A fresh Start?

Happy Friday,

I once had the pleasure to visit a reading by Professor Schnitzer, economic advisor to Chancellor Merkel, about the very controversial topic of "the Benevolent dictatorship". The idea was simple, a "Dictator" exercises absolute political power to benefit every single one of their subjects. We have seen many examples in history of attempts which started off "successful" but ended in revolution or crisis.

After this week's political "reform" in Russia, academics will take a closer look if a more guided democracy will economically benefit the Russian people. The last decade of domestic and foreign policy has put increasing pressure inside Putin's system. However, the conditions at the start of this decade are not too bad. A sovereign wealth fund of more than $125 billion, a government budget surplus that hit almost 3% of GDP in 2018, net public debt of zero, and a relatively stable and low inflation rate. All this has helped appreciate very strongly the RUB, with the currency being one of the best performing emerging market currencies in the last 12 month.

However, the political risk and unstable future are two of the many factors holding back Russia from reaching their full growth potential. The increasing of the retirement age and VAT rate in 2018/9 has added another pressure on the Russian system. Still, due to the upcoming Duma election in 2021 and the presidential election in 2024, the market is not expecting any deeper changes. However the ongoing US election and the hard-line of the EU will increase external economical and political pressures. We have to wait and see how Putin will not only reform the political system but also improve the economy in Russia, as only these two units together will guarantee him his power beyond 2024.

My thought of next week

Of course as a keen Royalist I was mainly focusing on the economical and constitutional impact of MEGIX and their move to Canada. However, the market will focus more likely at the BoC rate decision next week. The market is awaiting more data coming out of Canada in the next weeks such as CPI and GDP, which the Bank is seeing an annualized increase in 4Q of 1.3%. This number and the very strong employment number out on Thursday by adding 46K new jobs, could increase pressure on the BoC to evaluated their monetary policy. However, the market is not expecting any change next week and is more focusing at any adjustments in Q2 of 2020 if the economic situation is to continue to improve.