Nils van der Vegte
April 15, 2012
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Kudrin at the beginning of his lecture at the Federal Arctic University in Arkhangelsk. Sitting behind the desk is E. Kudrashova, the rector. Photo courtesy of R. Spurlock.

I will not join a government that conducts budget policies I do not agree with

Alexei Kudrin has been one of the most influential people in Russia’s political system over the last eleven years. During this period, whilst he was Minister of Finances, the Russian state repaid almost all debt and accumulated billions of Rubles in a reserve fund which was used to support the Russian economy in the crisis days back in 2008. Thanks to this and his prudent fiscal policies he was declared Finance Minister of the year by Euromoney magazine in October 2011.

However, on the 26th of September 2011 Kudrin resigned from his post because of differences with president Dmitry Medvedev over budget spending (Kudrin was against the huge investments in the Russian defence sector). Rumor has it that Kudrin expected to become Prime Minister under Vladimir Putin, a position Putin promised to Medvedev as part of the tandem switch.

Since then, Kudrin has been consistently criticising the Russian government over its policies and has recently started a Committee of Civil Initiatives. I suppose he will use this committee to give a lot of unwanted advice to Medvedev. I also expect Kudrin to be the first choice of Putin if Medvedev is somehow forced to lay down his function as Prime-Minister.

On Saturday the 14th of April, Kudrin came to the Northern Federal Arctic University in Arkhangelsk to hold a lecture on the state of the world economy and the problems and issues of the Russian economy in particular. As almost everybody expects Kudrin to continue to play an important role in Russian politics, it was interesting to hear what he had to say. And he had a lot to say.

Kudrin gets his honorary doctoral diploma by “Lomonosov” and E. Kudrashova, director of the university. Photo courtesy of R. Spurlock.

Europe in recession, again

It was by no chance a coincidence that Kudrin came to Arkhangelsk. Kudrin, born in the Latvian Soviet Socialistic Republic, went to school in Arkhangelsk before going to the Leningrad University to study economy. Kudrin received an honorary doctoral diploma from the newly named Northern Arctic Federal University, judging by his comments the newly formed university in Arkhangelsk is something of a personal project for him as he personally picked the director, E Kudrashova, which is normally a job for the Ministry of Education.

Kudrin started his speech with a short analysis of how the Financial Crisis started and how that crisis actually never ended. At the beginning he said that the recovery in the US goes very slowly and that the so-called Q1, Q2 and Q3 measures (Quantitive Easing) in the United States have not let to an improvement in the situation as the money, meant to more or less force the banks to start lending out money to people and companies again, was invested in gold, oil and food. In this way, that policy was hampering the recovery of the economy even further instead of improving the situation.

After shortly addressing the United States he said that the situation in Europe is still critical. The biggest problem is still the debt crisis. He specifically named Italy, Spain and Portugal (he did not mention Greece). He told the audience that Italy has to refinance 300 billion Euros in 2012 alone and because there is still a lack of trust in the Euro, Italy will end up increasing its debt instead of decreasing it, a kind of Ponzi Scheme. He added that the largest holders of government bonds in Europe are banks. But as the situation is now, these banks are afraid to risk buying new government bonds which means that the politicians in the European Union will have to support these banks to continue buying bonds from Italy, Spain and Portugal. Kudrin added that he belongs to the group of pessimists when it comes to the Euro. When I asked him about the necessity of forming a political union he said that it is incredibly important for all the countries in the European Union to agree on prudent measures and if they cannot agree amongst each other what to do, it might well be that we will see the end of the Euro zone in 1.5-2 years. Over the last few months he says that the chance that this will happen has risen to fifty percent. He continued that Europe is in a second recession now: “look at Germany, last year it had 3% economic growth now that has decreased to just 1%, Europe has to solve this debt crisis as soon as possible because if economic growth starts again in one to two years whilst the debt crisis has not been sufficiently addressed, Europe may fall back again”.

Lastly, he warned for further instability in the world economy, because China could well be in for hard landing. “Growth in China has fallen to six percent, this has different implications, mostly internal as China will get problems with unemployment and thus social unrest but it also has external implications: mainly that China can no longer function as the locomotive of the world economy”.

