September’s increase in inflation, which brought into focus the rise in prices of foodstuffs that has long been felt by the public, has caused serious concern among the authorities. It is now already clear that the inflation goals set by the Cabinet for 2007 will not be achieved. New Economic Minister El’vira Nabiullina has had to work up the courage to come clean about this to the President: she has reported that the figure is "over nine percent" as opposed to the planned eight percent.
For the first time in the past several years, we have run into a situation in which inflation has been imported from world markets. This is in relation not only to products that are mostly imported to the domestic market, but also to products like grain, for which Russia is an influential exporter but for which the prices are nevertheless tied to world prices.
The price of wheat has jumped by 60% in the past four months, and the index of worldwide prices for basic foodstuffs has demonstrated steady growth over the course of the last two years. This is because the rapid growth rates of developing economies, along with increasing the demand for raw stock in a way that is favorable to Russia, is also contributing to an increase in the standard of living of the populations of many of those countries, which in turn is leading to an increase in demand for foodstuffs, among other things. The world price hike in foodstuffs is a serious one, and will be long-lasting. We will need to keep this mid-range trend in mind.
Imported inflation is a new phenomenon for the Russian economy. It will not be solved by penny pinching or the strengthening of the ruble. Raising customs tariffs for exports and lowering them for imports may inhibit the price range for a certain mount of time, but in the long term, it will discourage manufacturers and increase the deficit.
It would not be out of place here to recall that the West experienced the same thing at one time, when the oil crisis of the 1970s led to double-digit inflation theretofore unseen in the world. However, they seem to have learned how to deal with such problems; the 200% price increase in imported energy resources and metals from 2004-2007, for example, did not bring such dramatic inflationary consequences.
Why does inflation generally decrease so slowly in Russia? It is fully obvious that it has some lines of support in the form of operation costs incurred by Russia’s ineffective manufacturing base. Expert fully agrees with French economist Jacques Sapir, who in an interview with our magazine stated that the high rate of inflation in Russia is connected not with a surplus of money, but with a lack of investments. Fixed assets and manufacturing funds are extremely old and worn out, because of this very shortage of investments. Ineffective fixed assets not allow us to offer competitive products, but function as the source that is constantly balancing out inflation costs. For this reason, if we invest in modernizing our fixed assets, we will reduce the long-term inflation potential of the economy.
In order to fight inflation system-wide, we need system-wide measures in place to widen the variety of goods produced domestically. The government’s challenge is to remove the barriers; once it does, businesses will pick up the slack. What are these barriers? The first is infrastructural limitations in the broadest sense of the term, from the high costs of connecting facilities to electricity and gas supplies to the lack of a system of high-risk credit for medium-sized and small businesses.
Administrative monopolies are a separate class of problems, especially in the real estate market. In order to build, for example, a new cement factory, one needs not only a huge amount of money, but a titanic effort and a considerable quantity of time to attain bureaucratic permissions. And after all that, everyone is somehow surprised that the price of cement has gone up.
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