Kudrin for PM?

(Business New Europe – bne.eu – MOSCOW BLOG – May 27, 2013) There has been a lot of noise about the possibility of Russian Prime Minister Dmitry Medvedev being sacked and replaced by the former finance minister Alexei Kudrin. We think it will happen ­ just not yet, but possibly as soon as this autumn.

Russian President Vladimir Putin is partly driving the speculation. He has gone out of his way to be nice to Kudrin, who quit his job last year following a very public row with Medvedev over spending on the military. On several occasions, Putin has personally singled out Kudrin for the most public of praise and made it quite clear that he is still a senior Kremlin player.

So what is going on here? According to the speculation in Moscow, Kudrin has been offered several very high level jobs including the governor of the central bank and most recently the job as head of the presidential administration, one of the most powerful roles in the country. But according to the conventional wisdom inside Moscow’s Garden Ring, Kudrin has turned everything down and is holding out for the PM’s job.

Certainly, Kudrin has been behaving as if he were running a campaign and has been a very vocal critic of the government recently, calling for deep reforms in order to avoid economic stagnation. “Even if we roll up our sleeves and set to work right now, we’ll need from three to five years to achieve new elements of efficiency,” Kudrin said at an Open Tribune meeting held by the State Duma, the lower house of Russia’s parliament.

He went on to lay some of the blame for Russia’s current lackadaisical growth squarely at the feet of the ruling United Russia party. “The political system is lagging behind the challenges of time, and does not ensure the mechanism for arranging the modernization of the country.” Kudrin also dismissed the economy minister’s optimism (and that of the consensus in the market) that growth will pick up in the second half of this year.

Given the media in Russia is largely controlled by the state, Kudrin’s high profile and sharp criticism wouldn’t be possible without a nod from the Kremlin. Chris Weafer speculates that Kudrin is being used as a goad and Putin is using the threat of Kudrin for two objectives: “One was Putin showing the Russian people that the man they consider the proverbial ‘safe pair of hands’ is waiting in the wings, so that if there is any crisis he can he called on. The second objective was to remind the current PM and his cabinet that if they mess up and can’t deliver an improved economy, then the next PM is currently on your TV screen.”

Step by step

This is probably true. To understand the situation fully you have to first assume that Putin is a long-term planner who has already given much of the detail of his programme that is supposed to run through to 2020. You need also to assume that Putin is launching Phase II of his long-term strategy. Phase I, which ran over his two presidential terms from 2000-2008, was about taking back control of the political system from the oligarchs, patching up the worst economic problems and beginning the second round of large privatization ­ most of this was encapsulated in the so-called “Gref Plan”.

The second phase kicked off with Putin’s inauguration, which has the twin goals of asserting government authority again ­ except this time over its own employees, who have been helping themselves. And the reform roadmaps, the first of which Putin signed off the minute he was sworn in for this third term as president, are an attempt to systematically improve Russia’s system from the ground up.

In practical terms, this means Putin has several clear stages to move through. He preempted the roadmaps at the Sberbank investment forum in 2011 while still prime minister, but in the last nine months nearly 30 of these things have been launched and all are in the hands of Medvedev to formulate and implement. However, these are only a first preparatory stage that does little more than lay the groundwork for the implementation that comes later.

In parallel to setting the economic agenda, like at the start of his first term, Putin also launched the main thrust of his political goal: take tighter control over the government, which at this point means cracking down on graft. Actually, Medvedev can take responsibility for launching Russia’s first serious attempt to reduce corruption in his speech at the 2009 St Petersburg Economic Forum, but Putin took the agenda over with his attack on the utilities sector in the autumn of 2011, followed by another attack on the Defence Ministry in November 2012.

An attempt to institutionalize this campaign came only a few months ago with new laws that ban deputies and high government officials from owning assets abroad. This is a big agenda. In 1999, when Putin called in the oligarchs to the now infamous meeting there were only 20 men to cajole and threaten into towing the line; this time he has a staff of well over a million officials and bureaucrats to bring in line.

When to make the switch

It is clear to everyone that Medvedev is politically vulnerable at the moment. The current economic slowdown was widely expected (although it has been more extreme than expected) and clearly Medvedev is an ideal scapegoat that can be sacrificed at any time to take the blame. But while Russia is suffering economically and the people are worried, things are not bad enough yet to play the “sack Medvedev” card. Several Russian papers have speculated that he will go in the autumn ­ and then only if the economy falls further.

A second argument for delay is that Putin’s political capital is actually very limited. He has just launched a very frightening attack on his own political machinery and so he needs to be on top of that process before he can think of yet another shakeup. The audits of both deputies and state companies are going to be ready in June or July when the process of enforcing the new rules will start.

Bringing in Kudrin is bound to cause a dislocation. The word in Moscow is that not only does he want to be prime minister, but he wants sweeping powers to make real reforms, which will end up treading on a lot of the incumbent elites’ toes. And Kudrin, like Gref and Medvedev before him, would need a lot of support from Putin as PM to make his changes stick.

But bringing in Kudrin would be a watershed for Russia, not just as in marking the next step in the economic agenda that is due to run over the next seven years to 2020, but also for its image. Foreign investors love Kudrin and would give their eyeteeth to see him appointed PM with real power to effect change. It should be a transformational event for Russia’s image and would certainly be followed by a big uptick in both direct and portfolio investment. This is a very sexy card to play given the government’s stated goal of increasing investment, so the timing of it should be done to maximum advantage.

When is that? Certainly not now. Russia is right at the bottom in the currency global popularity stakes. The situation should improve if the widely expected global economic pickup in the second half of this year kicks in. Or indeed wait until next year when the recovery in Russia and elsewhere is a lot more robust. Or possibly he will wait longer than even that, as this is a seven-year campaign: leave Medvedev to do much of the dirty work and bring in Kudrin to polish after.

Of course, none of this could happen at all, but I can’t think of a simpler and sexier way to turning the Russia story around and getting people interested in it again as a business destination.