By Robert M Cutler
MONTREAL - Russian Prime Minister Vladimir Putin appears set to secure a return to the presidency this weekend, with the strong possibility that in spite of growing anger against his hold on power he will win Sunday's election in the first round of voting, without the need to go to a run-off.
While the run-up to the poll has been dominated by anti-Putin street protests, voters are in fact benefiting from an economy that grew at a 4.3% rate in 2011 over 2010, equaling 2010's rate of growth over 2009. Reflecting that expansion, consumers are spending more - circumstances that in many economies would reflect positively on those in power. However, the present strength in the economy masks important weaknesses.
Last year's growth was thanks mainly to a bumper crop in the agricultural sector and strong consumer spending, the latter showing a particular boost in the last six months of the year. Increasing investment figures throughout the year and low overall inflation also contributed.
The positive economic data has continued into 2012. Industrial production in January rose 3.8% over January 2011 despite weak external demand, exceeding consensus expectations of slightly under 3% that were based on December's weak 2.5% result. Meanwhile inflation fell to 4.2% year-on-year in January after the whole year 2011 registered 6.1% inflation, the lowest full-year inflation figure of the post-Soviet era.
However, observers have widely remarked that a strong contributing factor to the low January figure is the postponement of planned increases in household gas and utility bills until July, several months following the March 4 presidential election.
Inflation is generally expected to return in the second half of the year after government price controls give way to increased fiscal spending. The Central Bank of Russia (CBR) is targeting a range of 6-7% for inflation for the whole of 2012.
Russia's reliance on energy exports is a worrying link in the economy. Increasing amounts of commentary, including in Russia, draw attention to the fact that even in the medium term the country cannot continue to rely so heavily upon foreign exchange from such exports as it has done up until now. Oil proceeds now account for a quarter of Russia's gross domestic product (GDP) and nearly half of its federal budget.
It is generally agreed that balancing the budget requires a Brent crude benchmark price of US$125. (As of this writing, it is just under $123.) According to Mikhail Dmitriev of the think-tank Center for Strategic Research, as quoted in the Financial Times, "At prices below $80 per barrel, this system would receive a blow from which it could not survive."
When the world oil price collapsed in 2008, the Russian government pumped $200 billion into the economy that it had saved from past oil revenues. Even if Putin could survive politically and achieve re-election to serve into the next decade, Dmitriev observed that all "reserves of public trust ... have by now almost been exhausted. ... Most likely the authorities [would] face much larger and more widespread public protests" if a commodity price crash brought on another global recession.
Such a development would likewise kill the recovery in the Russian stock market, doubtlessly exacerbating the discontent of the middle classes. The dollar-denominated Russian Trading System Index (RTSI) closed Tuesday at 1,735 with short-term technical indicators neutral to slightly positive but with several very short-term technical indicators very favorable. The index is this week right up against an important long-term resistance at 1,737 (mid-May 2006, confirmed early March and late May 2007).
Also the distinct possibility of a triple-fan formation downwards from the May 2008 high cannot be discounted. On present data, the third fan would currently be passing just over the 2,000 level.
A short-term descending-tops downtrend resistance (based early April 2011) would require over two months to fall to the 1,737 level, if the current chart formation required so long a time in order to resolve its present situation.
The chart of the ruble-denominated Moscow Interbank Currency Exchange Index (MICEX) is generally similar with the RTSI's, but has already shown recent support. The MICEX's short-term technical indicators are generally more positive than the RTS's.
The MICEX is up 24.8% from its level on October 5, bouncing off a long-term support at 1,265 two weeks after President Dmitry Medvedev announced that he would not run for re-election in deference to Putin. The RTSI is spectacularly up 40.3% since then (bouncing off support at 1,225).
Looking ahead, the Russian markets may conform to the old "up on rumor, down on news" adage. Consumer spending will continue to underpin any general economic recovery in the country, but higher taxes to reduce such heavy reliance on oil revenues would be a damper on that factor. Manufacturing will likely also continue tailing off, although some observers expect it to pick up again later this year when government funding may again push investment demand forward.