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Russia's Conservative Liberalism to the fore

Posted by John Bonar on Thursday, 31 May 2012 09:11 | Published in Politics

By Chris Weafer

Russia's new government structure, both in the Kremlin and the White House, can be described as more liberal and business-oriented than its predecessor. This is partly a reaction to the changed political landscape after months of unprecedented public protests. It also reflects the need for greater urgency in tackling issues that have long impeded efforts to improve the perception of Russia as a place to invest and do business. The country clearly needs a new economic growth model, reducing reliance on extractive industry revenues and accelerating expansion in other parts of the economy. That is where the liberals come in. It is their job to implement that strategy. Sitting on top remains Vladimir Putin, a conservative but also a pragmatist. Of course progress will neither be swift nor dramatic. Putin has never been in favor of great leaps - slow, careful steps have been more his style. But whatever the eventual pace, there is clearly a new direction. When evidence of this becomes clear, we expect an equally slow but positive impact on Russian assets' relative valuations.

> An end to policy hiatus.... After nine months during which the domestic focus was all about political transition and the protest movement, the formation of the new government and clarification of areas of responsibility bring this hiatus to an end. The hiatus has certainly contributed to the high risk-premium that investors are applying to Russian asset valuations and the exceptionally wide discount at which equities now trade relative to EM peers.

> ...but stability the main priority. The main interpretation from the changes is that maintaining domestic and economic stability is the key priority - the muddle-through scenario. Neither dramatic changes nor a major shift in policy priorities are expected unless, or probably until, the existing economic and socio-political backdrop materially changes and forces a new strategic direction and the more dramatic changes that investors had hoped for. Still, the changes we have seen show the following.

> A key priority for the government is to try and improve the perception of Russia's business and investment environment by placing mainly economic liberals in key finance and economic-related functions in the cabinet.

>A partial response to the protest demands in that the interior minister's position has gone to the former head of Moscow police, who has been widely praised for his handling of various protest events and efforts to weed out corruption.

>A more determined approach to regional development. President Putin has highlighted the development of Russia's Far East as one of his key priorities but there have also been several new appointments, or expansion of existing roles, to reflect the importance of socio-economic development in the regions.

Chris Weafer is the Chief Strategist of Troika Diaogue

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