Russia: no surprises here
With Putin receiving a record majority (north of 77%), there were no surprises in the recent Russian presidential elections.
The markets expect the prime minister to be reinstated and for there to be no changes to the central bank governor. In each March, Putin set out his election pledges in his state of the nation address, and the crucial thing now is to wait to see if he will follow through on the priorities he highlighted:
- Pension reforms being a key way to finance other reforms
- With crude oil prices now more stable, Russia can adhere to a more balanced budget approach but needs to make cost savings
- On the spending side, Putin wants to reduce poverty and spend on education and infrastructure
Forecasts put increased spending at 1.5% of GDP, and savings of 0.5% of GDP from cost savings in defence. The market will be watching eagerly how he finances the remaining spending increase, especially with crude oil where it is at the moment.
The crucial thing here is that GDP forecasts are similar to previously, at 1.7%. We’ve seen inflation tip lower and rate cuts in February and March – both of which have been supportive for Russian currency and bond spreads. We’ve also seen the rating upgrade back up to investment grade, for the first time since the Crimea annexation. But the deterioration of international relations is a new risk to add into the mix. Our outlook very much depends on the international reaction to the recent poisoning incident. If it ends with the current diplomatic expulsions, Russia would continue with our forecast of being one of the best performers. But if the situation escalates and sanctions are imposed beyond what’s already in place, this could well have negative consequences.