As growth returns, Russia sticks to tough economic policies

Alexey Kudrin, Russia’s former Finance Minister and hero of the Western and Russian financial establishment and media, has now also said what The Duran previously reported – Russia has exited recession.

Latest figures from Rosstat (Russia’s statistical agency) confirm this.  GDP in August was at the same level as in August 2015, whilst industrial output grew by 0.7% and agricultural output by 0.5% with the Russian Agriculture Minister recently informing Putin that Russia will have a record harvest this year.

Inflation continues to fall at a faster rate than almost all independent forecasters predicted.  Though final figures for September have not yet been published, annualised rate of inflation in Russia as of the end of September was certainly no higher than 6.5% and is probably well below this figure.  The Central Bank is predicting that inflation at the end of the year will be 5.5-5.6%, which is in line with its current underlying rate.

Investment decline slowed in August and the Central Bank is claiming that an improvement in investment trends is underway.

Real incomes in August however continued to fall, with Rosstat reporting the fall as 0.7%.  (Some reports claimed preposterously that the fall was 7%.  Presumably some people ‘corrected’ the actual figure by moving a decimal point).

The fall in real incomes is the deliberate consequence of the government’s anti-inflation policy which by limiting economic activity through its tough monetary and fiscal policy is keeping the growth in wages below the continuing rise in prices.  The decline in real incomes reduces demand, which all other things being equal over time makes prices and therefore inflation fall still further.

The fact output is rising as real incomes fall incidentally shows something else: the economy is becoming more competitive.  It is also undoubtedly a reason why despite the recession unemployment never rose significantly (it peaked at 5.8% and has now fallen back to 5.2% in a country where the labour participation rate is currently 70%).

There are several reasons why during the recession unemployment in Russia never took off.  One is the decline in the working age population caused by the 1990s demographic crisis.  Another is the return of migrant workers during the recession to Central Asia, leaving vacancies free for Russian workers.  However the most important reason almost certainly is that by accepting a fall in their real incomes Russian workers did not price themselves out of their jobs.

Like the Central Bank Kudrin is reported as saying that growth will be slow initially, though he predicts it will rise to 3-4% “within five years”.  The Interfax report of his comments does not say whether Kudrin said why this would be so.  However The Duran has explained it previously: despite denials it is the tough monetary and fiscal policy the government and the Central Bank are following in order to bring inflation down to 4% by the end of next year.

On this subject Central Bank Chairman Nabiullina provided further clarity during a press conference in September

She admitted that the underlying inflation rate in Russia is now 5-6% and that it will not rise above this range even if interest rates are reduced and monetary policy is eased.  In other words there is space for cutting interest rates and easing monetary policy if the priority were to strengthen the recovery and increase growth.

The reason interest rates are being kept high is because the government’s and the Central Bank’s priority is not to strengthen the recovery and to increase short term growth.  It is to reduce inflation from its current underlying rate of 5-6% to 4% by the end of next year, and to keep it there indefinitely.  Here is what Nabiullina said about this

“It should be stressed once again that inflation risks are not understood to be the risks of inflation strengthening. Inflation will continue its downward movement – we are fully confident here, as well as market participants are. These risks consist in the rates of inflation ‘getting stuck’ at around 5%-6%, failing to reach the target level needed to enable a more favourable environment for economic growth.

We are sure that we will be able to reduce inflation to the target level even in case of the inflation risks materialising. As I say so, I want to emphasise that our target is to reach not a one-off mark of but a steady level of inflation. Yes, the task on hand is to deliver on its reduction to 4% in 2017. Yet, what we mean is not to have this level registered at a certain point in time, but to ensure that inflation resides sustainably around this mark of four per cent. And it is not a magic figure of some kind, yet a new level of price stability, inflation expectations and credibility in macroeconomic policy.”

(bold italics in the original)

In other words, as The Duran has explained, the government and the Central Bank are – quite consciously – accepting a trade-off: lower growth in the short term in return for sustainably lower inflation and higher and better quality growth in the future.  Nabiullina explained it again

“Living in a high price and income growth environment may seem to be more customary and even attractive. Yet, this is a deceptively easy and, obviously, a non-performing direction. What needs to happen is a change in our conventional ideas on what should be price growth in the economy. No less important is it for businesses to continue on the path of performance improvement, for the structure of the economy to upgrade and for competition to advance. These all would create a strong foundation to enable reduction in inflation and to spur economic growth of a higher grade.”

Moreover at a recent meeting to discuss budget policy Putin made clear that the policy has his full support

“The macroeconomic environment remains challenging. In fact, the Russian economy is gradually recovering from the downturn, but the positive trends are still fragile. Make no mistake, we need to create a macroeconomic environment that would foster economic growth, while keeping in place the downward trend in consumer inflation. In the medium term, the inflation rate should decrease to 4 percent.”

In a world where Central Banks around the world prioritise short term growth seemingly over everything else, are trying to increase inflation rather than reduce it.

Where there is quantitative easing, zero or even negative interest rates, and serious talk of ‘helicopter money’, and where the US Federal Reserve agonises over even the tiniest increases in interest rates.

I appreciate it must seem strange to many people that there is a government and a Central Bank in one country who are pursuing diametrically opposite policies of tight budgets and high real interest rates in order to reduce inflation, increase savings, and boost long-term investment so as to make the economy more efficient, productive and competitive over the long term.  However that is the policy Russia has now.