Kudrin Signals Steep Spending Cuts

Finance Minister Alexei Kudrin signaled Tuesday that steep spending cuts are in the cards after the government failed to take advantage of the heady days of high oil prices in the 2000s.

The federal budget will have to be cut by as much as 20 percent in 2015, and real spending in 2020 will be equal to 2010 levels, Kudrin told a conference at the Higher School of Economics.

Kudrin's remarks, which came a month before the State Duma reviews the 2011 budget, highlight two choices that the government faces in its efforts to encourage economic growth: a risky increase in budget spending or an introduction of liberal reforms to attract private investment.

It would now seem that the government is leaning toward the second option, with Kudrin calling for major spending cuts and a change in the "psychology" of the government's involvement in the economy.

The past decade "can be called various names: the era of restoration, the Putin era, the era of improvement in the standard of living," Kudrin said.

But, he lamented, those years were not used to "create a new base for a new future economy."

"One can ask the question, why in a favorable economy, in comfortable conditions, did … we fail to carry out reform, primarily institutional reform," Kudrin said, naming the police and courts as two institutions that are working poorly.

Over the next 10 years, Russia will have to "change its psychology" because it cannot afford to expand the economy by filling it with money from the federal budget, he said.

"We will not be able to get funds in the same manner and hope to obtain results by extensive spending," he said. "Budgetary means will be severely limited."

Kudrin also said the government was not planning to allocate any additional funds for the banking system, and bank lending will go up by 5 percent to 10 percent this year. It is unlikely that the refinancing rate will go down any time soon because of inflation risks, he added.

At a meeting with President Dmitry Medvedev later in the day, Kudrin said the federal budget deficit would only be overcome in four years provided that oil remains high.

Oil rose to an 18-month high of $87.09 per barrel on Tuesday.

Kudrin's figures reflect his political position to keep budget spending down rather than economic reality, said Vladimir Tikhomirov, chief economist at UralSib.

"If the budget deficit is 6.8 percent with the oil price set at $58 a barrel, it will not be 6 percent with the price going up to $85," he said, referring to figures in the current budget. "It's nonsense. Even with the strengthening ruble, the parameters are better than that."

He said the budget might actually reach a surplus this year rather than in four years as Kudrin predicts.

But Kudrin has to adopt a tough bargaining position and keep the deficit budget next year without a major overhaul, which will fuel pressure to increase spending, Tikhomirov said.

Kudrin frequently clashes with other Cabinet members over budgetary spending. Last month, he said there was no legal reason to raise pensions from April 1 and that the pension system was already in deficit. Putin, however, disregarded Kudrin's remarks, and pensions rose by 6.3 percent this month.

Natalya Orlova, chief economist at Alfa Bank, said the key question is not the overall amount of cuts to budgetary spending but the distribution of the spending in the economy. Since the budget is focused on social spending, "there is a real risk that everything but social spending will be cut," Orlova said, adding that pensions have grown by 33 percent over the last three years.

The Finance Ministry has been pushing to reform the way budget money is spent, proposing that the focus be on long-term goal-oriented programs instead of simply allocating preset amounts of money to ministries to perform their duties year after year. The plan was met with strong opposition from the Economic Development Ministry, but Kudrin said Tuesday that the ministries would reach a resolution by April 12.

Kudrin's influence in the government has increased amid the economic crisis because his insistence that the government not touch a multibillion-dollar reserve fund during better times has provided Russia with a softer landing during the crisis and even kept some industries out of bankruptcy, Tikhomirov said.

He said Medvedev and Prime Minister Vladimir Putin are now more likely to support Kudrin in reducing spending and opening up the private sector of the economy. "There is no third way," he said. "It would be stagnation."