Putin to Raise Wages As Inflation Cushion

ReutersPutin speaking during an interview with French daily newspaper Le Monde.
PARIS — Prime Minister Vladimir Putin said Friday that he would hike wages, pensions and social benefits to compensate for rising prices and smooth the effects of anti-inflation policy.

"Through raising wages, pensions, social benefits and subsidies, we will try to minimize negative consequences of our anti-inflation policy for the people," Putin said in an interview with the French daily Le Monde attended by Reuters and released on Saturday.

Missing the annual inflation target by a wide margin has become the biggest policy failure of Putin's last year as president and is likely to turn into a major headache for his Cabinet this year.

In his nomination speech before the parliament this month, Putin said he was prepared to tolerate double-digit inflation for a few years. His Cabinet has yet to present a comprehensive anti-inflation policy.

Putin said his Cabinet was aware of inflation dangers and kept a close eye on the situation. Inflation is running at an annualized 15 percent, making the Cabinet's goal of 10.5 percent for this year unlikely to be attained.

Russia's inflation is a result of global food price rises but also a consequence of capital inflow sand lavish budget spending ahead of parliamentary and presidential elections last year.

A more prudent budget policy would have helped the country curb price growth this year, but Putin signaled that he was not yet prepared to risk his high popularity ratings.

"We understand that [rising wages] means an inflow of money into the economy, but we are simply obliged to do it and we will do it," Putin said.

Wages grew by 28 percent year on year in April, and some officials have warned that the country risks falling into an inflationary spiral as Latin American countries did in the 1990s and have said wage controls could be necessary.

Food makes up more than 40 percent of the basket of goods and services used to calculate Russia's consumer price index, a typical feature for poorer nations, where the population spends a large proportion of income on food.

"We understand that food price growth hits those of our citizens who have low incomes. The share of their family budgets spent on food is big," Putin said.

Putin, who is still coming to grips with his new role as prime minister, mentioned a recent rise of the refinancing rate — a symbolic ceiling of official interest rates hardly used in practice — among anti-inflation measures.

The Central Bank has little leverage over the economy, swelled with petrodollars, with its interest rate policy, but the market takes guidance from its deposit and repo rates rather than the refinancing rate.

Echoing his foreign policy statements, Putin also blamed the West for Russia's inflation problem: "Inflation has been exported to Russia from developed economies, including Europe," he said.