BUSINESS
09/27/2011 07:26 EDT | Updated 11/27/2011 05:12 EST

S&P sees no change in Russian economic, fiscal policies with finance minister's depature

MOSCOW - The influential Russian finance minister who was ousted by President Dmitry Medvedev warned Tuesday that Russia's budget is overextended because of increased spending on defence and social needs.

Alexei Kudrin was forced out Monday after a public spat with Medvedev over the finance minister's statement that he would refuse to serve in the government if Medvedev became prime minister.

Medvedev and Prime Minister Vladimir Putin announced over the weekend that they intended to swap jobs next year. Many suspect Kudrin had hoped to be named prime minister under Putin.

In his first comments since the ouster, Kudrin, who has been Russia's finance minister since 2000, said his statement on the country's financial health was "well thought out and well founded."

"For the past several months, despite my numerous objections, some of them made publicly, decisions were taken on budget policies that without doubt have increased budget risks," he said in a statement. "And budget risks are connected first of all with excessive commitments in the defence sector and social sector that will inevitably affect the entire national economy."

Medvedev had decided to raise budget military spending by 1.3 per cent of Russia's gross domestic product.

Kudrin said he had discussed his desire to resign in February with Putin, who asked him to stay on because of the challenges of managing the budget during an election campaign. Russia holds parliamentary elections in December and a presidential election in March.

Putin appointed one of Kudrin's deputies, Anton Siluanov, to serve as acting finance minister, while one of Putin's deputies, Igor Shuvalov, will oversee financial and economic issues in the government. Kudrin had held both posts: finance minister and deputy prime minister.

Standard & Poor's said Kudrin's departure and the impending job switch between Medvedev and Putin would have no immediate impact on Russia's economic policies or its debt rating.

But investors and analysts, however, warned it would be hard to find a replacement who would be as effective in vehemently opposing populist spending, especially in an election year.

A darling of investors and post-Soviet Russia's longest-serving finance minister, Kudrin was widely credited with softening the blow of the 2008-2009 global downturn in Russia with his conservative fiscal policies. During Putin's presidency from 2000 to 2008, Kudrin set up a rainy day fund to stash away some of the revenue from Russia's oil exports. The idea angered many in the government who sought higher spending, but ultimately proved to be an invaluable cushion.

S&P said the recent days' events would be unlikely to result in a "significant departure from current economic and fiscal policies." The agency said it expects "Russian state capitalism and the close links between politics and business to remain unchanged."

The agency, however, voiced concern that a government reshuffle could make it difficult for Russia to "consolidate public finances" and boost long-term growth by "improving the business environment, competition, and the productive infrastructure."

Some analysts said the decision to sack him would reflect badly on Medvedev.

Vladimir Milov, former deputy energy minister and opposition figure, wrote in the Moskovskiye Novosti paper that "the firing of an efficient finance minister in a grave financial and economic situation and with the authorities' obvious inability to reverse it is an unexplainable decision."

Ovanes Oganisyan, vice-president at the Moscow-based investment bank Renaissance Capital, said in a note to investors that "the bench is quite short" for Kudrin's long-term replacement.

He said the finance minister's position will be key in the new government "considering the fiscal challenges that Russia may be facing in upcoming years, including a weak economic growth environment and growing budget deficits."

Russia markets, buoyed by higher oil prices and surging stocks worldwide, seemingly paid no heed to the landmark resignation. The MICEX benchmark index was up 2.4 per cent and the ruble gained 1.3 per cent against the dollar.