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CHAPTER4 Stabilizing Russia’s Finances “They are itching to get their hands on that money,” Finance Minister Alexei Kudrin told journalists in 2004, referring to the country’s spendthrift Duma members, its grasping industrial bosses, and the new class of security service elites who rose to power under Vladimir Putin. They wanted nothing more than to grab hold of the oil-fueled tax revenue that began flowing by the billions into Russian government coffers in the early 2000s. It was a rich prize for Russia’s ruling class, who wanted to spend the windfall on pet projects from roads to rockets to corruption-financed Rolls Royces. But what would happen when oil prices fell, Finance Minister Kudrin asked them? It was only several years earlier that an oil price slump caused thedeficittoexplodein1998,forcingthegovernmenttodevaluethecurrency and to default on its debt. Oil prices were volatile, Kudrin reasoned, so Russia should save its budget surpluses to prepare for leaner times. “You can tell them until you’re blue in the face that you mustn’t spend it,” Kudrin moaned. “But even after I’ve explained all that, they still come after me, crying, ‘Hand over the money!’”1 The 2000s were boom years for Russia, as oil prices skyrocketed from less than $20 per barrel in 1998 to over $80 a decade later. Russia’s government raked in billions, especially as its new energy tax regime transferred an ever-greater share of oil company profits to the government. That Russia got rich as oil prices increased was foreseeable. More surprising is that not all its windfallenergywealthwasspentimmediately.Manyoil-soakeddictatorships waste their petrodollars during good years and face dire consequences when pricesplummet.Putin’sRussiahaditsfairshareofexcess,asthegaudypalaces of his friends and his security chiefs show. Yet what is more surprising is how much of the oil wealth Russia saved. Over the course of the 2000s, over half a trillion dollars was put in reserve funds, defended from the grasping hands 60 | Stabilizing Russia’s Finances of Duma deputies and KGB clans. Putin and his team had lived through the tumult of the 1991 and 1998 crises, and they knew that hard times would come again. They feared debt, made sure that the government lived within its means, and built up a large stock of financial firepower to deal with any contingency. Putin’s government is often accurately described as including many former KGB colleagues and judo sparring partners. These groups have indeed acquired great influence. But they have coexisted, somewhat strangely, with a group of talented, technocratic managers centered in the Finance Ministry, the Economic Development Ministry, and the central bank. Putin selected many of these officials himself, and on issues that he cared about, such as budget deficits and inflation, Russia’s economic policy mostly followed their advice. The Duma continued to demand spending hikes and tax cuts; heads of state-run monopolies lobbied for higher subsidies; and Putin’s old judobuddies accumulated vast commercial empires. But despite the push and pull of politics, and the near-constant demands for a couple billion rubles here or there, the Finance Ministry—backed by the president—won many of the battles that it fought. Its main goal was to avoid the deficits that drove Russia to ruin in the 1990s. With the president’s support, the government used a large share of its windfall tax revenue during the 2000s to pay down debt and to save for a future rainy day. By the middle of the decade, thanks to this fiscal balancing, Russia had the most stable financial environment it had ever known. Paying Down Debt When Putin became president in 1999, Russia was over its head in debt. Moscow owed money to everyone: to international investors, who had lent Yeltsin’s government billions of dollars; to Russians themselves, many of whom held ruble-denominated bonds; to European governments such as France and Germany, who owned debts dating from the Soviet era; and to the IMF, to repay the bailouts of the 1990s. The dollar value of Russia’s total external public debt in 1999 was $148.5 billion. That was down slightly from the crisis year of 1998, when Russia owed $158.7 billion to external debt holders. But the 1999 figure was significantly higher than the $134 billion ownedin1997,theyearwhendebtlevelsdroveRussiatofinancialcrisis.More daunting was the ratio of debt to GDP, which measures a country’s ability to pay its debts. In 1999 external debts were equal to Russia’s GDP. That was a Stabilizing Russia’s Finances...


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