IS THE RUSSIAN GOVERNMENT EFFECTIVELY FIGHTING INFLATION?


17.01.07
MOSCOW. (RIA Novosti economic commentator Nina Kulikova)

Last year inflation in Russia was 9% compared with 10.9% in 2005. This could be viewed as a good result for the Russian government because the rate fell below 10% for the first time since the reform period began. However, the nature of Russian inflation does not hold out much hope for a quick decline.

Despite the high growth pace of Russia’s economy and its improving financial situation, inflation remains one of the most sensitive problems. In 2000, it exceeded 20%, but the government's attention to the problem, a tough monetary and fiscal policy after the 1998 financial crisis and the sustained surplus of the federal budget have helped to gradually reduce it.

Falling inflation has a healthy effect on the country's social and economic situation, which explains why the government is paying so much attention to the problem. Russian President Vladimir Putin has repeatedly said that the fight against inflation is one of the government’s priorities. Indeed, this sphere of macroeconomic policies has a direct bearing on the general population's prosperity. Lower inflation brings benefits that can be felt by ordinary people, who do not see anything of the country's energy export windfalls.

Inflation also influences interest rates, which remain high in Russia but which, if lowered, could encourage industrial and economic development. The current refinancing rate is 11% per year. However, Alexei Ulyukayev, the Russian Central Bank's first deputy chairman, has already said that the Bank's board will discuss reducing it in January-February because last year’s inflation rate stayed within the official forecast (8.5%-9%).

Inflation is projected to continue falling. The Central Bank believes that it will drop to 6.5%-8% by the yearend, while the economic development and trade minister speaks of 8% and independent analysts of 8.5%. Anti-inflation measures might be more efficient if all economic agencies had a common view of its causes. Right now, however, they have different opinions.

Finance Minister Alexei Kudrin has repeatedly said that Russian inflation is purely monetary and is caused by the influx of petrodollars into the country. "The bulk of inflation is caused by excessive money in the economy," he insists, recalling the fast growth of the Central Bank's gold and foreign currency reserves. He urges the government to continue sterilizing the excessive money supply and to reduce the pace of growth in budget spending. In order to achieve the former, Russia has set up a stabilization fund that accumulates windfalls from oil and gas exports; its balance has already reached $90 billion.

Not everyone agrees with this view. Deputy Economic Development Minister Andrei Belousov says that talk of inflation being purely monetary and about the need to toughen the short-term monetary policy is not quite correct.

Indeed, many independent experts agree that it is non-monetary inflation – primarily corporate price setting by natural, industry and local monopolies – that is the key source of price growth in Russia. The same is true of utility and housing bills, as well as the price of paid services and petrol, which have been growing faster than the official inflation rate.

Statistics support this view. According to the Russian Federal State Statistics Service, the price of petrol for the general population grew by 10.9% in 2006, the cost of passenger transport services by 14.2% and of utilities and housing services by 17.9%, exceeding the inflation rate by almost two times. So it is hard to expect that the government’s anti-inflation moves and the reduction of the money supply will be effective when there is no competition on these markets, all the more so as natural monopolies have already announced that they will further increase tariffs, especially for gas and electricity, in 2008.

Of course, inflation in Russia is not immune to other circumstances, primarily the decline in the price of oil. To a certain extent, this will compensate for other inflationary factors and could even contain money supply growth. Yet given the all-time high net inflow of private capital into the Russian economy last year ($41.6 billion), the monopolization of some sectors will not allow inflation to fall drastically.

It should also be remembered that the inflation rate is always a relative figure. If we compare the cost of necessities, which are the main consumer goods for the poorest people, we will see that last year’s inflation for the poor was higher than the average rate. For example, prices for essential food products grew faster than average inflation: prices of bread and baked goods were up 11.1%, of cereals by 12.1%, and of sugar by 14.9%. At the same time, the cost of non-essential goods and luxury items grew much more slowly. So the inflation rate of 9% does not quite reflect the price growth experienced by Russia's poor, who are estimated to account for up to 35% of the population. On the contrary, the country’s most prosperous individuals accounted for the bulk of personal income growth in 2006.

So, although inflation in Russia is falling, it remains quite significant, especially for the poor. Perhaps the Russian monetary authorities should consider some more effective anti-inflation measures. –0–