Boston, MA -- (SBWIRE) -- 07/11/2013 -- President Vladimir Putin's public criticism of Prime Minister Dmitry Medvedev's government implies a change of key officials could be on the cards over the next few months. A potential contender for Medvedev's job is former finance minister Alexei Kudrin, whose appointment would be a positive signal for much-needed economic reform.

While we expect Russia's consumer story to remain attractive over the next few years, economic growth will be lacklustre as a result of too much government intervention in key sectors - energy, infrastructure and banking - and declining global oil prices.

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The precarious security situation in the North Caucasus poses a major challenge for the Russian authorities, who are at risk of losing control of this vital region. The Kremlin has few good options, and will most likely maintain a combination of repression and federal subsidies, but tough security policies will create a backlash that could undermine its position further.

Major Forecast Changes

The rapid decline in Russia's current account surplus in 2012 signals that the erosion of export competitiveness is occurring faster than we had expected, hence our decision to revise down current account surplus forecasts. We now expect a surplus of just 2.6% and 1.7% of GDP in 2013 and 2014, with the surplus to shift to deficit by 2017.

We are revising down our 2013 real GDP forecast for Russia to 2.6% from 3.6% previously, on the back of signals that President Vladimir Putin is willing to let headline growth drop below the 3.0% level this year. Although this now places us below consensus on growth, we see potential for further downward revisions over the next few months.

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