Mission Impossible

At a meeting with the government, the Russian president instructed the ministers of the economic bloc to develop a set of measures in order to keep inflation within the planned framework next year and achieve its gradual reduction to 3-5% in subsequent years.

It would be useful to remember that inflation rises when there is an excess supply of money in the economy. And, in order for inflation to fall, contrary to fairly widespread belief, it is not at all necessary to reduce the money supply. You can take the path of stimulating the demand for money. Such demand grows during periods when the entire economy is growing, when business activity is high. And here we are once again faced with a slowdown in economic growth and a drop in business activity. The reasons are known. The main thing is the powerful pressure on business from the state. This is the “YUKOS case”, and tax “surplus appropriations”, and a noisy campaign to combat money laundering. All this led to a decrease in the rate of economic growth, business activity and, accordingly, a decrease in the demand for money and an increase in inflation.

Now, when the president demands to reduce inflation and says: “In general, I approve of your work, but the results leave much to be desired, we must try,” he should look not at Finance Minister Alexei Kudrin, but at the employees of his own administration, who initiated all these campaigns.

There is one very typical example. “The heroine of Russian business” Elena Baturina – a good businessman, by the way – sold her assets in the construction business and in the production of cement. With the proceeds, she bought shares in Sberbank and Gazprom. In other words, she preferred to receive dividends and make money from the growth in stock prices of state-owned companies. This promises her a decrease in income, but at the same time a decrease in the risks that an entrepreneur takes today when faced with the state in the guise of an entrepreneur. Such behavior is common today and precisely characterizes the reasons for the decline in business activity.

Or take the story of how the FSB opposed the appointment of foreign specialists to high positions in companies that develop natural resources. They say that information about mineral resources is a state secret. It is difficult to say how serious a secret this is, but there is no doubt that this episode served as another serious reminder to business, including foreign ones, of the precariousness of its position.

The capabilities of the government's economic bloc in modern conditions are very limited. Ministers cannot really improve the business climate, since this requires serious decisions and a return to the policies that were followed before 2003. But this contradicts Putin's policy. So all they can do is reduce the money supply and force the transfer of money to the Stabilization Fund, increasing the budget surplus year after year. Such a practice can only lead to economic growth rates falling even further. Because the money supply will be reduced. Foreign direct investment can become a kind of salvation, provided that it is made not with money, but with imported equipment. However, one should not expect that foreigners will radically change the situation.

At the same time, the Ministry of Finance and the Central Bank are talking about the need to combat the strengthening of the ruble. However, if anyone doesn’t remember, in 2000 the dollar was worth 28 rubles. Today – 28.46. If you look at the euro exchange rate, it has been growing all these years. Thus, there is no increase in the nominal exchange rate of the ruble. We are talking about the real effective exchange rate, which is growing due to the fact that the ruble remains at a stable level in relation to certain foreign currencies, but is seriously depreciating within the country. In other words, we are back to inflation again. If you stop supporting the ruble exchange rate, inflation will not decrease. But the reverse sequence is possible: if we manage to overcome inflation, the ruble will stop strengthening.

And the instructions that the president gives to the economic bloc of the government are simply impossible to implement in the current conditions and with the existing policies.