Currency devaluation tamed the country can turn to producing economic growth
In the period after the 2008-09 financial crisis, for the first time in its post-Soviet history, Russia’s Central Bank moved towards a policy of explicit inflation targeting. People in the West tend to think that a central bank setting interest rates to help increase or decrease the change in prices as “normal,” but while this certainly seems like the most effective way to conduct monetary policy, it is by no means the only one.
The early results of this policy were solid, if not spectacular: prices still grew at a rate (around 6%) that would seem excessively high in developed markets, but were significantly lower than at any other point since the beginning of Russia’s market transition. However the Russian Central Bank, while generally regarded as a well-run and effective institution, is not omnipotent, and forces entirely beyond its control (the war in Ukraine and the resulting sanctions, a massive decline in the price of oil, and a large decline in the value of the ruble) started to push prices higher towards the end of 2014 and the beginning of 2015. Consumer prices in 2015 grew by almost 13%, higher than at any other point since the Central Bank made the switch to inflation targeting.
At the end of 2014, in an urgent bid to stem the ruble’s free-fall, the Central Bank dramatically hiked rates from 10.5 all the way to 17%. At first this didn’t appear to have much of an impact (in January 2015 alone, prices grew by about 3.8%) but with a little more hindsight the situation looks a bit different. In the first five months of this year, prices grew at the slowest pace since 2013. It’s always possible that oil plummets and the ruble resumes its downward march, but at the moment it looks like the threat from inflation is largely in the rear-view mirror.
Now, this “success” hasn’t come without costs. While the Central Bank has gradually ratcheted down most of its hike (including a cut from 11% to 10.5% on June 10th) businesses were understandably wary of borrowing when rates were at 15 or 14%. Under those circumstances very few projects are likely to be profitable, and this had a predictably negative impact on economic activity. Curing inflation is never easy or painless. But if Russia is ever going to recover the economic ground that it has lost over the past several years, some level of price stability is an absolute necessity. And (at least at the moment) it looks like that has largely been achieved.
In other words Russia’s economy has got problems, but inflation isn’t one.