. Last Updated: 07/27/2016

August Inflation Stops Dead at Zero

Inflation, once the scourge of Russia's transition to a market economy, stopped dead in its tracks in August, the first month of stable prices since the start of economic reforms in 1992.


Economists said that the August figure of zero inflation was not a one-off but was part of a long-term trend to price stability after four years of raging inflation where prices jumped about 15,000 percent.


The low monthly inflation figure lends credence to the government's anti-inflation policy contained in the 1997 draft federal budget, which lawmakers took up Monday. The document pledges a continuation of tight monetary policy and sets an annual inflation target of 9.5 percent for next year. Although official statistics will not be released until later this week, Irina Goryacheva, head of inflation statistics at the State Statistics Committee, said in a percent, and over the past 12 months prices have risen 40 percent.


August's zero price growth is "a very big step toward stabilization in Russia," Yaroslav Lisovolick, an expert at the Russian-European Center for Economic Policy, said Monday. "It's one of the key factors that can lead to successful macroeconomic stabilization in other areas."


Although the fall traditionally has been a time for prices to rise, Lisovolick said the government is likely to keep a check on inflation in the future "if they stick to an adequate credit and monetary policy."


The recent low inflation figures mark a sharp change from the early years of reform when after prime minister Yegor Gaidar freed prices in January 1992, prices leapt more than 2,000 percent in a year.


Russia's inflation rate stayed high much longer than in many other East European transition economies because of Russia's political instability and a lack of clear government policy. In 1993, inflation remained at 800 percent, only tapering off to 200 percent in 1994 and 131 percent in 1995.


The underlying reason for the high inflation has been a government that has spent way more than it collects in revenue and has been forced to print money to make up the difference.


Over the past year, however, Russia's government has set aside the printing press and has funded its deficit only by borrowing either from commercial investors or from international financial organizations like the International Monetary Fund. The result has been a squeeze on the money supply and a gradual fall in inflation.


The government has signalled it will continue with a tight anti-inflation policy into next year, arguing that inflation is a tax on Russia's poor who are dependent on fixed incomes, and a major brake on investment.


Communists and other critics have argued, however, that the government has cut back on the deficit at the expense of investment in industry and funding for basic social services.


The State Duma is set to begin discussions on the draft of a new tight federal budget for next year, handed to the parliament over the weekend after government approval.


Mikhail Zadornov, head of the Duma's budget committee, said a working group of the committee would examine the document before the Duma returns from its summer recess at the end of September.


The 1997 budget sets a target of halving the annual inflation to 9.5 percent, bringing commercial interest rates down from near 100 percent to about 20 to 25 percent, and shaving the budget deficit to 3.3 percent of GDP.


"We are grateful to the government, above all the Finance Ministry, for the enormous amount of work that they have done," Zadornov was quoted by Interfax as saying.


The final amended version of the draft budget projects revenues of 433.6 trillion rubles ($80.9 billion), expenditures of 524.3 trillion rubles and a deficit of 90.7 trillion rubles, Interfax reported.


This year's budget set the deficit at 88.55 trillion rubles, or 3.85 percent of GDP, but because of a collapse in revenues as a result of presidential elections, the government by agreement with the IMF last week raised the deficit target to 5.25 percent.


The higher deficit will be financed exclusively by government borrowing. The government also recently announced a package of tough measures to boost tax collection.


Russian security chief Alexander Lebed, however, is staking a claim for his own version of economic policy which has up until now been controlled by Prime Minister Viktor Chernomyrdin.


Lebed sent a letter Monday to President Boris Yeltsin demanding a "serious revision" of next year's budget to increase financing of the Defense Ministry, Interfax reported Monday.


Lebed also criticized the "bias of industry towards fuel and raw materials" and warned that growing domestic debt was posing "real threats to the country's economic security."


Pavel Teplukhin, chief economist at Troika-Dialog, backed the current strategy. "The important thing is that this trend continues," he said.


Teplukhin said tight monetary policy had come at the very high cost of government borrowing. The government saw rates on borrowing rise to 200 percent earlier this year as part of its efforts to squeeze the money supply.


The Central Bank's tough reserve requirements for commercial banks -- 18 percent on ruble deposit accounts and 1.25 percent on hard-currency accounts -- also helped to slim down the money supply, Teplukhin said.


"It just shows that the government is set to continue the tight fiscal policy," he said.


One side-effect of the drop in inflation has been a stabilizing of the ruble which collapsed even faster than prices fell in the early years of reform.


The ruble has been declining gently over the past month in line with a government policy designed to help exporters.


The government announced in June it would hold the ruble above 5,600 to the dollar till the end of the year.


Lisovolick said the government's efforts to protect the national currency against inflation had improved the ruble's image on the foreign exchange market. "There is a real demand for rubles on the market, and even a certain deficit," he said.