Thursday, April 28, 2016

The Russian Central Bank is guided (among other considerations) in its inflation expectations by statistics produced by Rosstat (Russia’s governmental statistics agency) concerning the size of Russia’s imports relative to domestic production. The bank’s inflation expectation in turn is – judging by their policy statements – the decisive factor in its interest rate policy. Unfortunately, it seems that Rosstat has in its published statistics grossly overestimated the share of imports. According to the agency, the share of all imported products of the “consumer basket” would be 38%. Our research shows that the true figure cannot be more than 24%. When approaching the question from different angles we have derived results in the range of 4.9% to 24%.
The biggest problem in Russia’s economy is not its relative dependence on oil and gas revenue, rather it is the punitively high borrowing costs that should occupy the top spot in policy concerns. The Central Bank has been keeping its key steering rate at an inordinately high level of 11% although inflation has long ago fallen well below that. By end of March, the inflation for the past 12 months was down to 7.3% and running forward at a rate of approximately 6%.…
The Russian Central Bank thus proceeds from quite erroneous premises in motivating its cutthroat interest policy by historical inflation records and “inflation risks” based on faulty statistics connected with a distorted view of the share of imports in the national economy. There is yet a third, perhaps more fundamental error, which is the neoliberal belief that inflation is strictly a monetary phenomenon. This when in fact the root cause of Russia’s inflation over the last two decades has been insufficient supply to meet the demand. Therefore, the immediate concern of the Central Bank should be to make affordable lending available for Russian producers. This should be done even at the risk of increasing the inflation in the short-term, because before the supply side is addressed it will not be possible to break the vicious cycle.…

3 comments:

Matt Franko said...

""The biggest problem in Russia’s economy is not its relative dependence on oil and gas revenue, rather it is the punitively high borrowing costs that should occupy the top spot in policy concerns. The Central Bank has been keeping its key steering rate at an inordinately high level of 11% "

LOL!

Ignacio said...

If they want lower inflation they should reduce IR pronto... Adding fuel to the fire. >But this is risky because:

GDP nominal growth is negative (real is deeply negative), import substitution is happening, but still has a long way to adjust. Current policies are stabilizing unemployment and making the burden shared by all society, including oligarchs, contrary to other nations which insist on keeping pegged exchange rates. If they reduce inflation the burden will swift towards the majority of the population in favour of creditors and asset holders (oligarchs).

They are losing purchasing power and wealth overall with all those tasty oil rent transfers. But they are managing better than Venezuela, S.A. and others.

A long road to stabilization though... probably decreasing IR a bit would help (around 4%?).

Tom Hickey said...

The problem in Russia now is entrepreneurship and innovation at the middle and lower levels in order to diversity away from big state-owned and oligarch-owned companies. High borrowing rates are stifling and lagging demand is also a factor. Interest payments are not increasing consumption across the board as it needed to support private investment at the small to mid-level — "mom & pop" enterprises and start-ups. Unlike developed countries, small business is lagging in Russia. Economic planners are trying to develop it but both high rates and voluntary constraints on fiscal policy are depressing it. These policies are about managing the currency to "create confidence" rather than focusing directly on using available real resources. This it is resulting in social unrest in the middle. This is potentially a big problem for Russia socially, politically and economically. It's a big wedge for the liberals to exploit.