An Interview with Alexei Kudrin on the European Debt Crisis and Russia's Entry to the WTO

After the close of his panel, Kudrin was kind enough to meet with me and a few other journalists for about half an hour. While a good deal of the discussion focused on Russian domestic politics, a sphere in which Kudrin, as an ex-minister still in good personal standing with Putin, occupies an interesting and unique position, I was able to ask a few questions that focused more on economic matters to which he provided very lengthy and thoughtful responses. I'm not sure I agree with Kudrin on all of the particulars, I'm sympathetic to his overall views but part of me thinks (or hopes) he's being a bit too harsh on the Eurozone, but he has a great deal of experience in a very challenging position and he's clearly someone who ought to be taken seriously.

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Of course Russia is very dependent on the world economy. In the next year or two if the Federal Reserve and European Central Bank (ECB) continue stimulus, then oil prices will be supported. Stimulus will support demand and the price of oil, and Russia will be a little better off. If there's a chance that the Federal Reserve and ECB decrease support, then oil prices will go lower. That's the first main factor. There is a second: the debt crisis. It's going to happen and it's going to be serious. Regardless of the ECB's actions the debt crisis will continue. The ECB's measures can delay the problem but not solve it.

The ECB can give liquidity to the market. Individual countries, however, can only borrow on the market and the countries of Southern Europe have a tough time doing this: they're going to see their debts grow. I already said, that if GDP growth is lower than the growth in debt, if for example GDP growth is 2% but there's a 3% deficit, then the overall fiscal balance is going to suffer and the debt problem is going to get worse regardless of the ECB's support. And if the ECB cuts off support, then things will get even worse. I think ECB can give support for another 6 months but after that I don't know. The ECB can't do its job on its own forever, and it will be  a difficult time for all of Europe.

There's another serious systemic problem. If the ECB uses resources on the least disciplined countries then you have the danger of moral hazard: spending common resources of the Eurozone only on those countries which are worst off. This is a hopeless strategy, and it doesn't create good rules or a healthy environment. Therefore I don't see how the problem is going to be solved.

To solve it through spending more German money won't work. And today there are two strategies being discussed in Europe and in Germany itself: the strategy of support and the strategy of exit. The strategy of support is going to be three or four times more expensive than the current estimates. It will be a lot more expensive. The Greek bailout, as we saw, ended up being a lot more expensive than people thought at the time. It would be exactly the same with Spain and Italy. 

Germany quite simply doesn't have the strength to bail out Spain and Italy, the scale is too big. Germany understands this. They think it might cost something like a hundred billion Euros but it will actually be three or four hundred billion at a minimum. Germany doesn't want to do anything like this, politically speaking, if it was capable of it economically. 

The costs of exit are also very substantial, very close to the figures I mentioned earlier. But this is nonetheless the only real choice [i.e. between support and exit]. They can't delay forever. Germany has an extremely difficult, historically difficult decision to make. Germany needs to decide for itself what it wants pay: the cost of support or the costs of exit.

I think it's a normal for Russia to be in the WTO. All the other leading countries have been in the the WTO for a long time, and it wasn't natural for Russia not to be a member. It was unnatural both for Russian and international businesses. Russia will be a part of the club that makes the rules. So, of course that's good.

I also think that the conditions for joining are reasonable. A lot of people in Russia aren't going to be happy, because there's a lot of production that is very far from the world standard. And so we need a plan to deal with this, to restructure and boost competitiveness. WTO membership opens up new possibilities, but there's no stopping Russia's being a member, and restructuring the economy is also inevitable.

Strategically, Russia will benefit from membership under normal economic conditions. Unlike in the past, Russia won't be able to suddenly change subsides or regulations in a number of fields including the agricultural, automotive, and timber industries. This will create more stable market conditions for businesses, for producers, importers, and exporters. It will improve the climate. It's a huge positive.