Eurasia in 2011: Recovery bolsters political stability

By Eurasia Group’s Eurasia practice

It looks like a relatively calm year for Eurasia, the area encompassing the former Soviet successor states at the crossroads of Europe and Asia. For the most part, the region is politically stable and countries will continue to see slow but steady economic growth. Russia and Kazakhstan face elections in 2012, but both are governed by well entrenched soft-authoritarian regimes. Ukraine is stabilizing, but risks remain in Georgia.

The ruling Putin-Medvedev tandem in Russia continues to govern with a minimum of internal friction, and the risk of social instability that rose following the financial crisis has now receded. Russian politics in 2011 will be defined largely by two events: the State Duma elections, scheduled for December, and the run-up to the presidential election set for March 2012. Russia’s regional influence is strong enough that it may be exercised more subtly than in the past. Russia’s GDP is expected to grow by 3 percent to 5 percent. Policy will be molded by two competing goals: the populist impulse to increase social and military spending ahead of elections and the finance ministry’s push to slash deficits and impose fiscal discipline. To shrink its budget deficit, Russia will turn to international capital markets, raise taxes, and embark on a massive privatization program. In terms of foreign policy, Moscow will work to improve relations with the West, the United States in particular, as part of a general strategy to draw more foreign investment.

In Kazakhstan, aging President Nursultan Nazarbayev remains firmly in charge and is expected to run for reelection in 2012 — unless a referendum is passed that extends his rule until 2020. But he will eventually need to groom a successor who is acceptable to the country’s various elite groups. In the meantime, political and business leaders will throw a few more elbows without destabilizing the current system. Most forecasts put Kazakh growth between 3 percent and 4 percent for 2011. The country will probably follow Russia’s lead on trying to shrink its budget deficit, raising taxes on oil and gas producers, and implementing measures to cut spending.

The implementation of IMF-mandated reforms in Ukraine may hurt the popularity of Viktor Yanukovych’s government, but the country’s perennially turbulent politics promise to stabilize next year. Popular anger could trigger protests against the government in 2011, and this could pose a longer-term threat to stability, particularly if Yanukovych’s popularity declines and the opposition is able to regroup. It also presents a risk to the implementation of measures required by Ukraine’s IMF loan. Regionally, there is also still a risk of a natural gas crisis between Ukraine and Russia that could affect supplies in 2011. Recently improved ties between Moscow and Kyiv are a major factor in containing the danger.

The major exception to Eurasia’s general sense of tranquility is in Georgia, where relations with Russia remain tense. It’s possible that another limited military flare-up between the neighbors could occur at some point in 2011. This would have an immediate negative effect on markets and the investment climate and cast a shadow over the rest of the region.

This post was written by analysts in Eurasia Group’s Eurasia practice.