Pudrin Lives!

On Monday evening Moscow time Russian President Medvedev fired Finance Minister Aleksey Kudrin. The executive order, published on Medvedev’s website, was as blunt as it could be: “I hereby relieve Aleksey Leonidovich Kudrin of his duties as Deputy Premier and Finance Minister of the Russian Federation.” Medvedev’s ukase didn’t give the reason for dismissing Kudrin. For that you need only refer to the messy, mean-spirited—and public—exchange between Medvedev and Kudrin earlier that same day. (It’s also on the president’s website, and I highly recommend reading the transcript if you want the full flavor.)

Kudrin, you see, had dared say—while here in Washington, DC, no less—that he disagreed with Medvedev on issues of budgetary spending and that he wouldn’t serve in a Medvedev cabinet come next year (when Medvedev gets formally demoted from president to prime minister). Medvedev demanded that Kudrin either apologize for his statement or resign immediately. Kudrin said he’d have to talk to Putin first. A couple of hours later, Medvedev announced he’d signed the order to dismiss Kudrin.

To me, Kudrin’s firing is a very important event, much more than Putin’s anticlimactic announcement over the weekend that he was going to demote Medvedev and return as president himself. I have long believed that Aleksey Kudrin has been the second most important person in Russia for over a decade, after only Putin himself. Someone who knows how I view Kudrin asked, so what do you think now? Is this all a charade, or are there real splits in the Putin team?

I’ll confess: I don’t know what to think. This is a genuinely puzzling turn of events. On the one hand, I am sure some elements of this episode have been stage-managed. It is unimaginable to me that Putin & Co. would allow this to play out in public the way they did without having thought it through. At the same time, there are serious issues at stake in the Kudrin affair, perhaps more than people generally realize.
Let me begin by saying why I think Kudrin is so important. It goes without saying that Kudrin has played a critical role in Russia’s economic good fortune in the past decade. The list of his achievements is well known. It’s an understatement to say that he implemented a radical reform of tax administration and enforcement. Before Kudrin there was no enforcement at all. By finally collecting taxes to the federal government, Kudrin led the way to restore Russia’s financial sovereignty after the disaster of the Gorbachev-Yeltsin years. During Kudrin’s tenure Russia paid off its foreign debt, balanced the budget, built up its foreign exchange reserves to the third largest in the world, and established a sovereign wealth fund to protect windfall oil export revenues. Russia was the hardest-hit major economy in the recent global financial crisis, but thanks to the reserves that Kudrin built and managed, it has weathered the crisis as well, or better, than any European country.

But there’s something else about Kudrin that is even more important than all this. It’s the history of his relationship with Putin. This was a partnership from the beginning, back in the early 1990s in St. Petersburg. Kudrin and Putin were both first deputy mayors of St. Petersburg in the first half of the 1990s. They co-managed the economy of the city. Kudrin had responsibility for the formal side of things, managing the city’s taxes, budget, and finances. Putin was the “fixer,” the man who used creative and unorthodox approaches to get both local and foreign businessmen to “help out” with the city’s economic issues and with various other problems their boss, mayor Anatoly Sobchak, might have. Putin and Kudrin tried their hands at politics, too. They co-managed Sobchak’s re-election campaign in the spring of 1996. But they failed at that, and as a result, both were looking for new careers by summer. Meanwhile, in Moscow, their fellow St. Petersburger, Anatoly Chubais, did a better job as President Boris Yeltsin’s campaign manager. Yeltsin, unlike Sobchak, won his contest. Chubais, whom Yeltsin then appointed chief of staff, asked his old friend and colleague, the now unemployed Kudrin, to come to Moscow to serve on his economics team. Kudrin put in a good word for Putin, so he was invited, too.

