Rebuilding a Collapsed Country
Alexei Leonidovich Kudrin became Russia’s Minister of Finance in 2000 and retained the post for 11 years. As the longest-serving finance minister in post-Soviet Russia, Kudrin is credited with laying the foundations of national financial stability. He developed Russia’s massive Stabilization Fund, which allowed for early repayment of $21.6 billion in state debt, saving billions in interest, and kept the economy afloat during the last two major economic crises.
Putin, when he came to power, had few long-term associates. He gradually elevated trusted colleagues from three informal groups: the siloviki, his connections from the KGB; the remnants of Yeltsin’s political “family;” and the “civiliki,” a group of economists and lawyers from St. Petersburg. Kudrin belonged to the latter, a group of academically qualified politicians who advocated for pro-free market reforms, privatization, and to diminish the state’s role in socioeconomic affairs. Although a capable (and stubborn) bureaucrat, much of Kudrin’s effectiveness is attributed to Putin’s nearly-unwavering support.
Early Life, Education, and Political Rise
Alexei Leonidovich Kudrin was born on October 12, 1960, in Dobele, Latvia (then the Latvian SSR). Seven years later the Soviet military stationed his father, a soldier, in Mongolia, where the family stayed until 1971. The Kudrins then relocated to Borzya Chita, a Russian border town situated about 25 miles north of Mongolia and 43 miles northwest of China. His father was reassigned to Arkhangelsk in 1974, where Kudrin completed high school in 1977.
Kudrin worked as a motor mechanic at the USSR Defense Ministry before studying economics at Leningrad State University. After graduating in 1983, he interned with the Leningrad Institute of Social and Economic Problems until taking up postgraduate studies at the Soviet Union’s Academy of Sciences, where he later received his doctorate. He has published over 15 academic works in economics and finance that primarily focus on competition during Perestroika, an economic and political reform movement during the 1980s that ended with Soviet collapse in 1991.
In 1990, Kudrin joined the St. Petersburg City Council under the liberal mayor Anatoly Sobchak. He served as Vice Chairman of the Committee for Economic Reform until 1993, at which point he and Vladimir Putin became the city’s top deputy mayors. After Sobchak failed to secure a second term in 1996, Putin and Kudrin transferred to Moscow after being offered positions in the presidential cabinet of Boris Yeltsin. As the Deputy Chief of Yeltsin’s presidential administration, and Chief of the Administration on Trade, Economic, and Scientific-Technological Cooperation, Kudrin managed the state’s internal and external debts, implemented welfare, housing, and public utility reform, and oversaw foreign economic relations.
Kudrin and the Ministry of Economy clashed during the August 1998 financial crisis. The ministry insisted on utilizing mutual offsets, an arrangement designed to reduce the mutual indebtedness of both taxpayers and the federal budget. As an example: an electricity company owes the federal government 1 ruble. An independent commercial bank lends the electricity company 1 ruble, which is then paid to the federal government. The federal government then transfers 1 ruble to a defense plant, which then pays 1 ruble to the electricity company for the electricity it consumed. Finally, the electricity company repays the 1-ruble loan to the independent commercial bank. Importantly, all transactions made used accounts opened in the commercial bank, and the ruble never left the commercial bank.
Although offsets did buffer the economy, Kudrin maintained that the arrangement In January 1999, amid conflict and opposition, Kudrin quietly resigned from his post.
Yeltsin announced his own retirement effective January 1, 2000. He appointed Putin acting president. Putin then elevated Kudrin to the post of Minister of Finance and, thanks to booming oil prices and Kudrin’s prudent fiscal policies, Russia emerged from the economic crisis with surprising speed.
In Putin’s Administration, 2000 – 2008
Kudrin was part of a team that implemented a comprehensive package of tax reforms between 2000 and 2001, of which a 13 percent flat-rate income tax was among the most popular and, although it technically lowered taxes, it considerably boosted state tax revenue.
Tax enforcement in Russia was notoriously weak during the 1990s, with only about 40 percent of individual tax incomes actually collected. This allowed public sector debt to remain high and denied the federal budget dependable revenue for salaries, public programs, and other state functions. It also meant that many Russians were working under-the-table, illegally. The flat tax aimed to combat tax evasion, but Kudrin opposed reducing the tax to 13 percent, warning that anything under the then-standard 18 percent would stoke inflation. Ultimately, Kudrin lost, but compliance improved and federal tax revenue rose from an unadjusted $6.2 billion in 2000 to almost $12 billion in 2002.
Chronic budget shortages hindered the state’s ability to provide pensions and social benefits at the level many Russians had become accustomed. Kudrin helped develop a multi-tiered replacement system in which a basic pension, a work-related pension proportionate to years of service, and an optional private pension program provided coverage in lieu of a single state-provided plan. The new system sharply reduced the pension burden on the national budget which, at the time, accounted for 83 percent of Russia’s extrabudgetary spending. The reforms, however, sparked a wave of protests across Russia, for which Kudrin and a handful of other liberal ministers accepted full responsibility during a session of the State Duma. Although Kudrin had previously refrained from using the Stabilization Fund for anything other than paying foreign debts, he announced that he was prepared to utilize the fund for a pensioners’ emergency spending package.
