Russia’s Eternal Inflation

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.