Global Political Insights From Arab Spring to Russian Winter

Global Political Insights
From Arab Spring to Russian Winter

 Russian parliamentary elections saw a decline in support for the ruling party –
Russia’s parliamentary (Duma) elections saw an unexpected decline in support for the
ruling party and widespread allegations by the press and election observers of
irregularities, prompting the largest political protests in some years. The emergence of
an energized, youthful political opposition would mark a change in trend in Russia and
increase the pressure upon the political establishment, increasing the potential for
political uncertainty in the months ahead. Any heavy-handed government response
against the protests would risk a wider backlash.
 A watershed moment in Russia’s post-Soviet political trajectory – The protests
and open criticism of the regime expressed in the days since Sunday’s parliamentary
elections suggest Russia may be experiencing a watershed moment in its post-Soviet
political trajectory. While a return to the presidency for Vladimir Putin in March 2012
elections does not seem to us to be in doubt, his party’s lack of success in securing the
support of Russia’s urban middle classes means continued tensions are highly likely.
More open questioning about the legitimacy of the ruling party amongst business and
political elites also seems likely.
 Show me the money? Weaker growth and fiscal constraints will limit the ability of
authorities to increase social spending in response to public discontent, while the
combination of heightened political consciousness and the ability to document
violations with technology will reduce the ability to contain dissent through more
forceful means. But Russia’s middle class has not experienced significant reversals of
living standards, and in fact, living standards have continued to rise. With this in mind,
we believe the pressure upon the regime to introduce liberal reforms and political
competition looks likely to increase.
 Lessons from the Arab Spring – Following this year’s wave of global protests and
MENA revolutions, the developments in Russia highlight some of the key themes that
we think will shape the year ahead: the necessity of understanding public opinion, the
myth of permanent political stability, the rise of new political actors and the importance
of maintaining the support of the middle class, who increasingly demand new social
contracts between government and society. As we head into a year marked by
elections, including in Russia, investors must take note of the lessons of the Arab
Spring, and prepare for a Russian Winter.

No Slavic Spring, but a Tense Russian Winter
 20 years after the fall of the Soviet Union, Russians are demanding greater
accountability from their leaders. International and local election observers
have criticized the fairness of the vote amid widespread press reports of electoral
manipulation. Despite suggestions of irregularities, the Kremlin-affiliated United
Russia party saw a drop in its support from 64% in 2007 to 49.5%, depriving the
party of its constitutional majority although maintaining its ability to pass
legislation. Exit polls suggest that the actual level of support for United Russia
was much lower than the official turnout, especially in cities, underscoring the
drop in support from Russia’s urban middle classes. The Fund for Public Opinion
in Russia estimated United Russia’s actual share of the vote at 27.5%.

 United Russia’s loss of its constitutional majority is, in our view, a significant blow
to Putin’s standing and the government’s ability to pass legislation. The party’s
constitutional majority gave it the ability to pass such controversial measures as
eliminating the direct election of regional governors and increasing term limits for
the Duma and the presidency. The end of this majority means United Russia will
have to work in cooperation with other parties for the first time, a process which
will likely take some getting used to. There have also been suggestions that the
opposition parties in parliament may work together in a bloc, posing a further
challenge to passing legislation.
 In our view, United Russia’s loss of its constitutional majority and subsequent
anti-government demonstrations mark a significant turning point in the politics of
the post-Soviet era. Russia’s system of “managed democracy” mandates tight
restrictions on political party registration, with few parties able to overcome the
minimum threshold that would allow them to participate. With this in mind, the
Communist party’s improved showing, gaining a 19% share of the vote, we think
reflects in part a protest vote against the political establishment rather than a
genuine nostalgia for a return to Russia’s Communist past. United Russia’s
apparent failure to secure the support of Russia’s middle class urban elites, who
have historically been politically apathetic in the post-Soviet era, could undermine
the party’s longevity and ultimately prompt greater demands for political
competition. Indeed, Kremlin spokesman Vladislav Surkov has suggested a new
party should be formed to reflect the concerns of “angry urban communities”.
This is unlikely to transpire in time for the March presidential elections, but it
means that a subsequent 4th term for Putin as president in 2018 can no longer be
assumed. Given the limited organized political opposition in Russia, there are few
obvious candidates to replace him even if increased political competition were to
be introduced. Yet the experience of the Arab Spring this year underscores the
extent to which “leaderless” political movements, assisted by social networking
and new technologies, have been able to overcome traditional limitations. With
as many as 51 million Russians estimated to be surfing the internet daily—over
1/3 of the population– the influence of social media is high.

