Kudrin battles hard for reform

20/07/2006 | Simon Pirani

In an interview with Emerging Markets, Russia’s finance minister attempts to calm fears about the growing influence of the state

Russian finance minister Aleksei Kudrin is bracing himself to resist spending pressure from politicians in the run-up to parliamentary elections in December 2007 and the presidential poll in 2008.

In an interview with Emerging Markets, Kudrin also called for heavier taxation of gas production – and said that the state-controlled oil company Rosneft’s initial public offering (IPO) heralded a reduction of the state’s role in the oil sector.

Asked whether his warnings to his government colleagues about unnecessary expenditure were being heeded, Kudrin replied that the preparation of the 2007 and 2008 budget plans was “going well”.

But “even though the government has laid down the main parameters, ministries, parliament and [parliamentary] deputies come up with proposals to increase expenditure of various kinds. And so we are put under great pressure. But everything is under control, and I’m sure we’ll take a reasonable decision.”

Russia needs a great deal of investment in infrastructure (the power sector, roads, ports, airports, etc) and in its national projects on education, health and demographic development, Kudrin said. It was also “a concern” that state sector wages are falling behind as general pay levels rise. “And in the run-up to the elections we can expect a great deal of political pressure to be put on us.

“Knowing that all these problems have to be solved, we can’t allow ourselves to use up all the resources we have on them. We have to keep within definite limits, to prevent any sharp increase in inflation or further strengthening of the rouble. It will be hard to explain these things to parliament, on the eve of elections – but, nevertheless, the effectiveness of our budget spending must be improved.”

Kudrin said that Russia’s tax regime for the oil industry – with high taxes on production, and some of Europe’s lowest on oil processing – is satisfactory, but that taxes on gas production “should be higher”. He believes the level of investment in new fields – which has been a matter of concern to economists – will rise once the new law on mineral resources is adopted later this year.

There would be “definite limitations” on foreign participation in “the most important oil fields”, which include some of the world’s largest, he said. These could be worked by joint Russian- and foreign-owned companies.

Kudrin stated several times last year – in sharp contrast to the apparent direction of Kremlin policy – that the state’s role in the oil sector should not be increased. Asked how he saw this issue now, he said: “The Rosneft IPO is a reduction in the role of the state in the oil and gas sector. So the view I expressed coincides exactly with what Russia is doing in this regard.

“The measures taken in the last two years – when Sibneft was bought by Gazprom, and Rosneft received some of the assets that used to belong to Yukos – caused a great deal of concern. But no-one regards state ownership of such assets as an end in itself. These measures were taken at a particular stage of the restructuring of the sector. But we are not going to see a continuous strengthening of the state’s position.”

Asked about Gazprom’s current drive to increase its share in formerly privately-owned gas companies, he said: “There should be an independent gas sector in Russia and a reduction in its size is not desirable.”

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