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Friday, August 25, 2006

Inflation Eats Russians Alive as Personal Incomes Nosedive

Dutch disease is slowly closing its icy, bony fingers around Russia's neck (the Russian graphic shown above depicts the difference between inflation in Russia and various other countries as designated by their national flags) . The rising price of oil abroad is exerting harsh pressure on domestic prices, and things are being made worse by the strengthening ruble, which makes it much more difficult to sell Russian products abroad and depresses employment and wages in Russia. A Moscow Times report indicates that inflation has brought ordinary citizens to the brink of starvation in Russia:

When the price of bread jumped by 6 rubles overnight, Vladimir Gaidukas was left reeling. City authorities quickly began handing out bread coupons to him and hundreds of other pensioners in Petropavlovsk-Kamchatsky -- the first time food vouchers had been issued anywhere in the country since the dark days of 1992. But the gesture brought little comfort to Gaidukas, 72, who lives on 5,000 rubles ($187) per month.

"People are in a state of shock," Gaidukas said by telephone from the remote city on the Kamchatka Peninsula this week.

While no other cities have resorted to vouchers, Petropavlovsk-Kamchatsky is not unique in its problem. Nationwide, prices are rising sharply for everything from sugar and pasta to apartments and gasoline. Inflation is eating into people's paychecks and savings. This means that millions of people are getting poorer, even as the country heads for its eighth straight year of economic growth.

Real disposable incomes -- the amount of cash a person has after taxes, and adjusted for inflation -- fell by 4.9 percent in July, according to data from the State Statistics Service released this week.

Even though real disposable incomes have grown by 11.2 percent over the past year, inflation of 9.3 percent over the same period has eaten much of those gains.

Some economists expect income growth to recover in the next few months, but prices for goods and services are expected to keep going up.

In Kamchatka, the situation was exacerbated when regional authorities withdrew energy subsidies for businesses, and bakers immediately passed on the extra cost to consumers in early August. Bread prices rose from 14 rubles to 20 rubles on average. The Petropavlovsk- Kamchatsky's social security committee was forced to print 10,000 bread coupons to feed the needy.

But the food vouchers -- which made national television reports -- proved such an embarrassing reminder of post-Soviet food shortages that they were canceled last week and the head of the city's social security committee was reprimanded. The Federal Anti-Monopoly Service is investigating the price hike and is expected to wrap up its report on Sept. 5, Interfax reported Wednesday. For now, pensioners are allowed to buy bread at discounts.

Things are not getting any cheaper elsewhere. Nationally, a basket of essential foodstuffs, including meat, dairy products, sugar, pasta and fruits and vegetables, cost 1,538.30 rubles ($57.50) at the end of July, an increase of 14 percent from the start of the year, according to the State Statistics Service. Dairy products alone are 11.1 percent more expensive than last year, while fruits and vegetables are 11.9 percent more expensive.

July prices for new Russian cars such as the Lada sedan went up by 2.1 percent, while jewelry became 1.4 percent more expensive, compared with the previous month.

Consumer prices have risen 6.9 percent since the beginning of the year. Moscow falls just below the national average, at 6.8 percent, while prices in remote areas like Kamchatka have shot up more than 8 percent. (Prices, however, rose only 0.1 percent during the first 14 days of August and will fall for the rest of the month and for the month as a whole, the Economic Development and Trade Ministry said Wednesday.)

A large part of the reason that living costs are growing is a government campaign to eradicate poverty -- a fiscally sensitive effort that has prompted the state to print billions of extra rubles to pay for higher salaries and pensions, among other things. Extra money, of course, helps fuel inflation.

So while the standard of living has improved for most people, inflation is so high that it is undermining the effort to fight poverty, said Vladimir Pantyushin, an economist with Renaissance Capital. "People can really feel the price movement. It hurts psychologically."

In its crusade against poverty, the government is only targeting the poor and "has a vague idea of what's happening in the middle class," said Yulia Tseplyayeva, head of research at ING Bank.

She said the growth in the cost of living for the middle and upper classes, whose needs and spending habits are different, was well above the average 6.9 percent. "The 6.9 percent figure doesn't really concur with my feelings. I am from a different income group," she said.

Also from a different income group is Alexei Klevetov, who said he was lucky if he managed to bring home $1,500 per month from two jobs. An engineer by training, he is a technician for a mobile phone operator by day and a taxi driver by night.

Ever-increasing gasoline prices loom large in Klevetov's budget. Energy prices also play a key role in fueling inflation, because high fuel costs make it more expensive to get food to store shelves. But Klevetov does not need an economist to tell him that. "Gas prices are rising everyday," he said glumly. "Prices are slowly but surely going up."

Gasoline prices have risen by 7 percent from Jan. 1 to Aug. 14, according to the State Statistics Service. In the first three weeks of August, the average price of gasoline in Moscow soared 5.5 percent, Kommersant reported Wednesday.

Klevetov said he did not feel his financial situation had been improving as the country raked in billions of petrodollars amid record-high global oil prices. Despite working two jobs five days per week, Klevetov is struggling to support his wife and a child. His family lives with his mother-in-law, as property prices spin out of control. "Buying an apartment is unrealistic," he said.

The average price per square meter in Moscow is $3,812, according to, a web site that monitors the real estate market. The average home price in Moscow grew a staggering 50.5 percent in the first half of this year.

Federal authorities have turned to administrative measures to try to rein in the price frenzy. The real estate market is facing scrutiny from the Federal Anti-Monopoly Service. The government has pressured oil companies to cap domestic gasoline prices. Gasoline and oil prices usually reach their peaks in August, during the summer driving and agricultural season.

"The month of August will be decisive in determining whether the targets approved by the monetary authorities will be met," said Yaroslav Lissovolik, an economist at Deutsche UFG. "If the reading is such that there's a pronounced trend toward inflation ... then the pressure on the Central Bank to appreciate the ruble is likely to be quite substantial."

August is also the month when Russia often experiences deflation as family harvests from the dacha contribute to less spending on food.

Some economists said that if deflation did not occur this August, the Central Bank might have to let the ruble appreciate against the dollar to help control inflation. A stronger ruble makes imported goods cheaper for consumers, but it can make Russian exporters less competitive abroad.

President Vladimir Putin on Tuesday urged the Finance Ministry to restrain the appreciation of the ruble, saying a strong currency could be "critical" for the economy.

Another inflation-fighting tool is raising interest rates, since higher rates encourage consumers to save money for the future instead of spending it on goods and driving up prices. But economists said the Central Bank's interest rate hikes for inter-bank loans did not always translate into higher rates throughout the economy.

"The government has few mechanisms to contain inflation," said Vladislav Tikhomirov, an economist at UralSib. Nevertheless, Tikhomirov said, there is a glimmer of hope for beating inflation if oil prices do not rise any higher. World oil prices jumped 40 percent last year, but only 14 percent from January to July. Oil prices now are only slightly higher than they were when Hurricane Katrina hit New Orleans last year.

Back in Petropavlovsk-Kamchatsky, pensioner Gaidukas, the son of a former gulag prisoner who heads the local branch of Memorial, a human rights group, expressed doubt that the government really wanted to make life better for ordinary people."I have to deny myself a lot of things," he said.

He said he had not left the peninsula for a decade and, like many other pensioners, could not afford dental care. "People are living without teeth," he said. "Putin speaks about demography and extending life expectancy, but [authorities] are doing just the opposite."

Indeed. It may well be Kremlin policy to intentionally reduce the size of the Russian population so as to make it more susceptible to total control by the Kremlin given Russia's increasingly limited resources. Totalitarian dicatorship, like all things, costs money.

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