beyondbrics

Other things being equal, prime minister Vladimir Putin’s decision to return to the Kremlin and swap jobs with president Dmitry Medvedev was not expected to scare investors. It promised stability and had, in any case, been widely forecast.

But suddenly other things are not equal. Alexei Kudrin (above), the much admired fiscal hawk, has upset the carefully-laid Putin plan by publicly declaring that he won’t serve in a Medvedev government.

Investors don’t seem to like it. Instead of the calm reception that Putin and Medvedev might have expected, Russian markets are down on Monday – although how much is due to the local politics and how much to the global economic mess is hard to say.

In late morning trading, the Micex share index was 0.6 per cent down and the rouble 1 per cent lower against the US dollar.

While most investors claim the announcement that Putin – and not Medvedev – would become president was hardly a surprise, Kudrin’s jabs at Medvedev and his threat to quit the government came out of left-field, they say.

Kudrin and Medvedev have quarrelled in the past about the way government funds should be spent, with Medvedev pushing for more defence and social spending to the ire of the fiscally-conservative Kudrin.

Yet few expected the finance minister to state outright that he would refuse to work under Medvedev as prime minister, an outcome that has left some wondering whether Kudrin will somehow try to edge Medvedev out of his promised prime minister spot.

“I think there’s going to be a lot of jostling,” says Roland Nash, chief investment strategist for Verno Capital, a Moscow-based hedge fund.

Though some market participants had placed hope in Medvedev and his reforms, the current president could in some ways be seen as less important to economic policy-making than Kudrin, who deftly shepherded the country through the 2008 global financial crisis after living through Russia’s 1998 sovereign default.

“Medvedev talked about reforms. But what was really achieved?” asks Steven Dashevsky of Dashevsky & Partners, a Moscow-based investment fund.

On the other hand, “a lack of intelligent financial conservatives in the new government could be seen as very detrimental by investors,” he says.

Kingsmill Bond, Russia strategist at Citibank says: “If Kudrin were to leave without any greater clarity the market would take it badly because he clearly would be instrumental in reigning in government expenditure.”

In the next few weeks Bond says investors will be looking for more clarity about who’s going to be coming out on top in the government, and also what type of Putin will be returning. Will it be the tough-talking Putin of the previous decade? Or a Putin whose policies and outlook more closely mirror the liberal views of Medvedev?

“I think very few people believe that there will be radical reform in Russia,” Bond says. “The question now lies between incremental reform and stagnation.”

Related reading:
Russian top job swap sparks Kremlin revolt, FT
Putin move risks public backlash, FT
Back room deal signals return to the Putin era, FT
Putin heads back to the Kremlin, beyondbrics