Federal Assembly Address - Government Resigns After President's Speech

Prime Minister Dmitri Medvedev and the government tendered their resignations following President Vladimir Putin's annual speech to the Federal Assembly (composed of the Duma and Federation Council) today that broached the possibility of changes to the constitution. Among other issues touched on by the president were measures aimed at improving demography and expanding social support, which, according to some preliminary estimates, could lead to around R400-500 bln of additional expenditures this year and R600 bln next year (less than 0.5% of GDP). > Prime minister, government resigned after Federal Assembly address. Prime Minister Medvedev explained that his resignation was connected with the proposed amendments to the constitution announced during the speech. Putin proposed expanding the powers of the legislative branch, granting it the right to form the government. According to the current constitution, after the resignation of the government, the president will nominate a prime minister within two weeks and the Duma, the lower chamber of parliament, will have another week to approve it. The initial market reaction to the headlines was negative, but the initial losses were recovered in the following hours. Until further details emerge about what the new government will look like, it is hard to draw any conclusions for the longer-term effect on the economy. > Fight against poverty, improving demographics were key points in this year's speech. Putin started his speech with a description of the demographic situation in the country and discussed the problems with poverty, especially among families with children. He announced several measures that should help to solve some of these problems. Apart from previously announced ones (such as monthly payments for low-income families for each child below the age of three, which should have started this month), he also announced additional payments for each child aged 3-7 for families in which the per-person income is below the cost of living. Payments will be half of the minimum cost of living this year but next year could be increased to the full cost of living, which is around R10,000.> Maternity capital program expanded, extended. Another important program targeting demography is the so-called "maternity capital" program, which Putin announced would be increased in terms of the size of the payment and also extended until 2026. The total payment will be increased from R453k in 2019 to R616k. Moreover, the first R466k will be granted after the birth of the first child (this was disbursed only after the birth of the second child in the previous iteration of the program) and an additional R150k will be available after the birth of the second child. Families with three children could be eligible to receive an additional R450k, which could be used for mortgage payments. Among other initiatives announced were free meals for school children in the first through fourth grades and further increases in the number of places available in nurseries. Putin also announced additional payments for teachers (R5k for head teachers of a class), as well as an increase in scholarship places in universities across the country.> Additional social expenditures could cost up to R400-500 bln this year, below 0.5% of GDP. Putin did not touch on the issue of tax deductions - this had been widely discussed in the media before the speech (see our note, "Federal Assembly Address Additional Social Support Measures Could be Announced"). According to some official estimates, the total amount of additional spending from the budget could be up to R400-500 bln this year and could increase to R600 bln in 2021, below 0.5% of GDP. Taking into account that the budget surplus was probably about 2% of GDP last year, financing this additional spending should not be a problem. Moreover, we estimate around R300 bln remained unspent from last year's budget and will be rolled over to this year, so the additional spending should be viewed more as a normalization of fiscal policy. This time, Putin only briefly discussed economic growth and investment, saying that measures that had previously been announced together with lower inflation should boost investment growth to 5%, which he said would put Russian GDP growth above the global average in 2021 (the IMF expects global growth at 3.6% next year). Putin mentioned the regulatory guillotine and softening of some criminal code articles as government measures that should help improve the investment climate. > Proposed changes to the constitution. Putin proposed changes to the constitution that are expected to have the effect of increasing the power of the Duma and Federation Council (the chambers of parliament), as well as the State Council (advises the president). The Duma would gain the right to nominate the prime minister (instead of just giving its consent to a candidate nominated by the president, as is the case now). It would also gain the power to appoint the ministers and deputy ministers in the prime minister's government; the president would not have the right to reject the nominations. The president would have the right to dismiss ministers and would remain the commander-in-chief. Appointments of defense-related ministers would be made after consultations with the Federation Council. The role of the State Council (which includes heads of regions, members of the government, the speakers of the Duma and Federation Council, presidential envoys in so-called federal districts) would be fixed in the constitution. Another set of amendments would directly prohibit citizens of other countries or Russian citizens with residence permits for other countries from holding high-level positions in the Russian government, including ministers, Duma deputies, Federation Council senators, judges, heads of regions. To be eligible for the presidency, a citizen must have lived in Russia for no less than the preceding 25 years and should never have held foreign citizenship or residence permit.Putin also said that the president should not be able to hold the position for more than two terms; currently, the constitution has a limit of two consecutive terms.