Russia: Old Vodka in New Bottles by Alexander Kliment Associate, Europe & Eurasia

INSIGHTS FROM EURASIA GROUP politics and the perspectives markets APRIL 2008

ver since President Vladimir Putin tapped First Deputy Prime Minister Dmitry Medvedev last fall as his successor, global E investors have tried to divine whether the relatively young technocrat from St. Petersburg might soften some of Putin’s more statist economic policies. Throughout an abbreviated presidential campaign that was tightly managed by the Kremlin, Medve- dev presented economic and political views that are slightly more liberal than those of Putin. He criticized Global Political the state for overreaching on the economy; called for Risk Index reinvigorated reforms in the judiciary, the bureaucracy The GPRI, which is produced by Eurasia and the tax regime; and even hinted at democratic Group, measures a country’s ability to reforms. As Medvedev prepares for his inauguration absorb political shocks. The higher the on May 7, the search has intensified for clues about number, the more stable the country. his real policy intentions. HUNGARY 77 Despite Medvedev’s somewhat liberal leanings on SOUTH KOREA 76 economic and political issues, he remains Putin’s pro- POLAND 74 BULGARIA 70 tégé and represents continuity with the existing order. MEXICO 67 Putin, who is likely to serve as Medvedev’s prime min- CHINA 66 ister, will reinforce the status quo. The broad strokes of ARGENTINA 65 economic policy—general fiscal discipline, government BRAZIL 65 SOUTH AFRICA 65 control over strategic sectors, state-led development TURKEY 64 and industrial policy and the gradual reform of natu- RUSSIA 63 ral monopolies—largely will remain the same under INDIA 62 Medvedev’s leadership. THAILAND 62 Medvedev belongs to the Russian political elite, EGYPT 60 ALGERIA 59 and this group, in spite of its internal squabbling, has COLOMBIA 58 reached a broad consensus in favor of a leading state UKRAINE 58 role in the economy and an assertive foreign policy. SAUDI ARABIA 57 government In addition, the results of the March 2 election, while INDONESIA 56 PHILIPPINES 55 society flawed in many ways, reflected the Russian popula-

IRAN 51 security tion’s cardinal interest in maintaining the Putin legacy VENEZUELA 51 of economic growth and political calm. economy NIGERIA 46 (continued on inside cover) PAKISTAN 42

Courtesy of Citi Private Bank (continued from cover) CLOSE-UP: Nigeria At the outset of his presidency, Finding Balance on the Scales of Justice Medvedev largely will be dependent by Sebastian Spio - Garbrah, Analyst, Middle East & Africa on Putin. The new president will lack the clout and political network to stability Spotlight Nigeria’s political stability increased significantly make meaningful gains against the following the February 2008 unanimous court interests entrenched in the bureau- of appeals decision that verified President Umaru cracy, state corporations and security 46 Yar’Adua’s April 2007 election victory. Nigeria’s services. Yet, once Medvedev settles rule of law also gained credibility, as the court pro- into the tremendous symbolic and rating forecast cess proved it could contain election disagreements structural power of the Russian presi- and prevent a dispute from spilling over into the dency, it may eventually allow him streets, as happened in Kenya, threatening business to push more forcefully and advance confidence. some of the reforms he outlined dur- Nigeria’s supreme court has yet to rule on the ing his campaign. He will need to decision of the appeals court, but the popular accep- draw on his allies in the more liberal tance of the decision and the lack of civil violence wing of the elite, which is currently indicate that respect for the rule of law is beginning concentrated around the powerful to take hold in Nigeria. It also signifies a reduction finance minister Alexei Kudrin and in the legal risk associated with foreign-business the economic ministries. At the same Nigeria’s President operations in the country. Following the supreme time, he will need to prove himself Umaru Yar’Adua court decision, which is likely to come by early capable of managing the powerful April, Nigeria’s stability will be reinforced. clan of statist hardliners with KGB The country has shown its capacity for resolving major political dis- backgrounds—the siloviki—who insist putes without violence and mayhem. Nigeria’s April 2007 election was the on expanding state control over the first time in its 47-year history as an independent country that any demo- economy. It is expected that if Putin cratically elected president had served his full term and handed over power becomes prime minister, he will retain to another elected leader. Though tentative, this event signals potentially some of the siloviki on his staff. Given dramatic progress toward acceptance of electoral outcomes and legal deci- that Medvedev has no natural allies sions, which augurs well for Nigeria’s economic environment. in this group, he will rely heavily on Putin to manage relations with them. Even if Medvedev can position Growing Stability himself to implement farther-reaching Nigeria’s political stability moves toward a higher plateau. reform plans, movement will be slow. Russia’s political class is invested deeply 65 in the prevailing order, and Medvedev GPRI Government Stability Score (1 to 100) will be mindful of the fact that whole- 60 sale reform agendas historically have spiraled into chaos and instability. 55 In the coming months, observers await clues about the power distribution between Medvedev and Putin and 50 among the various power clans in the Kremlin. Key events to watch include 45 the expected restructuring of ministries, Average Over Period = 51 the formation of Medvedev’s cabinet 40 and the formal, as well as informal, Jun 05 Oct 05 Feb 06 Jun 06 Oct 06 Feb 07 Jun 07 Oct 07 Feb 08 distribution of power between the pres- Data Source: Eurasia Group as of 19 March 2008 ident and the prime minister.

