Russia’s election season in late 2011-early 2012 shows that the country’s economic and social development has outrun its political system. Our analysis concentrates on underlying drivers of political risk: legitimacy, which is the key to stability; and whether the resultant stability tends towards the dynamic or the stagnant. An important insight is that markets tend to overprice political risk because Russia’s institutional framework facilitates the political evolution required to preserve systemic stability.
The main focus of our research in the macroeconomic sphere since the financial crash and recession of 2008-09 has been the transformation of monetary policy from pre-2008 boom-bust settings to a rudimentary form of inflation targeting. We are closely monitoring whether this shift – which is an essential pre-condition for sustained economic growth – is bedding down or, on the contrary, showing signs of going off the rails. Turning from positive to negative developments, the structural fiscal loosening and resurgence of capital flight are also central research themes.
The medium-term economic outlook hinges on a shift from the demand-led growth seen in the past decade to a supply-side policy emphasis. We believe that Russia’s economy can grow fast and sustainably by raising total factor productivity to a level commensurate with the country’s rich physical and human resource endowments. The key to this shift will be an increase in the investment share of GDP from the present level of around 20 per cent to nearer 30 per cent. Against the background of Vladimir Putin’s return to the presidency and the formation of the new government led by Dmitry Medvedev, our policy research covers varied aspects of the two main conditions for achieving such an increase in investment rates:
Our sector research as Russia concentrates on how the restructuring and anti-corruption initiatives associated with the dawn of a new political cycle will affect shareholder value in state-controlled and state-influenced sectors: gas, electricity, pharmaceuticals, agriculture – and, in the light of Russia’s entry into the WTO, automotive.
Elsewhere in the FSU, we are now focused on political risk in Kazakhstan arising from uncertainties over the succession to President Nursultan Nazarbayev, and the challenge for Ukraine of overcoming basic obstacles to healthy economic growth.