With Putin’s unsurprising victory, the focus will now be on mobilizing sufficient resources to support the ongoing war in Ukraine
In the aftermath of the elections, both businesses and individuals will see hikes in personal and corporate taxes in the upcoming years, with Putin “promising” a clearer approach for businesses to avoid one-off unplanned taxes. Unofficial reports hint at a potential increase in corporate taxes from 20% to 25% and income taxes from 5% to 20% for earners above RUB 5 million annually, although official details have yet to be released. Consumers and domestic investors will see high interest rates persisting through 2024, as the central bank maintains tight monetary policy to fight inflation, which will weigh on both the consumer and B2B outlooks.
Labor costs will remain high for businesses due to acute shortages in the labor market. Another mobilization wave, which will exacerbate labor shortages, remains possible in late 2024 or 2025, yet Putin will seek to delay this decision to the greatest extent possible, relying comfortably on highly paid contractors given the current state of the conflict.
The extent of further seizures of Western businesses by Russia will depend largely on the actions taken by the West, with the Kremlin’s response directly proportional to the scale of the Western actions regarding Russia’s frozen foreign reserves. Notably, a substantial confiscation of Russian state assets abroad would likely prompt similar actions against multinationals in Russia. The Kremlin has already issued a warning, stating it possesses a list of US and European companies at risk of seizure if G7 countries proceed with the confiscation. It claims to hold a sizable amount of foreign private assets within the country, valued at approximately US$ 300 billion, equivalent to the frozen Russian reserves abroad.
Overview
- In the three-day elections from March 15 to 17, Russian President Vladimir Putin secured 87.28% of all votes, followed by Communist candidate Nikolai Kharitonov with 4.31%, New People candidate Vladislav Davankov with 3.85%, and nationalist Leonid Slutsky with 3.20%.
- This marks Putin’s highest score since he first came into power in 2000, reflecting his primary objective of demonstrating unprecedented public support for himself and his choices, thereby legitimizing the ongoing war.
- According to the independent researchers, around 22–32 million votes were thrown in for Putin. Novaya Gazeta, one of the independent media outlets in Russia, reported that nearly half of the 76 million votes cast for Putin were fraudulent.
- The “Noon against Putin” protest, calling voters to vote at noon on March 17, took place both within Russia and abroad without many disruptions but reflected growing public dissatisfaction and anti-Putin sentiment especially outside of Russia, where gatherings at the polling stations were sizable.
Our View
With an expected outcome, Putin is entering his fifth term amid a number of challenges on both the domestic and international fronts. In terms of the former, he needs to maintain economic stability, especially when it comes to keeping inflation in check and ensuring a stable ruble while also continuing a costly war in Ukraine. While his government resorts to some short-term fixes, including imposing capital controls or tapping into the National Wealth Fund, sustaining these measures in the medium term will be challenging. Capital controls have already proven to be costly for businesses, meaning that they are likely to be eased with a moderate impact on ruble depreciation. The liquid assets of the National Wealth Fund have almost halved compared to pre-war levels, which will restrain the government’s ability to fund the budget deficit and state-owned enterprises. Therefore, further depreciation of the ruble will not only be inevitable but also a preferable option for the government to offset the increasing budget deficit, resulting in an anticipated average exchange rate of RUB 95:USD in 2024. Inflation will remain high compared to 2023, yet likely below the double digits seen in 2022, averaging around 7% for 2024. The ambitious social programs, aimed at supporting socially vulnerable groups and boosting birth rates, will require generous government spending, which will be complicated by the substantial allocation of 30% of the state budget to the defense sector. The substantial military spending, which drove growth in 2023 through aggressive military spending, is unlikely to sustain high growth rates this year and beyond. The economy is already exhibiting signs of overheating, with capacity utilization rates, as reported by central bank surveys, hitting their peak levels since 2002. Yet, 2024 is unlikely to be a year of economic downturn, primarily due to relatively high energy prices in global markets.
Mounting international pressure due to expanding sanctions and increased scrutiny over their enforcement are set to pose significant external challenges to the Kremlin. There have been an increasing number of reports about Turkish, UAE, and Chinese banks halting their services to Russian clients in response to the US sanctions threats. While Moscow is exploring some avenues for evasion, growing Western scrutiny suggests that these will likely diminish over time. As the war drags on, unexpected challenges, such as the recent resurgence of the Ukraine based Russian paramilitary groups in Belgorod, are likely to become more acute and present real strategic hurdles to the war effort. Consequently, Putin and his economic management team will face difficult decisions in maintaining economic stability in an isolated and heavily sanctioned Russia for the foreseeable future.
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