Putin's Costly Crash Course in Economics

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What makes Russian leaders so confident that the country can ride out the financial storm? Above all, the country's large foreign currency reserves and its low government debt. Thanks to the smart advice of Andrei Illarionov, the former economic adviser to then-President Vladimir Putin, Finance Minister Alexei Kudrin's fiscal discipline and foresightedness and Putin's support, Russia was wise enough to pay off its external debts and build up huge reserves, despite opposition from the public and certain factions within the political elite.

Unfortunately, at issue is not only the size of the accumulated reserves, but how they are managed and by whom. Events of the last week demonstrated that the Central Bank's position is not as solid as was previously thought. The problem is that, despite having adequate reserves to ensure the ruble's stability, the people and companies no longer believe that reserves are sufficient.

What they fear is the Putin's dominance over all political institutions. Since he also pledged to use the very same pool of money for paying off Russian corporate debts while maintaining investment at the previous boom level, it is not clear now much money will remain for supporting the national currency.

The authorities should divide the Central Bank's foreign currency reserves into two parts -- one for supporting the ruble and a second for other purposes, such as their announced program to help Russian companies pay their dollar-denominated debts.

Second, they need to make it clear who is responsible for what is in the government plan. Central Bank Chairman Sergei Ignatyev should appear on all the news programs to explain the bank's policies on the ruble exchange rate, and he should back up his statements with concrete figures. First Deputy Prime Minister Igor Shuvalov or Kudrin should also explain how the rest of the reserve funds will be spent. It is very important that Russians understand exactly how the country's reserves will be divided and what they will be spent on. (Every television appearance by Putin on economic matters seems to resonate badly both with the public and the market, unlike his foreign policy initiatives.)

There is an old joke that Viktor Chernomyrdin, prime minister in the mid-1990s, received the world's most expensive education in economics. As the financial crisis spreads, the current prime minister will be forced to face the fact that a political leader's power does not guarantee stability of the national currency. In the end, Russians may pay much more for Putin's economic education than they did for Chernomyrdin's.

Konstantin Sonin, a professor at the New Economic School/CEFIR, is a columnist for Vedomosti.