Exit polls following parliamentary elections held in Russia this weekend showed the ruling United Russia (UR) party of Vladimir Putin has suffered a humiliating defeat.
Exit polls have suggested that the party could see its share of the vote drop from over 64 per cent in the 2007 election to between 46 per cent and 48 per cent. This would see the party of power lose close to 100 seats in the State Duma, losing both a constitutional two-thirds majority and also possibly its absolute majority.
The polls show that the beneficiaries of the UR's fall from grace have been a combination of existing established opposition parties, including the Communists who seem to have garnered around 20 per cent, the nationalist Liberal Democratic Party of Vladimir Zhirinovsky with around 12 per cent, and the centre-left Just Russia also with a 12 per cent poll share. Western style liberal democratic parties remained largely frozen out, a reflection of their own failure to create a united front in this space and also institutional weaknesses, such as getting air space on the state-controlled media.
Explanations for the poor showing of UR are numerous, but include growing unease over the dominance of the ruling party and its detachment from the mass of the population. The economy is beginning to recover, and expected to grow at around 4-4.5 per cent this year, but the perception still is that the benefits of growth/recovery are being too narrowly felt among the elite around UR.
For many among Russia's emerging middle classes there is also some frustration at the lack of real political pluralism in Russian political life - the restricted, controlled democracy which has hindered the development of Western-style political parties as identified above.
The baton exchange between the incumbent Dmitri Medvedev, to his prime minister, Vladimir Putin, in the forthcoming presidential election has been a source of much popular un-ease, as a Medvedev presidency was seen as offering the chance of greater reform both of politics and broader economic reform. A return to the presidency by Vladimir Putin is seen as offering status quo/stability and not reform which arguably Russia is in dire need of. The rise of the internet/social media also probably paid its part, with comparables drawn to the Arab spring.
What next? The first important point is that despite losing a constitutional or even absolute majority in the State Duma, UR will still remain the dominant party in parliament, and will likely be able to dominate parliamentary affairs still given the close relationship it still enjoys with the other three parties. These parties are often not driven much by ideology but business interests and patronage. The strong showing by the Communists and Just Russia might imply though a greater emphasis on social spending/provision.
Soul searching within UR is also likely to intensify, and the search for scapegoats is likely to intensify. Some have argued that Dmitry Medvedev himself could see that the promise (by Vladimir Putin) of his shoe-horning into the role as prime minister, after the presidential elections, will falter.
Medvedev was charged with leading UR's campaign in the parliamentary polls, so might be seen as the "fall guy." This could potentially open the way for the return of the market favourite, Alexei Kudrin, to the government, and even to the role of prime minister, after presidential elections. Kudrin's return might suggest that Putin has read from these elections that Russia is in greater need of reform, than the stability/status quo which has been his brand in office.
In the more immediate future, the focus will now turn squarely to presidential elections in March. Putin himself will want to win these elections well - a 51 per cent majority is not seen as sufficient for a politician such as Putin who cares about his public popularity and sees elections as giving something of a score card as to his stay in office.
UR and the state apparatus are likely to pull all stops out now to ensure Putin secures a large first round victory. Fortunately for Putin the Federal budget has been bolstered by high oil prices, and this has ensured that rather than running a deficit of 2.8 per cent of GDP this year, as of September the budget was running a surplus of 2.8 per cent of GDP. This has left great scope for pork barreling on a grand scale both to year end and in the first quarter of 2012.
Already this year state-owned banks have been aggressively expanding balance sheets trying to boost credit growth, and domestic demand in the process. This should provide a significant boost to the economy in the short run, and growth could well exceed expectations. It could well create a large post election hang-over which the "new" president and government will have to address - i.e. an even higher oil price at which the budget balances, and the need for more far reaching reform of public finances, pensions, welfare and social provision, which at present given Russia's dire demographics are simply unsustainable over the medium to longer term.
Beyond the presidential elections - which we still assume will be won by Putin - this election result suggests that Russia is at something of a watershed.
Vladimir Putin could take these results as a signal that the country needs more reform - perhaps appointing a reformer such as Kudrin as his prime minister. This could see more far reaching economic and political reform.
Alternatively, he might see these elections as reason to further extend state control/direction, both over the political scene and the wider economy. Obviously the hope is that he chooses the former, as the Russian economy is in need of deep-seated structural reform, if it is not to face an era of stagnation.
The choice for Putin is now one of stagnation or reform.
*Timothy Ash is global head of emerging markets research at the Royal Bank of Scotland in London. This note to investors was circulated early on December 5.
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