No one knows yet how and when what Harvard
professor Ken Rogoff calls the “great contraction” will end. Some predict a new
global recession starting with Europe and the United States. Even the normally
cautious International Monetary Fund has not been mincing its words, with new
managing director Christine Lagarde
saying we are entering a dangerous new phase.
How can Russia,
which is so vulnerable to oil price changes and capital flow surges, try to
steer a steady policy course in the face of such uncertainty? There are no easy
answers.
It seems that the usual recourse to international policy coordination has faded
from view, with each country trying to find its own solution.
Russia, unlike fellow BRIC
members Brazil, India and China, has no capital account
restrictions, and the ruble is completely convertible. This is probably the
main reason that the Russian economy suffered such a devastating blow relative
to the others as the financial crisis erupted in late 2008. Credit fled banks
almost everywhere, but in Russia,
it also left the country.
It would seem that, short of backtracking on its commitment to an open economy,
Russia
really has no choice but to create buffers by pursuing macroeconomic policies
that should be even more prudent than usual. In some ways, it has. After
falling to almost $380 billion in early 2009, foreign exchange reserves are now
at $545 billion. A budget deficit of almost 6 percent of gross domestic product
in 2009 is likely to be about in balance this year, admittedly thanks in part
to higher oil prices. And, importantly, gross public debt is less than 10
percent of G.D.P. this year, according to the I.M.F. ’s latest published data,
whereas it stands at almost 18 percent in China,
80 percent in Germany and
142 percent in Greece.
In one area in particular, and despite progress, the effort is insufficient.
This has to do with inflation. After averaging 8.8 percent in 2009 and again in
2010, the year-on-year increase in the Russian consumer price index registered
9 percent to 10 percent between January and July. Only last month did the rate
of inflation decline to 8.2 percent, and it is likely to decline further to
about 6.5 percent by year’s end.
But this is still just not good enough — not in this volatile global
environment. The problem is that Russia’s inflation rate is still
much too high in the context of a global low-inflation environment. Over time,
the ruble is losing the competitive margin it gained. If an inflationary wedge
continues vis-à-vis Russia’s main trading partners, the time will come when an
overvalued ruble comes under speculative attack, joining the other cases of
financial fragility that have been too much in evidence lately.
Before suggesting a policy
response, we need to understand why Russia continues to have such
stubbornly high rates of inflation relative to others.
Analysts everywhere, in seeking to explain inflation, write reams about
structural labor markets and wage conditions, infrastructure bottlenecks,
industrial monopolies, as well as excess demand, say, stemming from too much
government spending. All of these issues may matter at the margin in Russia, but
what really matters is money growth that is excessive relative to demand. The
point is simple: Russian inflation was running at almost 10 percent through
July because the stock of money was expanding at more than 20 percent on a
year-on-year basis. Inflation in other major emerging markets such as China, India
and Brazil
was lower because broad money was growing much more slowly in their economies.
For Russia,
broad money rose 22 percent in the year to August. With real G.D.P. growth of
less than 5 percent in 2011, it is hardly surprising that inflation should
still be so high. In fact, the rapid growth of the money stock would be
consistent with an even higher inflation rate, but presumably the difference
reflects a higher demand for rubles generally. In a global crisis, ruble demand
could plummet as investors and savers seek safe havens such as the U.S. dollar
and even gold.
As in other countries, there is no inherent reason that Russia should
not target an inflation rate of about 2 percent. It is a policy decision. The
Central Bank must tighten its monetary policy accordingly, or Russia will
remain exposed when — not if — the next global financial crisis erupts.
Martin Gilman, a former I.M.F. representative
in Russia, teaches at the Higher School of Economics in Moscow.
Originally published at the Moscow Times.
All rights reserved by Rossiyskaya Gazeta.
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