Reforms implemented during this period, along with surging oil prices, resulted in surplus revenue. In 2004, Kudrin began funneling the surplus, which would otherwise contribute to inflation, into a stabilization fund designed insulate the economy should oil prices fall below $20 per barrel. Two years later, Russia paid off nearly all of its Soviet-era debt using the Stabilization windfall. As the debt wasn’t due until 2020, early repayment saved the country $12 billion in interest payments and helped reduce Russia’s dependence on foreign benefactors.
From 1999 – 2007, the Russian economy grew at an impressive 7% annually, and a rapid 8% in the first half of 2008. Stabilization Fund reserves, including gold, grew from $76.9 billion in 2003 to $478.8 billion in 2007, the third largest in the world. Kudrin kept this money almost entirely out of circulation. Though largely supported by Putin and the IMF, other Russian bureaucrats criticized Kudrin’s dogmatic insistence on budget discipline as economic strangulation, forcing money which could have been used for investment in infrastructure and social programs to accumulate, as they said, uselessly.
The Great Recession struck Russia in November 2008. Although annual GDP growth averaged 5.2 percent, crude oil prices plummeted from $144 per barrel to below $55, and federal budget revenue fell 4.8 percent along with it. Although Russia, the world’s largest exporter of natural gas and second-largest exporter of oil, lost two-thirds of its stock market value in less than five months, the nation emerged from the crisis with surprising speed: Russia’s GDP returned to growth, rising by four percent, in 2010.
Kudrin pushed for aggressive budget discipline throughout the crisis. Although some officials, including Minister of Economic Development Elvira Nabiullina, argued that the government should increase spending and reduce taxes, Kudrin insisted that such a plan was both unsustainable and inflationary. Ultimately, Kudrin covered the budget deficit with the Stabilization Funds and, although the government didn’t cut spending, it did reshuffle priorities. All new projects stopped and many important projects were cut back to leave social benefits, such as pensions and important infrastructure projects, fully intact.
Despite faring better than expected, the crisis highlighted the Russian economy’s unhealthy dependence on oil revenue. In March 2009, Kudrin noted that the Russian government made insufficient efforts towards reducing its reliance on oil and pushed for diversification to help prevent another economic crisis. By 2017, he began advocating for full privatization of the oil and gas sector. The Kremlin has not yet endorsed this position.
From Medvedev to Present, 2008 – 2017
Putin was constitutionally barred from seeking a third consecutive term during the 2008 presidential elections. Dmitry Medvedev, Putin’s Prime Minister, assumed the presidency in his stead and, in turn, appointed Putin as Prime Minister. Although Medvedev was president of Russia during the 2008 Financial Crisis, the crisis-aversion measures implemented during the last decade, not Medvedev’s leadership, steered Russia from another large-scale economic disaster.
The Russian economy had trended towards stable recovery by the end of 2009. Over the next few years, Kudrin called for unpopular but, he argued, necessary measures like increasing the retirement age and reducing bureaucracy, while asserting that political reform must precede meaningful economic reform. United Russia, the ruling party to which Kudrin has declined membership, opposed both measures and asked the Finance Minister to refrain from political commentary.
On September 24, 2011, Medvedev recommended Putin as the 2012 presidential candidate. Putin, in turn, nominated Medvedev as his Prime Minister. The next day, at an IMF and World Bank session in Washington, D.C., Kudrin announced that disagreements with Medvedev on economic policy, particularly with his desire to increase arms spending, would prevent him from serving as finance minister of the new government. On September 26, at a meeting of the Ministry for Economic Development, Medvedev asked Kudrin to resign. Kudrin informed Medvedev that he wouldn’t decide until he’d consulted with Prime Minister Putin, but ultimately resigned later that evening.
Since his resignation, Kudrin has become the dean of the Faculty of Liberal Arts and Sciences at St. Petersburg University, co-chairman of the Board of Trustees of the Mariinsky Theatre, and the chairman of the Board of Trustees at the European University at St. Petersburg. In 2016, Putin appointed the ex-finance minister as deputy head of the Economic Advisory Council and as Chairman of the Board for the Center for Strategic Research (CSR), the think tank that drove Putin’s economic strategy from 1999 until 2010 and is expected to influence his 2018 economic program.
A December 2016 report from the CSR claims insufficient presidential authority has prevented many key areas of the Russian economy from fully implementing necessary reforms and suggests that a new body to coordinate reform policies, with its own budget, staff, and authority, be established in addition to reducing geopolitical tensions to integrate more fully into international production chains.
Alexei Kudrin speaks at the 2014 St. Petersburg International Economic Forum (SPIEF). This video also features Sergey Glazyev, another influential economist whose theories and suggested policies (most often protectionist) often oppose Kudrin’s.
As Russia enters the 2018 presidential election cycle, rumors that Kudrin could replace Medvedev as Prime Minister have started circulating. The Finance Minister has a history of loyal service to Putin, and is qualified to spearhead much-needed economic reforms. He also has experience dealing with fallout from those unpopular reforms. Importantly, Kudrin doesn’t pose a direct threat to Putin’s authority. It’s difficult to predict what Russia’s president will do next, but it’s characteristic of Putin to keep his options open.