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Cracking the Piggy Bank

By Svetlana Kononova Special to Russia Profile 10/18/2010

Upcoming Elections May Put Russia’s Reserve Fund in Danger of Destruction

The magazine Euromoney presented the Finance Minister of the Year 2010 award to Russian Finance Minister and Vice Premier Alexei Kudrin. The magazine praised his policy of preserving revenue generated by growing oil prices for the Russian budget. The Stabilization Fund that Kudrin set up did allow Russia to come out of the global financial crisis in much better shape than expected, but this “oil money” may not be around for much longer.

The award was presented to Kudrin during the autumn session of the International Monetary Fund (IMF) and the World Bank in Washington. “Kudrin is rightly hailed as a fiscal manager of the highest order,” Euromoney said. “Not just in the West, where his championing of the free market and fiscal prudence have long made him a favorite of foreign investors, but also in Russia, a country that has not always taken kindly to reformers. Entering the financial crisis with nearly $600 billion in foreign reserves allowed Russia to manage a 30 percent decline in the ruble. The Stabilization Fund also enabled Russia to pay off its foreign debt early. Kudrin is rightly praised for his commitment to tax and budget reform, Russia’s desire to join the World Trade Organization (WTO) and continuing the progress in privatization.”

Presenting the award, Padraic Fallon, the chairman of Euromoney Institutional Investor, noted that Kudrin’s policy focused on establishing reserves with oil-generated revenues despite considerable political pressure.

The Russian Finance Minister told journalists after the ceremony that the award is all the more precious since it was bestowed after the crisis. “Russia has already learnt this lesson; it was able to prepare and pass through this period. In this context, this is a result. And when you see your result, you feel satisfied. And when the result is praised by the professional community, it is especially important,” Kudrin said.

The Euromoney award is not the first time that Kudrin’s work has been recognized by the international financial community. In 2005 Kudrin received the Finance Minister of the Year award from Banker magazine, which belongs to the Financial Times group. In 2006 he was recognized as the best Finance Minister of a developing European country by the Emerging Markets newspaper, published by the IMF and the World Bank.

Kudrin has been running Russia’s Ministry of Finance since 2000, and he has been the only remaining “liberal reformer” in the Russian government since 2007. Kudrin’s proposals to continue privatization, increase the retirement age and cut the army of bureaucrats were repeatedly criticized by his political opponents, especially by the ruling United Russia party, which he refused to join.

His idea of setting up a Stabilization Fund still has both critics and supporters in Russia. “The Stabilization Fund is ‘dead money,’ which doesn’t work in the real economy. It would be better used for modernization projects and building infrastructure,” said Olga Chernishova, an economist at the Federal Treasury.

But Alexander Osin, chief economist at Finam Management, disagreed. “I believe that the creation of the Stabilization Fund is one of Kudrin’s main achievements. When he became the Finance Minister in 2000, it was too risky to invest the ‘oil money’ inside the country,” he said. “Firstly, modernization projects would have been left unfinished by the beginning of the global economic crisis. Secondly, at that time private investors were much more interested in short-term, income-bearing placements in speculative areas of the Russian economy than in modernization projects. It means that Russia would have entered the crisis with a heavy load of expensive, unfinished projects, and without a ‘cushion’ like the Stabilization Fund.”

Russia and other BRIC countries have different strategies in terms of attracting private domestic and foreign investments, Osin explained. While Russia has decreased the role of the state in regulating the financial sector over the past decade, other BRIC countries have kept it. As a result, the volume of foreign investments per capita in Russia is $577, which is three to seven times less than in Asian countries and 30 times less than in Israel. “Now the Russian Finance Ministry has to solve two difficult tasks simultaneously – to optimize the budget and to stimulate the economy so that the real sector becomes more attractive to private investors,” Osin added. “The privatization of state banks and other state companies that the government plans to carry out is the next attempt to attract foreign investments to Russia. But it seems that immediate revenue is not the main goal of such privatization. The main goal seems to be to attract large foreign investors for the long-term.” Osin believes that Russia’s future strategy of economic development will depend on the success of this privatization policy.

But what will happen to the “safety cushion” in these circumstances? The better part of the Stabilization Fund, called the Reserve Fund, may soon be fully spent, experts say. In February of 2008 the Stabilization Fund was split into two parts – the Reserve Fund and the Fund of National Welfare of Russia. From September 2008 to March 2010 the amount of money in the Reserve Fund decreased 2.7 times to $58.9 billion. In April of 2010 Russian Prime Minister Vladimir Putin signed a decree that allows the Finance Ministry not to publicize information on the aggregate assets of the Reserve Fund and the Fund of National Welfare by February 1, 2012. Moreover, the ministry is no longer obligated to publish information on how oil revenues are spent on its Web site.

Russia is entering the “the pre-election season,” Kudrin said last week. That means that social spending may rise significantly to buttress the chances of the ruling United Russia party in next year’s elections. Experts believe that this might lead to increased inflation. Moreover, the destruction of the Reserve Fund may lead to quicker accumulation of state debt, economists believe. “We already can see it,” Osin said.

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