. Last Updated: 07/27/2016

Duma Vote Keeps Markets Uneasy




The Russian parliament's rejection of Sergei Kiriyenko as prime minister Friday condemned markets and the economy to at least another week of uncertainty and waiting.


But analysts said it was clear that market-oriented reform would continue, although possibly at a slower rate, whether or not the State Duma, or the lower house of parliament, approved President Boris Yeltsin's nominee at a third and final attempt next week.


Russian shares slipped in Moscow, and in London the Duma vote hit dollar-denominated Russian and emerging market debt.


"It means another week of volatility in markets. If he isn't eventually confirmed, a couple of months of volatility," said Chris Speckhard, economist at Alfa Capital in Moscow.


"Russian interest rates will stay high for now. ... In the macro-economy, we're already seeing the effects of continued high interest rates. It'll probably put off the return to economic growth until the start of the third quarter."


But most analysts also said it was still probable that Kiriyenko would finally be approved.


If parliament rejects Kiriyenko again, Yeltsin must dissolve it, costing the Duma members their parliamentary seats and the perks that go with them.


"It's a question of brinkmanship now, of who has steelier nerves. I would say Yeltsin has the upper hand. He can kick them out of their jobs," said Julia Dawson at ING Barings in London.


Kiriyenko has, in just three weeks, become a focus for Western investors keen to see that reforms go on.


"The general sentiment is that he will add new dynamism to reforms, although a key question is whether any deals might be done on ministries -- whether Mikhail Zadornov will remain Finance Minister," Speckhard said.


"He's struck all the right chords for Western investors, advocating fiscal discipline and coming out for minority shareholders' rights."


In his speech to the Duma on Friday, he announced new measures to allow private sector debt to the federal budget to be restructured and to give regional tax authorities more autonomy. Separately, oil producers' shares received a boost when a government source said excise duties might be cut.


But analysts also say reform will not stand or fall by next week's vote.


For one thing, if Yeltsin dissolves the Duma, he can then simply ordain Kiriyenko -- or another figure -- to the prime minister's post, albeit at some political cost.


For another thing, the Duma seems to object more to Kiriyenko's personality and inexperience than to his policies. On Thursday, it passed the first reading of the tax code that he and investors alike see as one of the central planks of reform.


"Who holds the post of prime minister is not really the issue. Russia faces very limited policy choices and has a fairly limited choice of people to fill key leadership positions," said Ken Payne, head of research at Regent European Securities.


"If someone else were prime minister, what would he do differently? It's a question of the pace of reform, but not of the direction. High interest rates are not a result of bad policies but of uncertainty."


Concerning the order to allow restructuring of private sector debt owed to the federal budget, Kiriyenko said the move was one of a number of decisions taken during the past week intended to improve the business environment for industry.


He said the order would allow basic debt payment to be put off for four years and fines and penalties for 10 years, reducing the burden on companies' cash flow.


Regional tax inspectors would be able to take independent decisions to speed up implementation.


He said the first instance had been Tuesday, when the Moscow city government received a 59.07 percent stake in the Moskvich car producer in return for a pledge to pay off 650 million rubles ($110 million) of debts. Kiriyenko did not specify a time frame for the debt payment.


Yeltsin had already decreed the hand over of the shares a year ago, but there had been no formal government order until this week.


"The shares are sold, not given, by the federal government for a normal price along with the requirement to pay taxes, the requirement to invest in the factory, preserve jobs and to increase output," Kiriyenko said.


Moskvich has signed a joint venture agreement with France's Renault to build the Megane model at Moskvich's Moscow factory.