Is Putin Purging His Kremlin of Keynesians?

If Ulyukayev’s arrest is the beginning of a purge of Western Liberal economists from the Kremlin, it may have also been a litmus test to assess the political and social ramifications of further shake ups in senior leadership.

In a previous post about Russia’s geopolitical goals, I mentioned the struggle for influence among the Western Liberal economists running the Russian Central Bank and the Stolypin Club, a collection of economic advisors shaping Putin’s foreign policy goals. Judging from Russia’s recent geopolitical moves, it would seem that the Stolypin Club were winning that war of influence, and I have been watching for Putin to start purging the Keynesians that made their way into the Kremlin under the Yeltsin administration.

When news surfaced that Economy Minister Alexei Ulyukayev was arrested for accepting a bribe, I started parsing through the details to see if the incident may have been related to the palace politics I mentioned earlier. Ulyukayev is accused of accepting $2 million to “grease the skids” for a major deal between two Russian oil companies, and Putin dismissed him from service the same day he was arrested.

Corrupt oligarchs are the norm in Russia, so what’s the big deal? Although many in the media are characterizing Ulyukayev as an underling for Putin, Ulyukayev came into power under Prime Minister Dmitry Medvedev and held the position of Deputy Chairman of the Central Bank of Russia for 9 years prior. It was also the Medvedev economic team who bailed out major banks and initiated a stimulus program when the 2008/2009 recession hit the country- two very Keynesian policies. At this point, I began to wonder if Ulyukayev may have been the latest casualty in the war over Russia’s economic policies, and if the Stolypin Club had begun to eclipse their rivals.

Putin is a product of Russia’s corrupt oligarchical system. Formerly the mayor of St. Petersburg, any business who had planned to open up shop in his city needed his approval, and I’m willing to believe this is how Putin made many of his contacts among the Russian business and banking elites. But now, he claims to be cracking down on that corruption, perhaps in an effort to make Russian government and industry a bit more efficient and structured in case their economy continues to stagnate or decline.

“Putin hasn’t really done much to dismantle the corrupt system that has flourished in Russia under his rule — probably because graft is the glue that has held it together all these years. Yet he has appeared impatient with it since the 2014 Crimea land grab and the simultaneous oil price drop. No longer happy (or perhaps no longer able to comfortably afford) the crony capitalism of the 2000s, he wants a mobilized, militarized, patriotic nation that would circle its wagons against a perceived threat from the West and the economic difficulties that go with it. ”

Why Putin Sacrificed His Economy Minister

Putin is the one who has benefited greatly from cronyism, and it was Medvedev who ran on an anti-corruption platform, so Ulyukayev being dismissed by Putin for corruption is rather ironic. But the irony is lost on Putin’s more rabid supporters who are calling for a Soviet-style purge of all corrupt ministers and government workers. Some have even suggested that representatives from the FSB run the purged departments of government until an appropriate time for elections.

If Ulyukayev’s arrest is the beginning of a purge of Western Liberal economists from the Kremlin, it may have also been a litmus test to assess the political and social ramifications of further shake ups in senior leadership. Judging the public’s reaction to Ulyukayev’s arrest, I think a majority of the Russian people would buy into an anti-corruption cover story. If Putin begins to move against the Russian Central Bank or the rest of Medvedev’s team, then we can be sure there’s going to be another shakeup in Putin’s Kremlin.

“Putin has been careful not to threaten the economic team in Dmitry Medvedev’s government and the central bank.”

Why Putin Sacrificed His Economy Minister

So why the shake up? I think it may have something to do with the election of Trump, the death of TTP and other free trade deals, and a potential rehabilitation of the over-leveraged, bubble-prone debt finance model of economics. If Keynesians like Paul Krugman and Janet Yellen are in danger of falling out of favor in the West, then Keynesians in Russia should be listed as an endangered species.