On 15 January, following President Putin's annual speech to the federal assembly, the entire government tendered their resignations in a shock move. Later the same day a new prime minister was announced. Jacob Grapengiesser explains the significance of these developments.
Putin's speech itself was significant for two reasons. First it focused on constitutional reform, something perceived to be important in paving the way for a transition of power after Vladimir Putin steps down as president in 2024. The reforms, which will likely be put to a common vote, see increased powers to the Russian parliament and the unelected State Council.
The parliament will be responsible for selecting the prime minister and ministers whereas currently they can only approve the president's choice. The State Council will formally be involved in the selection of security-related posts and their role of advisor to the president will be enshrined in the constitution.
The Kremlin is very keen to improve support levels before the upcoming parliamentary elections in September 2021."
It is widely speculated that Putin could become head of this body in 2024. This would be following the playbook of President Nazerbayev in Kazakhstan who became lifetime Head of the Security Council and remained head of his party after stepping down, hence retaining an enormous amount of power in the country.
The other key aspect of the speech was a striking shift towards domestic issues, primarily aimed at tackling poverty and Russia's significant demographic issues. The additional spending announced will represent around 0.5% of GDP - financing hasn't been announced, though given the budget surplus of around 2% for 2019, this is not likely to be a problem.
This speech was swiftly followed by the resignation of the government. The official reason was to facilitate the constitutional reforms, though ultimately, we see this as reflection of falling support for the government after a range of important but unpopular decisions such as raising the pension age and VAT rate.
The approval rating of current prime minister Medvedev has fallen due to his inability to efficiently lead the government and the aforementioned issues. The Kremlin is very keen to improve support levels before the upcoming parliamentary elections in September 2021.
A few hours later news emerged that the head of the Federal Tax Service, Mishustin, has been nominated as prime minister. This was a further surprise as he is not a high-profile politician. However, on further consideration Mishustin seems like an ideal choice for the role. He is not a life-time politician, and is a technology specialist by background, who spent two years as president of one of Russia's reputable asset managers UFG. He was handpicked by Putin to run the tax service in 2010.
Since then, he has had remarkable success in turning the agency from a corrupt bureaucratic body into one of the most advanced tax collection agencies in the world - for example, between 2014 and 2018, VAT collections rose 64% versus a 21% increase in nominal household consumption.
Mushustin is an "executive", who has been appointed to improve efficiency and growth in Russia. His execution track record suggests he is well placed to achieve this, and his first quotes as prime minister-in-waiting support this view.
He said the first thing necessary was to "seriously work on institutional reform, how the government is run and of course the most modern IT approach". He also talked about the need to work with business, including discussing with them how to remove barriers to their growth.
These changes are generally positive, and expect that the focus on efficiency and growth will be renewed, something clearly positive for the Russian investment case. For the time being, we see GDP growth accelerating from 1.3% in 2019 to 2.0% in 2020 and beyond, though clearly there is upside to these numbers.
Equity and FX markets have not reacted too drastically to these announcements, and we feel investors are in "wait-and-see" mode. However, we see that if anything this offers more upside to the Russia story, which typically centres around very stable (though unexciting) macro as well as unjustifiably low valuations, in particular the dividend yield of around 7%.