|IS THE RUSSIAN GOVERNMENT EFFECTIVELY
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
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
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
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
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
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–