'Inflation rate in Russia is a political factor'
Economist Nikita Krichevsky — about oil, the meaninglessness of forecasts, and the real problem of Russian economy
What is the reason for an increase in inflation, how effective are the Central Bank's measures, will the rise in price of products continue, how will the ruble exchange rate change against the dollar and euro by the end of the year, and how seriously is the pandemic affecting the Russian economy? About this and much more — read in the interview with Realnoe Vremya with Doctor of Economics Nikita Krichevsky.
“Russia is still dependent on food imports”
The growth of inflation in the country is one of the most discussed economic issues. How critical is the current situation and was it predictable?
The situation, of course, is not critical, far from critical. As for the forecasts, sooner or later it was supposed to happen. And it was supposed to happen not here, but abroad, because during those periods when the economy was working, it was not in lockdown, additional money issuance was absorbed by production and financial sector.
But during the period when the global economy was forcibly stopped, money was practically dropped from a helicopter over banks and investment companies. Some reached people, but mostly the money settled in the financial sector and did not go further down. And the financial sector needed to invest this money somewhere — not only in speculative financial instruments, but also in securities reflecting real assets. Consequently, speculative growth occurred not so much on stocks and bonds as on derivative financial instruments. This led to that the prices of real goods began to rise. This began to ricochet from top to bottom and, of course, could not bypass Russia, because Russia, despite the bravura reports on the success of import substitution, still depends on food imports.
Could it have been predicted? Yes. It was about to. On the other hand, every cloud has a silver lining. This inflationary surge, which began in the metal products and building materials market in general, led to that the government was engaged in changing the pricing system in Russia. The system that has dominated the economy, consumer sector for almost 30 years. This is certainly good and even excellent. If there had not been this surge, if metallurgical oligarchs and oligarchs in the field of fertilisers had not become arrogant inside the country, then everything would have remained the same as it was. No wonder they became up in arms against the state. And the state brought them to heel as a result.
Now pricing not only in the metallurgy and construction sector but also in the field of domestic food production is under the control of the government and regulatory authorities. And this is very good. This is a positive externality, positive external effect that is not directly related to the event itself.
This inflationary surge, which began in the metal products and building materials market in general, led to that the government was engaged in changing the pricing system in Russia
“Covid-19 has become a black swan”
How do you assess the measures that our Central Bank is taking to reduce inflation? Some experts claim that they are ineffective.
There are different experts. There are biased experts, there are uneducated experts, there are experts interested in hype. It's hard to talk about someone's opinion. If we look at what is happening in Russia in a detached way, we can say that the government is paying attention to the causes of the surge in inflation, internal, where they can be levelled. For example, as Mishustin says, our greed is the engine of entrepreneurship. The question is not to kill it, but to put boundaries for it. This is on the one hand.
On the other hand, there is the Central Bank, which operates according to completely incomprehensible theoretical calculations, which have repeatedly proved their worthlessness, and they have been abandoned all over the world, because rate regulation is a 50-year-old method. The last time such a failure occurred was in the early noughties, when Alan Greenspan lowered the rate to one percent per annum — and the mortgage bubble in the United States immediately began to inflate. After this idea was finally abandoned and they began to saturate the economy with money, which categorically goes against the monetary theory.
But, what is most interesting, the glut of the world economy with money for more than 10, even 12 years did not lead to an increase in inflation. This is another paradox for classical monetary theory. It says that if there is more money in the economy, it means that they will depreciate, goods will become more expensive, and, accordingly, purchasing power and welfare fall. Nothing like this has happened for more than 10 years.
It wouldn't have happened if it wasn't for Covid-19. Guaranteed. There were no extraordinary events before the Covid-19. Covid-19 became a “black swan”, after the appearance of which Central Banks and governments decided to saturate the economy and the consumer sector with money. As a result, with a non-functioning economy, this led to that first securities, and then real products began to grow in price. And then there are also mistakes, the most obvious of which is the misguided policy of the European Commission on the European gas market.
