Russian inflation
Source Jim Devine
Date 05/02/01/15:05

[inflation is one reason why the switch from in-kind to cash benefits stings.]

February 1, 2005/NY TIMES
Russian Inflation Magnifies Sting of Welfare Changes

MOSCOW, Jan. 31 - More than ever, painful changes in Russia's economy are hurting citizens on government assistance, and the effect is being magnified by inflation.

Russia missed its 10 percent inflation target for 2004, ending up with 11.7 percent. That has cast doubt on the feasibility of this year's 8.5 percent target.

"I believe that it is possible to achieve the 8.5 percent target," Russia's economic development and trade minister, German Gref, told the Federation Council, the upper house of Parliament, in remarks carried by news agencies on Friday. He admitted in the same speech, however, that inflation in January would exceed 2 percent.

The higher inflation comes as President Vladimir V. Putin is embarking on some of the most difficult economic changes since the fall of the Soviet Union. Benefits for pensioners, veterans and disabled people, including free transportation, telephone calls, housing and medicine, were replaced at the beginning of this year with monthly cash payments. Those payments, to be paid to 32 million people, start at $7.

Economists are already skeptical of the government's war on inflation, saying prices will rise 11 percent to 15 percent in 2005.

"There's a substantial potential for inflation this year, and the target of 8.5 percent is wishful thinking," said Peter Westin, economist at Aton Capital, a brokerage firm and investment bank. "Inflation is unfortunate, but it's also a necessary consequence of adjusting prices and wages. It is part of the transition" from a cradle-to-grave social welfare state, he added.

Price tags in stores tell the story - a bag of groceries costs 20 percent to 30 percent more than it did a year ago, economists say. And Russians fear higher prices. According to a recent survey by the Levada Center, an independent polling group, Russians perceived the main threats to the country in 2004 to be inflation and poverty. In the rocky mid-1990's, inflation and poverty were tied with other economic problems, and they generated less concern than they do today.

January offered the first official hint that inflation - not uncommon in high-growth emerging markets - was accelerating. In the first three weeks of January, inflation raced past 2 percent. If that pace were sustained, prices could rise 24 percent this year.

Inflation is a sensitive issue in a country where people have had their savings wiped out at least three times since the fall of Communism in 1991. In the mid-1990's, prices doubled - sometimes tripled - every month.

In the last few years, the cabinet ministers in charge of the economy, Mr. Gref and Aleksei Kudrin, the finance minister, have managed to keep inflation tame and still keep the boom going.
But 2005 may challenge that record. In mid-January, thousands of pensioners protested across Russia, saying the cash payment does not begin to cover the cost of the benefits lost. Mr. Putin said last week that he would raise by $7 the scheduled increase in the average $75 monthly pension.

The reasons behind creeping inflation are many: oil, Russia's prime export and a quarter of gross domestic product, is hitting record prices, and the country is awash in export revenue, money that has flowed to companies and workers right down the chain.

Although some people are flush with cash, consumer prices - what people in stores, supermarkets and at the gas station feel as inflation - grew 12 percent, while producer prices were up 25 percent in 2004. In 2003, the consumer and producer price rates were closer to each other, at 12 percent and 13 percent respectively.

"The sharp increase in 2004 could feed into higher inflation, as producers shift the burden of higher costs onto consumers," noted Christopher Granville, head of strategy and politics at UFG, a brokerage firm, in a recent note to clients.

Mr. Putin's new welfare payments, meanwhile, leave those who previously received social benefits in a vulnerable position as prices rise. It is unlikely, economists say, that the new cash payments will stay abreast of inflation.

"Increases in the payments are supposed to keep up with inflation, but so far they're not," said Mr. Westin of Aton Capital. "Pensioners are going to feel a real loss in their pocketbooks."

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