April 15th, 2013

Russia on the edge of stagflation

The economic growth in Russia in January-February fell sharply to 0.9% on the annual basis. To support weak growth, the Central Bank of Russia is likely to ease monetary policy.

The official interest rate is 8.25%, but in reality the Central Bank lends money to banks at 5.5%, almost 2% below inflation. While unemployment reached record low, business faces labor deficit in Moscow and other large cities. Though the price for crude remains comfortably high, the budget lacks scope for expansion. Overall, the government ran out of ideas how to boost economic growth.

Elvira Nabiullina can't say no to Putin

Monetary policy uncertainty mounts as Sergei Ignatiev  to resign from the position of the Chairman of the Bank of Russia. During his 11 years in the office he managed to preserve the Central Bank’s independence, quite unusual feature in the Russian centralized political system. His successor Elvira Nabiullina is already confirmed by the State Duma as the next head of the Central Bank of Russia. Unlike some other economic liberals in the Putin’s team, she has never publicly argued with her boss. Luckily, her economic views evolved simultaneously with Mr. Putin’s. She already stated that she wouldn’t sacrifice economic growth in order to curb inflation.

The lower interest rates won’t help to speed up economic growth. The underdeveloped financial system and full employment make Russian economy not sensitive to the interest rate cuts. Higher inflation is likely to be the only outcome of loose monetary policy.

The government has exhausted safe options to stimulate economic growth in the short term. Structural reforms are the only answer to stagflation. The country needs to rebuild its juridical system and limit the role of government in the economy. Alas, the government lacks legitimacy and popular support to initiate any substatial reforms.


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