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Russia Achieving Best Inflation Outcome Since The USSR’s Collapse

Expectations of a rise in inflation because of the base effect, and supply constraints prove to be wrong.

Away from all the noise about Brexit, Rosstat – Russia’s statistical agency – and the Central Bank have published more data and forecasts that point towards steady recovery and a rapidly improving inflation picture.

Contrary to the Central Bank’s earlier predictions the annualised rate of inflation remained steady in June despite claims that it would go above 8% because of the base effect.  The annualised rate of inflation at the end of June instead turned out to be 7.4% compared to 7.3% in the previous months.  The true rate of inflation after eliminating all statistical anomalies remains rock steady at 0.1% per week (between 5 – 6% for the whole year) where it has been for months.  The Central Bank is now admitting that there will probably be deflation in August – a month when inflation in Russia traditionally falls – and that the annualised rate of inflation for the whole year could be as low as 5.5%.  The Economics Ministry more pessimistically predicts 5.9%.

Either figure would represent the lowest inflation rate Russia has experienced in any one year since before the USSR collapsed.  Predictions inflation would increase to 16% following the second oil price collapse at the start of the  year have proved completely wrong, whilst more recent claims that the peak of the period of inflation decline has passed and that inflation is now rising are also turning out wrong.

Meanwhile the Central Bank is now also predicting growth in the second and third quarters whilst unemployment – perhaps the strongest single indicator of the state of the economy – fell from 5.9% in April to 5.6% in May – the lowest for 7 months.   Meanwhile PMI for manufacturing in June stood at 51.5 – up from 49.6 in May – with any figure above 50 pointing to expansion and any figure below 50 pointing to contraction.  This is the best PMI outcome for 20 months, and is a further strong indicator of recovery.

All of the government’s economic agencies including the Central Bank, the Economics Ministry and the Finance Ministry are predicting growth for the remainder of the year.  However they also predict only low growth for the remainder of this year as well as next year and the year after.  However thereafter – from 2019 – the expectation is that growth will improve to a very respectable annualised rate of around 4%.  Kudrin incidentally is aiming for even higher growth.  He says he wants growth of as much as 6%. 

The reason for the predicted slow growth in the remainder of 2016 and in 2017 and 2018 is that the Central Bank intends to keep interest rates high in order to consolidate the inflation gains.  Once it is clear inflation has not only hit the Central Bank’s 4% target but is staying there, the tight monetary squeeze Russia has been experiencing for almost the whole of this decade will finally end, leading to hopes of higher growth. The Central Bank predicts this will be in 2019, which is why growth is expected to accelerate from that year onwards.

The fact that Russia has sailed through the period of oil price collapse and sanctions with only a brief recession is a fact that still elicits denial in many quarters.  I continue to read any number of articles that still talk of Russia being crippled by the sanctions and the oil price fall.  The facts however speak for themselves: Russia coped with sanctions and an oil price fall which were universally expected to crush its economy with what by Russian standards was only a very mild and short recession – the mildest since the USSR’s collapse and one which led to no significant increase in unemployment – and with an inflation spike that was quickly over.

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Alexander Mercouris
Editor-in-Chief atThe Duran.

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