Veritas: Eastern Europe tired of political opposition, for now

Eastern European countries such as Russia and Ukraine, which have been at the forefront of the news this year with political elections, are seeing a slowdown in the opposition movements.

The parliamentary election in Ukraine on Sunday brought no surprises – as expected, the Party of Regions won the majority of the votes.

Although the outcome of this election displayed some opposition movement and a tentative emergence of new political figures, there is no sense of urgency in this shift.

Investors in Ukraine’s market agree that this is not enough to move the needle. No major changes are expected until the forthcoming presidential election in 2015 – that one may well be a bigger deal.

In Russia, where the start of the year saw protests against the government following the presidential elections in March, the opposition movement seems also to have slowed down, for now.

A recent poll conducted by the country’s research centre Levada revealed a majority of the respondents had lost interest in politics for the time being.

Over two thirds of respondents to the monthly opinion poll said they support Vladimir Putin as current president.

However, here too there is a sense of “calm before the storm”. Although the Russians are content with Putin for now, an increasing proportion of respondents do not want to see him elected as president in the 2018 elections.

Levada’s survey reveals 49% of respondents saying Putin should not continue as leader for another term. Similarly, half of the respondents also do not want to see Medvedev return to the Kremlin as Prime Minister for another term.

So it seems the Russians are content with the way things are for now, but are ready for a change in the long run.

One reason for this state of affairs may be that Russians do not see a viable alternative to the current leaders among the opposition. A large majority of respondents said there is no one capable of replacing Putin at the moment.

However, almost half of them feel that such a figure will emerge in the next few years, in time for the next election. No indication has yet been provided as to which party this potential leader may belong to.

Last did weekend see the formal launch of a new political party by Mikhail Prokhorov, a Russian billionaire. After running in the presidential election in May, he has left his former business role to focus full time on politics as the leader of the Civic Platform.

However, Prokhorov only received 7.98% of the votes in the March election, so it seems unlikely his party will rise to the leading positions in the next one.

The general sense from both Russia and Ukraine is that of lack of incentive or pressure for change and political reform for the time being.

Commenting on the election in Ukraine, East Capital’s senior adviser Aivaras Abromavicius says “we might see some improvements in the areas of export markets and financing, but I do not foresee any major changes.”

Russia, albeit in a better position, also lacks incentive for a turnaround. The push would have to come from dropping oil prices, which in turn would have a negative impact on the budget. But for the time being they are remaining high.

Sberbank CIB says: “So long as oil prices stay high enough – either on their own or in combination with an expanded budget deficit – to allow the government to keep funding social programs, pensions and public sector worker salaries, as well as sustain a generally stable economy, there will be no major reforms.”

As a result of this relatively stagnant situation, many asset managers investing in the region are remaining underweight Eastern European equities.

Examples are HSBC Global Asset Management, which maintains a relatively small exposure to Eastern Europe within its frontier markets fund, and East Capital, a dedicated investor in Eastern Europe and emerging markets, which is also cautious in its Eastern European allocation.

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