What is most interesting, the glut of the world economy with money for more than 10, even 12 years did not lead to an increase in inflation. This is another paradox for classical monetary theory
What is your forecast for inflation at the end of the year and what one should expect next year?
Inflation rate in Russia is a political factor. Where politics intervenes, the economist has nothing to do. If inflation is higher, for example, six percent, then pension legislation will have to index pensions twice a year. With the assessment of inflation in Russia, we need to be extremely careful, and it is better not to forecast it at all. It will not be possible to reach less than six percent this year, because it is obvious to everyone that inflation is higher. It is even higher than eight percent.
But there is also a methodology for measuring inflation, consumer price index and other similar categories, which is always adjusted the way the authorities need it. In this situation, we can only talk about the subjective feelings of each individual. Even comparing two receipts with the same goods from the same store, a year ago and now, they are unlikely to say that inflation has increased by a certain fixed percentage. Because cost price changes, loan changes, loan price changes, external effects associated with the number of working days in a year or month change. And enterprises still bear the costs. How can we forecast and generally talk about inflation in a situation where we have floating initial data?
“Food stamps are necessary in any inflationary weather”
So this pandemic has affected the current situation in this way — by triggering inflation?
The impact of the pandemic on the current situation is manifested not in inflation, but in other things — for example, in changes in monetary and real incomes of people, in the activity of the state in terms of increasing benefits or introducing new benefits. The pandemic is important here, but it is important indirectly.
The main thing is that inflation is a political indicator, exactly the same as, for example, the population size. There is not a single country in the world that would accurately and honestly say how many people live on its territory, how many citizens of the country there are. The population is the potential of the country.
The impact of the pandemic on the current situation is manifested not in inflation, but in other things — for example, in changes in monetary and real incomes of people, in the activity of the state in terms of increasing benefits or introducing new benefits
And inflation is an indicator of the effectiveness of the government. No one in their right mind and sober memory will cut off their tail. Therefore, what will be the inflation rate? I'll tell you, let's say 10 percent. Why 10? Because I think so... For the last time in a century, an alternative way of determining inflation ended in the 1930s with the closure of the Conjuncture Institute. Kondratiev was then engaged in measuring inflation in the country according to his own methods. It ended with that Kondratiev died in Suzdal, and the institute was closed. (Nikolai Kondratiev is a Soviet economist who founded the theoretical foundations of the NEP and developed the theory of economic cycles. He was shot during the years of repression — editor's note).
We have already mentioned an increase in food prices, will it continue further? Will the situation worsen so much that there will be the introduction of coupons or food rations for the poor?
Don't lump everything together. Food stamps are necessary in any inflationary weather. This is a mechanism for supporting the poor, low-paid segments of the population. This is the support of those people who, for various reasons, cannot rise higher in their well-being. Unfortunately, this is a given, because in any country there will always be poor and there will always be rich. Always.
It's just that the poverty parameters will be different. There are poor people in Luxembourg, Monaco, and other countries. And there are a lot of them. But the Belgian poor differs from the Ukrainian poor very seriously. In self-respecting countries, such as the USA, such programmes have existed for many, many years. They were most actively developed just last year, when the coronacrisis broke out. The programme of material food assistance was used en masse. There's nothing wrong with that. Let people get some products, because they fall into those groups that are in need. For example, we have many children who receive free baby food, but no one has any questions about it. Why does it raise questions if single pensioners will receive food aid or a grocery electronic certificate? This means that people will have money left for other expenses. Moreover, this money will obviously not go offshore, it will be spent in the economy.
As for the price increase, I very much doubt that it will continue for a long time. In Europe, for example, industrial inflation has already begun to decline. By September, it had already been clearly visible. Food inflation — not yet. But this does not mean that it will grow indefinitely. Because consumers do not want to buy at the prices at which the manufacturer offers its products. They don't have bags with money. Therefore, it is necessary to reduce the price. Approximately the same situation is happening now in Russia: it all started with industrial inflation, and then prices for final products have already increased.
