Kudrin Wants More Private Investment

Finance Minister Alexei Kudrin on Wednesday called for more private sector investment, arguing that heavy state spending will only hurt the economic recovery in the long run through higher inflation and a stronger ruble.

But there were signs that Kudrin will struggle to win over politicians in the Duma, whom he was addressing.

"In the place of the president, I would have torn off your ears, together with the head," Communist Party leader Gennady Zyuganov told Kudrin, calling for higher budget spending.

Russia has returned to growth after its worst recession in 15 years. But the recovery is a slow one, and while consumer confidence data published on Wednesday hit a 21-month high, it remained below its precrisis range.

Modernization is a key goal of President Dmitry Medvedev, who wants to encourage high technology sectors in a country whose dependency on oil and gas, accounting for 60 percent of budget revenues, was a key reason for it being the worst performer in the G20 during the latest economic crisis.

"The government's task is to create conditions for private investment. We will not modernize with budget funds. Those funds can be used only to support innovation projects, to give the economy a leg up," Kudrin told the Duma.

"The main volume, 80 percent of all investment in the country on modernization, will be private investment. Now our concern is to create the conditions for private investment."

Bank lending — key to domestic investment — started to pick up in the second quarter, Central Bank Chairman Sergei Ignatyev told the Duma, but here too the pace is slow.

"Lending activity was restrained by high credit risks and the comparatively low level of demand for loans from borrowers at the available level of interest rates," he said.

Russia is seeking to double foreign direct investment over the next 3-4 years and also encourage greater involvement from domestic companies.

But active measures to encourage investors — especially foreign ones — remain few, while years of state-dominated Soviet rule have created the mindset that the government should be the economy's chief bank-roller.

Kudrin, a 10-year veteran at the helm of the Finance Ministry known for his fiscal prudence, said that it was imperative to keep a lid on spending in order to halve the budget deficit to under 3 percent by 2013.

"If we support demand with big [stimulus] packages it can support growth in the near term, within a year, but in 2-3 years it will, to the contrary, reduce economic growth," Kudrin said.

"It can create inflation, appreciation of the exchange rate, state borrowing and thus a reduction of corporate borrowing. So our task is to reduce the deficit in the next few years."

For now inflation remains tame, while global risk aversion has put a lid on the ruble.

Ignatyev said on Wednesday that Russia is ready to act if necessary on big inflows of capital, but will stop short of reintroducing controls on capital movement.

He added that the move towards a more flexible ruble exchange rate was already making it harder for speculators to put on one-way bets for ruble appreciation.