Streetwise Professor

Russia’s Finance Minister, Alexi Kudrin, endorses the SWP analysis of Russian inflation as primarily a monetary phenomenon, as reported in Kommersant:

Vice Premier, Finance Minister Alexei Kudrin spoke October 26 about the inflation surge in Russia. Despite all previous explanations of the government, he recognized the determinant role of monetary factors coupled with the increase in government’s costs.

The interim data on behavior of consumer price index that Kudrin announced past Friday didn’t match the recent optimism of Economic Development Minister Elvira Nabiullina, who spoke about the local nature of September inflation not long ago, specifying that consumer price index grew 0.8 percent that month. But the index soared 1.3 percent October 1 through 22, Kudrin said, adding it climbed 8.9 percent from the start of this year.

According to Kudrin, the growth in basic inflation (the price index less seasonal prices, the prices controlled by the government) was 1.5 percent to 2 percent in October. “It is the highest indicator that shows the true situation on the market,” Kudrin explained, pointing out that “we have stepped back to the time of two years ago, if it doesn’t happen that the inflation will be even higher.”

So, Russia is back to two-digital inflation, it is clear already. Of interest is that Kudrin directly recognized that not the growth in food prices but rather the monetary factors were the key engine of inflation. The economic policy of the government and the Central Bank of Russia collided with the surge in prices on agrarian market, which didn’t allow to edge the price shock. In inflation growth, Kudrin said, the monetary factors fueled consumer price index by 3.4 percent from the start of this year, while EU had just 0.2 percent. [My emphasis.]

Kudrin seems like a straight shooter–he was very critical, for instance, of the food price freeze initiative. As a result, he seems out of place in the midst of the Kremlin’s constant campaign of economic happy talk.

Kudrin also stated that the RF’s liquidity crunch seemed to be easing, in large part because capital inflows have resumed. Again from Kommersant: “The capital inflow resumed in October, as investors still believe in the course of the government all faults notwithstanding.” Kudrin stated that capital inflows were $6 billion in October, in contrast to the outflows for September and August. This is important because, as reported in the WSJ:

The central bank, meanwhile, has had its room to maneuver crimped by liquidity problems resulting from the U.S. financial crisis. It has been loosening, not tightening, credit in recent weeks, scrambling to stave off instability in the banking sector. Many of Russia’s commercial banks had relied on foreign financing to raise the money they lent to local companies and consumers. But after the U.S. credit crunch started in August, overseas funding for many dried up. The
central bank has pumped billions into the banking system to keep them afloat. Capital inflows appear to have resumed, Russian officials say.

So, absent some further aftershocks in the US and European markets, Russia seems to have survived the credit crunch pretty much unscathed. The inflationary situation is unlikely to be resolved as quickly, however, due to the Russian Central Bank’s predilection to keep the ruble from appreciating, and the government’s pre-election largesse.