Russia caught by geopolitics again

Russia is facing multiple challenges. Inflation has continued to spike and was 8.1% in October, the highest since 2016. COVID-19 has returned with a vengeance, with daily new cases running at over 35,000, well above previous waves, forcing Moscow back into lockdowns. And the economy is slowing, with 3Q GDP growth of 4.3%, down from 10.5% in 2Q. Now add to that the geopolitical risk of the Russian army amassing troops on the Ukraine boarder. This has all led to the RUB depreciating over 7% in the past month and MSCI Russia falling >10%. But Russia still has many policy arrows in its quiver. The government’s fiscal spending has been reasonably tight throughout the pandemic, with its fiscal deficit forecast at 1% of GDP this year, leaving plenty of room for stimulus spending. Monetary policy has also been more orthodox, with a hawkish central bank hiking rates multiple times, keeping real rates only slightly negative. And forex reserves are strong, allowing for intervention to support the currency, if necessary. The wildcard is geopolitics. Although Putin’s approval rating has fallen to the mid-60s, his United Russia party won recent parliamentary elections and the next presidential election is not until 2024, so there is no clear domestic reason to start a military conflict with the Ukraine. Whilst the annexation of Crimea was popular with Russians, and sent Putin’s approval rating to over 80%, forays into Ukraine’s Donbas region has much less support. Putin’s moves and the incentive behind them are always difficult to guess, but we believe there is only downside for Russia to attack Ukraine and therefore it is unlikely.