Putin’s Third Term in Russia: Does Instability Loom for Economy?

The widespread assumption among investors that Vladimir Putin's decisive victory in Sunday's presidential election will deliver stability to Russia's economy and its financial markets seems misplaced, according to a report.

Going by the report in Capital Economics, a macroeconomics research consultancy, increasing strains in Russia's growth model, coupled with mounting discontent over the country's governance, suggest that Putin's third term as president will be characterized by growing economic, financial and political instability.

The report points out that while a win for Putin in the first round of voting was largely expected, the margin of his victory seems to have cheered the markets, with gains seen for both Russian stocks and the ruble, despite falls in riskier assets elsewhere in the world. The logic seems to be that the greater the scale of Putin's victory, the less likely Russia is to experience political and economic instability.

But the expert report warns that on a political level, protests against the ruling elite are likely to continue. The lesson from recent events in the Middle East is that these can escalate quickly, with unpredictable results. The report mentions that the authorities have so far failed to develop a clear and coherent strategy for economic policy in response to the recent unrest.

In addition to political concerns, the economy could be another source of instability. A critical aspect to be borne in mind is that having delivered average growth of 5 percent a year since the start of Putin's first term in office in 2000, cracks are appearing in Russia's consumption-led model of development, according to the report.

Capital Economics states that for a start, the authorities are increasingly dependent on high oil prices to sustain domestic demand - leaving the economy exposed to a sharp slump in the price of crude. Even if oil prices do hold up, there are serious questions about the ability of the domestic economy to match demand growth of 5 percent a year with increases in output.

Hence Capital Economics has forecast that as Putin's third term in office unfolds, his reputation as the guarantor of economic, financial and political stability in Russia is likely to be called into question.