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. Last Updated: 07/27/2016

Duma Set but Investors Wait for Next Vote

After State Duma elections fraught with concerns over the strength of the democratic process, investors said uncertainty over President Vladimir Putin's succession plans meant it was too early to predict how the next administration would shape up.

In the weeks leading up to the elections, the results of Sunday's vote were largely seen as a done deal. Of greater significance was the majority by which United Russia would win and whether any of the marginal parties would gain seats in the Duma.

"There are obviously a lot of shortcomings on how the political process works, but the result was pretty much in line with what the polls were coming out with," said Clemens Grafe, chief economist at UBS.

Despite four parties clearing the 7 percent hurdle required for a place in the Duma, liberal factions were notably absent in the new chamber's lineup. The Union of Right Forces, which sought to portray itself as the true pro-business party in the race, gained just 1.1 percent of the vote.

"It would have been very useful to have a liberal party involved, so that is quite disappointing," said Alexander Branis, chief investment officer at Prosperity Capital Management.

Sunday's elections -- widely touted as a referendum on Putin's rule, given his October decision to head United Russia's party list -- gave his party a resounding 64 percent of the vote, ensuring a mandate to see through the economic reforms started during his presidency.

But the elections were also overshadowed by claims of official pressure on voters to cast their ballots in favor of United Russia. Putin insisted on Monday that the elections were a "legitimate" vote of public trust.

"All the weaknesses and wrongdoing during this election were more [evidence of] stupidity and lack of political culture than of the Kremlin's will," said billionaire Alexander Lebedev, a Duma deputy seeking re-election who switched his allegiance earlier this year from United Russia to A Just Russia. "I think it is better [to have] a State Duma like that than [none at all]. Most of the business community shares this view."

But the real test, investors said, would be the presidential election in March. United Russia said Sunday that it would name its presidential candidate at a special congress on Dec. 17, and it has been widely predicted that whoever is backed by Putin will get the top job.

In the past year, Russia has been overlooked by some investors in favor of other emerging markets because of perceived political risk and the growing attractiveness of China, Brazil and other countries. As a result, the Russian market is now looking relatively cheap.

"You don't really feel comfortable if you don't understand the process. And that is playing on people's minds," UBS's Grafe said.

A raft of IPOs planned for the fourth quarter of 2007 have faltered, which analysts say is more a consequence of the global credit squeeze than of Russian political risk. Nevertheless, IPO activity may pick up next year, as stability and predictability -- the factors uppermost in investors' minds -- are expected with the arrival of a new president.

"I think there will be more demand for Russian assets once there is more clarity," Prosperity's Branis said.

Both the country's main stock-market indexes were down in Monday trading, but analysts attributed this to a set of bad results from Severstal and said the election result had already been priced in.

The RTS index fell 0.85 percent to close at 2200.75 points, while MICEX fell 0.64 percent to 1838.78 points.

"[Even] if Putin were removed from the political scene, I think the people in government would follow more or less the same economic policies," said Jonathan Schiffer, sovereign analyst at Moody's. "In terms of the key economic policy questions facing Russia, I think there is a tremendous amount of consensus."

Nevertheless, some Russia watchers believe that there is still sufficient uncertainty to deter investors, an uncertainty that will only be resolved when the next incumbent is ushered in to the Kremlin.

"Exactly who is going to be a winner and a loser in the Kremlin, that is an open question right now," said Ian Bremmer, president of the Eurasia Group, a U.S.-based risk consultancy. "It is very clear that whatever Putin decides he wants to do with the transition, he is going to have somewhat less control, and some other group or individual is going to see an improvement in their stature and power. The lack of certainty around that process right now is what's spooking people."

Investors are hopeful that the new Duma will tackle their wish list of reforms. One of the most long-awaited reforms is the bill on foreign investment in strategic industries, which could bring clarity on the so-called "rules of the game." The bill has been postponed on a number of occasions already.

But there is work to do in a number of areas, investors said.

"There are the usual suspects," said Ulf Persson, managing partner of Mint Capital, a Moscow-based private equity fund. "You want the reforms to take on another lease of life, corruption to be reined in, the tax system to be improved, and the government to focus on education, because we all see how tight the labor market is."