3-5% Monthly Inflation Rate Within Sight

For the troubled Russian economy, a monthly inflation rate of 3 to 5 percent over the next one to three years could be as good as it's going to get.Leading Russian officials told the World Economic Forum on Wednesday that such a level, compared with an 8.9 percent rate in May, was attainable as early as this year."Fifty to 60 percent inflation is our destiny for the next one to three years," said Deputy Finance Minister Sergei Alexashenko, referring to the annual inflation rate.Central Bank Chairman Viktor Gerashchenko told The Moscow Times that data from the beginning of the month showed that the June inflation level could be as low as 6.5 percent.But sustaining a lower inflation rate would require substantial budget cuts and good progress in introducing competition to Russia's monopoly producers.While reducing inflation has been one of the key priorities of Russia's reformers, other measures will act to keep the level of inflation relatively high. In particular, as fuel prices and wages push toward world levels, the rising costs of energy and labor will limit Russia's ability to force down inflation, Alexashenko said.Deputy Economics Minister Sergei Vasilyev said the budget deficit would have to be brought down to 5 percent of gross domestic product to sustain a 3 to 5 percent monthly inflation level. The deficit envisaged in the current draft budget is about 10 percent of GDP.Such a reduction in the deficit could only be achieved by very deep cuts in the huge subsidies paid by the state to the coal, military and agricultural sectors. Vasilyev singled out agriculture as a sector that is ripe for quick budget cuts."Agricultural subsidies can be cut quickly because they are counterproductive," Vasilyev said.He said most agricultural subsidies are used improperly and are actually political subsidies to keep pressure on state collective farms."You can cut these subsidies without much harm," he said.First Deputy Prime Minister Oleg Soskovets told the conference that the government has already selected 50 coal mines to be closed down, many in remote areas, and that some employees had already begun to be redeployed.Last year, the government drew up a list of some 42 coal mines marked for closure but did not take matters any further. Soskovets did not provide a time framework for closing down the mines.The Central Bank's Gerashchenko said he was not entirely optimistic about Russia's ability to keep inflation between 7 and 9 percent at year end as had been agreed with the International Monetary Fund in exchange for a $1.5 billion loan."We are capable of fulfilling our limits agreed with the International Monetary Fund in the second quarter and we can crawl through the third quarter," Gerashchenko commented. "But I'm not sure about the fourth quarter."The Central Bank spokesman declined to elaborate, but Russia typically increases state credits in the autumn to pay for the harvest and for supplying the Far North for the winter. These credits would show up in consumer price increases toward the end of the year.By Steve LiesmanTHE MOSCOW TIMESFor the troubled Russian economy, a monthly inflation rate of 3 to 5 percent over the next one to three years could be as good as it's going to get.Leading Russian officials told the World Economic Forum on Wednesday that such a level, compared with an 8.9 percent rate in May, was attainable as early as this year."Fifty to 60 percent inflation is our destiny for the next one to three years," said Deputy Finance Minister Sergei Alexashenko, referring to the annual inflation rate.Central Bank Chairman Viktor Gerashchenko told The Moscow Times that data from the beginning of the month showed that the June inflation level could be as low as 6.5 percent.But sustaining a lower inflation rate would require substantial budget cuts and good progress in introducing competition to Russia's monopoly producers.While reducing inflation has been one of the key priorities of Russia's reformers, other measures will act to keep the level of inflation relatively high. In particular, as fuel prices and wages push toward world levels, the rising costs of energy and labor will limit Russia's ability to force down inflation, Alexashenko said.Deputy Economics Minister Sergei Vasilyev said the budget deficit would have to be brought down to 5 percent of gross domestic product to sustain a 3 to 5 percent monthly inflation level. The deficit envisaged in the current draft budget is about 10 percent of GDP.Such a reduction in the deficit could only be achieved by very deep cuts in the huge subsidies paid by the state to the coal, military and agricultural sectors. Vasilyev singled out agriculture as a sector that is ripe for quick budget cuts."Agricultural subsidies can be cut quickly because they are counterproductive," Vasilyev said.He said most agricultural subsidies are used improperly and are actually political subsidies to keep pressure on state collective farms."You can cut these subsidies without much harm," he said.First Deputy Prime Minister Oleg Soskovets told the conference that the government has already selected 50 coal mines to be closed down, many in remote areas, and that some employees had already begun to be redeployed.Last year, the government drew up a list of some 42 coal mines marked for closure but did not take matters any further. Soskovets did not provide a time framework for closing down the mines.The Central Bank's Gerashchenko said he was not entirely optimistic about Russia's ability to keep inflation between 7 and 9 percent at year end as had been agreed with the International Monetary Fund in exchange for a $1.5 billion loan."We are capable of fulfilling our limits agreed with the International Monetary Fund in the second quarter and we can crawl through the third quarter," Gerashchenko commented. "But I'm not sure about the fourth quarter."The Central Bank spokesman declined to elaborate, but Russia typically increases state credits in the autumn to pay for the harvest and for supplying the Far North for the winter. These credits would show up in consumer price increases toward the end of the year.