2 politics and the markets CLOSE-UP: Nigeria Finding Balance on the Scales of Justice I nside the Index In the following briefs, Eurasia Group analysts highlight the connections by Sebastian Spio - Garbrah, Analyst, Middle East & Africa between stability and key political issues in important emerging markets.

LEGEND

government POLAND UKRAINE society SOUTH KOREA security IRAN economy

Colombia- COLOMBIA VENEZUELA Venezuela GPRI 58/51

Border tension eases Colombia and Venezuela have resumed diplomatic relations after a week- long break that was accompanied by a trade blockade. The dispute seats will be decided in expected to remain strong Ukraine between the two countries April runoffs.) However, and the opposition PiS resulted from Colombia’s regardless of which group party is unlikely to have a GPRI 58 military incursion into takes the lion’s share, the political resurgence. Opposition blocks Venezuela-allied Ecuador core source of tension activity to assassinate a leading with the US will remain, South Korea FARC guerilla member. given that conservatives The ruling coalition’s GPRI 76 Border harmony and the and many reformers sup- razor-thin majority in parliament will make it very nations’ bilateral trade port Iran’s current nuclear Ruling party may hard for Prime Minister relationship will be tested policy. fracture again as FARC guerrillas Yulia Tymoshenko to pass Following April 9 legisla- try to undermine prog- any controversial pieces of Poland tive elections, the Grand ress toward peace by legislation without conces- GPRI 74 National Party could attempting to provoke an sions to the opposition. fracture and fail to cap- Former Prime Minister Vik- international conflict. Reforms continue ture the majority it needs tor Yanukovych’s Regions The new PO-led govern- to pass President Lee of Ukraine party—in protest Iran ment will continue its Myung-bak’s economic of government overtures GPRI 51 politically sustainable agenda. Infighting over to the North Atlantic economic- and social- candidate selection for Treaty Organization, or No change on nuclear reform strategy in an the upcoming elections NATO—was able to block policy attempt to improve labor has exacerbated existing parliamentary activity from If conservatives and markets and fiscal figures. tension between Presi- Jan. 18 to March 6. The reformers combined win To prevent an antireform dent Lee’s supporters opposition could again flex more seats than Mah- backlash, Prime Minister and a rival faction led by its muscles against the rul- moud Ahmadinejad’s Donald Tusk will take a former Chairwoman Park ing coalition in an attempt supporters in the final tally gradualist approach and Geun-hye. There is a 50% to hinder approval of the of the March 14 parliamen- focus on incremental chance that Park, angered government’s privatization tary election, the president reform, while widening by the repeated attempts plan, expected in April. will face a tougher land- his support base by not of Lee supporters to mar- scape on economic issues, leaving poorly paid public- ginalize her, will leave the and the scope of political sector workers behind. GNP after the elections discourse could broaden. If this plan proves viable, and form a new party. (Nearly a quarter of the the PO’s poll ratings are

