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Election to Bring Stability to Russian Markets

A strong enough vote to ensure that President Vladimir Putin can manage a smooth succession, and not too strong to alienate the West -- Russia's election provided no nasty surprises for financial markets.

Putin cleared the '60-60' barrier, with his United Russia party winning 63.3 percent of votes counted so far while turnout of 62 percent was enough to secure a popular mandate in a de facto referendum on his leadership.

And even as the opposition cried foul over alleged election irregularities, the fact that United Russia will be joined in parliament by three small parties will ensure at least some competition in a country with a long history of one-party rule.

"For markets, this gives stability for another 12-18 months," said Chris Weafer, chief strategist at UralSib in Moscow.

Stocks opened 0.5 percent weaker while the yield premium on Russia's sovereign eurobonds widened by around five basis points to 165 basis points over U.S. treasuries.

Rouble Stable

The rouble was weaker against the dollar and firmer against euro, but steady overall against the dollar/euro dual currency basket targeted by the central bank.

"The market shouldn't react to this event -- everything was already factored into the price," said Timur Nasardinov, an equities trader at Troika Dialog.

Looking ahead, investors will watch how Putin manages the run-up to the presidential election next March, where he must make way for a successor after his second four-year term.

"He now has the initiative in terms of what role he wants to stay on in," said UralSib's Weafer.

It's not really strong enough to justify a third term as president," Weafer said. "But it does substantiate the support he has among the population and satisfy his call to have the moral right to influence politics."

Year-End Rally?

Perceptions of political risk have played a key part in Russia's relative underperformance against its emerging-market peers this year, even as soaring oil prices suck in as much as $800 million in export revenues a day.

The MSCI Russia stock index is up 18 percent for the year to date, while that for China is up by 73 percent and India by 43 percent.

Capital inflows have resumed, meanwhile, easing liquidity on Russian financial markets that have been squeezed as a result of the global credit crunch.

Investors are waiting for Putin to name his preferred successor, with the United Russia party congress on Dec. 17 a date marked in their diaries, although he may want to delay an announcement to avoid becoming a lame duck leader.

"For investors it would be fairly good to end the year with a clear succession plan. It would create a good situation in terms of continuity going into 2008," said Alexander Branis, chief investment officer at Prosperity Capital Management.

'Insurance Policy'

Analysts now reckon that the more likely outcome will be for Putin to anoint Prime Minister Viktor Zubkov, whose relatively advanced age of 66 and personal loyalty would make him an ideal placeholder.

For now, with oil prices near $100 a barrel, it's all plain sailing for Russia's economy with growth this year forecast at around 7.5 percent.

But, say analysts, rapidly growing imports could eat up Russia's external surpluses within two or three years, putting an end to the central bank reserves accumulation that has underwritten the eight-year-old Putin boom.

If Russia's economy hits a rough patch, calls could mount for Putin, 55, to return to the highest office before the next parliament is out. And that's when the two-thirds majority -- sufficient to amend the constitution -- could come in handy.

"We don't expect that President Putin will use the two-thirds majority to change the constitution immediately, but it's a sort of insurance policy," said Ivailo Vesselinov, a Russia economist at Dresdner Kleinwort in London.