MACRO ADVISORY: August in Russia: What could possibly go wrong?

MACRO ADVISORY: August in Russia: What could possibly go wrong?
August is supposed to be the quietest month of the year in Russia, but something always seems to go wrong.
By Chris Weafer of Macro-Advisory  July 31, 2019

On Christmas Day one has the Queen’s speech and on Easter Day it is the Pope’s Urbi et Orbi; traditional messages with a familiar theme. In Russia, it has become a late July tradition amongst Russia watchers to remind ourselves that August is the month when unusual and trend changing events take place more often than in any other month of the year. If one needs a reminder, it was twenty years ago, on August 9 1999, that Vladimir Putin was former president Boris Yeltsin’s surprise choice to be his prime minister. The rest, as the cliché goes, is history. What may we expect this year?

The most obvious threat to an uneventful August is of an escalation in the political protests which could then evolve to broader social protests, much as we saw in late 2011 when the protests against alleged vote rigging in the Duma elections created a catalyst for ordinary Muscovites to vent their frustration at corruption and poor social services. What started as a containable political protest quickly evolved into a several hundred thousand strong (at weekends) protest camp just across the river from the Kremlin. The administration will be very keen to avoid a repeat but will clearly have to thread very carefully.

Over the past two weekends, there have been protests in Moscow over the blocking of several candidates to take part in the September 8 local municipal elections. But political protests are not, in themselves, a big deal or anything that the government usually worries too much about. Such protests are regularly allowed as a mechanism to allow the 20-25% of the population, who oppose the government, to blow off steam. Most of these protests are also well covered by the Russian media so that the Kremlin can show the population that A) it is tolerant of protest and B) that such protests are relatively small and represent only a small percentage of the population. The problem arises when that second assumption comes under threat.

The danger for the government is that these political, and local, protests come against a backdrop of broader public dissatisfaction with the performance of government and with the trend in the economy. Independent opinion polls, such as those regularly produced by the Levada Center, show that more people are, today, willing to take part in protests to express frustration with poor economic performance and poor social services, such as in healthcare and housing. As was seen in December 2011, the real danger for the Kremlin is that relatively unimportant political protests can quickly change to something a lot more serious and threatening.

The other threat to watch is the huge forest fire in Siberia. According to the Federal Forestry Agency, more than 2.7mn hectares of remote forest is currently burning across six Siberian and Far East regions, an area roughly equal to the size of Belgium. The smoke from those fires is steadily drifting towards large population centres and while posing no immediate danger, clearly this is a situation than may deteriorate quickly, as has been seen many times with the extreme weather events of August.

While watching two potentially dangerous events coming into August, there is always the possibility of unexpected good news. For those with an inclination towards optimism, the always active rumour mill in Moscow suggests that there may be some announcement with regard to Ukraine in the coming weeks. One such rumour is that the Ukrainian sailors, held since the Kerch incident last November, may be sent home as an overture to Kyiv now that President Zelenskiy’s party also controls the Rada. That opens the possibility for at least a more pragmatic engagement with Moscow on such issues as the gas transit renewal contract, which is due to end later this year, or on a re-opening of trade and transit routes between the two countries.

The fact that Putin so quickly and emphatically dismissed demands from the Russian parliament to punish Georgia for the recent anti-Russia actions shows that he is now much more interested in resolving, or containing, conflicts than in starting new ones. The reason for that is because he does not wish to create another excuse for US Congress to push ahead with ever more dangerous sanctions and because one of the key foreign policy priorities is to improve relations with the European Union over the next year.

The key to ensuring domestic social and political stability is to deliver improved economic performance over the medium term. The key to that is progress with the so-called national projects, a $400bn investment programme aimed at boosting and diversifying sustained economic growth and exports and in improving people’s lifestyles. National projects require much greater investment and a lot of that will have to come from foreign investors and private sector Russian investors. Hence the need to avoid any further damaging geopolitical events and to try and minimise the catalysts for sanctions escalation.

Beware the idles of August

As stated, historically, major political events, both domestic and geopolitical, have not been uncommon in August. The Molotov-Ribbentrop Pact was signed in August 1939, and construction of the Berlin Wall started in August 1961. Soviet troops entered Prague in August 1968, and in August 1991 there was an attempted coup against Mikhail Gorbachev by those looking to prevent the break-up of the Soviet Union. August 1999 was when Boris Yeltsin promoted a still relatively unknown Vladimir Putin to the post of prime minister. The Russia-Georgia war provided the backdrop to August 2008. History is certainly on the side of the Doomsayers.

As this July draws to a close the economy is showing a stable but unsatisfactory picture. The country’s finances are in good shape but growth is modest across almost all sectors. But a quiet economy has not always been the case in August, with arguably the two biggest macro events in the history of the state initiated in August 1998 and in August 2014. The former was the default on domestic debt and the collapse of both the ruble and a big portion of the banking system. In 2014 the sectorial sanctions were met with a retaliation that banned the import of food from most Western nations. 

August 2014 also saw the start of the collapse of the oil price, which directly pushed the economy into recession and, in combination with sanctions, led to 25% food inflation and some shortages the following winter. On a more positive note, Russia ended almost 19 years of stop-start negotiations and was finally admitted into the World Trade Organisation in August 2012.

Nature has also been very unkind to Russia in August. In August 2002 widespread fires raged in the peatlands around Moscow and blanketed the city in a toxic haze. August 2013 brought very destructive flooding to much of Russia’s Far East, which led to both expensive economic disruption and loss of life. The worst weather-related disruption came in August 2010 when large swathes of the country were hit with high temperatures and forest fires. That combination contributed to drought conditions across much of the farming belt and led to a big drop in the year’s harvest. In fact, it was this combination that persuaded Putin the country’s reliance on imported food (55% of consumption that year) and medicines was not only bad economics but a national security issue. The origin of what we now refer to as the “localisation’ polic” was in August 2010.

August can be an accident-prone month, such as in August 2000 when there were a number of serious accidents including the sinking of the Kursk submarine – an event which is again attracting unfavourable attention to Russia’s safety record with the release this month of a Hollywood movie commemorating the disaster - and a fatal fire in Moscow’s landmark Ostankino TV tower. In August 2006, 170 people died in an aeroplane crash on a flight from the Black Sea resort of Anapa to St Petersburg. In August 2005 the first case of avian flu was reported and while thankfully that did not develop as had been feared, it did lead to a sense of heightened concern for the month. In August 2009 one of the country’s largest hydropower stations suffered a catastrophic explosion in which 75 people died.

Even in relatively quiet Augusts, of which there have been very few over the past 15 years, there is always something noteworthy or just odd. In August 2001 the then North Korean leader, Kim Jong-Il, visited Moscow. But because of his fear of flying he rode his private train across Russia and caused havoc to passenger services. Such was the frustration of the inconvenienced people that when the train arrived at a Moscow station there were multiple bullet holes clearly visible on its side. In August 2007 a group of nationalist politicians paid for a mini-sub to take them to the floor of the Arctic Ocean where they planted a Russian flag in support of the country’s claim to sovereignty over the Lomonosov Ridge.

August 2019 will not be uneventful. That is already clear. The only question is whether it will take its place in history as yet another dreadful month when the economy or national optimism took another hit, or maybe a month when the recent positive sequence of events was added to. History favours the former unfortunately.

 

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