"I especially underline the importance of passing amendments to the budget to increase the wages of government employees and military personnel," Zubkov said in a speech before the State Duma lower house of parliament in Moscow today. "We should strictly fulfill all our promises to citizens,'' he told the Duma's opening session in remarks broadcast live on state television. Higher-than-anticipated inflation this year has made it necessary to budget extra funds for salaries, he said.
The Russian parliament has already approved an increase in government spending this year of about 2 percent of gross domestic product as part of the preparations for the parliamentary elections held on Dec. 2 and for the presidential vote which is due in March 2008. President Vladimir Putin, who has said he's ready to serve as prime minister beginning next May under his chosen successor, Dmitry Medvedev, said on Dec. 19 that the 2008 budget increase was essential to retain the "trust'' of the people.
Now far be it from me to criticise politicians for keeping their electoral promises, but there are promises and promises here, and some promises are simply populism and demagogery, especially if they involve effectively printing money to fuel ongoing inflation.
Russia's inflation rate rose to a two-year high in November, driven in part by unavoidable increases in the price of fresh fruit, vegetables and other food items, but also fueled by growing labour shortages as the 6% odd growth which the Russian economy is experiencing put pressure on a labour supply which is under great strain due to Russia's unusual demographics (a full analysis of this problem can be found in this post).
The inflation rate rose to 11.5 percent in November, the highest since October 2005, up from 10.8 percent in October, and there is certainly no sign in the immediate future of all this letting up.
The Russian government's "massive additional spending'' this year is pushing up inflation, according to the OECD. The OECD raised its forecast for Russian inflation up to 11% for this year and 9.5% for next year, from an earlier 7.5% for 2007 and 6.5% for 2008 as a result of the country's relaxed monetary conditions and tightening labor market, according to their twice-yearly economic outlook published earlier this month.
"The government's attempt to damp inflation by imposing artificial restrictions
on retail prices, both at the federal and regional level, appears to be
ill-advised," the OECD said. "Such steps create new distortions without
addressing the underlying roots of inflation."
The OECD identified private consumption and fast rising real wages together with credits to households as the main engine of growth., noting that massive net capital inflows, which aren't sterilized, and an unemployment rate that has fallen below the historic low of 6.0%, have played as big a part as food prices in boosting inflation.
So today's statement by Viktor Zubkov only pours additional oil onto already troubled waters. Russian wages have increased considerably in recent years, and the average monthly dollar wage (see chart below) has increased from around 175$ a month in 2003 to approxiamtely 500 dollars a month at the end of September 2007, including a 31 percent increase in the first nine months of 2007 as the rouble continued appreciating against the US dollar. The current trends suggest that the average monthly dollar wage at the end of December 2007 may exceed USD 520.
According to Rosstat, average real wage and disposable income increased by 16.2 and 12.9 percent, respectively during the first nine months of the 2007 (see chart below). Increases in real wages continues to be well above growth in GDP - and evidently well above productivity growth - in most sectors of the economy. Almost all sectors of the economy are now reporting increases in nominal wages well above 20 percent during 2007.
And there is no immediate end to this in sight. Conceptually we could think of Russia being about to have a very large version ofthe "Baltic problem" (the canaries down the coal mine). All you need to do is make a mental switch and replace capital inflows from oil lying under the ground for the people working out of the country in the Baltic (or Bulgarian, or Romanian, or Polish, or Ukranian) case. Both mechanisms produce a large inflows of funds, which go to work in domestic sales and construction. Since we are short of people in each case, then this surge in demand naturally squeezes up wages and then rapidly makes exports non-competitive. As a consequence the country involved becomes more and more dependent on imports.
Call this the Baltic syndrome if you will, and plagiarising an old adage, we might say that once the Baltics sneeze it is the global economy which catches the cold.
Amazingly, we are brought to the conclusion that if inflation continuies at this pace, and the rouble does not fall to compensate, then Russia could eventually have a trade deficit, even with all the natural resources she has in play, and at the rate we are going this point may not be too far away. What we need to bear in mind is that while global oil prices may drop back slightly (depending on whether and to what extent there is a slowdown in global growth in 2008), they are unlikely to continue to rise at the same pace as they have been (imagine a US consumer facing oil at $200 a barrel) and so since Russian oil capacity is, at best, more-or-less constant (due to depletion issues), Russia cannot continue to rely so heavily on oil exports for continuing growth (and as living standards rise oil revenues will gradually and inevitably come to consitute a declining share of GDP). And this will become doubly the case if the rouble is allowed to rise (as it must be at some point) since the roublevalue of the oil revenue will become accordingly less.
Really, if you want to understand more about this very important problem, my lengthy analysis of Russia in Too Much Money Chasing Too Few People is a must read.