Streetwise Professor

April 17, 2009

Stressed Out

Filed under: Economics,Financial crisis,Politics,Russia — The Professor @ 4:19 pm

Not me.  Alexei Kudrin.  Putin says so, as a way of dismissing Kudrin’s increasing pessimism, which contradicts Putin’s happy talk on the Russian economy.  Given Kudrin’s vital role as Horatius at the Gate; the fact that he is one of the few economically literate people in the Russian leadership; and the fact that various siloviki have had their knives out for Kudrin and their eyes on the treasures he guards; this could be a very important development.

This comes as evidence of strains and severe differences of opinion  within the Russian leadership  over the economy and measures to address it are becoming very public.  The most obvious evidence comes from the Reuters article linked above, headlined “Russian Ministers Clash Over Crisis Time Tax Plans”:

Russia’s top economic decision makers clashed on Wednesday over whether some taxes should be cut to help business through the first recession in a decade, or whether the budget cannot afford to lose any more revenue.

Officials painted a fairly glum picture of the oil-dominated economy, saying the economy could contract more than 7 percent in the first quarter of this year, while consumption is falling and the difficult times could last for the next three years.

In an early indication of a significant downturn, Russia’s statistics service later reported a 13.7 percent industrial output slump in March in year-on-year terms, the second biggest decline since 2002.

President Dmitry Medvedev has urged officials to present a united front on the crisis, but cracks are starting to show.

. . . .

The fiscally prudent Kudrin on Tuesday warned Russia should not expect a return of the favorable conditions it has enjoyed in the recent years for the next “five, 10, 20 or 50 years.”

On Wednesday, Kudrin warned tax cuts would further undermine falling budget revenues in such a climate.

But the Economy Ministry, which focuses on longer-term development, and an influential Kremlin aide said lower levies may be needed to maintain competitiveness. “For business as a whole … I agree, we should not increase the financial burden, not even in 2011,” top Kremlin economic aide Arkady Dvorkovich told the Russian Union of Industrialists and Entrepreneurs (RSPP).

. . . .

“This is my personal forecast … but I think that some decision to cut VAT could be expected from 2011,” he said.

Economy Minister Elvira Nabiullina echoed his comments.

“We think we should not increase the total tax burden on businesses, especially at the time of crisis,” she told the same meeting. “We can propose reforming the tax system … We need to stimulate spending on innovation, social spending.”


Finance Minister Kudrin, who spoke after Dvorkovich and Nabiullina, discarded their suggestions as populist.

“If we talk about the coming years, then we have not completed the analysis of how the government will function in the conditions of new revenues,” Kudrin said.

“I think my colleagues did not calculate, did not weigh up and made statements for the public.”

He added that the 2009 budget revenues forecasts now looked “optimistic,” while the economic contraction for the first three months of the year could be deeper than the expected 7 percent.

Earlier this week, Kudrin said Russia should slash its 2010 budget revenue forecast by more than 30 percent and cut planned expenditures by 13 percent, or $39 billion. He also said the state could borrow abroad for the first time in a decade.

The background for this, alluded to in the article, is that (a) the GDP contraction in the first quarter was more severe than anticipated, perhaps greater than 7 percent, (b) industrial production contracted by a larger than expected 13.7 percent year-on-year in March  (the industrial production decline was more  severe than forecasts by economists polled by Bloomberg (12.5) and reported in  Forbes  (12.3 percent)),and (c) dire alarums have been heard emanating from three major Russian banks, VTB, Sberbank, and Alfa Bank, about the prospects for a tsunami of loan defaults in the coming months.  

It should also be noted that there are those among the siloviki who agree with Kudrin’s gloomy prognosis:

Railway cargo turnover, a key indicator of the trend in industry, fell 15.8 percent in March from a year earlier, compared with a 26 percent fall in January,  Vladimir Yakunin, chief executive officer at rail monopoly OAO Russian Railways, said in a Bloomberg Television interview on April 6.

“We are only at the beginning of the crisis,” Yakunin said.

Yakunin’s OAO Russian Railways is apparently in a dispute with steelmakers over agreements to purchase rails.  OAO RR wants to cut back purchases dramatically.  The steelmakers claim they have a deal.

The debate between Kudrin,  Dvorkovich and Nabiullina illustrates Russia’s policy dilemmas: they may all be right.  Kudrin may be right in the sense that the weak economy so imperils the government’s financial condition that it cannot afford a tax cut.  Dvorkovich and Nabiullina may be right in the sense that without some relief, Russian companies will struggle to survive.  Like a failing city with a plummeting tax base (e.g., Detroit, St. Louis), Russia can’t afford to cut taxes, and it can’t afford to keep them high, either.  

