In eternal Russia, nothing changes when it comes to monetary management. Year after year, the Russian Central Bank (RCB) blames the weather, the poor harvest, or other non-monetary factors for its feeble performance in lowering the inflation rate.

Unlike many emerging-market and transition economies in the 1990’s, Russia did not abandon a fixed-exchange rate anchor in favor of an inflation-targeting regime as its guide to monetary-policy. As a result, the period since the financial crisis of 1998 has generated serious problems for monetary and exchange-rate policies. Faced with a balance-of-payments surplus – largely thanks to high oil prices – the RCB’s 2005 Monetary Program fudges: reducing inflation is a priority, but so is exchange-rate targeting in order to support growth.

This “just-do-it” approach works fine in the United States, for example, where the Federal Reserve has established its anti-inflationary credibility. But the RCB’s track record since 1992 has done little to stabilize inflation expectations and to persuade businessmen, investors, government officials and ordinary Russians that it is genuinely focused on reining in price growth.

During the early transition years, the lack of an effective monetary-policy framework reflected the challenge of establishing new institutions and regulations, as well as the difficulty of overcoming the legacy of central planning, under which budget and credit financing were indistinguishable. Sometimes the RCB acted as the government’s banker, providing liquidity without considering the financial markets; at other times, it focused on the financial markets, providing liquidity to banks. In both cases, there is no link between inflation and interest rates.

To be sure, the muted impact of inflation on interest rates is not surprising in transition economies, where the mechanisms of monetary-policy transmission and financial intermediation took long periods to put in place and still need reform and regulation. It is inevitably a long road from a starting point where credits are channeled to state-owned enterprises through state-owned banks to an economic environment in which interest rates are a proper indicator of monetary policy. Moreover, Russia’s default and devaluation in 1998 undermined the progress that was accomplished – starting in 1996 – in the banking sector and the capital markets in general.

But that excuse has worn thin. In recent years, slowing the pace of real exchange-rate appreciation to shelter domestic producers and employment from import competition seems to have gained clear precedence over disinflation. At the beginning of June, the RCB’s governor, Sergei Ignatyev, admitted not only that this year’s inflation target would be missed, but also that the RCB is not prepared to pursue inflation targets at the expense of a competitive exchange rate.

This helps explain why the inflation rate, as measured by growth in the annual consumer price index, has remained stubbornly high. Indeed, for the first time since 1998, the annual inflation rate has been rising this year, rendering the official targets – 7.5%-8.5% in 2005, 6%-7.5% in 2006 and 5%-6.5% in 2007 – little more than lip service.

Of course, many central banks around the world pursue both price stability and growth. But in Russia, there is no trade-off between the two, at least not using the exchange rate. As the IMF’s latest annual report on Russia’s economy points out, if the RCB continues to restrain the ruble’s appreciation for the sake of growth, the result will merely be higher inflation, which implies that the ruble would still strengthen in real terms, thereby damaging growth.

Russian macroeconomic performance has greatly improved since the 1998 financial crisis, and this success can be attributed in part to improved monetary policy. But the RCB’s lack of resolve in adopting a framework where low inflation is clearly stated as the priority now threatens to undermine what has been achieved.

As a starting point, the RCB should be charged with projecting inflation, formulate policies to stabilize prices, and either implement those polices or explain why it cannot and who could do so. The correct answer to the latter question – as the IMF suggests – may be the Ministry of Finance: the only sure way for Russia to reduce inflation and sustain growth is to maintain a sound fiscal policy.

The reality is the opposite. Rather than using the oil windfall to pay for long-overdue reforms in health care, education, and utilities – and thus helping to ensure the macroeconomic stability needed to sustain rapid long-term growth – President Vladimir Putin has chosen large spending increases for public wages and pensions. As a result, Putin’s Russia appears headed for the Latin American model of self-inflicted stagflation.