Publication: Eurasia Daily Monitor Volume: 4 Issue: 210

Russia may appear to be an island of tranquility in the sea of troubles that engulfed the world economy last week. Its stock market continues to rise, its banks are not exposed to the U.S. sub-prime mortgage fears, and $100/barrel oil prices only mean a greater transfer of wealth from Europe to its state coffers. The real picture, however, is far less positive, and the key indicator of accumulating economic problems is a sharp jump in inflation.

Until the first days of October the government had insisted on an inflation benchmark of 8%, but that estimate was later revised to 11-11.5% (Vremya novostei, November 8). A few percentage points might seem to be a far cry from a big deal, but the macro-figures of the State Committee on Statistics show only a fragment of the problem. Opinion polls show that up to 80% of respondents now assess inflation as “high,” while that figure was about 50% last summer (Lenta.ru, November 6). Such perceptions reflect the fact that food products are the main driver of inflation, with the prices on eggs increasing by 20–22% and on vegetable oil by 25–27%. Sociological research show that nearly 60% of families spend more than a half of their budget on food, so the current inflation surge is far more painful for the poor than for the rich (Vedomosti, November 8).

In the current election season, when it is crucially important for the power-holders to secure the political passivity of the general population and its consent to any scheme of re-distribution of the supreme authority under a new president, this cause of discontent is really bad news. The government response has been entirely predictable, announcing a flat increase of pensions by 300 rubles (on top of the 400-ruble raise earlier this year), but less than 30% of respondents in a recent Levada Center opinion poll were satisfied with this step, while 25% saw it as a cynical joke (Levada.ru, October 31). Another emergency measure was the enforcement of fixed prices on several “socially sensitive” kinds of food, including bread and milk. Without fail, that measure caused a jump in prices on other products, so inflation has added another 0.2% in the first week of November (Gazeta.ru, November 9). The government has even resorted to persecution of “greedy traders,” for instance, opening an investigation against a milk plant in Nizhny Novgorod (RosBusinessConsulting, November 10). However, the experts predict more damage than relief from these awkward Soviet-style interventions (Polit.ru, November 2).

Traditional disbursement of underutilized funds at the end of the year and seasonal bonuses practically guarantee another strong surge of inflation in January, which would make it very difficult to implement the planned increase of domestic prices for natural gas by some 25%. This step, strongly lobbied by Gazprom, is necessary in order to normalize Russia’s energy balance and should be followed by a similar increase in 2009, with the aim of closing the gap between domestic and export prices in 2011. There is much economic common sense in this plan, approved in late 2006, but in retrospect, Putin’s cautious decision to limit the increase for this year to some 11–15% was a mistake that did not prevent inflation from growing into double-digits but put further steps in jeopardy since political expediency would rule against unpopular reforms.

More mistakes followed, as Russia entered the last six-month stretch before presidential elections. The dismissal of Mikhail Fradkov’s cabinet on September 12 quite obviously came too early, since it is impossible now to blame the negligent government for high inflation. New Prime Minister Viktor Zubkov, who tries to win the hearts of the electorate with his impeccably Soviet manner of issuing orders and directives, hardly makes a suitable scapegoat. Finance Minister Alexei Kudrin could be chosen for that unenviable role, but he is the only high-level official who has a clue about inflation, even if he argues in vain against price fixing and for limiting the state spending spree that is generating the inflation pressure (Vedomosti, November 7).

Yet another mistake was Putin’s unexpected consent to take the top place on United Russia’s electoral list, which has put him in an awkward position of having no control over his own name, since it is now used freely as a slogan in the unbelievably dull campaigning (Gazeta.ru, November 7). The price jumps have damaged the appeal of this semi-official party, so Putin is now wasting his energy to rescue that “leading force,” which is busy debating how exactly to institutionalize his status as a “national leader” (Kommersant, November 8). Putin also made a conditional promise to accept the position of prime minister, but this mistake he was at least able to correct, asserting that he had never said anything of this sort. (Expert, November 5).

The sum total of all these mistakes is the apparently absurd situation when three weeks before the parliamentary elections nothing resembling a political debate is happening, while 16 weeks before the presidential election nobody knows who is running. Putin’s smart tactics of preserving full control and keeping loyal subordinates in the dark has set a perfect self-made trap where he can only pretend to ignore the irrepressible spread of the enthusiastic movement “For Putin!” His system of power has clearly exhausted its stabilizing potential and is facing a crisis of legitimacy and integrity—much the same way as Brezhnev’s stagnation presaged the end of an era exactly 25 years ago. The question is not whether the regime will be able to withstand a gathering economic storm but what tremble will suddenly send it crushing down.