Finance minister of the year 2010: Kudrin’s cautious approach pays off for Russia

Miriam Elder

Russia’s finance minister, Alexei Kudrin, steered the country through the global financial crisis. The country emerged not just intact, but enhanced in the eyes of global investors. Now Kudrin faces perhaps his biggest battle of all – keeping a firm hold on spending as an election approaches. By Miriam Elder in Moscow.

Kudrin honoured by Euromoney at IMF/World Bank meetings in Washington
Sunday, October 10, 2010

Finance minister of the year, Russia’s finance minister, Alexei Kudrin
FOR MANY YEARS, Alexei Kudrin was known as a survivor. As the oil price climbed to dizzying heights, bringing up with it the Russian economy, the soft-spoken finance minister battled endless attempts to reach into the country’s suddenly deep pockets and spend as if there were no tomorrow.

Today, looking back on a financial crisis that ravaged – but far from destroyed – the Russian economy, the view is very different. Kudrin is being hailed as a fiscal manager of the highest order. Not just in the west, where his championing of the free market and fiscal prudence long made him a darling of foreign investors, but also inside Russia, a country that has not taken kindly to reformers in the past.

"Kudrin was proved completely right," says Roland Nash, managing director of Renaissance Capital. "He said we need to save the oil price windfall. No one really believed him and there were huge amounts of pressure from all sides to go out and spend, and he managed to say no."

Instead, Kudrin created a stabilization fund designed to prepare for rainy days. Today, its reserve fund stands at Rb1.23 trillion ($39.5 billion) and its National Welfare Fund at Rb2.67 trillion.

"If Russia had gone into the crisis without its stabilization fund and massive reserves, it would have been 1998 all over again, only worse," says Alexander Kliment, an analyst at political risk consultancy Eurasia Group. "It would have been a catastrophe."

Instead, Russia entered the crisis with nearly $600 billion in foreign reserves, allowing it to manage a 30% decline in the rouble. The stabilization fund enabled Russia to pay off its foreign debt early and later acted as a multibillion dollar cushion that helped Russia weather the financial crisis.

"A statue should be erected to the guy in Moscow," Nash says. That’s a glowing view that’s long been held by westerners investing in Russia. Since making his way into the halls of power in the late 1990s, Kudrin has been one of the few voices championing an open investment policy and diminished government involvement.

Born in Soviet Latvia, Kudrin, who turns 50 this year, began building his career in St Petersburg, taking a PhD in economics from Leningrad State University, the alma mater of both prime minister Vladimir Putin and his protégé, president Dmitry Medvedev.

He began serving in the city government’s economic departments as the Soviet Union began to crumble, just as Putin was called upon to head its foreign investment committee. Yet it was Kudrin who was called to the Kremlin first – serving as deputy head of the presidential administration in August 1996 before being appointed deputy finance minister months later. He has held the title of finance minister since May 2000, making him the longest-serving finance minister in the G8. Since September 2007, he has held the post of deputy prime minister as well.

It hasn’t always been smooth sailing. Kudrin’s bespectacled visage and reserved demeanour belie a toughness needed to battle a powerful Kremlin contingent bent on scuppering liberal reform and ensuring that state rent-seeking remains high.

In November 2007, Kudrin’s deputy, Sergei Storchak, was arrested on charges of fraud and embezzlement – a move seen as a direct attack on the finance minister. Storchak was released one year later, the charges dropped without explanation, as the financial crisis began to unfold and Kudrin’s star started to rise once again.

Finance minister of the year, Russia’s finance minister, Alexei Kudrin

"Before elections, there is always a desire to show that the government is doing a lot. It’s hard to hold back"

Yet Kudrin’s political fate is far from sealed. Election season, in so far as it can be called that, has begun in Russia. Parliamentary elections are set for late 2011 and a presidential vote is due to be held in March 2012. Kudrin himself acknowledges that the worst might lie ahead, as the ruling United Russia party, headed by Putin, seeks to spend its way to electoral popularity.

So far, he seems on track, winning basic cabinet approval for the 2011-13 budget, a conservative plan that envisages a relatively small rise in spending as Russia seeks to close its first budget deficit in a decade. Yet several rounds of parliamentary approval – and time for political meddling – lie ahead.

Praised also for his commitment to tax and budget reform, to Russia’s desire to join the World Trade Organization and to the continuing privatization of the country’s state-owned heavyweights, it’s his cautious approach and restrained spending that wins the most plaudits. For some, that’s a worry.

"In the end, not spending money is not going to be enough. Russia actually does need a big public-sector spending spree," notes Nash of RenCap. "It takes one man to say don’t spend but it takes a whole bureaucracy to spend it effectively."