The main economic event of the last week was continuation of the discussion about perspectives of the lowering of the VAT from 18% to 12%. The deputy prime minister and minister of finance Alexei Kudrin turned out to be the chief newsmaker with his statement that such a measure would lead de facto to losses in the budget in the amount of 800 bn rubles, would threaten the macroeconomic stability and demographic situation in Russia, and even may affect the future of the mankind. In the minister’s opinion, it’s exactly the 33% budget share of expenses for defense and security that can guarantee that the nuclear war never happens.  

Generally, Mr. Kudrin is the man very careful about formulating, so if he has made such a loud statement, it means he considers the question to be a super principal one. He really has some reasons for that. The first one is protection of the apparatus positions. The finance ministry and he personally have been struggling in recent years against any attempts of reducing the VAT, so in case such a reduction takes place, it would mean his political influence going down.    

His own views are another reason. Mr. Kudrin appears to be sincerely proud of the fostered by him system based on macroeconomic stability. The budget surplus is the key element in that system. Undoubtedly, Alexei Kudrin will go down in economic history with it, like Gaidar did with liberalization and Chubais with privatization. It is commonly known that the surplus is fed with expensive oil. The finance minister is trying to make the system perfect so that it provides for budget surplus not depending on foreign economic conjuncture. To do that, it is necessary to have a control over expenses and to watch that VAT inpayments and profits taxes - that do not relate much to oil-gas-metals – be the basis of the state revenue. The expenses got out of control last year and if now the VAT gets reduced in the revenue part then the budget will become purely the oil-made and so unpredictable. And it is known that stability and unpredictability are antonyms.        

Here a question arises if we should understand stability only in macroeconomic sense or also in social-political one. Stability is what is usually ascribed to the Putin’s epoch where, roughly speaking, the authority offered an exchange of part of political freedoms for minimal set of social-economic guarantees and the legend about Russia standing up from her knees; and most part of the population accepted that exchange. Well, it is all clear about social and economic “bones” thrown on the festive and elective occasions. And in the philistine point of view, we got up from our knees as soon as we paid off all debts to the Paris Club. Before that, it was difficult to have Munich speeches, Petersburg’s G8 summits, Sochi’s Olympiads and other things.

It is obvious that all that superstructure rests on the basis represented with that budget surplus. During Putin’s epoch the money became the main way of solving problems; it allowed smoothing any managerial mistakes, closing gaps and sweetening any pills as minimum. Stability. It is when people keep silence because their mouth is filled with a piece of bread. This stability was featured with face of Putin and purse of Kudrin.   

Probably, this is what the finance minister meant addressing his passage to a certain audience whom we are used to call “enforcers”. Those people are not inclined to discussions, so maximum that is possible to be done is to explain to them that it’s 18% of VAT that has allowed Russia standing up from her knees and that something terrible might happen if this tax gets reduced. There is a hope that those people hear that and take measures in their own way.   

Incidentally, I do not deny that Kudrin would like to see prime minister Putin among that potential audience.