beyondbrics

It hasn’t taken long for the implications of Sunday’s election setback for Russian prime minister Vladimir Putin to hit the financial markets.

Late on Tuesday Moscow time, Russian stocks and the rouble plunged after Putin said he would reshuffle the government, assuming he returns to the presidency in elections next next March. It was the first sign that the man who has run Russia for over a decade might have been rattled by the ruling United Russia party’s poor showing and the post-election street protests.

The benchmark, rouble-denominated, Micex index fell by 3.9 per cent down and the $-based RTS index by 4.7 per cent, with the rouble losing 1.3 per cent against the US currency.

As investors were assessing the political outlook, protestors were gathering in Moscow’s streets for a demonstration to follow Monday evening’s rally, which drew 5,000 people angry at alleged electoral fraud.

The police, who arrested around 300 on Monday, were again out in force, with 50,000 officers on duty backed by 2,000 elite interior ministry troops.

Roland Nash, chief investment strategist at hedge fund Verno, told Reuters: “The market is reacting to the accumulation of evidence that there could be some [political] reaction to the election results. I think people are spooked about what will be the fallout.”

Charles Clover reported for the FT on Putin’s pledges to change political tack:

Mr Putin promised a reshuffle of top government jobs following his return to the presidency next year. “There will of course be a significant renewal of personnel in the government,” he told members of his United Russia party on Tuesday.

“Yes, there were losses, but they were inevitable,” Mr Putin said, defending the losses by United Russia. “They are inevitable for any political force, particularly for the one which has been carrying the burden of responsibility for the situation in the country.”

Putin remains overwhelmingly likely to win back the presidency next year. But it is no longer as clear as it was that president Dmitry Medvedev, who is standing down to make way for his political master, will move into the prime minister’s seat as easily as was intended.

At the very least, the election setback will prompt disruptive political jostling in the ruling elite, with different individuals and factions trying to dodge the blame for the debacle. That in turn could cause tensions over their business interests and the interests of their business associates.

None of that is good for the investment climate, even in the short-term. In the longer-term, the Kremlin plan for a smooth roll out for “Putin Two” looks under threat. Investors loathe uncertainty. Even if the man at the top retains control and promises stability – as he has done – there is suddenly lots to worry about.

Related reading
Russia: a dent in the Putin machine, beyondbrics
Kremlin’s hard man takes a body blow, FT
Capital flight: $49.3bn and counting, beyondbrics
Stalin’s horrors still throw Russia into turmoil, FT
Kremlin’s top dogs tussle for poll position, FT
Special Report: Investing in Russia 2011, FT