Alexei Ulyukayev, the first deputy chairman of the Central Bank of Russia, said inflation had amounted to 8.1 percent in the first 11 months of 2006.
Although December is traditionally an inflation-spurring month, the Russian monetary authorities hope to keep annual price growth from surpassing 9 percent. If they succeed, Russia will set a record for the post-Soviet period, in which it has built a market economy. Last year was the best so far, when inflation was 10.9 percent.
This achievement can be credited to the government and the Central Bank, which has addressed inflation this year more energetically than ever before. President Vladimir Putin has held several conferences with ministers on curbing inflation, and the ministries of economic development and finance and the Central Bank have drawn up special plans to combat this evil. But most importantly, the country's authorities have pursued a relatively well-coordinated monetary and credit policy aimed at restraining the growth of prices.
They did not agree to the state-controlled monopolies' request to sharply raise the prices of their services, notably gas. Russian consumers pay $40 to $50 per 1,000 cubic meters of gas, while energy giant Gazprom sells gas to foreign consumers for $200 or more.
Because Gazprom is a state-controlled monopoly, it is the government that sets domestic gas prices. It has denied requests by the gas lobby to bring domestic gas prices into line with global ones. Gas prices, in turn, determine the price of electricity, which is used to produce nearly all goods.
Thus, inflation is staring at a "gas time bomb." This year the government prevented its explosion and adopted a five-year plan to carefully and gradually raise domestic gas prices to the global level. Although gas prices will almost triple by the end of that period, inflation should be brought down under tight government control.
The monetary authorities have also pinned their hopes on strengthening the exchange rate of the ruble against the U.S. dollar. For a long time authorities tried to attain two opposing goals: bringing down inflation without letting the ruble get out of hand.
An excessively strong ruble will lower the competitiveness of Russian-made goods and affect economic growth. Russia has so far managed to absorb a heavy and growing flow of petrodollars. The Central Bank has been buying them for rubles to keep the dollar from plummeting.
However, the freshly issued rubles come to the market and spur inflation, in line with macroeconomic laws.
By the end of the year, the Russian monetary authorities have decided that they will stop spending so much on propping up the U.S. dollar, letting the ruble grow stronger (the exchange rate has fallen from 28 rubles to 26 rubles per $1 since the beginning of the year) and lowering inflation.
A decline in the growth of oil prices on the global market has played into Russia's hands. Despite forecasts of $80 to $100 per barrel, oil still costs about $60 to $65, and this has stabilized, if not slowed, the influx of petrodollars that has spurred inflation in Russia.
The government has also taken other measures. For the first time in years, it attempted to break up local monopolies in the housing and utilities sectors, and on the food market, where prices were determined not so much by supply and demand but by the groups that controlled them. The housing and utilities reform is still in its initial stage, and the police, the migration service and antimonopoly bodies are only trying to restore normal price competition on the markets. Even these modest attempts, however, have had a positive effect on inflation.
But this is not the time for the government to rest on its laurels. Inflation has been slowed but not stopped. There are two things to remember:
First, the consumer price index is growing faster than average inflation, which means that the average Russian family is seeing price increases of greater than 9 percent. Most Russians are concerned not so much with average spending as they are with their rising payments for housing, utilities, transportation and food.
Second, an inflation rate of 9 percent, which would make the government happy, is an unacceptably high level for industrialized countries, where annual inflation is usually kept at 1 percent to 2 percent, or 3 percent at most. This low inflation keeps families' budgets stable and gives people a chance to build a lives "by installment," meaning with mortgages, auto and business loans.
In Russia, where inflation is relatively high, the lending system cannot develop as fast as it should because of prohibitive interest rates. Therefore, the government and the Central Bank will have to work harder to bring inflation in Russia down to the global level.
This will be especially difficult to do next year, with both the parliamentary election and the start of the presidential campaign. These will involve the substantial spending of budgetary funds on social projects to persuade people to vote "correctly." Specialists note that the 2007 budget approved by the lower house of Russia's parliament called for a 26 percent increase in spending, which is almost double the rate of revenue growth (14 percent).
Although inflation should decrease, there is a very real threat of new price hikes in the upcoming election year. Inflation could easily throw off its deterrents and run free.
By Dmitry Dokuchayev