PROSPECTS FOR THE RUSSIAN FEDERATION PROJECT REP BN 01/02 March 2002

Third Time Lucky? Geraschenko Resigns (Again)

Dr William Tompson Associate Fellow of the Royal Institute of International Affairs

When the resignation of Central Bank chief Viktor Gerashchenko was announced late last Friday, many a Russian liberal probably reached for the champagne only to pause and wonder: can he really be gone? The durable bête noir of Russia’s liberal reformers has, after all, been dislodged from his position as the country’s top banker twice before. He was the last head of the Soviet Gosbank, returning after half a year in the wilderness to take over the Central Bank of Russia (CBR) in mid-1992. His second coming came to an end in the wake of the October 1994 rouble crisis, and that time he spent a good four years out of office, returning after the August 1998 financial collapse. The third time, however, looks like being a charm. Gerashchenko is 64 and his health—the officially cited reason for his resignation—has, according to Moscow rumour, been deteriorating. This time, the sacking—for it is clear that Gerashchenko was forced out—may well stick. Other things being equal, firing Gerashchenko is always a good idea, but President Vladimir Putin is unlikely to make a habit of it. One hopes, at any rate, that he will not have the opportunity to do so. Putin’s nomination of First Deputy Finance Minister Sergei Ignat’ev to succeed Gerashchenko adds to the irony of the situation. When Gerashchenko returned to the Bank of Russia in July 1992, Ignat’ev was the favoured candidate of the then acting prime minister, Yegor Gaidar. However, Gaidar knew that the Supreme Soviet would never wear such an appointment and Ignat’ev ended up with a short stint as a deputy to Gerashchenko, who viewed him as a Gaidarist fifth column in the bank and eventually got rid of him.

Gerashchenko out

The change at Neglinnaya is both long-expected and unexpected. Gerashchenko’s replacement had been anticipated since Putin Third Time Lucky? Chatham House Briefing Note Geraschenko Resigns (Again)

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became president, but Friday’s news nevertheless came as a surprise. After all, the CBR chief had only about five months of his four-year term left to serve. Putin could easily have replaced him, on schedule, at the end of the summer. There are numerous versions of the reasons for Gerashchenko’s premature departure circulating in Moscow. His relationship with the government has long been strained, owing to disagreements over both monetary policy and banking reform, and much of the business community has long been critical of Gerashchenko over a range of issues like the currency control regime. Moreover, it has always been clear that, sooner or later, Putin would want to install his own central bank chief. The question is why he has done so now— two years into Putin’s tenure and just six months from the end of Gerashchenko’s term. The answer appears to lie in the latest conflict between Gerashchenko and Prime Minister Mikhail Kasyanov, over the joint government-CBR position on amending the law on the CBR. The package of amendments passed by the Duma at first reading and recommended by its banking and budget committees would seriously undermine the CBR’s independence. In response, the government and the CBR agreed a joint position backing a compromise draft of the amendments. On March 11, however, the CBR appeared to shift away from its support for this joint position, specifically with respect to the timescale for its withdrawal from the ownership of Vneshtorgbank (VTB). For Kasyanov, who has long been dissatisfied with the CBR’s performance, this was reportedly the last straw. Another version—which is not incompatible with this account—holds that Putin’s promise to veto the bill if passed in its unrevised form was given in return for Gerashchenko’s departure. Nor should one wholly discount the health issue. While Gerashchenko certainly did not resign voluntarily on account of his health and he does not appear to be seriously ill, it has been rumoured for some time in Moscow that he was not entirely well. This, together with the knowledge that he would not be reappointed by Putin this summer, may well have made it easy for Gerashchenko to accept an early departure, particularly in return for a promise to protect the CBR’s status from the deputies.

