Finance Ministers

Russia Loses a Vital Cabinet Member


For foreign companies doing business in Russia, figuring out what’s going on in the Kremlin is never easy, and Prime Minister Vladimir V. Putin’s expected resumption of the presidency next May has made it even harder. When Finance Minister Alexei Kudrin was forced to quit by President Dmitry A. Medvedev on Sept. 26, it added tothe uncertainty.

The departure of Kudrin, an economist respected by the West, spooked currency traders who drove the ruble to a two-year low against the dollar. Sergey Dergachev, who helps manage $8.5 billion of emerging-market debt at Union Investment Group in Frankfurt, says he’s cutting his exposure to Russian bonds because Kudrin’s exit “creates additional uncertainty on future budget and monetary policies.” Yet some big companies have grown to expect a little turmoil on the tundra. The day of Kudrin’s departure, Coca-Cola announced $3 billion of new projects in Russia. “It’s a big market, they see huge potential there,” says oligarch Alexander Lebedev, who owns part of Aeroflot and various media properties.

Kudrin, 50, worked in the early 1990s for St. Petersburg’s market-friendly mayor, Anatoly Sobchak. Later he helped rebuild Russia’s finances after the ruble collapse in 1998. Appointed finance minister in 2000 by then-President Putin, Kudrin brought Russia’s debt down to 10 percent of gross domestic product, kept a rein on spending, and squirreled away a chunk of Russia’s oil earnings into a rainy day fund. He steered the economy through its worst recession ever, when GDP contracted almost 8 percent in 2009. Many saw Kudrin as a counterweight to the siloviki, the “men of power” typically trained in the old KGB who hold major posts in the government.

Kudrin was forced to resign by Medvedev after he said he wouldn’t serve in a Cabinet led by the Russian head of state, who is due to swap places with his mentor Putin. “It’s definitely not a step forward,” said Fredrik Colliander, a Stockholm-based fund manager at Carnegie Fonder who manages about $600 million of Russian equities. “It increases the risk of stagnation when it comes to the restructuring that’s vital to the Russia story.” Kudrin also objects to Medvedev’s plan to boost defense spending by 2.1 trillion rubles ($65 billion).

The loss of the finance minister won’t have a negative impact, says Medvedev’s spokeswoman, Natalya Timakova. “Budgetary and macroeconomic policy is set by the president and prime minister,” she says. “The departure of one minister, even such an experienced one, won’t change our course.”

Russia faces a renewed threat from global economic weakness and the euro-zone debt crisis. Oil prices are currently below the level needed to finance the Russian budget without borrowing. “Now is not a good time for the government to lose its arch-fiscal hawk,” says Neil Shearing, an economist at Capital Economics in London. “It is unlikely that Mr. Kudrin’s replacement will share his predecessor’s credentials and clout.”

Still, for multinationals including Renault-Nissan, Ford Motor, and Kraft Foods (KFT), it’s business as usual. A spokesman for Renault, which has invested $1.8 billion in Russia and along with its partner Nissan wants a majority stake in local carmaker AvtoVaz, says the political situation “doesn’t change” its strategy. For companies like Coca-Cola that have endured Brazilian hyperinflation and Turkish coups, the terrain in Russia is hard to navigate, not impossible.

Besides, Kudrin may yet reappear. Andrei L. Kostin, chief executive officer of state-owned Russian bank VTB Group, says he can see Putin appointing Kudrin head of the central bank after he is elected president in March. In Russia, stranger things happen all the time.

The bottom line: The departure of Kudrin, who was deemed credible by the West, makes Russia an even more uncertain place to do business.

With Kevin Crowley, Emma O'Brien, and Jason Corcoran
Meyer is a reporter for Bloomberg News in Moscow.

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