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The Kudrin plan: cut Russia’s inflation to 2%

Alexey Kudrin, Russia's former finance minister, reacts during a during a Bloomberg Television interview on the opening day of the World Economic Forum (WEF) in Davos, Switzerland, on Wednesday, Jan. 21, 2015. World leaders, influential executives, bankers and policy makers attend the 45th annual meeting of the World Economic Forum in Davos from Jan. 21-24. Photographer: Simon Dawson/Bloomberg *** Local Caption *** Alexey Kudrin

One of the big unanswered questions about Russian economic policies which has baffled economic commentators since former Finance Minister Alexey Kudrin was reappointed to an advisory post by Russian President Putin a few months ago was what his plan for the Russian economy would be

It has also been interesting to see how it would differ from what the Russian government is already doing.

Kudrin’s recent comments to the Gaidar Forum largely answer the question.  The answer is that what he proposes is a continuation of the Russian government’s existing counter-inflation strategy, with the only difference being that the target for reducing inflation is brought down further from the current target of an annualised rate of 4% to 2%

Speaking of monetary policy, we need to keep inflation below four percent, below the three-year set goal [by the Central Bank of Russia]. But even in the medium term,we have to go down to 2-2.5 percent. This cuts the costs of financial resources in the country, thus creating the basis for long-term money

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In other words Kudrin’s plan is simply more of the same but taken even further than it is at present.  I heard Central Bank Chair Nabiullina say at SPIEF in May 2014 that the inflation target was 4% and that the Central Bank had calculated that this was the optimal inflation rate that would allow the economy to grow.  Kudrin proposes something even more ambitious: he wants to bring inflation down even further to 2%, which as it happens is the inflation rate in most industrialised countries.

As is always Kudrin he sought to obscure his overriding focus on monetary policy by talking about increasing education and health spending.

In the last five to seven years, state spending on education and healthcare has stagnated or decreased. We, therefore, do not solve the task of building a new economy, we need a budget maneuver here

This is a fully worthwhile objective, which shows that Kudrin is not the doctrinaire anti-statist that some taken him to be.  However it should not detract from the fact that Kudrin’s primary focus is on maintaining Russia’s existing rigorous monetary policy.

With annual inflation in 2016 at 5.4% and current the Central Bank’s lending rate at 10% real interest rates in Russia are currently the highest in the G20.  With Kudrin wanting inflation to be brought down to 2%, and with every indication that he has President Putin’s backing, interest rates look like they will remain high for the foreseeable future.

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