Medvedev's challenge

Dmitry Medvedev welcomed his future US counterpart not with congratulations but threats. He warned in his first state of the nation address that Russia would site new ballistic missiles in the Russian enclave of Kaliningrad - embedded within the European Union - if the US deploys its planned missile defence shield in central Europe. Even welcome pledges on democratic reforms did not prevent his speech erasing a chunk of yesterday's earlier big gains on Moscow's equity markets, which have bounced 50 per cent since October 24. Mr Medvedev should heed the market reaction, for there is growing reason to believe Russia's foreign policy bravado will be undermined by its weakening economic outlook.

As Mr Medvedev spoke, Capital Economics became the latest forecaster to suggest Russian growth could slide to about 3 per cent next year. Compared with outright recession, that looks resilient. But it represents a hard landing from Russia's recent 7-8 per cent annual expansion. Capital Economics assumes $50 a barrel oil prices by the end of 2009, pushing Russia's current account and budget into the red.

Not everyone agrees. Yet Russia's growth since 1999 has been largely sustained by recommissioning production capacity mothballed in the 1990s, and by a consumer boom. There is now little unused capacity left - and credit to fund new fixed investment and keep consumers spending will be in short supply. Russian oil production has peaked and huge investment in new fields in challenging locations is required. Double-digit real wage growth is set to slow.

That presents the Putin-Medvedev tandem with its first real political test. The danger is the Russian leadership defaults to jingoistic nationalism. Investors, who had started scenting value in Russian assets at current rock-bottom prices, will hope Mr Medvedev drops the confrontational rhetoric and treats the arrival of a new US president as a chance for more constructive engagement.