Ignat’ev’s appointment

If the news of Gerashchenko’s early resignation surprised most observers, it clearly did not surprise Putin. The speed with which Ignat’ev’s nomination was transmitted to Duma Speaker Gennadii Seleznev—while Ignat’ev himself was summoned to the Kremlin to meet Putin—left little doubt that the resignation had been submitted earlier in the week and was only made public when the Kremlin was ready. On March 17, presidential chief of staff Aleksandr Voloshin confirmed that this was indeed the case. The delay allowed Putin to prepare to nominate a successor and also enabled the Kremlin to release the news after the markets had closed on Friday, so as to avoid any immediate unsettling of the foreign exchange markets. In any case, Putin has previously shown a liking for announcing

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important personnel changes late on a Friday. Apparently, even Gerashchenko did not know the identity of his successor until it was announced on Friday evening. Ignat’ev will be smoothly and quickly confirmed, probably by the end of this week. The Council of the Duma is to decide on March 19 when the full chamber will consider Gerashchenko’s resignation and Ignat’ev’s nomination—this will probably be on March 20 or 22. The Communists, the Union of Right Forces and the centrists fractions that constitute United Russia have already endorsed the nomination. The choice of Ignat’ev is interesting in a number of respects. First, although he is a native of St Petersburg, he is not a long-time Putin associate and he belongs to the ‘first wave’ of Petersburg reformers, who came to Moscow at the start of the 1990s. He was a deputy minister of finance in Russia’s first post-Soviet government and has been in Moscow ever since. In recent years, he has been very close to Finance Minister and First Deputy Prime Minister Aleksei Kudrin, for whom his appointment is reckoned to be a real political victory. Secondly, he is a macroeconomist; the conventional wisdom in Moscow had held that Gerashchenko’s successor would be a banker. Ignat’ev spent most of the 1990s in the finance ministry, albeit with stints in the economics ministry (as deputy minister), the presidential administration (as an advisor to Boris Yeltsin) and the CBR (as Gerashchenko’s deputy). As deputy CBR chairman in 1992–93, he was a lone monetarist voice in the bank, stuck, as it were, behind enemy lines during Gerashchenko’s more or less permanent conflict with the liberal reformers in the government. Thirdly, Ignat’ev is nevertheless well acquainted with the CBR. Since 1997, his responsibilities as first deputy finance minister have included most of those issues on which the ministry must work closely with the CBR: monetary and credit policy (the two institutions are jointly responsible for defining the ‘Main Directions of Monetary and Credit Policy’), banking reform and currency control. As such, he is very familiar with the bank, albeit often in conflict with its leadership, particularly over the former two issues. On currency control, he is, like most of the CBR and MinFin, rather cautious. Finally, Ignat’ev is regarded as a competent professional across the political spectrum and is not closely associated with any particular business clan or government faction.

CBR future: institutional questions

The full significance of Ignat’ev’s appointment will become clear only when a number of other issues regarding the CBR’s future are resolved. The first is personnel. Gerashchenko took great pains to fill the CBR with loyal subordinates, and Ignat’ev will probably wish to replace much of the Gerashchenko team. He may well retain the services of Gerashchenko’s first deputy, Tatyana Paramonova—this would allow for some continuity and Paramonova, with whom Ignat’ev reportedly gets on reasonably well, is in any case widely seen as more reformist than her departing boss. However, many others are likely to go. Ignat’ev may also seek to reassure some in the banking community by appointing a prominent banker as a deputy or first

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deputy chairman. All this is likely to happen slowly, however. The chairman- designate has already been at pains to emphasise that he is not interested in starting any major upheavals at the bank. The second is the bank’s legal status. Ignat’ev should find it easier than Gerashchenko to resist the more threatening elements of the Duma’s amendments to the law on the CBR. The deputies’ draft would transfer key powers now exercised by the CBR’s board of directors, which consists exclusively of CBR officials, to a revamped National Banking Council (NBS), comprising representatives of the Federal Assembly, the executive branch, the CBR and the financial community. The NBS would effectively supplant the CBR board. The government-CBR proposals, by contrast, would strengthen the NBS so as to make the CBR more accountable with respect to its own finances and management but would not permit the NBS to usurp the CBR’s policy-making functions or undermine its policy independence. The third area of change concerns relations with the government. Ignat’ev is likely to enjoy a far better relationship with the government as a whole and with MinFin in particular than has Gerashchenko. This will be even more likely if he follows the example of Sergei Dubinin—another CBR chief drawn from MinFin—and appoint former colleagues from the ministry to key CBR posts. There remains some reason to worry about the CBR’s independence. While liberals are extremely pleased to be rid of Gerashchenko, his early removal highlights, yet again, the political vulnerability of the supposedly independent CBR. Although the law provides for fixed terms to protect the CBR chairman’s tenure, none has yet served a full term. All previous CBR chiefs to date have been forced out early. This is not a happy precedent. It is therefore especially important for Ignat’ev to settle the legislative debate on terms that confirm his independence. Some compromises will probably be required, but simply resolving the issue will be beneficial. The legislature has been trying—sometimes with the backing of the executive—to amend the law on the CBR since 1997. The very fact that the issue is more or less permanently on the agenda is itself a source of political pressure on the bank and thus weakens its independence. CBR officials on the ulitsa Neglinnaya cannot help but make policy in the awareness that the parliamentarians are looking for a pretext to reassert their control over the central bank. A resolution of the issue, even if it involves some concessions by Ignat’ev, would thus help secure his position.

