Bloomberg News

Putin Must Beat Own Economic Record as ‘Golden Decade’ Ends

December 23, 2011

(Updates with Putin approval rating in 35th paragraph.)

Dec. 22 (Bloomberg) -- Vladimir Putin may be his own toughest competition in next year’s presidential race.

Putin, now prime minister, is trying to persuade voters he can repeat the performance of his first two terms in the Kremlin, when the economy grew at an annual average of 7.1 percent from 2000 to 2008.

Gross domestic product in Russia, the world’s biggest supplier of energy, may rise 4.5 percent this year, according to government forecasts, even after a boost from record oil prices. Russia’s main export blend of the fuel has averaged $109 a barrel in 2011, more than the $46 a barrel in 2000-2008.

Putin’s failure as prime minister to match the burst of growth under his presidency may push him to raise spending on favored groups, such as the military, to woo support before March 4 elections. United Russia, the party Putin chairs, won less than half the balloting in a parliamentary vote Dec. 4. Tens of thousands of people protested the following weekend in Moscow after international observers said there was evidence of ballot-box stuffing. More protests are planned for Dec. 24.

“His authoritarianism is precipitated on his ability to deliver increased welfare to a large portion of the society,” said Fredrik Erixon, director of the European Centre for International Political Economy in Brussels, in a phone interview. “If he doesn’t do that, his political model is going to be damaged.”

‘Golden Decade’

Putin’s ascent to the presidency in 2000 marked the beginning of a “golden decade,” Alexei Kudrin, who was finance minister during the entire period, said at a conference in Moscow last week. Spending surged fourfold on rising energy prices, leading to a 68-percent, 10-year rise in the economy, he said, adding, “That’s never going to happen again.”

President Dmitry Medvedev, 46, proposed in September that Putin, 59, return to the presidency. A showing of less than 50 percent in March would force Putin into a runoff. The premier says Medvedev, whom he handpicked to move to the Kremlin because of a constitutional limit on serving more than two consecutive terms, may now become prime minister.

Putin is almost certain to survive a runoff because voters remember how bad things were under former President Boris Yeltsin, said Michael Ganske, head of emerging-market research at Commerzbank AG in London, in a phone interview.

‘Strong Improvement’

“He’s a leader that after Yeltsin brought Russia back to power and economic improvement,” Ganske said. “The Russians traded off the lack of free speech and democracy. The majority still believes in a strong leadership. There’s been a strong improvement in average living standards in the last 12 years under Putin.”

Medvedev said in January that Russia should target growth of at least 8 percent annually within five years to keep up with the so-called BRIC countries, the largest emerging markets. Putin yesterday told a business lobby group that Russia would target expansion of 6 percent to 7 percent annually to make the economy one of the world’s five largest within five years.

The goal is also to lift per capita GDP to more than $35,000 from about $20,700 and create 25 million “quality” jobs “from scratch,” Putin told the group.

He also touted his economic record last week, including what he said was a 40 percent increase in pensions last year, in a 4 1/2-hour television program during which he answered questions from viewers around Russia.

‘Would Be Me’

Asked by a reporter after the call to use the skills he developed as a judo champion in the 1970s to identify his greatest challenger in the presidential poll, Putin said: “That would be me, probably.”

Growth rates have slowed since a collapse in global oil prices pushed Russia’s Urals crude blend from $143.50 a barrel in July 2008 to $32.34 five months later. The economy contracted 7.8 percent in the following year.

Urals crude is on track to average $109 a barrel this year, up from $78 last year and the previous record of $95 in 2008, according to data compiled by Bloomberg. Russia may be benefiting from unrest in the Middle East that toppled leaders in Libya and Egypt and prompted Saudi Arabia to boost social spending to quell potential violence.

Saudi Arabia’s fiscal break-even point jumped to $91 a barrel this year from $78 in 2010, Alia Moubayed, senior economist Barclays Capital, said yesterday in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “That obviously is related to the huge fiscal stimulus package that Saudi Arabia has put in place over the last year.”

Euro Threat

The sovereign-debt crisis in Europe threatens to reduce growth in the region, which accounted for 49 percent of Russian trade last year. Growth in China, which was responsible for another 9.5 percent, may slow to 8.5 percent in 2012, according to the median estimate of economists surveyed by Bloomberg.

Without the Middle East turmoil, oil could be about $70 a barrel, Ksenia Yudaeva, chief economist at OAO Sberbank, Russia’s largest lender, said in a telephone interview Dec. 14.

Net capital flows out of Russia may top $80 billion this year, Alexei Ulyukayev, a central bank first deputy chairman, told a conference last week. That’s more than double the net departure of $33.6 billion last year. It would bring the total since 2007, the last year of inflows, to more than $300 billion, according to central bank data.

