KavkazCenterRussia Date: 09 July, 2012
Time: 04:04 Emirate time

Events Russia will be hit by inflation in Putin's third term
[22 March 2012 , 13:18]

The Financial Times published an article by its Moscow correspondent Charles Clover who warned that Putin would force his Russians to tighten belt even stronger.

The previous decade was calm: oil prices quadrupled, budget expenditure rose nine times in real terms and real wages almost trebled.

But unless oil prices nearly double again, this era of easy money that has buoyed incomes and social spending will be finite. "Halfway through Putin's term the economy may hit the wall," says Ivan Tchakarov of Renaissance Capital, a Moscow investment bank.

Dynamics of Russian foreign trade balance shows that revenues from the export of Russian products - mainly oil and gas - are not growing since world oil prices do not increase.

At the same time government's spending increases. The balance is changing in the direction of the deficit, that is, the government will soon begin to spend more than they earn.

"I think Putin doesn't have any choice but to change. We hope he understands that if he doesn't, the economy could experience severe difficulties in three years' time", says Mr Tchakarov.

On the other hand throughout the decade of Putin rule, domestic consumption and imports outpaced GDP growth as Russians made up for the deprivations of Soviet life by splurging on everything from cars to fur coats and holidays.

This means that imports of goods and services is growing faster than exports. Assuming oil prices of about $ 100 a barrel, the International Monetary Fund predicts that rising imports will overtake exports and Russia will show a small current account deficit in 2016.

To prevent this, you need to either devalue the ruble, or to attract foreign investment.

"Rather than attracting capital, Russia at the moment is doing the opposite: partly because of political uncertainty, capital outflows totaled a net $ 84bn in 2011, equivalent to 5 per cent of GDP", says Financial Times.

And there is a second way to eliminate the deficit - the devaluation of the ruble. In this case, imports will gradually decrease until it becomes equal to the export.

You can, of course, borrowing, as suggested by the Russian Savings Bank's chief economist Ksenia Yudaeva. "In fact, I don't think we have been borrowing enough, and it's time we started".

The last time the current account swung into negative territory on a quarterly basis was in late 1997; it is a shift widely seen as a main reason for the collapse of the rouble in August 1998.


Department of Monitoring
Kavkaz Center

[1] photo from article