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What's Ahead For Russia's Economy Now That Kudrin Is Gone?

Former Russian Finance Minister Aleksei Kudrin had been praised in some quarters for his fiscal discipline.
Former Russian Finance Minister Aleksei Kudrin had been praised in some quarters for his fiscal discipline.
In the week since former Russian Finance Minister and Deputy Prime Minister Aleksei Kudrin resigned following a highly publicized dust-up with President Dmitry Medvedev, the Russian economy has not collapsed.

In fact, markets in Russia largely shrugged off this development and the much more portentous announcements that Vladimir Putin will run again for the presidency next year and, likely, name Medvedev as prime minister.

But Kudrin -- who became finance minister in March 2000 and who is reputed to be one of Putin's closest confidantes -- had earned a reputation as one of the most competent and professional ministers in the Russian government.

With Kudrin apparently shunted aside, will the government loosen its firm grip on state spending?

Kudrin is credited with guiding Russian fiscal policy through the boom years of Putin's presidency. He contained inflation by using revenues from soaring global energy prices to pay off Russia's foreign debt and build up a financial cushion that has served the country well since the global financial downturn.

He also rationalized Russia's tax system, introducing a flat-rate income tax, slashing value-added tax, and eliminating sales tax.

A Divisive Figure

"I think that more than half of the success that we have had in the last 10 years is due to Kudrin," says economist Yevgeny Yasin. "His stubbornness, his lack of posturing or a desire to win popularity, his ability to make responsible financial decisions always won high marks from me."

Others, however, are not so generous with their praise. State Duma Deputy Okasana Dmitriyeva, a leading member of the A Just Russia party who sits on the Budget and Taxation Committee, told RIA Novosti that Kudrin is widely praised abroad because he invested Russia's energy profits in Western securities instead of domestic infrastructure.

Former Russian Central Bank Chairman Viktor Gerashchenko is also among Kudrin's detractors. He maintains that the West was pleased that "we had such a weak minister" and criticized Kudrin's policy of hoarding energy revenues.

"What happened to the budget surplus beginning in 2004 was just stupidity," he says. "We aren't some kind of Norway that can create a fund for future generations. Our domestic economy, our infrastructure are full of holes."

"What is the point of holding funds in U.S. Treasury bonds where they earn a pathetic percentage instead of using them to repair domestic holes? It means you don't understand anything about economics."

Former Deputy Labor Minister Pavel Kudyukin praises Kudrin for his professionalism, but argues that the government went too far in pursuit of fiscal restraint.

"We clearly neglected structural questions for the sake of the necessary and important task of financial stabilization, but we clearly overdid it," he says.

"This was especially clear in the social sphere, where essentially important ministries stopped defending the interests of their spheres and obediently carried out the policies that the Finance Ministry laid out to optimize budget expenditures."

Departure Could Play A Constructive Role

Kudyukin adds that the problem became more dramatic after the departure of the equally powerful and respected German Gref from the post of economic development minister in September 2007.

Former Russian Economic Development and Trade Minister German Gref
"He was a figure of equal political weight and so formed a certain sort of counterweight to Kudrin and in the determination of policy he took into account not just purely financial questions, but also certain long-term matters, the interests of economic development," Kudyukin says.

"When Gref left the government, that counterweight disappeared. And that policy, in my opinion, grew stronger. So now I think it is possible that Kudrin's departure might partly play a constructive role from the point of view that the extraordinary influence of the Finance Ministry will become a thing of the past."

In the days and weeks before his departure, Kudrin had criticized the government for taking on new spending commitments, including increases in pensions, pay raises for state employees, and a plan to boost defense spending by $65 billion over the next three years.

Even as Putin was preparing to tout all these initiatives at last month's United Russia party congress to kick off the current election season, Kudrin was publicly warning that the government would have to raise taxes and cut spending next year.

Corruption Fears

The planned increase in defense spending is a particularly contentious issue because of the potentially fatal combination of secrecy and corruption. Igor Korotchenko, editor in chief of the magazine "National Defense," fears that much of the government's spending in this sector will be wasted.

Igor Korotchenko from Russia's "National Defense" magazine
"The excessive secrecy that is a legacy of the Soviet days creates the conditions for abuse and corruption," he says, pointing out that officially every fifth ruble is stolen in the system of state defense procurement, meaning that "the real figure must be at least twice this amount."

"If we don't bring some order to the elementary spending of resources on the purchase of new weapons, then a rather large portion of the 20 trillion rubles that have been promised for rearmament over the next 10 years will simply be stolen," he adds.

At present, the non-oil deficit (an adjusted figure that excludes oil revenues) in Russia is running at about 6 percent of GDP.

Without the spending discipline that Kudrin brought to the Finance Ministry, that number seems set to rise.

That, in itself, may not necessarily be a problem. But it remains far from certain whether the Russian government -- with its lack of accountability and oversight and its interlacing of political and economic power -- will be able to spend its resources effectively.

Kudrin's Own Uncertain Future

Also unclear is Kudrin's own future. Despite his highly visible ouster from the cabinet, he continues to serve on the National Banking Council and the president's Council on Financial Markets.

Given his close relations with Putin, Kudrin's name continues to come up as a possible Central Bank chairman or even, still, as a potential prime minister.

That possibility, however, is soundly dismissed by former presidential economics adviser Andrei Illarionov.

"Vladimir Putin would never appoint as prime minister a strong person, more or less independent, or potentially capable of growing into the position of a candidate for the highest government post in Russia," he says. "That is why Vladimir Putin only names to the post of prime minister people who are, first, unknown, and, second, personally incapable of growing into a political leader."

Former Deputy Economy Minister Ivan Starikov roundly disagrees.

"I am convinced that Aleksei Kudrin is not leaving politics, he says. "I think that within the next six months he will return in one of the highest government posts. I think it is very likely that he is a future prime minister."

written in Prague by RFE/RL correspondent Robert Coalson based on reporting by RFE/RL's Russian Service
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