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Monday, June 09, 2008

Putin Lies, and then he Lies Some More

Reuters reports that a Kremlin official has admitted that Russia alters its economic data to suit the whims of the dictator who rules it:

A deputy chairman of the Russian central bank, Konstantin Korishchenko, said on Thursday its 10.5 percent inflation forecast for 2008 was "politicised", but that the bank was unlikely to change its estimate.

Annualised inflation has already exceeded 15 percent in Russia, and the Organisation for Economic Co-operation and Development has predicted it will reach 13 percent in 2008 but officials stick to artificially low inflation forecasts. Korishchenko told the lower house of parliament the central bank's CPI inflation estimates "are indeed politicised" but that he did not see the forecast being altered. His critical comments are rare for a Russian central bank official.

He said increased volatility among factors that influence inflation had caused the quality of forecasts to deteriorate. "Our forecasting is based on statistical models. When sharp fluctuations of mathematical models' parameters are taking place, the forecasts' quality is going down," Korishchenko said. "The quality of any forecast in such an environment will be low."

Opinion polls show growing concern about rising food prices but, with political life tightly controlled by the Kremlin, Russia is unlikely to face popular protests like those seen in other emerging countries.


Korishchenko said exchange rate policy, food price rises, and excessive budget spending were to blame for Russia missing its inflation target by a wide margin in 2007. The Russian central bank is by law independent of the state, with its main goal being to ensure exchange rate stability rather than to fight inflation. "Inflation rates are currently in contradiction with exchange rate policy goals ... As they say, it is easier to enter the corridor than to exit it," Korishchenko said, referring to the central bank's managed float policy. The central bank keeps the rouble in a corridor against a dollar/euro currency basket. A freely floating currency would give the bank more leverage over the economy via interest rate changes but would increase exchange rate volatility.


The central bank has said it will widen the rouble corridor to allow more fluctuation. Since the currency is under appreciation pressure from energy export revenues and capital inflows, such a policy would effectively amount to revaluation. Many investors are betting on the central bank revaluing the currency in the near-term to fight inflation. Korishchenko said the widening of the corridor will be "gradual and slow". Korishchenko said he did not rule out a further increase in mandatory reserve requirements, which define how much money commercial banks should set aside on their operations. "If capital inflows continue at the current rate, I do not rule out (that) reserve requirements will be raised again," Korishchenko said, noting that such requirements were much lower in Russia than in China. The central bank, worried about galloping inflation and fast lending growth, said last month it will aggressively raise bank reserve requirements from July 1 in order to curb inflation. Korishchenko said state-controlled corporations increasing their foreign debt were the main source of capital inflows, and conceded that the central bank was powerless to act. "This is not our sphere of regulation," he said.

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