Why does it raise questions if single pensioners will receive food aid or a grocery electronic certificate? This means that people will have money left for other expenses
“Only in Russia the ruble exchange rate is used to fight inflation”
What changes in the exchange rate of the ruble against the dollar and the euro are expected by the end of the year, what puts pressure on our currency, and what can support it?
Nobel laureate Paul Samuelson instructed his student students: “predict everything, but not the price”. The rate is the same price. In this case, the price of the dollar or euro. There are no factors that could sharply strengthen or weaken the currency before the end of the year, and it is not expected. The exchange rate will be approximately within the framework that we are seeing today, plus or minus two rubles. At the same time, again, the exchange rate is, unfortunately, a tool to combat inflation, an instrument of protectionist support for domestic producers. The lower the exchange rate, the more competitive Russian-made products are in foreign markets.
Just what exporters need?
Yes. But this does not mean that exporters will be happy, and everyone else will not. Exporters will pay significantly more in taxes, duties and fees than they paid 5 or 10 years ago. The history of this year is metallurgists. Oilers give almost 70% of their revenue, gas producers — about 40%, and metallurgists — about 8% of their revenue. Now this figure will be higher. And this is absolutely normal. But manufacturers of industrial products for export are likely to pay less. These measures will stimulate production.
This is a worldwide centuries-old practice. There is no know-how here and there cannot be — everything has been repeatedly tested in America, Europe, Russia, China, and Japan. Only in Russia the ruble exchange rate is used to fight inflation, which in itself, of course, is nonsense. By the way, the end of the Japanese economic miracle coincided (by chance, of course) with the meeting of the leaders of the Big Seven countries at the Plaza Hotel in New York in 1985. Then the leaders of the Big Seven simply pushed the Japanese government to sharply strengthen the yen. Japanese products instantly lost their competitiveness. And throughout the nineties, Japan was in a state of stagnation, although before that the pace of economic growth was crazy.
But China does not repeat the mistake of Japan. Due to the artificially low exchange rate of the national currency, it is now continuing its global economic expansion. But in our country, the strengthening of the ruble automatically means a decrease in inflation, today you supply for 100 rubles, and tomorrow — for 90 rubles...
All over the world, in addition to the “oil curse” and the “commodity curse”, there is such a thing as a “commodity blessing”
“Oil dependence is a false liberal mantra of the noughties”
You have mentioned oil prices. What is the share of the impact of world oil prices on the well-being of the Russian economy today?
30 percent. Approximately this is the share of revenues from hydrocarbons in the national budget.
So the Russian economy is succeeding in moving away from oil dependence?
Oil dependence, oil curse is a false liberal mantra of the noughties. No one thinks that way any more. If someone repeats this, then he is simply stuck in that period and does not know that it is the end of 2021, because all over the world, in addition to the “oil curse” and the “commodity curse”, there is such a thing as a “commodity blessing”.
The problem is how to dispose of this blessing. If you thoughtlessly dispose of natural resources, which we are extremely wrongly attributed, then this is, of course, a curse. But there are plenty of examples of various countries where the availability of raw materials has been used for good. Australia, Norway, Chile, Mexico, many countries of the Middle East, from the latter — Saudi Arabia, which by 2024 was going not only to build a city of the future, but also to invite tourists there. This is a commodity blessing! You are given the opportunity not to experience financial inconveniences and problems in order to develop the country. There is money for a breakthrough. Unlike, say, Japan and South Korea, where there is nothing like that. The starting positions of the countries with significant natural resources are significantly higher.
What factors, in your opinion, are affecting the price of oil now and how does it affect us?
It doesn't affect us in any way. We live as we lived. Oilers pay the required amounts to the budget, order has been put in place a long time ago, the oil industry does not raise any questions either from the state as a whole or from the government in particular. Everything is settled down there, everything works.
What factors? The same gas crisis in Europe. It is having a negative impact on this market. Negative, because it requires an additional 1 million barrels a day. It's not for nothing that Biden is trying to call on OPEC+ to increase production.
