Putin takes a cue from Brazilian politics after protests

Vladimir Putin is putting the week's political unrest behind him and, so far, traders are going along with it. This seems to be right out of the Luis Inacio Lula da Silva playbook of market-friendly personal transformation.

Putin is promising to crack down hard on illegal protests while simultaneously distancing himself from his own United Russia party, which lost a lot of ground in Sunday's parliamentary elections. His new "All-Russia People's Front" promises to be "above all parties," giving him a base to run for president next year without what appears to be growing stink around United Russia. Two signals here. First, do not mess with Putin. Second, it was not his fault. While it is a totally different landscape, this is reminiscent of Brazilian president Lula's tactics after the 2004 Mensalao scandal, in which his own party paid off parliamentarians to ensure their votes. Lula said he knew nothing about it, no evidence ever emerged and the people believed him. Traders seem willing to go along with it in Putin's case because the RSX ( quote ) has recovered from the worst of the week's losses and is now down 4% since Friday's close.

Look for more aggressive spending after Putin loses ground in Russia

The weekend's parliamentary elections showed support for Vladimir Putin's "United Russia" party declining to the point where he barely has a simple majority to fall back on. These results are worth a closer look.

Merrill Lynch is out in front noting that Putin is on track to get 49.7% of the total votes, well below the 53% to 56% majority he was expected to bring down a few weeks ago.

This is shocking in light of recent events where Putin was actually heckled in public by Russians tired of his policies. If the trend continues, he might have trouble getting an easy bid in the presidential election next March.

He will probably be reelected, but even an incremental erosion of his once-total power says a lot about where Russia is going.

Look for the Kremlin to boost social spending and otherwise attempt to influence the voting public over the next few months. This will in turn expand Russia's public debt and perhaps create new budget deficits next year.

Traders are already nervous about a lack of fiscal discipline in Russia after the departure of finance minister Alexei Kudrin. This may make sentiment for the RSX ( quote ) worse in the next few months.

After that, all those public projects will leave Russian voters wealthier and the domestic economy on the move.