Severe Economic Downturn in Russia Likely – Russia is likely to suffer a deep economic downturn due to the crisis in the Eurozone. It sells half of its exports, mainly energy, to the EU. Almost half of Russia’s foreign exchange reserves are also denominated in euros. Taxes on oil and gas extraction make up almost half of the federal budget. Thus, a fall in energy prices, a likely outcome of the crisis in Europe, would lead to deterioration in Russia’s fiscal accounts. The 2012 budget was based on the rather optimistic oil price of $116 per barrel (prices were $109 on 6 December). Should oil prices drop, the budget deficit would be substantially higher than the Ministry of Finance projections of -1.5% of GDP for 2012.
High Likelihood of SME Bankruptcies
A banking crisis is likely to hit mainly small and medium-sized banks, which are not sufficiently connected to secure government bailouts. Banks focused on servicing construction, transport, retail and agriculture industries, such as HCF, Standard Bank, Vozrozhdenie, Nomos Bank, Bank of Moscow, are also at particular risk. Russia has over 700 banks, but the top-20 banks control 70% of total assets in the sector. The sector is likely to go through restructuring following a likely wave of bankruptcy events.
Capital Controls and Sovereign Non-Payment Unlikely
Political setbacks for Prime Minister Putin are likely to constrain his scope to implement any austerity policies after the 2012 elections to mitigate the budgetary impact of the Eurozone crisis. He is unlikely to go back on his promise of higher salaries and pensions in the military and in public services. Nevertheless capital controls and sovereign non-payment are unlikely as the government is unlikely to reverse the policy direction since the 1998 default. The government is more likely to run higher budget deficits and privatise state enterprises such as VTB, Rosneft, RusHydro, and Russian Railways and seek bilateral financial support e.g. within the framework of the China Shanghai Cooperation.
(Writing by Alisa Lockwood, Head of Eurasia Forecasting, Exclusive Analysis is a specialist intelligence company that forecasts commercially relevant political and violent risks worldwide.)