fbpx

Kudrin and Fiscal Discipline in Russia

kudrin041708.jpgRussia’s Finance Minister Alexei Kudrin is an interesting character. Thrust into the center of the clan wars for holding the keys to the country’s massive stabilization fund, the occasionally outspoken technocrat has openly contradicted Vladimir Putin in public not once but twice, and is known for saying exactly what Western finance loves to hear from a government official. Kudrin was able to narrowly escape the siloviki witch hunt which snagged his #2 man Sergei Storchak by splitting the stabilization fund and creating a separate sovereign wealth fund (of a “modest” $32 billion), allowing some of his opponents some state resources to play speculation games with in foreign securities and strategic assets. Today Alexei Kudrin speaks with the Financial Times, and yet again openly criticizes Putin’s economic policy (on the freezing of food prices). The interview depicts Kudrin as fighting against powerful forces within the Russian government to keep spending down, despite the ballooning state coffers from high oil and gas prices. “Russia’s economy emerged from the Communist command economy, so some people lack an understanding of market mechanisms,” he says. “They think if the state has money it can solve any problem.” It takes quite a uniquely influential person to disagree with Putin so publicly so often.

From the Financial Times:

Alexei Kudrin: A guarantor of fiscal disciplineBy Neil BuckleyThe softly-spoken Alexei Kudrin is a great survivor in the bare-knuckle world of Russian politics. Finance minister since 2000, and a deputy prime minister since last autumn, he is one of the longest-serving finance chiefs of the world’s big economies.It has not been plain sailing. Moscow’s rumour mill suggests Kremlin hardliners tried to engineer the prominent liberal’s removal from the finance ministry last September. Though he survived the later arrest of his deputy, Sergei Storchak, on embezzlement charges, is seen by some as “revenge” against Mr Kudrin himself. Mr Kudrin has protested Mr Storchak’s innocence, though otherwise prefers not to comment.But with a relative liberal, Dmitry Medvedev, elected president, and Mr Kudrin’s friend Vladimir Putin set to be prime minister, his government place seems assured. Investors will take comfort. Mr Kudrin is seen as guarantor of Russia’s fiscal discipline of recent years, even if that slipped in 2007. With elections looming, even Mr Kudrin could not halt an inflation-stoking 40 per cent nominal increase in spending. Opposing it, he jokes, made him “the most unpopular person during the election period”.Mr Kudrin also made clear his dislike of the distinctly non-market mechanism the government employed to prevent spiralling food prices becoming a hot political issue ahead of last December’s parliamentary polls: a price freeze on basic foods.“That was a forced measure, a reaction to the shock increase, when some foodstuffs became 40 per cent more expensive,” he says. “Of course it sends a wrong signal to the market. But we understand that without this measure the situation could have been even worse.”He insists inflation is “solvable” through new budgetary rules, rigid monetary policy and export duties on some foodstuffs in short supply. “This year it will be more difficult, probably, due to the [global] financial crisis and the need to support…liquidity,” he admits. “These two tasks are contradictory, but hopefully we will not be forced to do it on a big scale.”The credit crisis, he notes, “is happening when we haven’t yet fully matured, and this is going to be a serious test”. But Mr Kudrin says Russia confronts the crisis in good shape, with last year’s gross domestic product finally regaining its 1990 level.Mr Kudrin is in the sometimes uncomfortable position of gatekeeper to the oil tax windfall stashed in Russia’s Stabilisation Fund – split this year into a conservatively-invested $125bn reserve fund and growth-orientated $32bn national wealth fund. Banks want wealth fund money to be used to help them through the financial crisis; “oligarchs”, he says, are lobbying to use it to build their business empires, particularly by acquiring stakes in foreign companies.Mr Kudrin “does not exclude” that the state could use the fund to buy corporate stakes abroad – apeing moves by countries such as China. But he says the finance ministry is developing a mechanism limiting stakes to 5 per cent of any company.Holding down spending, he admits, is tough amid a flood of petrodollars, as is explaining the need for prudence to ordinary citizens. “Russia’s economy emerged from the Communist command economy, so some people lack an understanding of market mechanisms,” he says. “They think if the state has money it can solve any problem.”But he says the Medvedev-Putin leadership will be positive for the market economy. “Major politicians…with the exception of President Putin and President Medvedev, have a poor understanding of market mechanisms,” he says. “[But] I would say that Putin understands macroeconomics better than any minister. His transition to the government is a guarantee of further steps in this direction.”