New Spending

Higher political risk after this month’s election, which stripped United Russia of a supermajority in the parliament that had allowed it to change the constitution unilaterally, may spur additional outflows, Fitch Ratings said in a statement Dec. 19.

The new spending Medvedev is proposing for the military, including for equipment and salaries, will total 2.1 trillion rubles through 2014, or about 3 percent of GDP that year, Kudrin told reporters on Sept. 24 in Washington. He also announced he wouldn’t join a Medvedev-led government.

“That’s equivalent to the financing in 2011 for the entire education system, including every university, school and special educational institution,” Kudrin said. “I regret that this wasn’t adequately discussed at United Russia’s congress.”

Medvedev ordered Kudrin to resign two days later over his disagreement. On Nov. 4, he signed changes into law that more than doubled most military and police salaries effective Jan. 1 and raised their pensions by at least half.

‘Rainy-Day Savings’

For now, Russia can afford the expenditure, said Neil Shearing, senior emerging-markets economist at Capital Economics in London, in an e-mailed report yesterday.

“The government has $120 billion in rainy-day savings that it could unleash in order to buy back support,” he wrote.

Higher energy prices have benefited some of Russia’s largest oil producers, including OAO Lukoil, TNK-BP and OAO Gazprom Neft. They all forecast record profit this year. OAO Gazprom, the state-run gas export monopoly, will also have its most profitable year, according to projections compiled by Bloomberg. All have outperformed the benchmark Micex Index this year, as has the Micex Oil & Gas Index of 14 stocks.

Another plus for Putin is the low danger of inflation. Real wage growth slowed from an average 15 percent a year during his presidency to 1.6 percent since the beginning of 2009, according to data compiled by Bloomberg. Putin said yesterday that consumer prices will rise 6.2 percent to 6.3 percent this year. That would be the least since the collapse of the Soviet Union two decades ago.

‘Fortunate Situation’

“Putin is in a fortunate situation because inflation has been decreasing rapidly and will decrease further,” Aurelija Augulyte, a Copenhagen-based emerging-market analyst at Nordea Bank AB, said in a phone interview. “Right now, consumers are pretty confident, wages are increasing and inflation is decreasing. There are further promises of public-sector wage increases and pension hikes.”

That doesn’t encourage Boris Zhuravlyov, 68, a physiology professor who runs a laboratory at the Russian Academy of Medical Sciences. While he said his economic situation has improved by “maybe 25 percent” since 2000, “They’ve forgotten about us. There’s not nearly enough financing” for education and research.

Zhuravlyov said he voted this month for the Just Russia party, which calls for greater social spending, and hadn’t decided yet whom he would support in the presidential election.

Oil Revenue Constraint

Further pay growth for state workers may be constrained as Russia becomes more dependent on oil revenue. The minimum price to balance the budget is $115 a barrel, Capital Economics’ Shearing wrote, and may rise to $125 per barrel by 2015 based on increases in the draft budget for 2012-2014.

While the surge in capital outflows from Russia should be monitored, it doesn’t yet pose a threat to the country’s BBB sovereign credit grade, Fitch said Dec. 19. The nation benefits from a positive capital account, meaning it exports more goods and services than it imports, the company said.

Russia is rated Baa1 at Moody’s Investors Service, the company’s third-lowest investment grade. Fitch and Standard & Poor’s both rate Russia’s long-term foreign currency debt at BBB, their second-lowest investment level.

The Finance Ministry said in August that Russia was underrated because of its low public debt as a percentage of the economy and that it would strive to achieve an A rating. Gross government debt this year will be equivalent to about 11.7 percent of GDP and rise to 16.8 percent in 2015, the International Monetary Fund said last month. That is lower than any of the euro’s 17 members except Estonia.

Prokhorov’s Challenge

Putin’s approval rating fell to 63 percent this month from 67 percent in November and 79 percent a year ago, according to a poll by the Moscow-based Levada Center published today. The survey of 1,600 people, conducted Dec. 16 to 20, had a margin of error of 3.4 percentage points.

Moscow city authorities have authorized a rally for as many as 50,000 people for Dec. 24 as opposition parties and politicians seek to turn anger over the election results into a challenge for Putin’s re-election campaign. Kudrin and billionaire Mikhail Prokhorov, who is running against Putin in the race, have both said they may attend.

Prokhorov, who owns the New Jersey Nets basketball team and is ranked by Forbes magazine as Russia’s third-wealthiest person with an $18 billion fortune this year, would be a “worthy, strong competitor,” Putin said last week during the television program.

--With assistance from Stephen Bierman and Anton Doroshev in Moscow and Tom Keene in New York. Editors: Anne Swardson, Hellmuth Tromm

To contact the reporters on this story: Scott Rose in Moscow at rrose10@bloomberg.net; Agnes Lovasz in London at alovasz@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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