Ukraine: Russia’s Duma election puts Putin’s economy to the test

Russian President Vladimir Putin is preparing for a wartime reckoning as the Kremlin prepares to hold its first parliamentary elections since the full-scale invasion of Ukraine in early 2022.

The closely controlled three-day vote, from Friday to Sunday, is widely expected to give the ruling United Russia party an edge in the 450-seat lower house of parliament.

There is no doubting the result, but outside observers will be paying close attention to turnout and the margin of victory for United Russia for any signs of public discontent after more than four-and-a-half years of war.

Opinion polls show President Vladimir Putin’s United Russia Party has a wide lead over its rivals, but its support has fallen to its lowest level in four years due to the nationwide fuel crisis and attacks on delivery warehouses by Ukrainian drones.

All parties participating in the vote have publicly pledged at least some degree of allegiance to President Putin and his political views. The Yabloko party was the only registered party to oppose Russia’s war in Ukraine, but last month the country’s Supreme Court blocked the Freedom Party from contesting the vote.

“The recognition that war is very costly is becoming a consensus and general feeling in Russian society, to the point that even President Putin’s elite is starting to talk about the need to end the war,” Sergei Guliyev, dean and professor of economics at London Business School, told CNBC.

The Kremlin reportedly fired Andrei Klepakha from Russia’s state-run development bank VEB last month. A former chief economist has submitted a report warning that Russia cannot win a long war of attrition with Ukraine and predicts a major social crisis.

Putin has previously clashed with Gref, a German from Sberbank. At an economic forum last September, the CEO of Russia’s largest bank warned of a recession in the country’s economy, prompting a backlash from President Putin.

“Look at the polls too, no matter how polarized they are. You can see that Russians are feeling the pain of the war economically. Economic growth has stopped. Indeed, as you rightly said, the budget is not in the best situation,” Guliyev said.

“So President Putin had to raise taxes, which is very unpopular. As you can imagine, even with the tax increases, we still have a large budget deficit. It’s not something that will destroy (the) Russian economy, but it is creating more and more unhappiness and dissatisfaction throughout Russia,” he added.

The Russian embassy in London could not be reached for comment.

Analysts said one of the main reasons the House elections are more important than expected is that the elected House of Representatives will last until 2031, including the 2030 presidential election.

This means that the Duma will play a key role in controlling and legitimizing Russia if it undergoes significant political changes over the next five years.

The United Russia Party, which currently has 310 seats, needs to win at least 300 seats in order to maintain a supermajority and carry out constitutional reforms without relying on support from other parties.

In recent months, Ukraine has stepped up attacks on Russian oil and logistics facilities in a bid to raise Russia’s war costs and test President Putin’s resolve to continue the conflict.

The recent rise in oil prices has brought a big financial windfall to the Kremlin’s war chest as the United States and Iran vie for control of the Strait of Hormuz, but not everyone is convinced it will make a big difference in the long term.

“This is a very temporary boost,” Katia Grod, deputy foreign policy director at the Center for a New Eurasian Strategy think tank, told CNBC.

He added that even if oil prices rose in the short term, the Kremlin would not be able to sufficiently prop up Russia’s budget to continue paying the “very high” contractual salaries promised to soldiers drafted into combat.

“Therefore, we do not expect this to lead to greater economic stimulus for the Kremlin by increasing disposable currency,” Grod said.

Some outside observers say Russian authorities appear to be preparing for a new wave of military mobilization after the Duma elections, a prospect that is highly unpopular within Russia. The Kremlin has repeatedly denied plans for forced mobilization.

Vladislav Vlasiuk, a special envoy to Ukrainian President Volodymyr Zelenskiy, said on Tuesday during a visit to Singapore: “There was (was) a lot of information suggesting that they would start mobilizing. We’ll see. To me, it looks like the complete opposite of peace talks.”

Vlasiuk also expressed disappointment at what he felt was a lack of anti-war movement within Russia, concluding that perhaps this meant that most Russians supported Putin’s war. “It’s worrying. It’s really worrying,” he added.

One key indicator that investors will want to watch over the coming months is how the situation develops on the front.

Guryev said that if Putin believes that Russian troops are advancing in the eastern region of Donetsk, the Russian president is likely to conclude that “time is on his side” for peace talks.

He added: “If this line is completely frozen and there are signs that the Ukrainians are actually getting there, then President Putin may finally start thinking this year that maybe it’s time to negotiate in earnest.”