For the first time, Moody's Investors Service named “unorganised regime change” as one of the risks for the Russian economy in a ratings note on February 23.

Russians are becoming increasingly disgruntled as the standard of living continues to slide. The problem is that despite a controversial upgrade to 2.3% growth and a return to profit for the leading banks and companies, none of this has filtered down to street level. Real incomes were down again slightly in 2018 for the fifth year on the trot.

A pessimistic mood has settled over regular Russians, who have suffered from four years of austerity as the Kremlin sanction-proofs the economy and sacrifices prosperity for security. Trust in Russian President Vladimir Putin fell to 33.4% in January – a 13-year low – while those that think Russia is going in the “wrong direction” are now in the majority for the first time in years. 53% of Russians said in December that they want the government to resign, up from 33% in November, according to the most recent poll by independent pollster the Levada Center.

To head off potential social protests Putin just delivered a homely state of the nation speech on February 20 that was replete with social spending promises – largely targeted at families with young children, but not only, in an effort to make a visible difference to ordinary people’s lives. However, analysts remain sceptical that the Kremlin can hit any of the targets it is proposing, summarised in the May Decrees, and more disappointment could threaten the incumbents.

Moody’s agency analysts noted the growing dissatisfaction of Russians with the political system and possible problems with the transfer of power due to “Putin’s dominance” when (if) he steps down in 2024 as the Constitution demands.

But they added a violent change of regime is a long-term risk, and in the near future Russia will be more harmed by stagnation due to state domination in the economy and new US sanctions, the introduction of which Moody’s does not doubt.

The transfer of power to the new leadership will complicate the dominance of Putin in Russian politics, analysts of the agency write, as cited by The Bell. Russians are dissatisfied with the current political system: this is indicated both by the results of opinion polls and the results of the last regional elections, where even the presidential appointees found it hard to mobilise the electorate, according to a Moody’s report.

The dominance of the public sector, which Moody's estimates at 40–50%, impedes the growth of investment and productivity, creates unequal conditions for business activity, and aggravates the situation with the right of ownership and the rule of law. The state’s pre-eminence is especially noticeable in public utilities, mining, transport, finance, electronics and equipment manufacturing. A separate problem is the low quality of Russian institutions: endemic corruption and the weak rule of law, an ineffective judicial system and a significant influence of the authorities on the business environment.

Moody's notes separately the risks for the strong Russian IT sector, which from 2008 to 2018 enjoyed a 2.5-fold increase in exports of computer and IT services. According to analysts, “government intervention, which ranges from the alleged involvement of cybersecurity firms in espionage to the forced transfer of control over successful startups to people close to the government, threatens its viability.”

Moody’s has no doubt about the introduction of new “crushing” sanctions against Russia that were delayed by Washington last year. These may include sanctions against specific oligarchs close to the Kremlin, their enterprises, structures involved in the construction of the Nord Stream 2 gas pipeline, the new and existing sovereign debt and dollar settlements of Russian state banks.

Sanctions could disrupt the auctions by the Ministry of Finance of its workhorse OFZ bonds and impair the government’s ability to finance itself. That would lead to a "structural gap" on the public debt market and the depreciation of securities. If public finances deteriorate due to unexpectedly harsh sanctions, Moody's could lower Russia's credit rating, the agency said. But the negative effects will be temporary, experts say: sanctions will can damage the key elements of the Russian loan portfolio, which is in a robust state. Putin announced, for example, in his February speech that Russia can cover its external debt dollar-for-dollar with cash now for the first time ever.

The consequence of fears of external shocks is capital outflow, which Moody’s calls the main external risk. Russia has seen over $500bn leave the country since 1994 and enjoyed net inflows for only two years – at the height of the boom in 2006 and 2007.

In the last few years Russia has been losing a modest $20bn a year, but in 2018, capital flight began to accelerate again due to investors' fears of external shocks. The current outflow is unlikely to reach the highs of 2014, but new sanctions and other external shocks can accelerate it.

The demographic decline is another key internal risk: a reduction in the number of the working-age population while simultaneously the baby boomers from the 1960s start to retire, restrains economic growth. In 2018, for the first time in a decade, the influx of migrants did not compensate for the natural decline in population, down by 93,500 people. Labour shortages can be mitigated by attracting migrants from Central Asia and Ukraine, attracted because of socio-economic instability and military conflicts at home.

The closer the year 2024 comes, the greater the uncertainty over the transfer of power and the more that will concern business. Moody’s first mention of an unorganised change in regime is the signal of the related problems, suggests The Bell: the countdown begins. In the meantime, news of new sanctions will remain the main market-moving news.