Moscow News
http://www.mnweekly.ru/
April 24, 2008
Cold Compress for the Russian Economy
By Marina Pustilnik
Everybody seems to agree these days - the Russian economy has been overheated and needs a serious application of some sort of a cold compress. If nothing is done, we run the danger of once again running into double-digit inflation this year, while the economic situation is characterized by the imbalance between the growth of labor productivity and labor costs and a widening gap between domestic supply and demand.
The consumer credit frenzy shows no sign of diminishing - as a result, the wait time to a buy foreign car has increased by 6-7 months, while the price of apartments in the Moscow suburbs can jump as much as $20,000 in a matter of two weeks. The ruble is getting stronger by the day, but its buying power does not seem to be growing, as inflation is eating up all of the advances. Just a year ago an apartment rent of 40,000 rubles seemed like something completely unaffordable. Today it can be considered a good price - not because the incomes have grown dramatically, but because inflation has changed people's attitude towards money.
It is not that the government is not doing anything. The Economy and Finance Ministries as well as the Central Bank have been unsuccessfully fighting inflation for years. The key word here is "unsuccessfully."
The most recent example is the liquidity crisis, which threatened the country's banking system after the banks gave out too much unsecured consumer credit financed with the money they got from cheap capital markets in the West. After the West was hit by the tide of the U.S. mortgage market crisis, rumors of an impending downfall of the Russian banking system abounded. To fight the liquidity crisis the Central Bank and the Finance Ministry pumped the federal budget money and funds of the state corporations into a number of large banks - only to provoke a new leap of inflation. Price freezes that were proposed and implemented by the Economy Ministry at the end of last year did little to help.
This week, the Russian Federation Council hosted a roundtable discussion about the overheated economy and methods of fighting this economic evil. The ideas that gathered the most approval can be described as, well, "anti-market." Sergei Glazyev suggested freezing the tariffs of natural monopolies for a period of three or four years. Participants then went on to suggest other prices be frozen as well. There was even talk of reinstating the State Price Committee and the State Supplies Committee, but this is so "back to the USSR," that it will definitely have to wait, at least as long as the Finance and Economy Ministries are staffed by liberal economists.
The said economists believe that one of the main culprits of this overheating is excessive budget spending. I see the reasoning behind that, but at the same time I cannot shake the idea that the government could and should spend money - on building infrastructure and financing other such long-term projects, which are extremely important for the long-term viability of the country's economy. In doing so, the state would bring the money to Russia's regions that have not felt any effects of this overheating and create real jobs for people.
I am much more likely to blame the Russian banks that concentrated their efforts on high-margin consumer credit instead of giving lower-margin business credit that could help the country's small and medium-sized business grow, closing the gap between supply and demand of goods.
From this point of view, the Economy Ministry's suggestion for fighting the heat by stimulating people to save up (in the banks) strikes a more positive chord. But, unfortunately, such measures depend on so many "ifs" that their success remains doubtful. Freezing an overheated economy demands some unpopular measures. We'll see if Russia has a government capable of taking unpopular measures after inauguration of the new President. But I'm guessing that the summer will be very hot, and not just because of the weather.