Magazine

Andrei Illarionov


It's long past midnight in the Kremlin, but President Vladimir V. Putin's top economic adviser, Andrei N. Illarionov, is still at work. And he isn't too tired to engage a listener on his favorite topic: the Russian government's slow pace of reform. "These people may be still hostage to old-fashioned planning methods, even if they are young--and even if they call themselves reformers," says Illarionov, 40, known throughout Russia for his sharp tongue and outspoken views.

Illarionov relishes being the rebel within the Kremlin walls. In press conferences, on TV talk shows, and in government meetings, he keeps the pressure on his colleagues in the economic and finance ministries. He wants them to move faster to cut government interference in Russia's economy and encourage competition and free markets. For Russia to boost its current level of 4% annual growth to 8% or 10%, he argues, the government must shake up and deregulate monopolies such as Gazprom, RAO Unified Energy Systems, and the Railways Ministry. "It's clear the government must work much harder to reach higher growth," he says.

Illarionov's abrasive style has made him enemies among Russia's political elite. "Illarionov is an irritant," says Mikhail Zadornov, a former finance minister and now an influential deputy in the Russian parliament. But foreign investors applaud the presidential economic adviser. "He is one of the few Western, liberal-oriented economists in Russia, and it just so happens that he has the President's ear," says Roland Nash, head of research at Renaissance Capital, a big Moscow brokerage. "He has been extremely useful in educating the President on economic policy."

And Putin appears to be listening. Shortly after he appointed Illarionov--a fellow native of Saint Petersburg--in April, 2000, Putin decided to support the economist's proposal for a 13% flat income tax. That rate, introduced in January, 2001, represented a major cut from the previous sliding scale of 12% to 35%. Russia's income taxes are now Europe's lowest and the country's once-meager tax collection has vastly improved. Putin also backs Illarionov's ideas for slashing bureaucracy and creating competition for the monopolies. But these reforms have been slower to take hold, largely because of resistance from civil servants eager to preserve kickback opportunities.

Pressure from Illarionov has forced ministers into action in some important cases, however. In late 2000, Illarionov denounced Prime Minister Mikhail Kasyanov's reluctance to pay off $38.7 billion in old Soviet foreign debt on schedule as "hooliganism." Now, to the relief of Russia's foreign creditors, the government has even been paying its debts before they are due--a move that has helped clean up Russia's reputation following its massive default in August, 1998. Some analysts now say Russia could earn an investment-grade rating by 2005; Standard & Poor's currently gives it a B-plus. Such an achievement would please Illarionov, but not enough to persuade him to slow his push for more reform. "When you reach the top of one hill," he says, "you find there is another hill, higher than the one you just climbed."

Illarionov himself keeps climbing. The son of two teachers, Illarionov received a PhD in economics from Saint Petersburg State University and came to Moscow in the early 1990s as Boris N. Yeltsin launched Russia's first market reforms by freeing prices. An adviser to Yeltsin's early architect of reform, Yegor T. Gaidar, Illarionov forged a reputation as an independent thinker from the start. He harshly criticized the government for failing to curb inflation and for torpedoing liberal reforms by compromising with the industrial lobby.

A fan of libertarian writer Ayn Rand, Illarionov believes that economic and political freedoms are two sides of the same coin. "Every tariff and every limit on foreign-exchange transactions is a blow to our consciousness. Every tax acts against our freedom," he says. Whether or not Putin continues to follow his advice, Illarionov is likely to keep stimulating debate--and shining the spotlight on government mistakes.


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