Vladimir Putin re-elected, focus shifts on the future economic policy of Russia

As widely expected, President Vladimir Putin was re-elected for a second consecutive presidential term of six years on Sunday with 76.7% of the votes and a participation rate of 67.5% after 99.8% of the votes were counted. There were reports of irregularities submitted that the Electoral Commission said it will investigate but the result is largely in line with both with exit polls and and polls taken prior to the election. Compared to the last presidential election, President Putin’s support has risen due to significant declines in the support for all other candidates except for the nationalist LDPR candidate Vladimir Zhirinovsky but even his % of the vote declined. The dynamics in the participation rate was uneven.

Focus will now shift on the future program, which has not yet been published, and the composition of the future government. Following comments from Vladimir Putin, neither of the two is likely to happen prior to the inauguration of the president, timed for 7 May according to Tass news agency.

Going forward the focus will switch to the future policy agenda. President Putin clarified yesterday that “All changes to the government must be performed by a president, who entered his new term, so now I will think about what needs to be done and how it should be done. All changes will happen after the inauguration”. Similarly he is not expected to reveal his program prior to the inauguration.

The most detailed but still very broad description of the program was given in Vladimir Putin’s speech to the federal assembly. In our view, the message largely delivered to a domestic audience was that Russia’s recent reform of the military and its rearmament has succeeded in keeping Russia safe and able to defend its interests internationally. Instead there were no major announcements on military spending going forward. In fact, according to the budget plan, military spending is going to decline.

On the economy specifically, the focus is moving from investing in stability to investing in growth. In fact to our knowledge it was the first time since at least 2014, that a growth target (5% in average for the next decade) was pronounced. At the same time, the government has not been given the same constraints in running policy, such as non resource taxes and the pension age, could not be raised. Although we continue to estimate Russia’s trend growth rate at 2.5-3.5% – significantly higher than others and policy makers think estimate – reaching 5% growth would require significant reform efforts.

In terms of monetary policy making, there is room for lower rates given our view that Russia has the second largest output gap after Italy among the economies we cover, while having among the highest real interest rates in the world at a policy rate of 7.5% and inflation rate of 2.2%. We think rates will fall to 5.5% by 2019.

Fiscal policy has also been tightened procyclically but with the budget now essentially in balance, at least the second derivative of the fiscal balance should turn to be more growth supportive. More spending on healthcare and education should be expected and, in our view, would make economic sense.