Russia’s high inflation rate may be even worse than first meets the eye

Russia’s inflation rate has risen to a four-year high and is likely to remain high until spring 2015, according to a report by Russia’s Central Bank published on Nov. 10.

Russia’s economy began showing signs of decline approximately two years ago, but in recent months this decline has been progressing far more rapidly, indicating a drastic drop. Rising inflation is one major component of this. It deserves a closer look.

{mosads}The latest official figures show a hike in inflation to 8.3 percent after Russian President Vladimir Putin banned various food items from the West in August 2014, in response to Western sanctions following Putin’s annexation of Crimea from Ukraine.

Inflation is an aggregate summary of the change in prices of goods and services over time. As high as Russia’s inflation rate is, a deeper look shows that the situation is even worse. A look at individual key sectors is more alarming.

To be sure, some inflation is desirable. Still, economists generally tend to indicate that the rate of inflation should be stable and fairly low, usually between 2 to 3 percent. In fact, this is usually what the U.S. Federal Reserve aims to maintain. Russia’s own Central Bank too aimed to keep inflation at approximately 5 percent — significantly lower than the current rate.

While Russia’s inflation still hovers in single digits, prices on certain basic foodstuffs rose by over 30 percent in the first quarter of 2014. According to The Wall Street Journal, prices for meat and poultry rose by 16.8 percent in September 2014 as compared to September 2013, and prices on fish and seafood rose by 14.1 percent.

Russia is also facing food shortages according to an October 2014 Business Insider report. Though these shortages are nowhere near the dire levels of the Soviet period, or that of the 1990s when Russia spun into hyperinflation and had to default on its national debt, according to the report these shortages are nonetheless noticeable, as prices on domestic food items are rising while Western foods disappear. Russia’s business-oriented Kommersant reported on Oct. 30 about an upcoming shortage of buckwheat. According to the report, a low harvest is partially responsible for this, but another is that individual farmers are holding onto their buckwheat rather than selling it, in anticipation of further price hikes. Some farmers have already raised their selling prices threefold or higher.

The Russian ruble abruptly hit a historic low of 48 to the U.S. dollar on Nov. 7. Compare this to 32 to U.S. dollar in January 2013. This means that the ruble lost over 33 percent of its value. In response to this hike, the Russian Central Bank decided on Nov. 10 to freely float the currency in an attempt to protect it. Yet this move only further points to Russia’s economic decline as investors are pulling out and the weaker ruble is further driving inflation by rising prices of other import products.

Russia’s economic breakdown has many reasons, though they ultimately come down to Putin’s mismanagement of the economy, turning Russia into a corrupt and inefficient petro-state dependent on the ebbs and flows of energy prices. When it comes to inflation too, it is Russia’s own self-imposed sanctions that are largely responsible. Ironically, Putin retaliates against the West by hurting Russia.

The Russian government is optimistic about improvements in inflation by the end of 2015 as Russia turns away from using U.S. dollars and euros and as Russia is actively expanding cooperation with China. During his trip to China this week, Putin said that Russia and China will increasingly use their own local currencies in settling trade accounts. Yet increased ties with China will bring another set of problems for Russia, as it simply cannot compete with China economically and militarily. The Russian government may brush off inflation concerns as temporary, but Russia’s economic future looks bleak.

Borshchevskaya is a fellow at the European Foundation for Democracy. Follow her on Twitter @annaborsh.