Fishing for votes with Russian economic policy

By bne IntelliNews June 15, 2011

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The press may be obsessed with reading the runes trying to decipher which of the Medvedev/Putin tandem will take the top spot in the Kremlin next year, but the powers that be are more concerned with making sure they get the constitutional majority in this year's Duma elections needed to maintain a tight enough grip on the levers of power to carry out their long-term strategies.

Campaigning for the twin Duma and Presidential elections in December and next March respectively has kicked off, and sound economic policy has already been sacrificed. Two groups are the first in the Kremlin's crosshairs when it comes to geeing up Russians to vote the way they're supposed to.

"The most important demographic ahead of elections is Russia's 40m pensioners and 15m state-sector employees, who account for around 40% of the population," says Natalia Orlova at Alfa Bank. The twin pillars to boost support are tried and trusted: a clampdown on inflation and raised spending.

This year's election-led policies are almost a carbon copy of the last time round. Pensioners and public servants like teachers have already had at least one pay rise this year, and more may be on the slate.

Prime Minister Vladimir Putin recently reiterated a target pensions/wages ratio of 40%, "implying possible pension growth of 25% y/y versus the budgeted 10% y/y," in 2011, points out Orlova. Yet after several hikes, the terribly inefficient pension system is costing the budget dear, having helped increase the breakeven oil price from $34/bbl in 2007 to $120/bbl this year.

At the same time that social spending is rising, inflation is being stomped artificially, with perennial favourites - food and petrol prices - in the spotlight again for this election round. Grain exports were banned following last year's fires to ensure there were adequate domestic supplies, whilst the Kremlin has lent on petrol producers to keep price increases low, even as the cost of crude soars.

These measures come alongside traditional restrictions on gas and power tariff increases - despite the Kremlin's own massive investment plans in key infrastructure sectors - with both Gazprom and the electricity sector facing pricing curbs.

All of which leaves the economy footing the bill for the authorities' election bid, with the likes of Gazprom also being hit with increased taxes to help pay for the social spending. There is also talk of large increases in oil taxation (reversing pre-crisis talk of cutting taxes to allow more investment into new fields), whilst business across the sectors was walloped by January's hike in payroll taxes from 26% to 34%. Analysts say that the hike was too big, and has done real damage to economic growth - to the point where the Kremlin is insisting on adjustments already.

"The government's social policy is aimed at transferring wealth from the real sector to the general population," says Orlova, noting that the payroll tax rise was implemented specifically to narrow the pension fund deficit. And that of course will win votes.

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