Policy prospects

Ignat’ev is also likely to adjust policy with respect to the exchange rate and banking reform, although he will move cautiously on both issues. Ignat’ev will almost certainly be more willing than Gerashchenko to allow the rouble’s nominal exchange rate to sink in line with inflation. Gerashchenko’s preference for a stronger rouble has been one of the main sources of conflict with the government, which sees real rouble appreciation as a threat to competitiveness and growth. However, no central banker wishes to begin his tenure by allowing the currency to depreciate too rapidly, and Ignat’ev is unlikely in any case to allow it to keep up with inflation. The currency’s real appreciation will slow under Ignat’ev but it probably will not stop altogether. His comments over the weekend

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about the down-side of devaluation appear designed to avoid any sharp movements by the rouble in response to Gerashchenko’s removal and to quash expectations of a major change in the CBR’s stance. Ignat’ev is likely to adopt a more active approach to banking reform. Although he will not revive the ‘Mamut proposals’ for accelerating the consolidation of the sector, he will probably be tougher on the hundreds of banks that face extinction if banking reform moves ahead and prudential regulation is made tougher. He may also be more responsive to government pressure for the CBR to divest itself of its stakes in major banks, chiefly the savings monopolist Sberbank and the foreign trade bank Vneshtorgbank (VTB), but this is far from guaranteed. Ignat’ev has indicated that he intends to stick to the 2003 deadline for divestiture of the VTB stake, but he may, like his predecessors, drag his feet on this issue once in office. He will certainly be in no hurry to give up control over Sberbank. Official policy since the first half of the 1990s has called for the CBR to relinquish its Sberbank and VTB stakes—its position as the sector’s regulator and the owner of its two largest banks is fraught with conflicts of interest. However, successive CBR chiefs, including the liberal Sergei Dubinin, have never shown much enthusiasm for this change, finding the central bank’s control of these two banks to be extremely convenient. In any case, Sberbank and VTB are more likely to pass to government control than to be broken up and privatised, so such a change is likely to bring only marginal benefit to commercial banks resentful of the two state-owned giants’ privileged position. More generally, Ignat’ev can be expected to move slowly on all fronts. Caution is, according to those who have worked with him, one of his hallmarks and his statements over the weekend were clearly aimed at dampening down expectations of rapid personnel changes or major shifts in policy with respect to macroeconomic policy or banking reform. On the vexed question of liberalising the regime of currency controls, too, he has called for gradual liberalisation, more in line with the caution of the CBR and the finance ministry than with the more aggressive approach advocated by the Ministry of Economic Development and Trade and demanded by the business community. Overall, Ignat’ev’s appointment is likely to bring a softer exchange-rate policy and a more pro-active approach to banking reform but policy changes will be adopted gradually. It is also likely to contribute to a smoother CBR- government relationship and to a settlement of the much-contested legal status of the CBR itself.

Chatham House is an independent body which promotes the rigorous study of international questions and does not express opinions of its own. The opinions expressed in this paper are the responsibility of the authors.

Chatham House St James’ Square London SW1Y 4LE United Kingdom

5 Third Time Lucky? Chatham House Briefing Note Geraschenko Resigns (Again)

Dr William Thompson www.chathamhouse.org.uk

Contact: James Nixey, Russia and Eurasia Programme, [email protected]

© Chatham House, 2004. All rights reserved.

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