Bloomberg Businessweek (Europe)

The Russian reformer who may be returning to the Kremlin

Investors want Alexei Kudrin to fix the economy But will Putin let him “take on the ‘power vertical’ ”?

- −Irina Reznik and Ilya Arkhipov

With the Russian economy mired in recession, investors are hoping the government will come up with a credible rescue plan. Many are nostalgic for Alexei Kudrin, who in 11 years as finance minister imposed fiscal discipline and backed market reforms that buoyed the economy. He created a special fund designed to tide over the government in case of a sharp downturn. President Vladimir Putin has relied on that fund heavily as the recession has deepened.

A prominent economist and longtime Putin ally, Kudrin left the government in September 2011 after clashing with then-President Dmitry Medvedev, currently prime minister. Now he’s in talks with Putin and other top officials about returning to a senior post to help deal with the worsening economy, according to three people familiar with the discussion­s. Kudrin met privately with Putin and Medvedev as recently as the second half of December to discuss the plans, though no formal offer has yet been made, the people say. A decision could come early in 2016.

“I met with Prime Minister Dmitry

Medvedev. We discussed economic issues. An invitation to join government service was not discussed,” Kudrin said through spokesman Pavel Kuznetsov. “He’s not being appointed to anything yet,” Kremlin spokesman Dmitry Peskov says.

“Markets will like Kudrin’s return to government as they will assume this means serious fiscal consolidat­ion and some significan­t and much-needed structural reform—if Putin lets him take on the ‘power vertical,’ ” Tim Ash, head of emerging-market strategy at Nomura in London, said by e-mail, referring to the Kremlin’s top-down system of rule. Despite the investor enthusiasm that would greet his return, “there is serious doubt about what real capability Kudrin would have to change policy,” says Vladimir Tikhomirov, chief economist at BCS Financial Group in Moscow. Within the government, the effort to bring Kudrin back reflects a realizatio­n among top leaders that the economy, pressured by falling oil prices, is likely to worsen, despite public assurances by Putin that the crisis is past its peak, according to senior officials. The economy will contract an additional 0.5 percent in 2016, according to 39 economists surveyed by Bloomberg.

Russian business leaders have asked for a meeting with senior government officials, as well as with Kudrin, according to people familiar with the conversati­ons. Among the posts under considerat­ion for Kudrin are a senior job in the presidenti­al administra­tion, where he would coordinate economic policy, and a top spot in Medvedev’s office. Some important Kremlin figures oppose Kudrin’s return, the people say.

Kudrin left his job in government after a dispute with Medvedev over budget priorities. He publicly opposed plans for major increases in arms spending as unaffordab­le. Since leaving government, he has run a think tank and continued to advise Putin, often criticizin­g Kremlin initiative­s.

Speaking on condition of anonymity, one senior government official warned in December that the government could have only a few months before worsening economic conditions begin to fuel social unrest. That could be a problem for the Kremlin as it heads into parliament­ary elections in September and a presidenti­al election in 2018. Russian Economy Ministry data released on Dec. 28 showed that the contractio­n accelerate­d in November, with the economy declining 4 percent from a year earlier. Wages were down 9.2 percent in 2015. In an interview with Interfax, a Russian news agency, published on Dec. 28, Kudrin called for more steps to reduce regulation. He said that hopes the economy would hit bottom in the fall had proved false as oil prices continue to decline, and he added that inflation is likely to be higher than forecast because of the sharp drop in the ruble’s exchange rate in December.

Kudrin also repeated his longtime criticism of high military spending, noting that while the air campaign in Syria is likely to be relatively low-cost, procuremen­t of new weapons is a major budget burden. He also questioned the government’s use of economic sanctions, such as those imposed against Turkey after a Russian bomber was downed along the Syrian border in November. “I was surprised to hear that the government said its anticrisis program had significan­tly neutralize­d external risks,” Kudrin said, according to Interfax. “That’s wrong.”

The bottom line President Putin has explored the idea of changing economic policy and personnel before popular protests break out.

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