Analysis: Putin election blow boosts Russia fiscal risks

Douglas Busvine

MOSCOW (Reuters) - A weaker showing by Russia's party of power in Sunday's general election and gains for left-wing opposition parties increase the risk Vladimir Putin may hike spending yet further as he seeks to regain the presidency next March.

The prime minister, president from 2000-08, may be tempted to open the fiscal spigots even wider to minimize risks of a credible challenger emerging after his United Russia party's lower-house majority was cut to just 13 seats, economists said.

United Russia's support fell to below 50 percent and left-wing parties, led by the Communists, were resurgent, reflecting a protest vote among Russians whose living standards have fallen this year for the first time since Putin rose to power.

"The greater risk is to macroeconomic stability if the growth of fiscal spending goes too far," said Yaroslav Lissovolik, chief economist and head of research at Deutsche Bank in Moscow.

Putin has already planned a hefty dose of fiscal stimulus, timed to deliver a 'feel-good' factor for voters in time for his bid next spring to return to the Kremlin.

Government spending will double this month, in an unusually big year-end splurge, swinging the budget balance from a large surplus to balance for the year as a whole.

Federal outlays will rise in 2012 by a nominal 14 percent, driven by a trebling of military pay and major hikes in national security and social spending.

And, while the budget deficit would only reach 1.5 percent of gross domestic product in 2012 the underlying deficit, after stripping out energy revenues, would widen to 11 percent of GDP.

BALANCING THE BOOKS

Higher spending will increase the oil price at which the public finances of the world's largest energy producer would balance to a record $117 per barrel next year.

And, while sovereign debts are low, any further spending hikes would further ratchet up Russia's exposure to any oil price slump that may result from the West's debt crisis and a darkening global economic outlook.

"The government will not want to be complacent with another election ahead so we may see a stimulus in the form of increased social spending," said Alex Kantarovich, a strategist at JP Morgan in Moscow.

"We generally dislike it when the government spends, but during uncertain times a boost could be a good thing. The macro-economic environment could benefit."

Higher spending could give a temporary lift to Russia's $1.9 trillion economy, which economists expect to grow by less than 3 percent in 2012, down from around 4 percent this year.

It would be negative at the margin for the rouble and Russian bonds, as a potential driver of further capital flight, but could lift to consumer-focused stocks such as retailers and financials, analysts say.

ROCKING THE BOAT

Investors played down the prospect of near-term political ructions as a result of United Russia's election showing which, while weak, was in the range of expectations and will secure a working majority for Putin.

President Dmitry Medvedev, who led the party list in the election and plans to swap roles with Putin to lead Russia's next government, may find himself weakened but should still get a shot at the premiership.

"The priority is not rocking the boat to make sure the elections next year go relatively smoothly," said Roland Nash, chief investment officer at hedge fund Verno Capital in Moscow.

For now, the priority will to be ensure a smooth transition and, should additional spending be needed, acting Finance Minister Anton Siluanov would lack the political clout to stop that from happening.

Siluanov was brought in as a temporary stand-in after former Finance Minister Alexei Kudrin quit in September in protest at the proposed political 'castling' by Putin and Medvedev and their plans for a $600 billion, 10-year defense splurge.

Analysts do, however, question Medvedev's durability and say he may be sacrificed by Putin after a relatively short spell in government.

The next government will need to close a gaping hole in the state pensions system and shift the economy away from consumption to investment.

The price of inaction would be an evaporation of Russia's oil-fueled trade surplus that would, within a few years open up twin deficits on its budget and current accounts and sap the country's financial strength.

"I cannot rule anything out, but the leaders seem to be at ease given the results," said Ivan Tchakarov, chief economist at Renaissance Capital in Moscow.

"I think Putin will give Medvedev the chance to lead the government, and later on down the road he might initiate major changes."

(Additional reporting by Megan Davies and John Bowker)

Reuters