Inflation Soars out of Control in Putin’s Russia

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Two months ago we reported on Russian inflation, and showed that over the past year the country’s rate of price increase had doubled, in horrifying fashion.  Since then, as the chart above shows, things have gotten even worse.

Russia’s consumer price inflation rate stood at 7.4% for May 2013, well above economists’ predictions and well above the Russian Central Bank’s outside target range. Food inflation was a truly terrifying 9.2% for the month (Russians spend almost half their income on food, compared to ten percent in the USA), and Russian inflation stood at the highest rate it has reached in nearly two years.

Over the past three months, prices have soared 0.2 points per month. And the worst news of all is that while inflation has been rising, economic growth has been dramatically slowing.  In the first quarter of this 2013, year-on growth was wel below 2%.  With demand falling in this way, prices should not be rising, they should be falling.  That they are rising shows an extremely critical fault in the basic foundations of the Russian economy.

It’s now perfectly clear that we were right two months ago in believing that inflation is out of control. The Putin regime is experiencing a meltdown in its primary directive, boosting the economy, the main basis of Putin’s claim to legitimacy.  Economic growth is faltering, prices are soaring, and there is no sign that Putin can do anything about it. To the contrary, in a disturbing sign of Russia’s descent into neo-Soviet darkness, Putin has just driven Russia’s leading economist, Sergei Guriev, the Russian Paul Krugman, into exile, apparently to silence his persistent criticism of the regime.

The are dark days ahead for Putin’s Russia.

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Bleak Despair for the Russian Economy

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In a stunning concession, the state-sponsored propaganda outlet Russia Today has reported that Renaissance Capital, the leading Russian broker of equities, has predicted that Russia could enter a recession in 2013.

The reason for this gloomy outlook is clear: Russia’s growth rate has plummeted from 4.3% in 2011 to 3.4% in 2012 to a projected 2.5% this year; but the latter figure is being handed out by the Russian government itself, and is clearly self-serving.  Renaissance Capital doesn’t find it convincing, and believes that Russia could slip into negative territory before the year is out.

That’s because Russian growth in the first quarter of this year was just 1.4% and this fell to a mere 1% in the second quarter. If this pattern continues through the end of the year, Russia will be flirting with or in recession.

A second stunning admission came from another state-sponsored propaganda outlet, Russia Beyond the Headlines.  It reported:  “Energy prices were the only reason why Russia avoided a recession trough. Despite all the promises, or, to use the government’s rhetoric, ‘strategic plans’ to reduce oil sales proceeds to 5.6 percent of GDP, its share is still at least double that.”

And the Financial Times completes the picture, noting that even 4.3% growth is far below the level promised by the Kremlin, namely 5%.  So even according to its own data, in the best case scenario the Kremlin will be at a level of economic progress by the end of this that is half what it targeted. In the worst-case scenario, Russia will be mired in catastrophic recession.

And the only thing that will stop recession will be oil prices over which Russia has absolutely no control. That is, Russia’s economic fate is held in the hands of foreigners, not Russian hands.

And the reason for all this is simple:  Vladimir Putin.  Putin has totally failed to wean Russia off what Dmitri Rogozin has called the “needle” of fossil fuel dependence, and he has failed to generate significant growth in any other major sector of the economy. In fact, many areas are a major drag on Russian growth.

The dramatically straight black line shown in the graph above depicts the Russian GDP rate in freefall, descending at the constant rate of nearly 1 point per year. That’s a 20% loss in growth from 2011 to 2012 and a 25% loss from last year to this one.  Even under the government’s own projection, based on this trend next year would be even worse, with growth well under 2%, and recession would be inevitable, particularly if world oil prices decline. If the latter happened severely enough, Russia would instantly head into a major depression.

If not one but two Russian propaganda outlets are willing to admit things are this bad, do you dare imagine how bad they really are?