But the most interesting aspects of this are two.  One is that Medvedev has been relatively silent on these issues, his most notable remarks of late being some blather about the prosperity-freedom trade-off debate.  That is, for the most part, in the realm of political philosophy, and suggests some detachment from dealing with the immediate crisis.  

The other aspect is even more interesting than Medvedev’s apparent detachment.  That is Putin’s remark about Kudrin’s stress.  Maybe it was just a way of deflecting questions about the substance of Kudrin’s prognosis for the Russian economy.  But, given that it was not uncommon for high level Soviet officials who had become embarrassing in some way to “retire” for health reasons, there may be much more to it than that.  The “stress” remark lays the groundwork for Putin to shunt aside Kudrin if the differences between Putin’s assessment and Kudrin’s evokes so much cognitive dissonance in Russia that the Finance Minister’s continued presence becomes intolerable to the Prime Minister.  

Whether this happens or not is partly dependent on the path of the Russian economy, and government finances, in the coming weeks and months.   Stabilization or improvement would raise the odds of Kudrin’s survival.  But if his predictions turn out to be accurate, over the side he could go.  Thus, his departure would be a signal of the dire straits of the Russian economy, while at the same time removing from the scene the person most capable of handling these economic trials.  This would represent a double disaster for Russia, so it bears close watching.

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  1. Ah yes. So now we see the real brilliance of Russian economic thought, which caused the USSR to become such a blinding success. Putin studied at the hand of the Poliburo, and took careful notes.

    It’s really quite simple: Anyone who disagrees with you is insane, and simply needs a prolonged “rest” in a nice institution with padded walls and bars on the windows, until they see things “correctly.” Solzhenitsyn, Kudrin, it’s all the same.

    And in emergency cases, of course, there’s always a bullet in the head. The Stalin solution. It worked so well for the USSR, why not try it all again.

    But wait! I know! What happened to the USSR was just a spot of bad luck, wasn’t it?

    Good grief, what a country.

    Comment by La Russophobe — April 18, 2009 @ 7:07 am

  2. Seems like Kudrin’s deputy is also under massive stress. She now says the Kremlin may be forced to make spending cuts of a truly breathtaking THIRTY PERCENT next year, not the 10% Kudren mentioned.

    Russia stands at the edge of an abysss, inches from national collapse.

    Comment by La Russophobe — April 19, 2009 @ 7:18 pm

  3. And, the good news just keeps on coming. According to Russian news sources, close to 70% of all construction companies are close to bankruptcy. When they start going defaulting on their loans, this will bring down a fair number of banks. See:

    Comment by Michel — April 20, 2009 @ 12:54 pm

  4. Again I am commenting in the wrong post as usual. But the slew of Q1 profit declarations by all the troubled banks (BoA, GS etc) clearly validates SWP’s prophecy that the banks would try to gamble their way out of insolvency instead and stating the truth and going under government control. Sadly the adeventurous times have begun.

    Comment by Surya — April 20, 2009 @ 6:31 pm

  5. Again I am commenting in the wrong post as usual. But the slew of Q1 profit declarations by all the troubled banks (BoA, GS etc) clearly validates SWP’s prophecy that the banks would try to gamble their way out of insolvency instead of stating the truth and going under government control. Sadly the adventurous times have begun.

    Comment by Surya — April 20, 2009 @ 6:32 pm

  6. WOW.

    Russia just posted ELEVEN POINT NINE PERCENT unemployment for March. Close to a 50% increase from February. Seems like Kurdin’s deputy was correct to imply he’s being very conservative.

    It’s getting ugly out there, boys and girls.

    Comment by La Russophobe — April 20, 2009 @ 6:57 pm

  7. Surya–feel free to comment where you will;-)

    Take a look at the end of my post on the What the Oil Market is Telling Us for my brief comments on the idiocy of viewing the recent bank earnings announcements as good news. I state that they are merely irrelevant. The elephant in the room is what’s going on on their balance sheets, not their income statements. Typical Three Card Monte trick–trying to distract attention from what the con man is doing with the black Queen. I fear, though, that you may be onto something, i.e., the earnings announcements are a symptom of banks gambling for resurrection.

    The ProfessorComment by The Professor — April 20, 2009 @ 9:52 pm

  8. […] I vaguely recalled a similar Putin diagnosis, at the height of the crisis.  With a little digging, I confirmed that recollection: Prime Minister Vladimir Putin, addressing workers at a rail car […]

    Pingback by Streetwise Professor » Kudrin’s Shrink — October 8, 2011 @ 9:10 pm

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