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Banks are optimistic on Russia's economy ahead of Sunday's election, but problems remain rife

Key Points
  • As Russia prepares for its presidential election on Sunday, the economy remains a primary consideration for voters.
  • Russia has recovered from its two-year recession, growing an estimated 1.4 percent last year, but regions outside Moscow have seen wages and living standards decline. 
  • The election outcome could see a reformist cabinet more inclined towards fiscal spending, says J.P. Morgan, but deeper reforms to corruption and inefficiency aren't likely. 
Russian President Vladimir Putin speaks during a campaign concert as supporters, celebrities and dignitaries look on at Luzhniki Stadium on March 3, 2018 in Moscow, Russia.
Mikhail Svetlov | Getty Images

As Russia prepares for its presidential election on Sunday, its economy remains a primary consideration for voters.

But despite long-running economic burdens ranging from entrenched corruption and low growth to Western sanctions and fluctuating oil prices, UBS and J.P. Morgan see cause for confidence in the country's near-term future.

Russia has recovered from its two-year recession, growing an estimated 1.4 percent last year, according to UBS, a growth driven largely by improving domestic demand and investment. The bank expects its gross domestic product (GDP) to continue growing for the next two years.

Incumbent President Vladimir Putin, who is expected to win in a predictable contest in which viable opponents were barred from running, enjoys high popular approval ratings of near 80 percent, according to polls. The election's democratic credentials have been widely criticized, both domestically and internationally.

But while Putin's continued tenure won't be a surprise, a new and potentially reformist cabinet will be central to defining any future structural reforms.

'Positive' growth prospects

"We are positive on the growth prospects for the Russian economy as we expect consumer spending to remain robust as real wages increase," said Diana Amoa, emerging markets debt portfolio manager at J.P. Morgan Asset Management.

The election outcome could see a cabinet "more inclined towards fiscal spending which would be an additional tailwind for growth," she added. "But, overall, we expect policy continuity on the macroeconomic front."

Outlook for the ruble is positive, and J.P. Morgan forecasts it staying relatively stable "with a slight appreciation bias" as steady oil prices attract portfolio inflows into the economy.

Ultimately, however, the ruble's risks are less macroeconomic and more geopolitical, which the bank admits is harder to predict.

Deterioration in living standards

Serious challenges remain, with growth potential remaining low given structural constraints like low energy prices, an aging population, low efficiency and ongoing Western sanctions. And although many Russians still love Putin, polls show the country's economic performance garners less enthusiasm.

Despite some growth concentrated in Moscow, real wages outside the capital have been falling for the past three years, said Daragh McDowell, principal Russia analyst at Verisk Maplecroft.

"There is a general sense that people 'in the regions' are getting increasingly fed up with the deterioration in living standards," he told CNBC. He described Russia's growth outlook for the next three years as "mediocre at best."

Protester holding a poster depicting Russian Prime Minister Vladimir Putin, Central Election Commission chief Vladimir Churov and Russia's President Dmitry Medvedev shouts slogans during a rally to protest against alleged vote rigging in St.Petersburg, Russia, Sunday, Dec. 18, 2011. About 7,000 demonstrators demanding a rerun of parliamentary elections gathered Saturday in central St.Petersburg for a second weekend of protests against Russia's fraud-tainted vote, a comparatively small crowd that
Dmitry Lovetsky

While inflation has stabilized and there appears to be a revival in the agricultural sector, the key handicaps on Russian economic growth are the same as they've been since the Soviet Union's collapse: insecure property rights, weak rule of law, and corruption.

But don't look for reforms on these anytime soon, said McDowell. "As Putin's system of government depends on all these factors both to retain and exercise power, reforms remain unlikely."

Pledge to 'cut poverty in half'

Putin, in a campaign speech in early March, focused on domestic issues, pledged to cut the nation's poverty rate in half over the coming six-year term and turn Russia into a world top-five economy.

"This is a complicated task, but I am sure that we are ready to accomplish it," the president said.

This is something the Kremlin needs to address in the coming years "or risk upsetting the stable socio-economic balance," according to a report by Macro-Advisory Partners. Putin also hinted at political liberalization — a claim on which observers are highly skeptical, particularly given that recent months have seen hundreds detained and arrested in opposition protests and rallies.

In terms of external variables, commodity prices and Western sanctions remain the most important influences on Russia's economy, although Moscow is now less reliant on oil revenues than it was when prices plummeted in 2015.

New sanctions may be on the horizon in the wake of Russia's alleged nerve agent attack on a former spy on U.K. soil, which has further poisoned relations with the West amid the worst tensions since the Cold War.

In the longer-term economic picture, J.P. Morgan's Amoa said, "We are yet to see meaningful reforms that would boost potential growth, so the story for now remains one of a cyclical rebound with potential for fiscal stimulus."