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reflections

Jan 13, 2016 | 02:36 GMT

5 mins read

In Russia, Budget Cuts Favor the Financial Elite

(Stratfor)
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

All Russian government ministries have been ordered to slash their budgets for 2016 by 10 percent, a government source told Russian newspaper Vedomosti. If any ministry or agency fails to submit its budget reductions by Friday, the Finance Ministry will reportedly make the cuts itself. This forceful directive is not only a response to Russia's dire economic situation but the Kremlin's direct acknowledgement that it cannot delay financial reforms for political reasons any longer. It is also an indicator that Russia's financial elite is gaining power within the Kremlin.

Despite the Finance Ministry's attempts to craft a budget based on lower oil prices during intense Kremlin debates, the Russian government's budget was predicated on the average price of (Urals crude) oil remaining at around $50 per barrel in 2016. However, Urals crude prices have averaged in the $30 range for the past two months. In the past 48 hours, the price dipped to $29 per barrel, a vast departure from the $97 per barrel average in 2014 and the $51 per barrel average in 2015. Sustained low oil prices have given the Finance Ministry the impetus to force painful but necessary cuts to the budget. Even Russian President Vladimir Putin recently called the current budget unrealistic.

The Russian government only recently forced through a similar 10 percent budget cut. However, that directive came straight from Putin, and the Russian leader refused to touch defense spending at all. This year's budget is even tighter than last year's, and the impending cuts will reportedly affect even the sacrosanct defense sector. The one area that will remain untouched, however, is pensions.

The safeguarding of pensions exposes the Kremlin's growing concern about social unrest in Russia. When the government cut pensions and benefits in 2005, protesters across Russia took to the streets. The demonstrations, which drew 100,000 participants in some cities, were Russia's largest protests in a decade. Demonstrators blocked roads in major cities, hijacked buses and stormed government buildings. This volatile reaction occurred when the Russian economy was relatively stable and growing. Now, Russia is in a recession, the currency has weakened, and inflation is at its second-highest level since Putin came to power. Cutting pensions in this environment could spark a firestorm of protests.

Instead of targeting social spending, the Kremlin is making the tough decision to cut its defense expenditure. Russia has active military campaigns in Ukraine and Syria and is trying to counter a NATO buildup on its doorstep. Even in the original, austere 2016 budget, defense spending was not cut, though it increased by only 0.8 percent. If the government decreases defense spending by 10 percent, Russia could maintain its current military activities, but it would have to make cuts in other areas, such as the rearmament program.

A reduction in defense spending would also be a rare victory for the Finance Ministry, which has long battled the entrenched defense and security complex at the heart of the Kremlin. Current Finance Minister Anton Siluanov has been a vocal critic of the country's defense spending and ambitious rearmament program. Former Finance Minister Alexei Kudrin left his position over the matter.

Since becoming finance minister in 2011, Siluanov has repeatedly failed to push through spending and economic reforms, lacking the political weight to do so. Not only having to deal with the powerful security and defense circles, Siluanov also found himself at odds with Putin and Prime Minister Dmitri Medvedev. But the Kremlin's financial clique has gained favor in recent months as Russia's worsening economic situation amplifies concerns about social unrest.

Furthermore, rumors are buzzing that Kudrin will return to the government. Many Russians and Westerners consider Kudrin one of the more levelheaded financial minds in the country. He served as finance minister at a time when Russia's leaders considered national security and defense more important than economic and financial reforms. Since leaving the government, Kudrin has been working with nongovernmental organizations that promote civil society and human rights. In addition to building a loyal following, Kudrin also gained attention by calling for early presidential elections. In another popular move, he has been at the forefront of developing ideas to get the West to lift sanctions — and to coax foreign investment back into the country.

On Monday, Vedomosti cited unnamed Kremlin sources as saying a new position overseeing economic policy within the Kremlin would be created for Kudrin. Similar rumors have surfaced regularly since June 2015, suggesting that Kudrin could eventually become prime minister or even try to run for president. The man himself denied such ambitions, saying he preferred to return to the government in a more tactical role. But Kudrin's return to the Kremlin would indicate that Putin agrees with the uncomfortable economic reforms that the former and current finance ministers have called for.

With Putin's blessing, Kudrin and Siluanov could have the combined political weight to start pushing for policy changes. Besides cutting the budget — particularly defense spending — the duo wants to decrease the Russian government's involvement in the big state firms: in short, decentralize the economy to a degree. The biggest test for this major shift would be the proposed privatization of 19 percent of Rosneft, the energy firm that belongs to security heavyweight Igor Sechin. Sechin wields the political clout to fend off Kudrin and Siluanov's agenda for Rosneft, but as the financial elite garner more attention and influence, the scales could tip in the Finance Ministry's favor this year. 

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