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Medvedev Talks Tough on Military Spending to Sideline Rivals for Premier

Russian Tanks on ParadeRussian President Dmitry Medvedev hardened his stance on military spending, the issue that triggered Alexei Kudrin's exit as finance minister, as he seeks to bolster his chances of becoming prime minister next year.

Government officials who question the president's plan to boost defense spending must quit or "work elsewhere," Medvedev said yesterday. Russia "isn't a banana republic" and must maintain a military that reflects its status, he said.

Medvedev agreed last week to swap roles with Prime Minister Vladimir Putin after presidential elections in March. He is trying to fight off possible challenges for the premier's post in order to push on with his plans to diversify the economy and fight corruption, according to Lilit Gevorgyan, a London-based analyst at IHS Global Insight.

"What has changed is his political intention to ensure a secure grip on the post of the prime minister, unchallenged by people like Kudrin," Gevorgyan said yesterday by phone. "He wants to become that reformer, to take a leadership position along with Putin."

The president fired Kudrin yesterday after the minister, 50, told reporters in Washington on Sept. 24 that he couldn't work in a future Cabinet led by Medvedev because his plan to spend an additional 2.1 trillion rubles ($66 billion) on defense through 2014 would create too much "additional risk" to the economy.

Desire to Leave

Kudrin, in office since 2000, steered the nation's recovery from its 1998 default by reining in public spending and creating sovereign wealth funds that cushioned the impact of the global credit squeeze. In a statement yesterday, the former finance minister said his comments were "considered and balanced," and that he told Putin he wanted to resign in February.

Ruble bonds were the only local-currency debt among the BRICs to deliver a loss as Kudrin departed Sept. 26, sliding 0.7 percent. The Russian currency weakened against the dollar today, depreciating 0.5 percent and extending declines in its worst quarter since 2009.

Putin, who engineered Medvedev's succession in 2008 after serving the legal limit of two consecutive terms, told the dominant United Russia party Sept. 24 that he would run for president after Medvedev suggested the party support him. The announcement ended years of speculation over how the so-called tandem of Russia's two most popular politicians planned to rule after Medvedev's term ends in May.

'Extremely Unpopular'

Medvedev would take over from Putin as prime minister just as a global slowdown threatens to damp demand for oil, the lifeblood of the economy. Russia is vulnerable to swings in oil prices and will have to cut spending, including pensions, to bring its budget into line and lower its dependency on commodity exports, the International Monetary Fund said Sept. 21.

The next Cabinet will become "extremely unpopular" after taking painful decisions to overhaul the economy and will be replaced within one or two years, Nikolai Petrov, a political analyst at the Carnegie Center in Moscow, said yesterday.

"The next government, including the prime minister and the finance minister, will be kamikazes," he said by phone. "Putin may make Medvedev the scapegoat for unpopular reforms and bring back Kudrin to replace him in a couple of years."

Acting Minister

Putin yesterday named Anton Siluanov, Kudrin's deputy for overseeing military spending, as acting finance minister, an appointment he said was approved by Medvedev. The decision was made jointly with the president and Siluanov is a "good, solid specialist," Putin told a government meeting.

"The main goal for me personally and for the Finance Ministry is to continue the work that was already started," Siluanov said late yesterday by telephone in Moscow.

The finance ministry will have a more difficult time without Kudrin, he said. "I understand that replacing him is impossible, but honestly, I'd like to be like him. It will be hard for us without him."

Siluanov was a "surprising" choice whose "political weight is unclear," Natalia Orlova and Dmitry Dolgin, analysts Alfa Bank in Moscow, said today in a research note. "The ministry will have a more technical rather than political decision-making role, increasing the risk of additional growth in expenditures"

'Tectonic' Shift

Kudrin's ouster signals the polarization of the Russian elite, which is on the verge of a "tectonic" shift in ideology, billionaire Mikhail Prokhorov said in a blog post. "We stand on the verge of very important changes," Prokhorov said. "There's no doubt" more Cabinet members will resign.

Prokhorov, Russia's third-richest man with a fortune Forbes magazine put at $18 billion, quit as leader of the Pravoye Delo party on Sept. 15, saying Medvedev's administration had blocked the group's preparations for December's parliamentary elections. The Kremlin removed Prokhorov from a presidential commission, made up of government ministers and top Businessmen, on diversifying the economy on Sept. 25.

Pravoye Delo is an "artificial project" that is "discrediting the liberal-democratic idea," Kudrin said yesterday, denying he had ever considered leading the pro- business party.

'Questions to Decide'

"The new government will still have these questions to decide, including creating a balanced budget system and reducing risks to the economy as a whole," Kudrin said Sept. 24. "In this case, it will be up to Medvedev's future new team to solve them."

Medvedev said in January that Russia needed to grow at least 8 percent a year within five years to keep up with other emerging economies like China and India. Expenditure on arms procurement and military wages will remain a "priority," he said yesterday after overseeing the counter-terrorism exercises with fighter planes and tanks in the Chelyabinsk region of the Ural Mountains.

Russia's credit profile is unaffected by the government reshuffle, Standard & Poor's and Fitch Ratings said. The rating companies have in the past month both affirmed the country's long-term rating at BBB, the second-lowest investment grade, citing vulnerability to sudden changes in the oil price.

The cost of protecting Russian debt against non-payment for five years using credit-default swaps dropped 29 basis points to 295 yesterday, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Article ©2011 BLOOMBERG L.P. ALL RIGHTS RESERVED; article also appeared at www.bloomberg.com/news/2011-09-27/medvedev-hardens-stance-to-sideline-rivals-for-premier-s-post.html

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