Russian Government Fighting With Itself

Publication: Eurasia Daily Monitor Volume: 1 Issue: 78

During August simmering tensions within the Russian government surfaced, with ministers trading recriminations in public view.

Some see the dispute as politics as usual, the struggle for power between rival factions. Others, such as Nikali Vardul, see a profound rift between liberals, philosophically committed to a hands-off economic policy, and statists bent on regaining control of the “commanding heights” of the economy. This would involve a program of large-scale state investment, and individual ministries taking responsibility for growth in their sector (Kommersant-Dengi, August 23).

In the five months since his appointment, Prime Minister Mikhail Fradkov has failed to assert his authority over the government, especially the liberal team of Finance Minister Alexei Kudrin and German Gref, Minister of Economic Development and Trade (MERT). Compounding the problem was the government restructuring launched in April, which produced administrative chaos for months as posts and duties were reassigned.

Konstantin Smirnov points out that apart from their philosophical differences, Fradkov has clashed with Gref in the past. It was at Gref’s suggestion that the Foreign Trade ministry, which Fradkov headed, was liquidated in May 2000 (Kommersant Vlast, August 30).

The feud spilled out before the media on August 19 as the government revealed its draft plans for the 2005 budget. Fradkov told Gref that his estimate of 6.3% GDP growth in 2005 was too cautious, given that it grew 7.4% in the first quarter of this year. In order to meet President Putin’s target of doubling GDP by 2010, a 7.5% growth rate would be needed. Kudrin came to Gref’s defense, criticizing Fradkov for slowing the pace of reform of the natural monopolies (electricity, gas, railways, and housing). Kudrin said, “We have screwed up all our plans.” In response, Fradkov suggested that a rotation of ministers might be in order (Moscow Times, August 20).

Kudrin and Gref then traveled to Sochi for a meeting with Putin on August 21. Fradkov did not attend, which was taken as a signal that Putin was standing by the liberals. Officially, the feud was patched up. On August 23 the Cabinet approved the draft budget with the original 6.3% forecast. In public, all sides said that healthy disagreement was normal and expressed their respect for each other, with Fradkov describing Gref as an “emotional and very talented person” (Izvestiya, August 30). The National Strategy Council, usually associated with the silovik wing of the Kremlin, weighed in with a press conference blasting Gref on August 27 (Vremya novostei, August 30). The siloviki themselves had nothing to complain about in the draft budget, which awarded defense spending a 28% increase next year.

Fradkov himself seems determined to use his administrative powers to tighten his grip on the government. On August 12 he announced that ministries would be expected to draw up performance targets for all their departments starting in January. On August 29 he complained, “The ministries are hostages of the resources that the finance ministry controls.” The liberal ministers are vulnerable, given their unpopular plan to monetize social benefits, a measure that will increase the financial burden on regional governments. Fradkov urged the finance ministry to increase its monitoring of regional budgets, and pledged weekly meetings to monitor the progress of the monetization reform (Izvestiya, August 30).

Fradkov is refusing to budge on the question of reforming Gazprom — on the contrary, he is suggesting that it is worth increasing the state’s stake in the company from the current 38%. He argues that reform of the electricity monopoly, UES, must be completed before tackling Gazprom, its major supplier. In June, Fradkov suspended the creation of wholesale generating companies, the current stage in the ongoing restructuring of UES. He formed a working group consisting of UES head Anatoly Chubais, industry minister Viktor Khristenko, and aluminum magnate Oleg Deripaska to review the process. The UES board is due to present a fresh plan for continuing the reform at its meeting on September 3.

Another bone of contention in preparing the 2005 budget is the stabilization fund. All revenues from oil duties when the price is above $20 a barrel are being steered into a separate stabilization fund, rather than being used to boost federal spending, which could be inflationary. Once the fund goes above 500 billion rubles, ($17 billion), the excess can be spent, and the fund is expected to clear that threshold by the end of this year. The Pension Fund is asking for 70 billion rubles from the fund to cover its deficit — a gap that critics blame on the liberals’ decision to cut the social tax by 10%.

The current spike in world oil prices guarantees Russia a high growth rate and balanced budget for the immediate future. But there is little sign that either the liberal or the statist wings of the government have either the ability or the authority to come up with a program that will ensure the sustainability of the current boom.