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. Last Updated: 07/27/2016

Putin's Economist a Reluctant 'Ultraliberal'

He was the economist who predicted the August 1998 ruble devaluation as inevitable months before the crash, a heretic who has consistently insisted Russia does not need to borrow billions from the IMF and a man hailed in the national media as an ultraliberal.

But now that Andrei Illarionov has President-elect Vladimir Putin's ear on all things economic, he bristles at labels like "radical" and "liberal." Instead, he is prescribing "sensible" economics.

"We want to be a rich and developed country - is that an ultra-liberal aim or a normal aim?" asked Illarionov rhetorically at a recent news conference. "The only thing stopping us is whether we're ready to work for this aim."

Illarionov, Putin's newly appointed economics adviser and the head of the Institute of Economic Analysis, is keeping his prescription for the economy simple: There should be no stealing, no printing of fake money, no budget deficit and no government borrowing. Debts should be serviced, and there should state regulations on market activities, like limits on foreign-exchange transactions, should be avoided.

Economists and investors have welcomed Illarionov's appointment as a sign that Putin intends to pursue free-market economic policies - perhaps even some quite daring ones.

But Illarionov is careful to say that he can only advise, not decide policies, and former government members warned Monday that root-and-branch reform would ultimately depend on the will of the new Kremlin management.

"If the government and the president stick to structural reforms and tax reforms, then Illarionov's knowledge will be needed," said former Finance Minister Mikhail Zadornov in a telephone interview Tuesday. "But if they drag their feet again, then [it won't]."

Illarionov left Russia's original "reform" government under a dark cloud in 1994, resigning as head of the government's Center for Economic Reforms hard on the heels of the removal of Prime Minister Yegor Gaidar.

Then-Prime Minister Viktor Chernomyrdin said at the time that Illarionov had been fired, for "absenteeism." But Illarionov said in a resignation letter that "the government has fallen on its knees" before industrial and regional lobbies.

By October 1995, years before the crash, Illarionov was warning that the new treasury bill market was driving up state debt to "monstrously high" prices - and that lax market regulation encouraged big companies to invest all their cash in high-yielding government securities, rather than in paying wages or paying off debts to one another.

"The state is not a single entity - it has been privatized in the sense that officials are being used to further private interests of specific private groups," Illarionov said a year later, in October 1996 - at a time when the word "oligarch" was just about to come into fashion. "This is the biggest obstacle not only to reforms but also to any purposeful government policy."

But at a news conference Friday - his first since becoming presidential economics adviser - Illarionov was unusually reticent. He was careful to note that he could only suggest, not do.

"An adviser is not responsible for real economic policy, the government is and it acts according to the priorities it sees," he said.

Tellingly, that same day, as Illarionov was speaking of how it was unnecessary to borrow further from the international financial institutions, First Deputy Prime Minister Mikhail Kasyanov was preparing to head off for Washington for talks with the International Monetary Fund on kickstarting loans.

Illarionov argues that annual economic growth of 8 percent to 10 percent is achievable. Getting there, he says, involves drastically cutting down state spending - from the 36 percent of GDP he says it now represents to an optimal level of 17 percent to 20 percent of GDP.

"If we want to be richer, then sooner or later we need to cut down state spending as a percentage of GDP," he said. "The volume of spending as a percentage of GDP is determined by the role and place of the state in the economy."

That argument has already come under fire in the press and by other influential economists.

"Illarionov is swapping real problems for abstract concepts," said former deputy finance minister Oleg Vyugin.

Vyugin now heads the macroeconomic policy work of Putin's economic think tank, the Center for Strategic Research. He said Tuesday he thought it was pointless to insist on an optimal level of state spending.

"The real problems in Russia are that there is no level playing field for economic competition, that the state interferes too much in the economy and that the budget does not record a great deal of state spending and is still riddled with nonpayments," Vyugin said.

"There is a need to cut down state spending and cut out inefficiencies and over-regulation, but there is no point in defining a particular percent that should be attained.

"Illarionov uses China as an example to show that low state spending has produced fast economic growth. But conditions there are entirely different. In China, part of the population runs around in little more than underpants. Russia is a totally different country, and if people were to run around in just underpants then they would get very cold. The question is far more complicated than that."

Former Finance Minister Zadornov said that the first priority of reforms should be to wipe out state spending that remained unrecorded in the budget - which he estimates boosts real expenditure to 70 percent of GDP - and to bring spending in line with federal income.

Zadornov added that it would be political suicide to halve state spending in a hurry. "That would break the lives of millions of people," he said.

"It's clear that there are a whole row of duties that the government is not meeting - in education, in health and in security," Zadornov said. "Spending on the basics has to be made more efficient. Reforming the state apparat is necessary, but cutting back the state needs money."

In a recent article in Ekspert magazine, Illarionov argued that Russia's reforms over the last decade failed because the state had played too great a role and had mixed reform with populism.

Quoting Adam Smith as saying, "the less the state busies itself with the economy, then the better it is for the economy," he argued Russia had yet to undertake true liberal reforms.

But will Illarionov be listened to?

Vyugin noted that Illarionov's post seemed to have less definition and clout than that of former presidential adviser Alexander Livshits.

"Livshits was an aide who worked on presidential decrees and government orders on the economy. Not one decree went through without him seeing it," he said. "If Illarionov is to have the same administrative reponsibilities, then he'll be very influential in shaping economic development. But so far there has been no information on what his role involves."

Illarionov was also keeping mum Friday about what exactly his job involved beyond "advising" the president. He even joked that he could not reveal how often per week he would meet with Putin because that was a "state secret."