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Excerpts from the JRL E-Mail Community :: Founded and Edited by David Johnson

The slippery politics of petrol

Russian Gas Pump Nozzle Inserted into Car Gas TankThe rampant oil price is causing a conundrum for the government, which is seeking to tackle inflation at the cost of a competitive rouble.

With the presidential election looming in March, inflation has leapt to second place behind corruption in the list of voter concerns.

A range of measures show it is also looming large on the government's radar as the Kremlin seeks to appease a worried electorate.

"Inflation is probably a sensitive issue for the government ahead of the elections," said Alexandra Evtifyeva, chief economist at VTB. "In the last couple of months the focus has firmly shifted to tackling inflation."

Curbing inflation

Despite the rate of price growth hitting 9.6 per cent in April, the government still targets a rise of 7.5 per cent in the consumer price index.

Analysts say that while they expect inflation to slow throughout the year, the government is unlikely to hit its target, with Deutsche Bank forecasting 8.7 per cent and VTB 9 per cent.

The Central Bank raised interest rates on April 29, signaling that it is prepared to tackle inflation over growth, and the government has introduced a range of artificial measures to stem price rises.

Prime Minister Vladimir Putin ordered curbs on fuel prices in February and introduced a grain export ban last year following the poor harvest.

This did help to slow inflation as food represents a large part of the average consumer's budget, while petrol impacts prices through transport costs. But the policy distorted the markets.

Petrol shortages first grabbed the headlines in the Altai region. Oil analysts and driving associations said price controls were forcing energy giants to export oil leaving the domestic market short.

And the coming harvest is likely to have a big influence on grocery bills, particularly following the wildfires that burned crops last year causing prices of staple goods to jump.


Russia has allowed the rouble to rise, helping to curb prices by holding down the cost of imports.

But this means more competition for domestic producers while making exports more expensive.

"In terms of competitiveness this is a problem," said Yaroslav Lissovolik, chief economist at Deutsche Bank. "Clearly this rouble appreciation will add to expanding imports, which will contribute to the growth of real incomes along with higher fiscal outlays ahead of the election."

The government is also hoping it can deliver a boost to its policy of modernisation.

"If Russia really wants diversification and new industries, then a stronger rouble might not hurt it by encouraging imports of cheaper new technologies," said Evtifyeva, of VTB.

Lissovolik says the government could even try to keep the rouble strong after the election.

"The long-term effects are more oriented to stronger growth and household consumption, but competitiveness will be one of the key issues," he told The Moscow News. "A theme that will be very important in the coming years is the modernisation of industry through the importing of technology."

Standard of living

Most economists insist a stronger rouble will have a positive effect on the living standards of ordinary Russians, even though it is mixed news for their employers.

"For consumers high inflation erodes real incomes but high oil prices will translate into higher nominal wages growth. So from the point of view of incomes it won't hurt consumers too much," said Eftivyeva.

The rouble has gained about 13 per cent to 27.86 since the dollar's recent high on November 30, 2010. The government says the rouble could strengthen to 24 and 25 to the dollar by the end of the year.

The greenback has been wilting as investors come to fear the printing of $1 trillion in stimulus will eventually lead to inflation, devalue US assets and raise costs for business.

Over the same period the rouble has strengthened 6 per cent against the euro, but has remained stable since the turn of the year.

Imports priced in euros, like many of Russia's food imports, are not getting cheaper in rouble terms. Manufactured goods from Asia, however, are priced in dollars and will fall further in price if the rouble does strengthen to 24 to the dollar.

Cost of bureaucracy

If they really want to hold down inflation and reduce prices, however, politicians need look no further than the ministries and institutions that they head, experts say.

Russia remains a much more expensive place to live than most of Europe, and the chief reason for that is bureaucracy and corruption.

Research by the European University in St Petersburg suggests this adds 15 per cent to the average food bill.

Where big purchases like Moscow real estate are concerned, the report's author, Vadim Volkov, says bribes and bureaucracy inflate prices by up to 60 per cent.

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