Kudrin and Putin came in August 1996 as a package, and in fact they operated under Chubais as such a tight team that Barry Ickes and I wrote that the two may as well have been a single entity—“Pudrin.” Chubais gave the pair a special role in the campaign he was launching to arrest the process of collapse of the Russian state and to rebuild the crumbling central authority. He appointed Kudrin head of the Central Control Directorate (GKU), a oversight agency that Chubais had beefed up to serve as the main enforcement arm in the campaign. This was, after all, the heyday of the “virtual economy,” when private businessmen and government officials at all levels were rampantly evading taxes and ripping off the state in every conceivable way. As press accounts at the time related, Kudrin turned the GKU into a “feared” agency, sending out teams of inspectors across the country on literally thousands of field missions each month to regional and local government offices, other state agencies, businesses, even army and police bases. He himself was described as ruthless in his pursuit of those who misused government funds and colluded to undermine the federal government. “Heads are rolling,” the newspapers wrote. Kudrin was in the limelight. Putin was in the background. He was in charge of the department that provided the financial and logistical backup to Kudrin’s GKU—a bagman of sorts to Kudrin. In the spring of 1997, when Chubais moved Kudrin over to become deputy finance minister in charge of Russia’s foreign debt, Chubais named Putin as the new head of the GKU.

There’s plenty more in the story of the Putin-Kudrin partnership, but this short version should make it clear why I don’t think Putin is abandoning Kudrin (or Kudrin Putin). They will continue to work together. The question is, how? Where does Putin want Kudrin now, so that he can continue to play his key role? I suggest the following.

Vladimir Putin believes that the biggest security risk that Russia faces is the uncertain future of the global economy. Analyzing that risk, and deciding how to deal with it, is his most important economic policy challenge. There is no one in Russia who could advise and assist Putin in this regard as well as Aleksey Kudrin. Putin has decided that being in charge of Russia’s domestic economy is not the most important contribution Kudrin can make right now.

(By the way, people who suggest Kudrin’s absence as finance minister portends the end of conservative fiscal policies, and so on, misunderstand his role. Kudrin didn’t decide budgetary policy. Putin did. And he will continue to do so. Kudrin’s task was to inform Putin of the fiscal consequences of decisions, the implications for Russia’s financial sovereignty, and so forth. Putin then decided the trade-offs. Actually implementing budget decisions was always a secondary job for Kudrin. Others can do that just as well. )
Figuring out that there’s not enough money for everybody at home, that’s easy. Putin explained that all over the weekend to the loyalists of his United Russia party. What Putin does not know—and realizes more than ever that he needs to know—is what is going to happen with the global economy, how it might affect Russia, and what Russia can do about it. Putin therefore needs Kudrin to focus on this task. So he’ll find some position for him to do that. There are many possibilities, already existing or to-be-created. One possibility is as head of Russia’s Central Bank. Consider the advantages. Kudrin would be subordinate only to Putin and could continue his role as Putin’s main advisor on fiscal-monetary issues. He could still be in charge of Russia’s foreign debt. He would remain at the table as Russia’s representative at all international gatherings, something that would please the international investment community, who think so highly of Kudrin. (True, there is an incumbent in this post, Sergey Ignatiev, and his term doesn’t expire until June 2013. But we can assume that Putin can persuade Mr. Ignatiev to step down if he, Putin, so desires.) Or maybe Putin will invent a new post for Kudrin. It doesn’t matter; wherever Kudrin ends up, that position will be important because he holds it.

None of this may happen until Putin formally assumes the presidency. In the meantime, Kudrin can travel abroad pretty much full time, talk to friends and peers in governments and businesses worldwide, think about the issues, put it all in context, and report back personally to Putin.

All I’ve written may or may not convince you that it makes sense that Putin would “resign” Kudrin from the finance minister’s post. I still don’t have a good story about why it happened in the messy way it did. But there are of course in theory some gains for the Putin team from the episode. Medvedev, whose now-official lame duck status compounds his teddy bear image, gets to appear manly on national TV as he stares down Tough Guy Kudrin. It’s a bonus that Kudrin is a generally unpopular figure in Russia, as any tight-fisted finance minister is. (Quite a few Russians would agree with Communist Party leader Gennady Zyuganov when he says that “Kudrin is not the finance minister of Russia but the finance minister in Russia”—that is, the West’s agent planted in Russia to subvert it.) So Medvedev gets points with the nationalists. It’s also nice that the Medvedev-Kudrin dispute is ostensibly about the arms procurement budget. Medvedev gets to look like the tough hawk because he wants to spend more and Kudrin less. And Kudrin? Well, he at least comes away with the image of the valiant, uncompromising crusader for fiscal orthodoxy, which will further endear him to Westerners and enhance his reputation as a “liberal.” Finally, there’s Putin. We hardly need to ask whether Putin might behave in such a Byzantine way. Sure he would. He loves to do things in a way that confuses people and reminds them that nobody understands Russia. And that they especially don’t understand Vladimir Putin.