Russian Prime Minister Dmitry Medvedev submitted the resignation of the Russian government, just hours after President Vladimir Putin’s address to the nation (see our flash report here). The only information available at the moment is that Medvedev himself will be appointed as Deputy Head of the Russian Security Council, a position created especially for him. The Russian ruble has not reacted to the news. The main question now is who will be appointed as prime minister and if that person will be considered as a potential candidate to replace Putin in 2024.
In our view, the new prime minster is likely to be from the younger generation. While the new appointment could bring market volatility in the short-run, we do not expect the Russian macro case to be subject to changes as a number of economic guidance were announced by President Putin during his address today.
Putin calls for support to the younger generation. The economic part of President Putin’s address today focused on providing support to the younger generation and boosting fertility (currently 1.5 births per woman). With 70-80% of Russians who live below the poverty line consisting of families with children, the president has announced: (1) to increase financial subsidies for children under 3 years old, (2) to introduce additional subsidies for children 3 to 7 years old, and (3) to extend and index the maternity capital program until 2026. The latter provides families with children with financial resources to be used for real estate purchase – this programme will now offer up to RUB1.0 mn ($16,000) to families with 3 children. The maternity capital programme was launched in 2007 when the average fertility rate was 1.4 – the president now targets 1.7 births per woman by 2024, which looks achievable. That said, it is worth keeping in mind that it will still remain below the 2.5 global average.
Sets firm growth targets. The second key point in today’s address was the focus on short-term economic goals. Putin has indicated that Russia’s GDP growth in 2021 needs to exceed the world average (currently forecast at 2.6% by the World Bank). Investment growth needs to surpass 5% y/y and the share of investments to GDP needs to grow to 25% by 2024. With 1.3% GDP growth expected to be announced for 2019, this seems to be an ambitious task and a sign of growing pressure on the Economy Ministry.
…and proposes constitutional changes to be passed via referendum. The third point in today’s address was Putin’s proposals for constitutional changes. Some of these look technical at the moment – he proposed granting the Russian parliament the right to approve not only the Prime Minister, but also the heads of federal ministries – however, that could be an area of political struggle should the Russian political system one day revert to its 1990s status. The most important proposal, however, is that a person running for president should be a resident in Russia for not less than 25 years – a measure which would exclude potential candidates with Western backgrounds (Mikhail Khodorkovsky is one example). We note that all these proposals require a referendum to be passed, which will likely complicate any subsequent objections to these constitutional changes.
The Finance Ministry assesses fiscal stimulus at RUB400-450 bn. The initial expectation was around RUB1tn of social stimulus, which was expected, and will likely come from income tax exemptions for income below the poverty line. The actual stimulus is only half of what was expected, i.e. about 0.3% of 2020 GDP, but we view the announced package of measures as being good from a structural perspective. First, it is focused mainly on young families; second it does not target consumption, but rather provides additional support to the mortgage market and, thus, construction. Third, the rumored proposal to eliminate income tax for poorer groups could create a poverty trap, and we thus welcome the decision to focus the announced measures on very specific vehicles. we expect this to drive 2020 GDP growth to 1.8% y/y vs our initial 1.4% y/y forecast.
Our two main takeaways: An improved outlook for 2021. Before today’s address, we expected the Russian leader to be satisfied with a better 2020 growth outlook, which coincided with a decline in geopolitical pressure, and to relax by 2021. However, it appears that President Putin intends to maintain pressure on his cabinet. With the CBR having delivered a series of fast rate cuts in 2019 and interest rates already supportive of growth, the focus now appears to be turning to the economic bloc. Also, the concrete growth targets announced for 2021 imply that there are growing chances of fiscal stimulus not only this year, but next year too, which improves our growth outlook for 2021.
… and an increasing likelihood of a power transition in 2024. The second point is that the proposed constitutional changes that would limit the list of potential independent presidential candidates suggests there are real preparations in place for a transition of power. While this transition is clearly not a certainty, the proposed constitutional amendments via referendum highlight that it should not be excluded. For the Russian market, which does not incorporate a political risk component because it does not exist currently, this is negative news. However, we are not sure if this development will affect the market performance in the nearest future.