of the Duma election will likely focus on how to ensure a continued majority to support the government. There are several options, although all are risky. The first is for the President and Prime Minister to support United Russia and restore its popularity. The second is to ditch United Russia and form an entirely new political party. Rumors abound of an All Russian National Front bloc to be launched. The third is to start several new parties and cover the available political spectrum with loyal parties. The most likely outcome is a combination of all three.

Support for United Russia, the dominant force in the current parliament, has decreased substantially. From a peak of 42% support, United Russia is now polling around 30% (see Figure 13). While a concerted campaign would see support rise leading up to the elections in December, it is unlikely that even the highly effective Kremlin election machine can restore confidence in United Russia. The Party is unlikely to dominate the next Duma as it does the current. In particular, it is very difficult to see it reaching the super-majority of 66% of seats that is needed for a constitutional amendment.

The main determinant of the potential electoral success of United Russia is likely to prove whether Vladimir Putin chooses to head the party as he did in 2008. This decision will be officially announced at the annual council of United Russia on September 23-24. If Putin chooses not to support United Russia, then it is likely he will form the new bloc, pulling the best aspects from United Russia, and adding to them his natural support base.

Under either circumstance, and despite the loss in popularity of United Russia, pro-Kremlin parties look set to enjoy a similar dominance in the next parliament as they do in the current. The latest polls suggest only three parties would gain the necessary 7% to

cross the minimum threshold - United Russia (30%), the Communist Party (13%) and the LDPR party (8%). Those numbers would translate into a parliament where United Russia held 59% of the seats, the Communists 25%, and the LDPR 16%.

The other two parties that have any realistic chance of gaining seats are the pro-Putin Fair Russia party (particularly if it receives the explicit support of Vladimir Putin) and the liberal party of Union of Right Forces ("URF"). The URF was, until recently, unelectable but is now headed by one of Russia's best-known (and richest) oligarchs, Mikhail Prokhorov. The combination of name recognition and financial clout means that the URF has a chance of breaching the 7% barrier. While much is often made of how leading liberals in Russia find it difficult to gain political influence, they are genuinely unpopular. Two of the best-known liberals, Mikhail Kasyanov and Boris Nemtsov, were recently unable to register as leaders of the URF for the upcoming elections. It has been speculated that they were refused registration because the government did not want to see them in the Duma. But it is just as likely that they couldn't register because they are unelectable. With Prokhorov heading the liberals, the URF may get into the Duma, which would add some balance in parliament and actually make it easier to pass some of the more technical legislation that the government wants to see implemented. It is suspected that Prokhorov has at least the implicit support of the Kremlin behind him, and is, effectively, the liberal wing of a managed democracy.

Russia's next parliament is therefore likely to look quite different from the current one. However, it will share as its main political objective continued support for the government. Politics both within the Duma and between the Duma and the government may be more active, but the next Duma is unlikely to prove a major barrier to policy implementation. Perhaps the biggest change might be that if the government begins to lose popularity should the economy stop growing, for instance, the Duma may again become a political force.


While presidential elections are likely to gain a great deal of media attention in coming months, we do not expect much mystery surrounding the outcome. Once it has been decided whether Vladimir Putin or Dmitri Medvedev will stand as the official presidential candidate, most of the electoral uncertainty will be over. Moreover, while there is some difference in style between the two candidates, we do not believe that there will be much shift in strategic direction. For better or worse, most of the major decisions about the direction and speed of policy have already been taken.

Parliamentary elections are somewhat less clear cut. United Russia is not supported by most voters, and will struggle to legitimately gain a majority in the next parliament. While the government is likely to continue to enjoy the support of a large majority within the Duma, it is likely to be spread across a number of parties. The Duma elections may therefore prove to be somewhat more competitive than the presidential elections, and the next Duma somewhat more political.

The major risk for Russia is the impact of external events on the domestic economy shaping domestic politics, as we saw in 2008. This would be particularly true if the next Duma was more pluralistic than the current. The actual risk of domestic politics, even in election season, is minor. While this peculiar form of democracy may disappoint some in the West, Western democracy has tended not to enjoy majority support in Russia (see Figures 14a and 14b).

Roland Nash is Chief Investment Strategist of Verno Capital

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