The Russian Economy: the oil factor

The second part of his lecture was about the state of the Russian economy and especially its problems. He began with saying that the Russian economy is very dependent on oil and that 85% of Russia’s exports consist of raw oil/oil products. He started with telling that when he became minister of Finances the price of oil (in dollars) was about 20 dollars. He was satisfied with this, he added. “I thought, as long as the prices stay above 20 dollars, everything will be fine and then, a few months later, the price went up to 27 dollars and there was quite an argument within the government. German Gref said that we should immediately increase spending but I was against this, I recognized that oil prices are inherently unstable and that we should accumulate this money instead of spending it, in the end, I won the discussion”. Kudrin added that he was vindicated by the consequences of the 2008 crisis but the crisis itself also served as a warning: “in June 2008, the oil price was 140 dollars, in December 2008 it was just 30 dollars”.

He immediately used this quote to counter one of the most heard criticisms of Kudrin’s policies: many people in Russia and also some foreign economists, say that if he had spent all this money Russia would have had a dynamic innovative economy by now. “I will explain to you, how an oil economy works” he said. Kudrin started by saying that in the period 1991-2000 Russia sold about 2 billion dollars worth of oil, when we compare that with the period 2000-2011, we sold 4 trillion dollars worth of oil. This had many consequences for the Russian economy. For one, the recovery of the manufacturing sector in Russia after the 1998 devaluation was slowly grinded to a halt. “We definitely suffered from Dutch Disease” Kudrin added.

According to Kudrin, the system works like this: Russian oil companies sell oil on the world market and get paid in dollars for this. Because they are located in Russia, they need to exchange this dollars for rubles as it is illegal for companies to pay in dollars in Russia (Kudrin added that this was an excellent thing because otherwise Russia would have been “even more dependent” on the Federal Reserve in the United States). After they have exchanged their dollars for rubles, the oil companies start paying for transport, the use of infrastructure and salaries with this oil money. But because the oil prices have been consistently high since 2000, the demand for rubles has increased as the oil companies had to exchange their dollars for rubles. This has had huge consequences for the exchange rate: the ruble has gained 75% in value vis-à-vis the dollar. This meant that imports became a lot cheaper whilst exporting manufactured goods became very hard, if not outright impossible, for Russian producers. Russia uses all this oil money to pay for its imports, which amounts to 250 billion dollars per year. Kudrin added that even if the exchange rate of the dollar and the ruble would not have changed, the ruble would still have increased in value because of the fact that inflation in Russia is higher than in the United Stated. “So that is my answer when people ask where all this money is: it is being used to pay for foreign import. Of course, we have a reserve fund which holds some of the money as well but I would like to remind you that amount of money it holds has not increased since the crisis of 2008… well, a little last year but the government is continuing its lavish spending despite this”.

This situation, Kudrin said, has let do boom and bust cycles in the Russian economy which means a lack of predictability and, echoing Vladimir Putin, stability. “If a bank lends money to small or medium businesses, the rates are incredibly high, the minimum is at least 5% and 10% if very common as well, why is this? Because there is lack or predictability and stability, who knows what the oil price is going to do next year, how high will inflation be? A bank thinks: Whenever I lend you money, maybe I end up losing money on it because of the high inflation. It is time for a new economic model”. Furthermore, he noticed that the practise of supporting certain companies for example in the automotive sector was a bad practise and the government should strive to end this kind of policy: more market in the economy. At the end he added that the only exception was the supporting the defence industry, something he had so opposed when he was still minister of Finances. He did not contradict himself but, once more, I got the feeling that he was simply looking for a way to clash with Medvedev and that the extra investments in the defence industry were just an excuse.

I asked a question to Kudrin about the necessity of creating a political union in Europe. Kudrin said that the EU definitely cannot afford to allow political disagreements to continue ti exist. Photo courtesy of R. Spurlock.

The third door

After his lecture, there was some time for questions. Someone in the audience asked something about his Committee of Civil Initiatives. Kudrin answered that he could not say much about it yet but that some mayors had shown interest in working with him. Kudrin denied that he was about to start a political party: “You know, with the liberalization of the law on Political Parties, we will soon see dozens and dozens of parties and naturally, some parties have the same ideas and solutions, if I were to registrate my own political party, it will only add to the confusion”. Nevertheless, I thought that the story about different mayors who are “ready to work with him” is certainly a sign that he is laying some kind of groundwork, quite possibly for a political party. At the end of the lecture someone asked Kudrin “there are two doors: behind one door we have anarchy, behind the second door we have dictatorship, which door would you choose?” Kudrin, wisely ignoring the reference to Yeltsin and Putin answered that he would opt for a third door. Kudrin, it looks like, is still keeping the door open.