Experts explained how the protests will affect the Russian economy

Analysts of the telegram channel MMI, dedicated to macroeconomic issues, paid attention in their publication to Saturday's protests:

“Some readers accuse us that MMI is starting to slide from an economic channel into a political one. No, it’s not. The main question to which we have always looked for an answer is what is happening in the global and Russian economies, what to expect next, and how this will affect the financial markets. We continue to think in this direction, sharing our thoughts with you. But it really seems to us that the growth of protest activity can become an important factor influencing both the economy and the markets. It cannot be ruled out that this will generally be the next black swan. Therefore, we will continue to closely monitor this topic. And now a few thoughts on past events.

On Friday, we conducted a survey on the impact of the upcoming protests on financial markets. The most popular response from our readers (35%) was that the protests would be modest. Considering that 40% of our readers live in Moscow and the region, we can say that, on the whole, they were right. We will not discuss the numbers now (we may be wrong), but we got the impression that the scale of the protest in Moscow was smaller than in August 2019. But this cannot be said about Russia as a whole. In many cities, protest activity this Saturday was at an all-time high.

For economists, this is a very curious detail. Why are the regions more dissatisfied than Moscow, although it has always been the other way around?

1. Economy. In the last 7-8 years, we have all seen a steady trend of separation of Moscow from the regions in terms of living standards, infrastructure and social services. During the pandemic, this became very clear, showing the scale of the destruction of the health care system in the country in comparison with Moscow. Moreover, the infrastructure in Moscow has improved not only in relative terms (compared to the regions), but also in absolute terms (we ourselves live in Moscow, and these are our subjective observations). Moscow is indeed a different country in comparison with Russia, differing not only in the convenience of life, but also in most of the macro parameters. For example, Moscow has traditionally lower inflation, which is largely due to more developed consumer markets and higher competition in them. In short, Muscovites should have significantly fewer economic reasons for dissatisfaction. Why hasn't this been shown earlier, and the protests in Moscow have always been stronger? We are not political scientists, but we will venture to suggest that there was simply no reason (which happens when a strong reason appears, Khabarovsk showed). The film by Navalny and his team could hardly have become a strong reason for Muscovites. Again, we mostly judge subjectively, but for us it was about five percent new. All the deafening facts of corruption presented in it were known earlier. But for the regions that are focused primarily on their problems, the information presented in the film could become a revelation, and be exactly the reason that blew up the situation.
2. State apparatus. Loyalty. Analyzing how the structure of the economy is changing, we have repeatedly noted that the most steadily growing sector is the state apparatus. In the 2020 crisis, he did not suffer at all. Considering that the state apparatus is concentrated primarily in the capital, as well as state-owned companies, it can be assumed that the share of people who depend on the state budget directly or indirectly increases from year to year, which, accordingly, reduces the share of protest-minded citizens. There is also a well-known topic - mortgage. The level of its penetration in the capital is higher. Moreover, the entire mortgage boom last year was mainly in Moscow, St. Petersburg and the Krasnodar Territory. Families burdened with mortgages are also not the most protest electorate.

From the events of last Saturday, we draw the main conclusion: protest moods reach their maximum outside Moscow, and there are serious economic reasons for this.

How will all this affect the economy? And here it depends on the reaction of the authorities. In democratic countries, the natural answer would be to redistribute the social pie from the center to the regions (in democratic countries, such a concentration of resources in the center is generally difficult to imagine). In authoritarian regimes, reactions can be most unexpected and inadequate. But still, given the upcoming elections to the State Duma, to which the government pays great attention, it is logical to assume additional measures of budget support aimed specifically at the regions. And this may become an additional factor in the growth of the Russian economy this year, which we still expect to be above 3%. By the way, while we're on the subject of economics, here's a quick look at the current picture:

• The economic downturn that we expected in the 4th quarter did not occur. In terms of “quarter to quarter with the elimination of seasonality”, GDP in the 4th quarter, if it decreased, then insignificantly;
• It is too early to sum up the results of January, but it seems that the economy is about the same as in December. At the same time, external demand is stronger, with investments - it is not clear, with consumer demand - without any significant changes;
• Inflation is decelerating in terms of “month-on-month with the removal of seasonality”, but the annual rate continues to go up due to the base effect and will reverse only in March.

How will the rise in protest sentiment in the country affect the markets? Not yet. According to our estimates, the notional “sanctions premium”, where the risks associated with domestic political factors can be dumped, remains very high. She simply has nowhere to grow further.

Therefore, in relation to the ruble, we continue to recommend the traditional seasonal investor model: in the 1st quarter, we sell the dollar at any upward jumps; we turn over starting from March-April, and for the rest of the year we play up the dollar.

In relation to OFZs, we also consider the current yield levels to be already noticeably deviated from equilibrium. Approaching the long end of the curve to 7% is already overkill.

As for stocks, they continue to live their lives. There is indeed a bubble here that we haven't seen since the dot-com boom at the end of the last century. It will begin to deflate, apparently, after the first signals about the collapse of QE. When to expect it? It depends on the extent to which the Biden plan will be adopted. If $ 1.9 trillion, as announced, then the Fed will need to take action in the summer and autumn, because with such an incentive, the US economy can very quickly find itself in a state of overheating. In fact, it is in the excessive stimulus from the American administration that we now see the main macroeconomic risks for the markets.