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A Laundry List for the Kremlin: Russia's Former Finance Minister Alexei Kudrin Has Come Up With a Plan to Help the Kremlin Maintain Fiscal Discipline

Alexei KudrinRussia's ex-Finance Minister Alexei Kudrin, who lost his job last month after publicly criticizing planned increases in Russia's military spending, has been showing no signs of letting up on his criticism of the Kremlin's fiscal policies. However, the former deputy prime minister has also been trying to pitch a five-point action plan with new initiatives that could help the Kremlin to address pressing economic challenges. Speaking at an annual international conference on Tuesday, Kudrin highlighted "some weaknesses" of the Russian economy, which he blamed on the government's dogged reliance on rising oil prices to boost defense spending and plug holes in the budget. Kudrin challenged the Kremlin to commit to live within its means in part by striving "to balance the budget at $100 per barrel of oil by 2015 and $90 by 2017. He noted that the budget expenditure would be about 21.6 percent of the GDP from just 18.3 percent in the heat of the financial crisis in 2008. Russia's sovereign wealth fund ­ which comprises the Reserve Fund and the National Welfare Fund ­ will dip to around eight percent of the GDP in 2012 from 16 percent of the GDP in 2008, Kudrin said.

In an opinion piece for Kommersant business daily on Tuesday, Kudrin spelled out specific guidelines for attaining fiscal discipline. The Russian government, he said, has been pursuing "a risky economic policy" prompted by "a complex mix of internal political motivations and favorable, but volatile prices for oil, the country's key export." Kudrin suggested that Russia would need a "new model" for economic growth "based on the growth of private investment, supported by a stable financial system with low inflation."

As part of his plan, Russia should aim for a deficit-free balanced budget in 2015 at an average price of $90 per barrel of oil, Kudrin said, adding that the country could have a balanced budget this year if the average price of Urals crude oil stays at $108 a barrel. The current average for Urals in 2011 is $109.22 per barrel, Bloomberg reported on Tuesday.

Experts say Kudrin's call for a return to fiscal prudence will be a hard pill to swallow for a government facing parliamentary elections in December, to be followed quickly by a presidential poll in March. Nor will his appeals sit well with many Russians, who, according to various polls, prize profligacy over prudence in financial matters. An opinion poll conducted by the Levada Center pollster at the end of September showed that out of 71 percent of Russians who knew about Kudrin's dismissal, 37 percent were happy to see him go. Only 21 percent said they opposed his resignation.

Kudrin was dismissed from his job as finance minister by President Dmitry Medvedev in September after publicly criticizing 2.1 trillion rubles ($66 billion) in additional defense spending through 2014. Kudrin said the additional military expenditure, which was factored into the budget despite his protests, would create too much "additional risk" for the economy.

President Medvedev has defended the high military spending, saying that Russia cannot "avoid [heavy] defense spending worthy of the Russian Federation." Russia, he said, "is not some 'banana republic,' but a very large country, a permanent member of the UN Security Council that possesses nuclear weapons." Prime Minister Vladimir Putin has also put his weight behind the planned military spending, telling investors this month that the country's aging military infrastructure and weaponry needs to be replaced.

Kudrin said that in addition to hiking military spending, the government also plans to increase budget spending by raising teachers' wages and pensions, all of which will consume up to 20 trillion rubles in the next decade alone. Meeting all the goals, he argues, would produce a budget deficit, while Russia, as a G20 group member, had vowed to cut its deficit by half by 2013. "The government has all the instruments to change this course, but it is necessary to determine priorities," Kudrin said, stressing that the government is running out of time.

Kudrin also warned that although oil prices had recently been at historic record levels, this was very volatile, while Russia's surplus revenues have been spent with nothing left to replenish the country's safety cushion. If oil prices fall to $60 per barrel, the budget deficit will amount to 5.5 percent of the gross domestic product and the rest of the country's oil wealth Reserve Fund would be depleted within a year.

Part of his five-point recommendation is for the government to set rules for spending surplus oil revenues, which he says seriously affect inflation, the exchange rate and the country's reserves. The government must also revise its military spending and decide on a 2012 social strategy to invest in growth programs, he said. Finally, Kudrin urged spending cuts without tax increases to reduce pressure on the GDP.

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