FACTBOX-Key political risks to watch in Russia

MOSCOW Aug 2 (Reuters) - Russia is one of the world's most lucrative emerging markets but the risks are big.

Oil sales are the foundation of Russian stability. The plans of Prime Minister Vladimir Putin, the country's paramount leader, also remain central to Russia's future.

Otherwise, the biggest risks remain corruption and the arbitrary rule of law.

OIL

Russia is the world's biggest energy producer and remains heavily reliant on oil and gas exports, which make up 65 percent of exports despite Kremlin calls to diversify the economy.

A sharp and sustained fall in oil prices CLc1 would lead to a sell-off in the equity, bond and currency markets, undermine the economic recovery and erode Putin's popularity before the March 2012 presidential election.

Major investment banks expect this year's Gross Domestic Product (GDP) to grow by more than the official 4.0 percent forecast after the economy shrank by 7.9 percent in 2009, the worst annual GDP result in 15 years. [ID:nLDE64R1KY]

While Russia's 2010 growth forecasts look impressive when compared to developed markets such as the European Union, they are less rosy when compared to China and India which are expected to grow by about 10 and 8.5 percent respectively.

The Kremlin is betting on oil prices of over $75 per barrel for its recovery and a moderate fall in prices could push the budget further into deficit [ID:nLDE66B08K].

Russia posted a budget deficit of 5.9 percent of GDP in 2009 and with an oil price assumption of $75 per barrel in the 2010 budget, it is forecast to be 5 percent of GDP.

Russia's Finance Ministry wants to be in the black by 2015 but spending has been raised and there is a lack of political appetite for tax increases ahead of the 2012 election.

Under current spending plans, the budget would only be balanced at an average price for Russia's Urals URL-E blend of oil of about $95 per barrel, according to investment banks.

Investors snapped up $5.5 billion of Russia's first sovereign Eurobond issue in more than a decade this April [ID:nLDE63L0HZ], but their appetite could wane if oil prices fell, the very time when Russia could need cash.

Even so, Russia's foreign exchange and currency reserves rose to $469.3 billion on July 16 and are the world's third largest after China and Japan. [ID:nMOS007598]

Russia also has plans to sell $29 billion in state assets, the most ambitious privatisation plan since the rigged sales of the 1990s. [ID:nLDE66P0S0]

What to watch:

-- Prices for oil, gas and metals. Chinese demand is key.

-- Russia's rouble RUB=: could appreciate further against the U.S dollar if oil prices are high, undermining the recovery.

-- What Putin and Medvedev say about spending ahead of the 2012 election, or about potential borrowing.

-- Comments from Finance Minister Alexei Kudrin, a fiscal conservative, on additional sources for budget revenue, such as borrowing or asset sales.

VLADIMIR PUTIN

Putin is Russia's most powerful and popular politician and dominates the political system despite stepping down as president in 2008.

Putin is the senior member of what Russian officials call a ruling "tandem" with Medvedev, the former corporate lawyer Putin tapped as his successor when a constitutional limit of two consecutive terms kept him out of the 2008 presidential race.

Both Putin, 57, and Medvedev, 44, have suggested that one of them will run for president in 2012, and that they will agree in advance which one it will be.

Many analysts expect Putin to return to the Kremlin in 2012 but some diplomats say he does not even need to be president to remain Russia's paramount leader. Putin is also leader of the biggest party in parliament.

Medvedev's biggest constitutional reform as Kremlin chief was to extend the presidential term to six years from four, meaning that the next president could serve until 2024.

Any strong signal from Putin that he will run for president in 2012 could spark a rally in Russian assets, just as any indication he was preparing to leave power or unable to fulfil his duties would have unpredictable consequences.

Returning to the Kremlin or staying in power beyond 2012 could raise concerns about the long-term stability of a political system based on the rule of one man.

What to watch:

-- Clarity from Putin and Medvedev on their presidential election plans.

-- Any real signs of discord between the two men could provoke a constitutional crisis, though there have been no indications of any major policy difference to date.

-- How Putin and Medvedev are presented in the domestic media and in opinion polls. Any drive for public relations stunts could indicate the beginning of silent campaigning ahead of the 2012 election.

-- Most of the key posts in the Kremlin administration and the cabinet are held by long-time Putin loyalists. A significant shake-up of high-level officials could mark a major shift in the balance of power and herald major policy changes.

RULE OF LAW, CORRUPTION

Western executives say the biggest barriers for business in Russia are endemic corruption, red tape and the arbitrary way the rule of law is imposed. [ID:nLDE62B1Y7]

Medvedev says corruption is one of the biggest threats to Russian national security and has promised to reform the judicial system and courts to improve property rights.

But he admitted in July that his administration had made almost no progress in fighting corruption, which pervades all walks of life in Russia and amounts to an additional tax on businesses. [ID:nLDE66D1XB]

Officials can demand multi-million-dollar kickbacks before investments are approved and then threaten to close down a business unless they get a slice of the profits. A corrupt court system prevents owners from protecting property rights.

Last year Transparency International placed Russia in joint 146th place -- along with Zimbabwe and Sierra Leone -- of 180 countries in its Corruption Perception Index, saying bribe-taking cost about $300 billion a year. [ID:nLH589300]

Transparency said Russia was perceived to be far more corrupt than its emerging market peers such as India, China and Brazil, which were ranked, respectively, 84th, 79th and 75th.

Most Russians believe the problem has worsened in the past decade [ID:nLDE66J1TA] and companies ranging from IKEA, the world's biggest furniture retailer, to fund managers such as Hermitage Capital Management say they have fallen foul of corrupt Russian officials. [ID:nLDE61E0MV] [ID:nGEE5AN1EH]

What to watch:

-- Dismissals of senior Kremlin or government officials for bribe-taking.

-- Polls on perceptions of corruption.

-- The second trial of imprisoned former YUKOS oil company chief Mikhail Khodorkovsky is seen as a bellwether of policy. A not-guilty verdict or decision to drop the case could be a sign of liberalisation.

ATTACKS BY INSURGENTS

Twin suicide bombings in Moscow's subway system on March 29 killed 40 people -- the deadliest attack in the capital in six years -- and sparked fears that Islamist rebels from the north Caucasus could unleash a wave of attacks in Russia's heartland.

Islamist rebels who want to create an independent sharia-based state along Russia's southern flank claimed responsibility for the metro bombings.

The self-proclaimed leader of the militants, a Chechen rebel named Doku Umarov who calls himself the "Emir of the Caucasus Emirate", has vowed to attack economic infrastructure such as the pipelines which feed Russia's $1.4 trillion economy. On Sunday, Umarov said in an Internet statement he was stepping down and appointing a successor, Aslambek Vadalov. [ID:nLDE6700DK]

Suspected Islamist militants stormed the Baksanskaya power plant in Kabardino-Balkaria in July, shot dead two guards and set off remote-controlled bombs beside the main generator units, bringing the station to a halt. [ID:nLDE66K0FA]

What to watch:

-- Markets shrugged off the Moscow bombings and subsequent attacks within the North Caucasus, but further strikes on Russian cities or against economic infrastructure such as pipelines or power stations could spook investors.

For political risks to watch in other countries, please click on [ID:nEMEARISK] (Reporting by Guy Faulconbridge, Editing by Mark Trevelyan)