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. Last Updated: 07/27/2016

Banker Gives Good Signal On Inflation

A small sign has emerged that there may be some political will to address the problem of inflation. It came surprisingly enough from the chairman of the Central Bank, Viktor Gerashchenko.

As head of the body that controls Russia's monetary system, Gerashchenko is crucial if Russia is to have any hope of controlling inflation. His power is greater in that he answers not to the government but to the parliament, which has so far failed to accept the realities of economic reform.

Gerashchenko also has considerable personal decision-making power on how many loans to issue to Russia's commercial banks. These loans are a major factor in determining the amount of money in circulation and hence the inflation rate.

In his policy speeches, Gerashchenko has talked almost exclusively about the need to maintain production. To that end, he has issued virtually unlimited loans. He says that these credits will save Russian industry from bankruptcy and destruction.

The ruble has briefly stabilized, but this is just a pause, as happened in December. Inflation continues to bum and the ruble will plunge again. The Central Bank issued a huge lump of credits in December for which financial markets are now bracing.

But this week Gerashchenko appeared to change his tune. In the face of an inflation rate that he himself puts at 2, 000 percent per year, he has set a date, March 1, for raising interest rates.

Higher rates mean it is more expensive to borrow money, so fewer can afford or want to do it. This mops up excess money, slowing inflation and reducing the capital flight undercutting the ruble.

Gerashchenko should be encouraged in this change of heart, but so far he appears barely to have scratched the surface of the problem. The rise in official interest rates to 100 from 80 percent is almost insignificant in the face of a 2, 000 percent inflation rate. Moreover, Gerashchenko has still done nothing to ensure that the cheap credits he issues actually go toward his often-stated goal of maintaining production.

Many Russian commercial banks are not using the credits for anything other than simple speculation. Part of the money goes to pay wages, part is creamed off by corrupt bankers and ends up in private hands, part is shipped overseas as dollars bought at foreign exchange auctions. Almost none is actually used as investment capital for business.

Bearing this in mind, Gerashchenko needs to reexamine the whole approach to supporting industry by cheap credits. To tackle the inflation problem, the credits need to be replaced by more transparent and market-oriented solutions.