Walker's World: Fiscal woes roil Kremlin

By MARTIN WALKER, UPI Editor Emeritus  |  March 4, 2009 at 10:11 AM
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MOSCOW, March 4 (UPI) -- The Russian political system is learning the hard way that economic hardship forces political disputes. Budget deficits require policy choices over what to cut and what to preserve. Ministries and special interests mobilize to defend their turf and their budgets, and appeal to higher authority for support. Tough decisions have to be made.

Until a year ago, those tough decisions were made, in effect, by one man, President Vladimir Putin. But a year ago Putin stepped down to become prime minister and bequeathed his Kremlin post to the reform-inclined lawyer Dmitry Medvedev, who was merely to reign while Putin continued to rule.

In public profile and in public popularity, Putin continues to dominate Russian political life, but however constrained his political role, Medvedev's presidential office embodies the prospect of a divided government. At the least, it constitutes an alternative court of appeal for ministers who feel their budgets are being unfairly targeted, or for industrialists and regions who think they deserve more of the available investment funds.

So the harsh impact of the recession on Russia is shifting the balance of power between prime minister and president, between Putin and Medvedev, as economic issues become divisions over policy that threaten to spill over into political rivalries. Even when the two principals are determined not to let this happen, aides and policy allies start to congeal into factions and the media chase stories of a government split. Issues become personalized and, almost before the principals know it, their loyalists are at one another's throats.

This began to happen in Moscow last autumn as oil prices and the Moscow stock market collapsed and the ruble began to totter. The ambitious public spending plans drawn up during the boom called for more spending on everything -- on housing, healthcare, education and the military. Now the boom is over, and the national security establishment and their allies in heavy industry are defending their budgets and proposing currency controls while liberal economists urge social spending and more reform.

A former KGB officer, Putin has always been close to the "siloviki," the tight-knit clan of security service veterans he brought to power. It includes First Deputy Prime Minister Igor Sechin, National Security Council Secretary Nikolai Patrushev, military procurement chief Viktor Cherkesov, Deputy Prime Minister Sergei Ivanov and Federal Antinarcotics Service head Viktor Ivanov.

But Putin has always balanced the power of the siloviki with the technocrats like Medvedev and Finance Minister Alexei Kudrin and the civilian reformers on their staff. In the boom years, there was enough in the state budget to satisfy everybody. But with the economy now shrinking at an annualized rate of 6 percent and the state budget facing a 42 percent revenue shortfall, the budget has become a political battleground. And the political battle is emerging into the open.

"Today the most honest and independent opinions on Russia's problems are coming from the liberal wing, rather than from the so-called statist patriots. The pendulum is definitely swinging our way," says Igor Yurgens, who runs the Institute of Contemporary Development, of which Medvedev is a trustee.

Yurgens created a stir when his think tank last month published a report critical of the bailouts for "obsolete branches of industry." The report blamed Russia's financial crisis on "fundamental, structural flaws in its economy." And while Putin and the siloviki blamed the financial crisis on the greed of American bankers, Yurgens insisted that Russia's woes had "nothing to do with the West."

Finance Minister Kudrin, brought to Moscow by Putin, is the man in the middle as he draws up a new budget for the coming year, based on a far more realistic assessment of the oil price at $41 a barrel, rather than the $95 that had been assumed. Speaking this week at the Global Investment and Finance Forum in Moscow, he warned that the economic crisis would deepen, property values would fall further, and that investors had pulled $40 billion out of Russia in January. The core problem was that Russia's economy was overly dependent on oil and gas.

"I share the responsibility for not managing to diversify the economy as much as we wanted," Kudrin told reporters. "We were spending more money than we could afford, which is why we had a rapid strengthening of the national currency and high inflation. I think the government should have been more conservative in its financial policy and save more money that it received from the high global oil prices."

If the U.S. and world economies recover, Russia could grow between 2 percent and 3 percent next year, but "the moment when private demand revitalizes itself on the market is the moment we emerge from the crisis," Kudrin went on. "And to revitalize this private demand, the government should direct efforts at lowering taxes, lowering costs for enterprises by force of government tariff regulations, providing for salaries and reducing administrative barriers," Kudrin said.

So far, Kudrin and the government have managed to fund both the siloviki and social reforms, but at the cost of raiding the $600 billion national reserves from the boom years. But with the government spending more than $200 billion to defend the ruble and bail out industrialists, and facing a $120 billion budget shortfall, the reserves are dwindling fast. And the politics of hard economic times are becoming edgy.

"Medvedev does understand the situation in the economy is dire, and he's trying to distance himself from the prime minister (Putin), who is responsible for the everyday economy. They are afraid, and I think Medvedev understands the risks involved," commented Yevgeniya Albats, editor of Novaya Vremya magazine. "There are plenty of people around Medvedev who would like him to become a real leader as opposed to a puppet of the prime minister."

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