The Beginning of the Next Year will Be Difficult to the Russian Economy

The rate of inflation has become a priority for the Central Bank of Russia: to combat it the Central Bank of Russia has reduced the volume of its foreign currency interventions and, actually, switched over to a floating exchange rate of the ruble.

In our view, those measures should have been taken earlier. In the past weeks, the Central Bank of Russia had to make billion US dollars worth of foreign currency interventions which accounted for a substantial portion of the reserves, but that measure failed to yield a positive result. For instance, Kazakhstan let its currency depreciate immediately by actually 20% in the beginning of the year and after that there was no further depreciation. On the contrary, the currency even appreciated though Kazakhstan depends on the price of oil as much as Russia.

The reaction of the population to depreciation of the ruble is quite natural. There is no evidence of the fact that depreciation of the ruble will stop and people want to safeguard their savings. The national currency accounts for the main volume of cash funds in the country, though at present the share of deposits in foreign currency has increased substantially. On the other side, those who took loans in rubles have advantages: in a situation of the speed-up of the rate of inflation and depreciation of the ruble the previously high interest rates on loans appear more acceptable. In addition to the above, consumption is growing. People spend the devaluating funds on goods which prices have not grown yet. That situation hides the general economic decline. It is durable goods, including household appliances that a primarily meant here.

But it is likely that more negative news is still to come. In the beginning of the year, the growth in prices is likely to accelerate: contracts concluded on the basis of previous prices will come to end, while products supplied on the basis of new prices are definitely going to be more expensive. In addition to the above, petrol prices are expected to go up (due to the domestic fiscal policy) and that factor will contribute to appreciation of prices on goods. As a result, everybody will experience that to any extent. The least well-off strata of the population suffer because food prices grow fast (due to Russia's food sanctions as well). Food products account for a large share in the pattern of expenditures of that category of people and each percent of appreciation of prices is sensible to it. The crisis will hit the middle class, too, because it uses more import goods. It is to be noted that it concerns not only goods, but services, as well. For instance, tourist trips are getting more expensive.
In future, the above situation will produce the following two effects: first, dramatic slowdown of the rate of consumption due to a lack of funds and, second, a switchover to cheaper goods, in particular, inexpensive brands of clothes and household appliances. For some people, individual groups of goods will become a luxury again, for example, foreign-made cars. All those changes are the matter of a few months. So, the beginning of the next year will be difficult to the Russian economy.

Pavel Trunin, Head of the Monetary Policy Department of the Gaidar Institute

The comments were prepared on the basis of the interview of Pavel Trunin to the Ogonyok magazine