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. Last Updated: 07/27/2016

Reformers On Top After Cabinet Spat

VedomostiFinance Minister Alexei Kudrin
A Cabinet row over how to double the size of the economy may have strengthened the hand of modernizers who say the government risks squandering a chance to achieve its most cherished goal, analysts say.

Tensions between Finance Minister Alexei Kudrin and Economic Development and Trade Minister German Gref, on the one hand, and Prime Minister Mikhail Fradkov, on the other, boiled over last week in an unusually public show of discord widely aired in the media.

Kudrin and Gref, who advocate shaking up a creaking banking system and reforming the nation's two biggest monopolies -- power utility Unified Energy Systems and state gas giant Gazprom -- are unhappy with Fradkov's lack of resolve since taking office in March.

"It's clear that Kudrin and Gref are frustrated by the slow pace of reform under Fradkov," said Sergei Voloboyev, an economist at CSFB in London.

The two men fear Russia is in danger of catching "the Dutch disease", a name given to countries whose economies -- like the Netherlands in the 1960s -- are bent out of shape by major oil and gas exports. They argue the country must forge a more diversified economy.

Record high prices for oil, the main export, are set to deliver growth of almost 7 percent for the second year in a row. The economy must grow at that pace consistently to have a hope of doubling GDP in a decade, a target set by President Vladimir Putin.

So long as legacies survive of the Soviet-era planned economy, including heavily subsidized utilities prices and an undersized banking system, the country runs the risk of suffering a precipitous slump if oil prices fall, analysts say.

Pressure from the top to run the economy flat out in order to achieve Putin's goal is bringing differences in the Cabinet out into the open. Kudrin lashed out when Fradkov, in full view of the media, told Gref he was being too cautious and should raise a 6.3 percent growth forecast in a draft budget for 2005 to 7.5 percent. "We have screwed up all our plans," Kudrin said, referring to foot-dragging on reforming gas and utilities.

"Both Kudrin and Gref were dismayed," said Voloboyev. "They were told by someone who is not an economist to raise the growth number and that is why they went on the offensive."

Few doubt the two strongest champions in the cabinet of reform, both from Putin's home city of St. Petersburg, won the skirmish -- although only time will tell whether Fradkov will heed their plea to accelerate reforms.

Kudrin and Gref looked relaxed after emerging from a weekend meeting with Putin at the Black Sea resort of Sochi.

A Cabinet meeting Monday approved the 2005 draft budget with the original 6.3 percent growth forecast intact.

In what looked like a concession to his reform-minded colleagues, Fradkov said during the meeting: "It is good that the Finance Ministry talks about diversifying the economy and it is necessary to listen to what the Economy Minister says."

"I think they are winning the argument," said Yulia Tseplayeva, an economist at ING in Moscow. "They have stuck to a realistic growth forecast and I am sure it can be upgraded in 2005 if oil prices stay high."

A high ranking member of the Kremlin administration, Arkady Dvorkovich, said Tuesday that the government would take a fresh look at reforming UES in the autumn and would revisit Gazprom, the unreformed gas monopoly, by year-end.

"There are plans to examine this issue before the end of the year. We hope that the basic principles can be spelled out ... chiefly, the removal of uncertainties," Dvorkovich, a former deputy to Gref, told news agencies.

Underlying the tensions is what appears to be a very different approach to running a government between Kudrin and Gref, both liberal-minded technocrats, and Fradkov, a cautious bureaucrat plucked from obscurity earlier this year by Putin.

"I believe Fradkov does not really understand what they were talking about. They were talking different languages," said Yevgeny Gavrilenkov, chief economist at Troika Dialog.

Others said the cautious Fradkov was unlikely to risk another open clash with key members of his government again.

"I think he will try to avoid direct confrontations in future," said Voloboyev, adding tensions could nonetheless resurface again if Fradkov stalls reforms.