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. Last Updated: 07/27/2016

Anything But a Normal Economy

Why the anomaly of rising inflation and a stable ruble continues, and for how long it will last, is a matter of debate.

One argument is that the government's efforts at tighter monetary policy are paying off with a ruble that has stayed between 1, 000 and 1, 200 for the past six months, despite a 20 percent average monthly inflation rate. With rubles no longer flooding the economy, banks and other enterprises have found a need for the national currency and no longer automatically go to the currency exchanges to convert their rubles to dollars. The government has also soaked up billions of rubles from the economy by issuing treasury bills and gold-backed bonds and raising the Central Bank's discount rate to 17. 5 percent monthly, offering heftier returns in the ruble economy than can be earned in the West.

In a normal market economy, tight monetary policy would eventually tackle inflation - and there are some signs that this is happening. Monthly price increases have slid from 26 percent in September to an estimated 15 percent in November.

Yet Russia is anything but a normal market economy. From sausages to automobiles, much of the economy's output remains controlled by monopoly producers subject to little or no competition. They have been increasingly catching on to market principles and charging the maximum the market will bear. High import duties keep them from feeling the pressure of foreign producers.

Their costs, meanwhile, have been increasing partially because the inflation spiral has taken on a life of its own, and partially by governmental design. The government has slowly been deregulating the economy and bringing subsidized Russian prices in line with the rest of the world for key commodities like oil, gas and grain.

As the price of these inputs has increased, the price of finished products has also gone up.

Another argument, however, that the ruble has been kept artificially stable, with the Russian Central Bank limiting access to the currency exchanges, mandating that half of all dollars be converted to rubles and using its own dollar reserves to buy rubles and keep the currency afloat.

Yet unless inflation is tackled or the ruble is allowed to devalue, the danger for Russia is that it will price itself out of world markets. Rising prices will make buying in Russia, once the discount store on the block, more like shopping on the high street.

Foreign businesses, already reluctant to commit to Russia because of the unstable legal and political situation, may find in the stable ruble another excuse not to invest here.