The same gas crisis in Europe. It is having a negative impact on this market. Negative, because it requires an additional 1 million barrels a day
How does this OPEC+ agreement to reduce production now affect the Russian oil industry?
When this agreement was concluded, we made one big mistake. We agreed to reduce oil production. Whereas it was necessary to reduce exports. As a result, we reduced production, and exports decreased as a consequence. Because we cannot reduce domestic consumption. And due to exports, we had to get into the framework that we were forced to comply with. Why this happened, I do not know. Therefore, if this agreement is revised, it will only be a plus for Russia.
“Typical Russian hypocrisy — when evil is covered with virtue”
Have we already touched on the topic of the pandemic, will it have a strong impact on Russia's GDP for 2021?
It's not about GDP. There is one country in Europe that has had the lowest economic growth rates over the past 50 years. This is Switzerland. There is very little economic growth, but a very high quality of life. So GDP is far from an indicator of the success of any economy.
For example, in recent years before the pandemic, the growth rate of budget revenues was double-digit, up to 20 percent increase annually, while the economy grew by 1-1,5 percent a year. Who cares how this economy grew if the budget was replenished? We are wrongly told that the greater the economic growth, there will be more money in our pockets.
This is both not true. Economic growth is an individual thing for each type of activity. Somewhere, unfortunately, whatever economic growth is, it will not lead to an increase in the incomes of the population. For example, if the production is outdated and you work in a warehouse. You have released a thousand blanks, and none of them has been sold, and there is simply no money for wages. Although your rate is amazing. And somewhere else the situation is different — the greed of the owners-oligarchs does not allow to raise wages. This requires a regulatory process on the part of the state, of course.
Economic growth is a mantra, a deception, a veil to cover up one's own inaction. When your share of wages in GDP is 50 percent, and around the world, on average, it is 70 percent, then whatever the growth of the economy may be, you will still pay people less in amount than they pay in those countries that you will overtake in terms of economic growth. They will live better. Therefore, it is great to call for the pace of economic growth, for more efficient work, but it is also an excuse for one's own worthlessness and inactivity. After all, labour productivity depends mainly not on the employee, but on how much the owner, management, and, most importantly, the state are interested in this.
Economic growth is an individual thing for each type of activity. Somewhere, unfortunately, whatever economic growth is, it will not lead to an increase in the incomes of the population
Are there any foreign policy factors of pressure on the Russian economy at the moment?
They were, are and will always be. This has been going on for 100 years, as long as the state of Russia exists. One factor will disappear, another will surely appear. You can call for living in peace and harmony, but in reality this will never happen. There is a global global competition, there will definitely be other countries that will put sticks in your wheels. Because you prevent them from developing. This is an absolutely normal story. What you consider normal and legitimate for yourself, such as annexing Crimea, somewhere in the same America, the average resident of which will not find where this Crimea is, it is considered nonsense, outrageous behaviour. It is believed that this should be limited by sanctions.
That's the world. It was also after the conquest of Novgorod the Great by Ivan the Terrible, then the Hanseatic merchants announced a boycott. We have been under sanctions for most of the 20th century. We lived without sanctions for only 2 years. Bush abolished them, and Obama reintroduced them in 2014. So we live. The problem is not external. An internal problem prevents us from living with dignity.
It is hindered by that the authorities are interested in the development of the country only in words, but in fact they do what the group of close associates wants. The authorities are not at all concerned about the search for effective managers and, at the same time, repel those who think something. These people are leaving the public administration system, leaving the public sector, leaving the country, emigrating, it's terrible. We verbally support scientists, but in fact, scientists get on a plane and fly to where it is better to work. We are talking about supporting large families, that the growth of the number of citizens of the country is the main thing, and the Moscow City Hall throws the topic of the abolition of free parking for large families. Typical Russian hypocrisy — when evil is covered with virtue. This is what hinders us, and as long as it happens, absolutely nothing will change.
Blaming external factors is the same as blaming the change of seasons...