April 30, 2009

April 30, 2009 | Commentary on Russia, Economy

Kudrin's Anti-Crisis Plan

Finance Minister Alexei Kudrin got a surprise gift on his recent visit to Washington -- a subpoena. The paper was served to him on April 24 as he entered the Peterson Institute for International Economics to deliver a speech. RTVi television, which belongs to former oligarch Vladimir Gusinsky, caught the action on film.

The subpoena came from U.S. law firms representing shareholders of bankrupt Yukos. Later, Russian government sources said the U.S. District Court for the District of Columbia had summoned Kudrin to give evidence in the trial of former Yukos CEO Mikhail Khodorkovsky. None of this seemed to fluster Kudrin, who proceeded to deliver his Peterson Institute speech before an audience that included former World Bank chief James Wolfensohn, financier George Soros and scores of government experts and analysts.

Speaking of the global economy, Kudrin noted that the International Monetary Fund and other economists now tout crisis management practices, such as bailing out failing companies or injecting liquidity, that raise a lot of questions. "IMF violates recommendations they gave Russia in the early 1990s [not to bail out or inject liquidity]," he observed with a dose of irony. "Now, developed countries violate their own recommendations."

For now, Russia is sticking to conventional wisdom -- trying to stimulate the economy by cutting corporate income tax from 24 percent to 20 percent and speeding up annual amortization rates from 10 percent to 30 percent. Despite these measures, though, credit in Russia continues to shrink, the financial sector has yet to stabilize and currency reserves might not be adequate to weather the crisis.

Kudrin characterized the rate of economic decline as worse than expected. Gross domestic product contracted 9.5 percent in the first quarter, rather than the expected 7.5 percent. Industrial output fell by 14.3 percent, investment dropped by 15 percent and construction declined by 19 percent.

Russia's bad-loan problem continues to grow. When international methodology is used (counting all late loans as bad), Kudrin said the amount of bad loans is 8 percent. If the banks reach the 10 percent mark, he said, the Finance Ministry would provide additional credits to maintain liquidity. The Finance Ministry has earmarked $28 billion for VTB and Sberbank.

The state will also double support for small businesses and cut taxes for this sector by 50 percent. Overall, Kudrin said, the tax burden will drop to 2 percent of GDP. But that may create some tensions since the state also wants to increase pensions and provide targeted support to automotive, aerospace and shipbuilding sectors and export subsidies. With the budget revenues falling by 30 percent, the government may re-examine support of federal road building, education and defense, he said.

Kudrin also explained what he meant when he said Russia may not see the beneficial economic conditions of the last decade for another 20 or 50 years. "I did not say, as some communist press accused me, that the current crisis will last 50 years. ... Instead, I focused on three factors: one, the highest oil prices in history; two, the longest rise of oil prices; and three, the high rate of growth of oil production in Russia of up to 10 percent a year." These favorable circumstances may not return for many years, he noted.

As for foreign policy, Kudrin said Russia demands that the United States treat it as a peer in the global arena, presumably disregarding its economic dire straits. The IMF talks on the new supranational currency (international drawing rights) did not get very far. "We already meet a cool attitude and even resistance [to reform plans] of the international financial architecture that would provide more power to developing economies such as Russia and China."

Kudrin suggested that Russia was ready to invest some of its $385 billion reserves in the IMF drawing rights. But, he noted, Moscow needs reassurance that the drawing rights would be sufficiently liquid.

It may take years before the IMF is ready to launch drawing rights. Meanwhile, Kudrin will continue working to get Russia into the World Trade Organization -- and to stay one step ahead of those pesky court marshals.

Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security at the Allison Center of the Katherine and Shelby Cullom Davis Institute at The Heritage Foundation.

About the Author

Ariel Cohen, Ph.D. Visiting Fellow in Russian and Eurasian Studies and International Energy Policy in the Douglas and Sarah Allison Center for Foreign and National Security Policy, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation
Douglas and Sarah Allison Center for Foreign and National Security Policy

First  appeared in Moscow Times