Abstract
Russia is in the midst of a very deep macroeconomic crisis, and we now expect
the economy in 2009 to
contract by 7.1% in real terms, with risks weighted
to the downside. This will be a domestic demanddriven
recession, but
contextualised within a wider global capital shortage. As Russia continues
to
experience net capital outflows, domestic credit conditions will remain
highly constricted through to at
least 2010, ensuring a prolonged
contraction in gross fixed capital formation and private consumption.
Economic conditions continued to worsen in Russia through Q109, confirming our
view that the Q308
financial crisis would have severe consequences for the
real economy in 2009. While no official GDP
figures for the quarter have
been released, Russian Deputy Economy Minister Andrei Klepach stated on
April 23 that the economy likely contracted by 9.5% year-on-year (y-o-y). If
confirmed, this will mark the
largest decline since the post-communist
economic transition. On the back of the estimate, we have
further revised
down our full-year real GDP growth forecast for Russia and now expect a
contraction of
7.1% – a worse outturn than experienced during the
last major recession in 1998.
While through to the end of 2008, it was the
external sector that was predominantly impacted, weighed by
the collapse
in oil prices through H208, in 2009 we expect the feed through to reach
domestic demand.
Ultimately, the underlying problem in the Russian economy
is a capital shortage. The sharp drop off in
energy export earnings tied
to weak commodity prices has slashed the current account surplus to
multiyear
lows and, by extension, foreign capital available in the
economy. This, though, has been accentuated
much further by the net
capital outflow recorded through investments and external lending.
We have
lowered Russia' s short-term political risk rating to 62.0 on the back of the
spike in
unemployment in April. In comments made on May 26, Russian
President Dmitry Medvedev cautioned
the cabinet on making overly
pessimistic statements on the state of the economic outlook. He
specifically
referred to comments made by Finance Minister Alexei Kudrin
who had said that Russia would not
experience the same favourable economic
conditions (seen in 2002-2007) for over 50 years. Calling the
finance
minister' s statement ' unacceptable' , Medvedev also stated that Kudrin may wish
to seek
employment elsewhere. We have long cautioned that divisions within
the senior levels of government in
Russia were likely to rise alongside
the global recession, and these latest statements reinforce this view.
We
maintain that there are high risks of a cabinet shuffle.
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 the 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.
This quarter, we have introduced a
significant new aspect to BMI' s defence reports, which is the City
Terrorism Rating (CTR). This assesses the risk of a terrorist attack. The CTR
takes into account the
overall BMI Terrorism Rating for the country in
question. It also incorporates the ' prevalence' of
terrorism, which
recognises the frequency of attacks and whether the city is a target for
terrorists. The
CTR also recognises the ' threat' of terrorism in terms of
the likely numbers of victims and the ability of
groups to launch
sustained campaigns. In Russia we assess the CTRs for Moscow and St
Petersburg. Both
cites score lower ratings (62.5 and 55.0, respectively)
than the country as a whole. Also both are located
towards the lower end
of the cities ranked to date. Moscow is ranked at 23 out of the 32 cities
rated and St
Petersburg even lower at 27th.
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