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Wednesday, August 15, 2007

Neo-Soviet Inflation: Lies and the Lying Russian Liars Who Tell Them

FX Street reports that Russian officials are lying brazenly about the country's inflation picture:

In an interview given to Reuters, first Deputy Chairman of the Russian central bank (CBR) Alexei Ulyukayev says that more rouble appreciation in 2007 is unlikely. He adds that rouble weakening against the dual currency basket consisting of EUR (45%) and USD (55%) cannot be ruled out in the medium term. (Source: Reuters).

These views are, in our opinion, not consistent with recent actions seen from the CBR or with the CBR’s objective of bringing down inflation to no more than 8% y/y by year-end 2007. Just last week the CBR allowed the rouble to appreciate against the currency basket - see Flash Comment - Russia: RUB strengthens versus basket, August 9 - in an attempt, according to Ulyukayev, to bring down inflation. Inflation has inched up over the past couple of months, and preliminary numbers indicate that year-on-year inflation will be around 8.7% y/y in July.

Looking ahead, inflationary pressures will continue to build, and inflation will move above 9% y/y in Au-gust/September. We have already on numerous occasions highlighted that liquidity growth is excessive in Russia and probably fuelling inflation. Other than that, expect a less positive development in food prices this summer, as the harvest forecasts in Russia and the Ukraine continue to be revised down as the impact of the drought becomes clearer. On the fiscal front we note that policy is loosening significantly ahead of parliamentary and presidential elections. As well as fiscal spending increasing rapidly, private spending is also very strong, fuelling pressure on prices and the labour market - real wage growth is close to 20% y/y, which is probably somewhat higher than productivity growth in Russia.

Keeping these issues in mind and remembering that the CBR’s only real instrument to fight inflation in the medium term is to allow for further rouble strengthening, it is very hard to see how Ulyukayev’s comments released today are consistent with the CBR’s medium-term objectives. Russian officials have repeatedly stated that the 2007 inflation target will be met, and we have no reason to believe that the CBR will not take any measure needed to accomplish the objective.

We will thus not change our rouble forecast for the coming 6-12 months, as we believe it will appreciate by 2-3% against the basket over the coming 12 months. In the longer term, deteriorating Russian external balances will reduce the upside potential for the rouble - see Flash Comment - Russia: Trade balance surplus falls sharply, August 10 - but for now we have faith in the currency.

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