Russian Finance Minister's Dramatic Ouster Deepens Concerns over Economic Reform Agenda

Race for Second Best Spot

On 26 September, Russian president Dmitry Medvedev during a meeting of senior officials in the town of Dimitrograd called on the country's deputy prime minister and finance minister Alexei Kudrin to resign. Medvedev's sharp public comments came after Kudrin—who has been Finance Minister since May 2000—announced that due to policy disagreements with Medvedev he is not planning to carry on with his ministerial duties in the new government which is most likely to be led by Medvedev. Kudrin made his comments on 24 September, the same day that Medvedev delivered his speech at the ruling United Russian (ER) Party convention and revealed his plans to step down as the president of the country and support Prime Minister Vladimir Putin to return to the Kremlin. In a carefully orchestrated move, Putin finally revealed that he will indeed run for the presidency and if he wins the election in March 2012 he would have Medvedev as prime minister. Given lack of any real political opposition in the country as well as Putin's relative popularity, his winning the upcoming presidential vote is a foregone conclusion. It is most likely that Medvedev will be prime minister, but his potential premiership has already been tainted by the public row with influential Kudrin.

The events of the past 48 hours reveal the political differences and rivalries at the top of Russia's power pyramid. The falling out between Medvedev and Kudrin essentially boils down to the policy differences and political ambitions of the two politicians. In Dimitrograd Medvedev's harsh tone was to signal that he is still the favourite for the premiership when Putin returns. He reiterated that he will be making key decisions in the country until 7 May 2012, when he is likely to hand the presidential office to Putin. In a show of defiance Kudrin delayed his decision until after a meeting with Putin, hinting that there is only one decision-maker in Russia at the moment and it is not Medvedev. The Russian president shot back, saying that, "You can consult with whomever you want - with the prime minister - but as long as I am the president, I make such decisions myself."

The outcome of Kudrin's talks with Putin is unclear, but in another unusual move, Putin handed in Kudrin's resignation letter—emphasising the hostile relations between the outgoing minister and the president.

Casting Shadow on Tandem

When Putin orchestrated Medvedev's humiliating withdrawal from the presidential race on 24 September, part of his plan was to end months of speculations and harmful uncertainty among investors in Russia. The message from the tandem was one of reassurance that the political stability will be maintained and the Kremlin team will continue working as before. However, the uncontrolled fall-out between Medvedev and Kudrin revealed problems that the tandem would like to keep under cover.

Kudrin is respected because for over a decade he has been at the forefront of economic reforms in Russia. During Putin's first presidential term (2000-2004) Kudrin spearheaded the liberal reform drive, ceaselessly advocating opening the Russian economy to the rest of the world. Despite the strong resistance of the traditionally protected energy, agricultural and military industry lobby he managed to convince Putin that Russia will have to drop its paternalistic policies and join the World Trade Organization (WTO). He was one of few Russian leaders who realised how addictive and damaging it can be for the economy to ride on easy income from energy exports. He argued that this is not a sustainable path of economic development. Under Kudrin a state oil fund was set up to save some of the income. His foresight helped to cushion Russia from economic disaster when world oil prices fell sharply in the wake of the global economic crisis in 2008-09. This was an alarming reminder for the Russian leadership to take determined measures and diversify the economy away from, as Kudrin put it, the dependency on the "needle" of energy exports. Kudrin also argued that one of the problems with the Russian economy was that blindness of its leaders to the fact that that oil prices are unlikely to grow exponentially, which means that the government will sooner or later will run out of means to fund the growing public spending.

It is clear that Kudrin chose to leave because he did not want to be a prime-minister-in-waiting for the next decade as well. But he also left because he was in disagreement with Medvedev over his plans to spend USD65 billion on the military in the next three years. Curbing growing social spending is unpopular, but exactly what Kudrin has been arguing for. His departure on policy grounds is damaging for the Putin-Medvedev tandem, revealing that their economic development policies are not well thought through. In the time of large scale social spending cuts the Russian government's plans to expand is even more alarming for investors.

Outlook and Implications

Kudrin's sharp reaction reveals that he was not aware of the Medvedev-Putin deal, which in turn indicates how closely the pair work together. However, it is a blow to the tandem and especially for Medvedev, who has been working towards capturing the reformist agenda since coming to power in 2008. His plans of modernisation and economic diversification on the surface coincide with the reforms advocated by Kudrin. However, the difference is in the implementation. Medvedev has failed to grow as an independent politician who could come out of Putin's shadow. Despite the hopes that he would challenge Putin in the upcoming election and the rallying by a number of oligarchs and top ranking state officials behind him, he failed to rise up to the call of so many Russians. This political weakness questions whether he could stand up against Putin's populist social spending plans, especially if the economy starts to underperform and social discontent rises. Furthermore, unlike Kudrin, who was a technocrat passionate about the economy but less about his political ratings, Medvedev is the opposite. Just like Putin he is likely to use the state funds to channel into projects that could boost his popularity. It is very likely that Medvedev is not ruling out standing for the presidency again in the future.

Regardless of who is in power in Russia, its economy and corruption-riddled state administration need reforms. It could be an opportunity for Medvedev to prove that he is a true reformer and to continue Kudrin's legacy. Failure to do so may leave the door open for the now-former finance minister to return.