MOSCOW, Aug 2 (Reuters) - Russia is one of the world's most
lucrative emerging markets but the risks are big.
Oil sales are the foundation of Russian stability. The plans
of Prime Minister Vladimir Putin, the country's paramount
leader, also remain central to Russia's future.
Otherwise, the biggest risks remain corruption and the
arbitrary rule of law.
Russia is the world's biggest energy producer and remains
heavily reliant on oil and gas exports, which make up 65 percent
of exports despite Kremlin calls to diversify the economy.
A sharp and sustained fall in oil prices would lead to a
sell-off in the equity, bond and currency markets, undermine the
economic recovery and erode Putin's popularity before the March
2012 presidential election.
Major investment banks expect this year's Gross Domestic
Product (GDP) to grow by more than the official 4.0 percent
forecast after the economy shrank by 7.9 percent in 2009, the
worst annual GDP result in 15 years.
While Russia's 2010 growth forecasts look impressive when
compared to developed markets such as the European Union, they
are less rosy when compared to China and India which are
expected to grow by about 10 and 8.5 percent respectively.
The Kremlin is betting on oil prices of over $75 per barrel
for its recovery and a moderate fall in prices could push the
budget further into deficit.
Russia posted a budget deficit of 5.9 percent of GDP in 2009
and with an oil price assumption of $75 per barrel in the 2010
budget, it is forecast to be 5 percent of GDP.
Russia's Finance Ministry wants to be in the black by 2015
but spending has been raised and there is a lack of political
appetite for tax increases ahead of the 2012 election.
Under current spending plans, the budget would only be
balanced at an average price for Russia's Urals blend of oil of
about $95 per barrel, according to investment banks.
Investors snapped up $5.5 billion of Russia's first
sovereign Eurobond issue in more than a decade this April, but
their appetite could wane if oil prices fell, the very time when
Russia could need cash.
Even so, Russia's foreign exchange and currency reserves
rose to $469.3 billion on July 16 and are the world's third
largest after China and Japan.
Russia also has plans to sell $29 billion in state assets,
the most ambitious privatisation plan since the rigged sales of
What to watch:
-- Prices for oil, gas and metals. Chinese demand is key.
-- Russia's rouble could appreciate further against the U.S
dollar if oil prices are high, undermining the recovery.
-- What Putin and Medvedev say about spending ahead of the
2012 election, or about potential borrowing.
-- Comments from Finance Minister Alexei Kudrin, a fiscal
conservative, on additional sources for budget revenue, such as
borrowing or asset sales.
Putin is Russia's most powerful and popular politician and
dominates the political system despite stepping down as
president in 2008.
Putin is the senior member of what Russian officials call a
ruling "tandem" with Medvedev, the former corporate lawyer Putin
tapped as his successor when a constitutional limit of two
consecutive terms kept him out of the 2008 presidential race.
Both Putin, 57, and Medvedev, 44, have suggested that one of
them will run for president in 2012, and that they will agree in
advance which one it will be.
Many analysts expect Putin to return to the Kremlin in 2012
but some diplomats say he does not even need to be president to
remain Russia's paramount leader. Putin is also leader of the
biggest party in parliament.
Medvedev's biggest constitutional reform as Kremlin chief
was to extend the presidential term to six years from four,
meaning that the next president could serve until 2024.
Any strong signal from Putin that he will run for president
in 2012 could spark a rally in Russian assets, just as any
indication he was preparing to leave power or unable to fulfil
his duties would have unpredictable consequences.
Returning to the Kremlin or staying in power beyond 2012
could raise concerns about the long-term stability of a
political system based on the rule of one man.
What to watch:
-- Clarity from Putin and Medvedev on their presidential
-- Any real signs of discord between the two men could
provoke a constitutional crisis, though there have been no
indications of any major policy difference to date.
-- How Putin and Medvedev are presented in the domestic
media and in opinion polls. Any drive for public relations
stunts could indicate the beginning of silent campaigning ahead
of the 2012 election.
-- Most of the key posts in the Kremlin administration and
the cabinet are held by long-time Putin loyalists. A significant
shake-up of high-level officials could mark a major shift in the
balance of power and herald major policy changes.
RULE OF LAW, CORRUPTION
Western executives say the biggest barriers for business in
Russia are endemic corruption, red tape and the arbitrary way
the rule of law is imposed.
Medvedev says corruption is one of the biggest threats to
Russian national security and has promised to reform the
judicial system and courts to improve property rights.
But he admitted in July that his administration had made
almost no progress in fighting corruption, which pervades all
walks of life in Russia and amounts to an additional tax on
Officials can demand multi-million-dollar kickbacks before
investments are approved and then threaten to close down a
business unless they get a slice of the profits. A corrupt court
system prevents owners from protecting property rights.
Last year Transparency International placed Russia in joint
146th place -- along with Zimbabwe and Sierra Leone -- of 180
countries in its Corruption Perception Index, saying
bribe-taking cost about $300 billion a year.
Transparency said Russia was perceived to be far more
corrupt than its emerging market peers such as India, China and
Brazil, which were ranked, respectively, 84th, 79th and 75th.
Most Russians believe the problem has worsened in the past
decade and companies ranging from IKEA, the world's biggest
furniture retailer, to fund managers such as Hermitage Capital
Management say they have fallen foul of corrupt Russian
What to watch:
-- Dismissals of senior Kremlin or government officials for
-- Polls on perceptions of corruption.
-- The second trial of imprisoned former YUKOS oil company
chief Mikhail Khodorkovsky is seen as a bellwether of policy. A
not-guilty verdict or decision to drop the case could be a sign
ATTACKS BY INSURGENTS
Twin suicide bombings in Moscow's subway system on March 29
killed 40 people -- the deadliest attack in the capital in six
years -- and sparked fears that Islamist rebels from the north
Caucasus could unleash a wave of attacks in Russia's heartland.
Islamist rebels who want to create an independent
sharia-based state along Russia's southern flank claimed
responsibility for the metro bombings.
The self-proclaimed leader of the militants, a Chechen rebel
named Doku Umarov who calls himself the "Emir of the Caucasus
Emirate", has vowed to attack economic infrastructure such as
the pipelines which feed Russia's $1.4 trillion economy. On
Sunday, Umarov said in an Internet statement he was stepping
down and appointing a successor, Aslambek Vadalov.
Suspected Islamist militants stormed the Baksanskaya power
plant in Kabardino-Balkaria in July, shot dead two guards and
set off remote-controlled bombs beside the main generator units,
bringing the station to a halt.
What to watch:
-- Markets shrugged off the Moscow bombings and subsequent
attacks within the North Caucasus, but further strikes on
Russian cities or against economic infrastructure such as
pipelines or power stations could spook investors.
(Reporting by Guy Faulconbridge, Editing by Mark Trevelyan)