Business » Finance
Author`s name Alex Naumov

Russian government fails to keep inflation down

The Russian government seems to have lost the battle to keep inflation within the planned range of 8 percent in 2007. Consumer goods prices keep rising faster than they did last year. Inflation reached 0.9 percent in July this year, a 0.2 percent increase on July of 2006. Inflation grew mainly because prices of grain went up. However, experts claim that bread prices will not soar as steeply as they did over the last few months.

Despite a rather unfortunate economic situation taking shape in the first months of 2006, the government succeeded in keeping inflation down to 9 percent last year. This year’s story is quite different. Through the winter, the government officials were boasting about a lower inflation rate, and some analysts even started to correct annual inflation forecasts. But things changed for the worse in spring. According to data released by the Federal Statistics Service (Rosstat), prices rose 0.6 percent in April 2007, up 0.2 percent on year ago. By and large, prices keep rising faster this year than they did over the same months last year. The government officials put the blame on oil prices which proved to be higher than expected. They also point out the impact of a huge capital inflow.

The 2007 capital inflow forecast became a reality in the first months of the year. The Stabilization Fund cannot absorb all the “surplus” money of the economy. The Central Bank and the Ministry of Finance keep talking about the forthcoming ruble appreciation. As a result, an inflow of speculative capital is on the increase. Besides, the government expenditures went up significantly this year despite the protests lodged by Finance Minister Alexei Kudrin, the chief guardian of Russia’s macroeconomic stability. In addition, VTB Bank and Sberbank raised nearly 30 percent of capital of the entire banking system by conducting IPOs at the start of the year. Consequently, lending limits will go up, thus increasing inflation risks.

A stricter regulation on retail sales went into force on April 1, 2007. The new law contributed to a higher inflation rate. Predictably enough, the move resulted in the decrease of retail outlets and supply. As a result, prices rose. Prime Minister Mikhail Fradkov had to order the Rosstat to carry out a weekly monitoring of the situation at the retail markets. The Rosstat reports say that the use of retail outlets is on the increase though the process is going very slowly. Consequently, prices of fruit and vegetables keep rising though the price increase rate was much lower in July – a mere 1.9 percent up, compared with 12.2 percent increase in June.

Aside from the factors mentioned above, the world’s grain stock hit a 30-year low this year. As a result, global grain prices soared. Despite the fact that Russia is a grain exporter, prices on its domestic grain market are growing alongside world grain prices. Some analysts say that somewhat inconsiderate statements by the Ministry of Agriculture about an allegedly poor crop of wheat have prompted the price of grain products to go up. Prices of wheat flour grew by 11.1 percent in July; bread prices grew by 7.2 percent; vermicelli and oatmeal prices grew by 3.9-4.3 percent in the same period. An increase in mixed fodder prices led to an 8 percent hike in the price of eggs in July. However, wheat prices stabilized in late July. The summer’s first wheat crop proved to be better than expected. According to experts, 49 million tons of wheat should be harvested this year – a 2 million ton increase by comparison to the last year’s crop.

One day after the Rosstat released its data on soaring prices of bread and bread products, Economic Development and Trade Minister German Gref issued a statement to console the countrymen. He said that the government would sell grain on the market to help dampen food price rises. The move is designed to curb inflation. However, the government has not made any decision on grain sales yet. Agriculture Minister Alexei Gordeyev said that so far a work group had been set up to assess the situation.

The government will, without doubt, intervene in the situation in view of the forthcoming parliamentary and presidential elections. “A socially responsible state should protect the interests of its low-income citizens,” Boris Gryzlov, the speaker of the State Duma and head of United Russia, was quoted as saying by Russian news agencies last week.

The government will undoubtedly use all possible instruments of monetary policy and administrative power in an attempt to keep inflation down in the year of elections. For instance, no one doubts that the Central Bank will again take steps for ruble appreciation this fall. The government may as well “convey the message” to oil producers so that the latter would refrain from raising gasoline prices. In 2005, the government already dealt with gasoline prices in a similar fashion. The issue of gasoline prices is a political issue. According to Rosstat data, gasoline price index rose 0.3 percent in July or 7.8 percent on year ago.

Meanwhile, experts are reviewing annual inflation forecasts as Gref and Kudrin keep saying that the government expects inflation to stay within the planned 8 percent limit. Experts estimate annual inflation could rise to 8.5-10 percent in 2007.

Translated by Guerman Grachev

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