 Putin under pressure. While Prime Minister Putin is expected, based on polls,
to win his bid to return to the presidency for a third time in March 2012 elections,
the public reaction to the parliamentary elections could mean he does not win
outright in the first round. Questions about the regime’s continued legitimacy to
rule may also prompt divisions between political and business elites, undermining
the stability that has prevailed for much of the Putin era. The perceived “taboo”
against criticism of the regime has been broken, judging by the unprecedented
open opposition expressed toward its leaders on the streets of Moscow in recent
days. While we don’t see a Slavic Spring for Russia—yet—we sense that a
political watershed has been crossed in Russia.
 An iron fist, or velvet glove? The events of this year’s Arab Spring highlighted
how a regime’s response to protests in the early stages can determine the
ultimate outcome. The use of force has hardened protestors’ resolve,
transforming demands for reform into regime change. With that in mind, the
government’s decision to send thousands of troops to Moscow to quell protests
could provoke a backlash, with further protests being called for this weekend.
The arrest of prominent activists such as Alexei Navalny, whose anti-regime
website attracts as many as 1 million followers per day, could also consolidate
discontent, and recalls the incarceration of Egyptian blogger and activist Wael
Ghonim, who became a major figure in Egypt’s revolution following his release.
Based on previous bouts of protest activity, we do not think that Russian
authorities will resort to the widespread use of force, but the incarceration of key
opposition could keep the momentum elevated and an event that acts as a
catalyst for increasing support for protests cannot be excluded.
 Putin’s children? The faces in the crowds in Moscow and St. Petersburg were
mainly young and middle class, products of a largely post-Soviet upbringing
defined by Putin’s leadership. We think the scale of the protests, which were
marked by calls for “Russia without Putin” suggests that the post-Soviet social
contract, defined by political scientist Ivan Krastev as trading political rights for
consumer rights, may have come to an end. In this sense, even though we do
not expect a Slavic Spring for Russia, we regard the political developments in
Russia as reflecting many of the themes of the Arab Spring: young middle
classes mobilized by new technology and acting in response to a combination of
outrage over reported high levels of elite corruption and limited political rights and
civil liberties1. While Russian demographics mean that the youth cohort is
comparatively small and the opposition nascent, in our view a return to the
political status quo is no longer possible. The question will be whether the regime
heeds the call for reform, or returns to its standard playbook, attempting to ignore
the wider political zeitgeist. One commentator noted that this election was the
first in Russia to take place in a situation of “parallel information flows—the
official one, and the mass civil network”. The key question for Russia in 2012 as
presidential elections in March provide another potential focal point for dissent
will be the authorities’ ability to adapt to the changing expectations of the
population.
 Adding up the numbers: We believe that promises of higher spending in the
coming months will be a key signpost to watch for. However, there is limited room
for impact. First the key disenfranchised group of urban elites will likely be
unimpressed by higher social spending. Second, there is not much money left for
it. Non-oil deficits are already assumed to stay at around 10% even with oil price
near US$100 pb for years to come. As Russia has over US$110bn (6.5% of
GDP) in fiscal funds combined, the authorities may attempt, in our view, a shortterm
boost to social spending in a bid to boost ratings. However, the massive
discretionary fiscal stimulus (amongst the largest in the group G-20 countries
according to the IMF) of 7% of GDP in 2009 (measured as a change in non-oil
deficit) was hardly felt by the economy, not preventing it from contracting close to
8% in 2009.
 Looking for money on international markets may prove harder than it
seems: With the government debt-to-GDP ratio at less than 10%, Russian
authorities may also be tempted to increase government debt if reserve funds are
depleted. However, we believe that large reserves and low government debt are
key “selling points” for Russia and without these support factors, raising debt may
be challenging, especially amidst news of political instability. Furthermore, debts
of the state-controlled enterprises (external debt of state-controlled enterprises is
about 10% of GDP) is viewed by international fixed income investors as a
substitute to government debt.