Abstract
BMI ' s core scenario for Russia is decidedly bleak with an economic
contraction of -4.0% for the fullyear.
It is important to stress that even
with this well below-consensus forecast, we continue to highlight
downside
risks. With Urals oil set to average just under US$43/bbl over the course of
the year, the
country' s external and fiscal dynamics are set to worsen
considerably. The current account, which posted
large surpluses since 1999
is forecast to fall into deficit by 2010 while the federal budget is expected
to
flip from a 4.0% of GDP surplus to a 6.8% shortfall. Even more worrying
is the lack of stability of the
banking system.
While it is already
clear that Russia is headed for a recession, these factors suggest to us that
the risks of a
systemic crisis are concurrently rising. The key question
to ask for Russia is, ' Does the government have
enough ammunition to
ensure banking system and credit market stability while simultaneously
providing
the fiscal stimulus necessary to avert a very deep economic
contraction?' While BMI ' s core scenario is
that the answer is ' yes' at
least through 2009, we caution that amid the current global market volatility
and
unprecedented levels of deleveraging, that there are very real
negative risks to this view. We stress that
there are multiple
inter-related factors which could drive the economy toward a crisis risk
scenario at an
accelerated pace.
We have lowered Russia' s short-term
political risk rating (STPR) to 62.9 to take into account the
increased
likelihood of the deterioration of social stability in 2009 and beyond. With
unemployment set to
rise back into the double digits, concurrent with a
marked erosion of purchasing power resulting from a
27% depreciation of
the rouble (versus the dollar-euro basket it is managed against, from its June
2008
peak), there will be significant potential for public dissatisfaction
to increase rapidly. Already, at least one
major government policy action
has directly resulted in large public demonstrations. The decision to
increase the tariff on imported automobiles on December 9, 2008, resulted in
protests in several major
cities, the largest of which occurred in
Vladivostok on December 21. More than 100 people were arrested
at the
demonstration by special Interior Ministry security forces, specially flown in
(under direct
command) from Moscow.
Especially worrying is the
potential impact social instability will have on policy continuity and
certainty.
We believe that the most significant foreign policy precedent
of the war applies mainly to what Russia
refers to as its ' near abroad' .
By establishing that it is willing to breach national sovereignty, Moscow
has
sent a clear message to capitals throughout the CIS, Georgia and
Ukraine that its core strategic interests
should not be ignored.
As a
result of the growing internal conflict in the North Caucasus, Russia has
decided to place greater
operational emphasis on Special Forces.
Developments in Chechnya in 1994 and 1999 showed Russia
that regular armed
forces were not able to deal with the low-level conflict, and that, more
importantly,
conscripts were not able to deal with the rigour of an
insurgency. What was needed was a professional
force dedicated to dealing
with insurgencies. Russia' s State Weapons Programme 2015 underwent
refinement in 2006. The main aim is to provide Russia with a modernised
nuclear deterrent force and to
enhance the army' s poor public image. The
armed forces were reduced by 200,000 in 2005 in a bid to
professionalise
the Russian army.
Russia maintains a massive defence industry that,
despite pain associated with modernisation,
restructuring and excess
capacity, supports a thriving export industry. Russia is at least challenging,
if not
surpassing, the US in terms of total defence industry exports. In
2008, Russia exported US$7bn worth of
military items and the government
arms-exporting agency Rosoboronexport expects foreign military
sales to
remain at that level through the next several years.
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