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Putin Faces Chaos If Greek Euro Exit Triggers New Recession

Published: May 24, 2012 | 8:37 am
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Vladimir Putin faces the risk of Russia’s political stability being shaken if Greece leaves the euro area, triggering a global crisis and sinking the price of oil, according to the Center for Strategic Studies in Moscow.

There’s a more than 50 percent chance of a Greek exit, which would lead to more countries pulling out of the currency union, Mikhail Dmitriev, the research institute’s head, said in an interview yesterday. A worsening economy, which would raise the risk of swelling sentiment against the Russian president, and increased political repression are the main risks for the country, according to a study published today by the institute, which advises the government.

“If these trends continue, we will see the escalation of political violence and repression on one hand, and the worst economic crisis on the other,” said Dmitriev, a deputy economy minister from 2000 to 2004. “This may lead to Putin losing control and a chaotic political transformation.”

Putin, 59, returned for a third Kremlin term this month as tens of thousands demonstrated in Russia’s biggest cities after disputed parliamentary elections in December. A deteriorating global economy would hamstring the government’s ability to deliver on social-spending pledges and would threaten to wipe out capital that Russian investors and businesses moved to Europe in search of safety, Dmitriev said.

‘Atomic Explosion’
“There is large-scale capital flight from Russia, despite the economic recovery,” Dmitriev said. “And this capital is flying into the epicenter of the global financial crisis, which is in Europe. That is actually the same as creating a food supply in the center of an atomic explosion.”

In a worst-case scenario following Greece’s exit from the euro area, Russia’s economy would contract 2.1 percent with the potential for $95 billion in capital leaving the country in a year, Ksenia Yudaeva, chief economist at Moscow-based OAO Sberbank (SBER), the country’s biggest lender, said by phone yesterday.

“It’s on everyone’s minds,” said Sergei Guriev, rector at the New Economic School in Moscow and a member of a group of experts that advises Medvedev, who called for cuts in public spending and speeding up steps to trim the expanding deficit in Russia’s pension system and the sale of state assets.

Energy Reliance
Russia, which relies on oil and gas exports for half of its budget revenue and Europe as a market for more than 50 percent of its exports, may suffer a worse recession than in 2009 if energy prices plunge, according to Dmitriev.

Russia’s economy grew at an average annual rate of 7 percent during Putin’s presidency from 2000 to 2008 before contracting 7.8 percent in 2009 after crude prices plunged to $34 from $147 as the bankruptcy of Lehman Brothers Holdings Inc. in August 2008 sparked the worst global recession since World War II.

The government reduced its projection for growth this year to 3.4 percent, from 3.7 percent. Gross domestic product expanded 4.9 percent in the first quarter from the same period last year.

Brent, the grade that underpins prices for Russia’s Urals oil blend, may decline to $80 a barrel if Greece leaves the currency union without triggering crises in other euro-members or as low as $60 if there is a “disorderly” breakup of the euro region, according to a Bank of America (BAC) Corp. report dated May 17. Urals yesterday traded at $104.87, the lowest since Dec. 19.

Workers, Pensioners, Military
After promising $153 billion in new spending on state workers, pensioners and the military to ensure his re-election, Putin is seeking to head off a widening deficit, with oil prices more than $10 below the average price of $117 a barrel needed to balance the budget this year. The government has said it will increase taxes on OAO Gazprom (GAZP) and independent gas producers from 2013-2015 to raise billions of dollars.

There is a “critical lack of trust” and “fatigue” with Russia’s ruling elite across society, according to the institute, which conducted surveys between March and May in a dozen cities and towns across the country.

The government being unable to deliver on pledges for social spending would trigger mass demonstrations across Russia, according to the institute, whose board of trustees is headed by Deputy Prime Minister Dmitry Kozak.

‘Loss of Control’
“The political crisis could quickly become acute if it’s aggravated by a fresh economic crisis,” it said. “This is highly likely to provoke a rapid loss of political control and an accelerated change in the political system.”

The majority of respondents wants a large-scale replacement of government officials at the federal, regional and local levels, according to the study. That desire was illustrated by the victory of opposition candidates in recent mayoral elections in Yaroslavl, Togliatti, Taganrog and Chernogolovka, it said.

There is a “widespread negative” attitude toward United Russia, the ruling party, according to the report, to be presented by former Finance Minister Alexei Kudrin in Moscow. While a majority of respondents said they voted for Putin because of the need for stability, they don’t want him to stay in power indefinitely, it said.

Middle-class anger was also stoked by Putin’s decision to push aside his protégé, Dmitry Medvedev, to return to the Kremlin after 12 years of rule, according to opinion polls at the Moscow rallies. Medvedev, who served for four years as president while Putin kept the reins of power as prime minister, is now head of Putin’s Cabinet.

Popular Approval
Fifty-six percent of Russians approve of the December mass protests, according to a survey by the Pew Research Center released yesterday. While 72 percent have a favorable opinion of Putin, 64 percent also believe the economy is in poor shape, the survey of 1,000 adults between March 19 and April 4 showed. It had a margin of error of 3.6 percentage points.

Putin warned Medvedev’s new Cabinet on May 21 that it must tackle a “difficult situation” in the world’s largest energy exporter because of global economic uncertainty.

“For Russia, it all comes down to two factors — capital outflows and oil prices,” Dmitriev said. “They come together in a crisis.”

businessweek

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