COMMENT: Mr Kudrin goes to Washington and is subpoenaed

By bne IntelliNews April 28, 2009

Ariel Cohen in Washington -

Russia's finance minister got a surprise gift on his recent visit to Washington, DC: a subpoena. The paper was served to Alexei Kudrin on April 24 as he entered the Peterson Institute for International Economics to deliver a speech. Vladimir Gusinsky's RTVi channel caught the action on film.

The subpoena came from US law firms representing shareholders of Yukos, the bankrupt Russian oil firm. Later, Russian government sources said the US District Court for the District of Columbia had summoned Kudrin to give evidence in the trial of former Yukos owner Mikhail Khodorkovsky. None of this seemed to fluster Kudrin, who proceed 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 (IMF) 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, at least, Russia is sticking with the "conventional wisdom:" trying to stimulate the economy by cutting corporate income tax from 24% to 20% and speeding up annual amortization rates from 10% to 30%. 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.

Starting in 2011, Kudrin said, Russia could raise taxes by over 1% of GDP. He predicted the budget deficit would be 7.9% for 2009 and in a similar range for 2010. He said that Russia could sustain such budget deficits for the next three years, paying for it from currency reserves. Kudrin traced his nation's current credit crunch to its unsustainable expansion of credit in 2007 (when credit increase 50%) and 2008 (35%). Russian bank managers, he said, do not have enough experience to evaluate and manage credits of such a scope.

Kudrin characterized the rate of economic decline as worse than expected. GDP contracted 9.5% in the first quarter, rather than the expected 7.5%. Industrial output fell by 14. 3%, investment by 15%, processing by 20.8% and construction by 19%. The IMF forecasts for Russian GDP decline track closely with those from Moscow.

Russia's bad-loan problem continues to grow. The government pegs 2-3% of all loans as being over due. But, Kudrin noted, when international methodology is used (counting all late loans as bad), the figure rises to 8%. If the banks reach the 10% mark of bad loans, he said, the Ministry of Finance would provide additional credits to maintain liquidity. The Ministry of Finance has earmarked $28bn for Vneshtorgbank and Sberbank.

The state will also double small-business support and cut small-business taxes by 50%. Overall, Kudrin said, the tax burden will drop by 1.5-2% of GDP. That may create some tensions. 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%, the government may re-examine support of federal road building, culture, education and defence, he said.

Kudrin also explained his now-famous saying that Russia may not revisit 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: 1) the highest oil prices in history 2) the longest rise of oil prices and 3) the high rate of growth of oil production in Russia of up to 10% a year." These favourable circumstances may not return for many, many years, he noted. Putin had excused the original statement by claiming that Kudrin was under pressure from all sides.

"Medium-term budgetary balance may undergo a serious optimization," Kudrin said in his typically technical lingo. To translate from the Russian financeze, that means budget cuts lie ahead. He also said they will implement a government programme to cut profligate fuel consumption, something that might free up more hydrocarbons for export.

As for foreign policy, Kudrin said Russia demands that the US treat it as a peer in the international arena, presumably disregarding its economic dire straits. The IMF talks on the new supra-national 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 complained on April 26. "The leading countries are not in a hurry... This was the main discussion, the nerve of the IMF meeting."

Kudrin suggested that Russia was ready to invest some of its $385bn war chest – the third largest in the world after China and Japan – in the IMF drawing rights. But, he noted, Moscow needs reassurance that the drawing rights would be sufficiently liquid.

It may take years before 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 Shelby and Catherine Cullom Davis at The Heritage Foundation.

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