Legend: Positive change Negative change No change

politics and the markets 3 The Outlook Key issues and possible outcomes for the coming month. country GPRI* outlook what to watch for Algeria 59 President Bouteflika may use parliament to secure a third term instead of seeking popular approval through a referendum. Argentina 65 Despite new CPI methodology likely to be released this month, doubts will persist about the accuracy of inflation statistics. Brazil 65 Record tax revenue and abundant rainfall reduce fiscal and energy risks. Bulgaria 70 The government is between a rock and a hard place when it comes to fiscal challenges and a strengthening opposition. China 66 Despite Ma Ying-jeou’s election as Taiwanese president, Beijing and Taipei’s efforts to liberalize relations will be incremental. Colombia 58 Security improves as armed forces continue making progress against the FARC with information from confiscated guerrilla laptops. Egypt 60 Rising wheat prices and tension surrounding municipal-council elections will limit government capacity to push economic reforms. Hungary 77 The government’s fiscal package and the cabinet’s survival are threatened in the wake of March’s referendum on reforms. India 62 Ruling-coalition divisions grow over the India-US nuclear deal, risking a withdrawal of leftist-party support. Indonesia 56 Though rifts between Yudhoyono and the Golkar party will persist and undermine the legislative process, a split remains unlikely. Iran 51 Election results could influence domestic policy, but the substance of nuclear and foreign policies will not be affected. Mexico 67 President Calderón’s energy-reform proposal faces strong opposition from the left. Nigeria 46 An appeals-court ruling and the public’s acceptance of it bolster President Yar’Adua’s legitimacy. Pakistan 42 The government will increase pressure on President Musharraf by pushing to reinstate the judges he removed in November. Philippines 55 Near-term political tension will decline, but President Arroyo’s opponents will continue to look for opportunities to oust her. Poland 74 The government will continue its incremental and politically sustainable approach to reform. Russia 63 The United Russia party congress on April 15 will help clarify Putin’s role in Medvedev’s presidency. Saudi Arabia 57 Domestic tension will intensify over the management of oil revenue and the possible creation of a sovereign wealth fund. South Africa 65 Ruling-alliance tension increases over the direction of fiscal, monetary and labor policies ahead of April’s summit. South Korea 76 The potential fracturing of the ruling party after legislative elections threatens President Lee’s economic agenda. Thailand 62 With the risk of inflation growing, the government will likely resort to expansionary fiscal policies to supplement rural incomes. Turkey 64 Conflict between the ruling AKP and the secularists over the headscarf ban escalates amid court controversy. Ukraine 58 Disagreements over NATO membership, as well as gas agreements with Russia, may cause political problems for the government. Venezuela 51 The government will continue to adopt piecemeal measures to contain spiraling inflation and production shortages.

Legend: Positive outlook Negative outlook Neutral outlook *The GPRI, which is produced by Eurasia Group, measures a country’s ability to absorb political shocks. The higher the number, the more stable the country.

Citi Private Bank has retained Eurasia Group to offer political analysis and insight. The opinions expressed in this report are solely those of Eurasia Group and do not necessarily reflect the opinions of Citi Private Bank or other business units of Citigroup Inc. Eurasia Group developed the first qualitative comparative political-and-economic-stability index, which Citi Private Bank has licensed, called the Global Political Risk Index, or GPRI. The index is designed to measure a country’s ability to absorb external or internal political shocks. Although the timing of such events cannot be predicted, the GPRI is meant to gauge how well particular nations would be able to withstand them.

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