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Wednesday, April 09, 2008

Inflation in Russia and Ukraine March 2008

Well how all this is going to end is anyone's guess, but the probability that it will be intears seems to be growing by the month. What I am referring to is the large inflation bonfire that seems to have been lit in Russia, and the even bigger on that is ablaze in Ukraine.

Russian Inflation

The best thing that can be said about inflation in Russia in March is that it didn't move upwards, since Russian consumer prices rose at the same annual rate as in February (12.7%), led by bread, vegetables and other food costs. Prices rose 1.2 percent from February, according to data from the Moscow-based Federal Statistics Office earlier this week. This means that Russian prices have already risen by 4.8 percent so far this year (January to March).

Russia, which is the world's biggest energy exporter, is struggling to bring down the inflation rate to 9.5 percent this year from 11.9 percent in 2007 as money from oil and gas sales, strong wage pressures resulting from widespread labor shortages and rising global food prices fuel consumer price growth. Inflation reached 12.7 percent in February, the highest since July 2005.

Food prices rose 2 percent in March, including a 4.3 percent increase in bread, according to the Statistics Service. The cost of the staple food basket reached a monthly average of 1,993.5 rubles ($84.52) in Russia and 2,231.7 in Moscow, the country's biggest city. Central bank Chairman Sergey Ignatiev said on April 2 that that he thought it was still possible to hold inflation below 10 percent this year, but this view may well be way too optimistic. Ignatiev said the bank "doesn't exclude the possibility" of a further increase to its refinancing rate and to the mandatory reserve requirements as a means to combat inflation. The bank raised the refinancing rate by a quarter of a percentage point on Feb. 4 and increased reserve requirements for banks on March 1.

Internal inflation in Russia continues to spiral dangerously upwards, with the cost of goods leaving Russian factories and mines rising at the fastest rate in more than three years in February as global energy and commodity prices remained high, and internal wage pressures continued to push up costs.

Russian producer prices increased by 26.4 percent year on year in February, the fastest annual rate since December 2004, and up from 25.2 percent in January, according to data from the Federal Statistics Service in March. Prices rose by 0.6 over January.

Labour Shortgage Induced Price Spiral?

According to Simon Shuster in this article, Russian industry is increasingly facing wage disputes from workers who are now anxious to flex their muscles given their relatively advantageous short supply situation.

Labour disputes have hit three major employers in Russia in two weeks, signalling severe tightness in the labour market that could send costs soaring for investors, said experts, employers and union leaders.

The disputes - at Swiss food giant Nestle, French retail firm Leroy Merlin, and United Company RUSAL, the world's largest aluminium producer - have not yet hurt production, but alarm bells are going off. The Russian economy has been booming for the past nine years on the back of soaring world prices for oil and commodities. Workers from the coal mines to the corner offices want to be paid accordingly. "European quality, European standards, European wages," read one of the picket signs outside Nestle's Russia headquarters last week, as factory workers called for a 55 percent raise that would take the monthly wage to about 24,000 roubles

The Russian government desperately wants wage growth to come into line with the growth in productivity but, as Schuster points out, Russian workers have grown used to rapid income growth, as wages have grown around 10 percent a year in real terms since 2000.

Ford who were once one of the most vocal advocates of foreign investment in Russia, got a first-hand taste of Russian labour trends last December when a major strike brought its St. Petersburg assembly lines to a halt. Hundreds of workers initially called for a 50 percent raise from the U.S. automotive giant. The demand was negotiated down to 16-21 percent, but the message to Ford and its peers seems to be getting home.

Andrei Bader, head of corporate affairs at Nestle Russia, is quoted as saying that "There is simply no one to work here, especially specialised workers, skilled workers. This is a systemic problem in Russia,". And the data suggest it is only getting worse. In some ways the figures speak for themselves, since the Russian population has been in decline since 1996, while the number of people older than 65 has increased by 12 percent, according to the State Statistics Service. Over roughly the same period, the number of man-hours lost each year to strikes has grown eightfold, reaching an average of 1,231 hours for every employer affected in 2006, the year the statistics service last published strike figures.

And the problem isn't just a Russian one. It is becoming fairly general all over Eastern Europe. According to this article in Bloomberg this morning, Jiri Cerny, vice president of Toyot and PSA Peugeot Citroen's joint venture in the Czech Republic, says that three years after opening shop it's getting harder by the day to find workers, and he is now actively considering importing them from Mongolia.

Companies that were attracted to formerly communist nations in eastern Europe by the promise of cheap and plentiful labor are finding less of both, as faster growth drives up wages and open borders encourage emigration. Indeed there is increasing speculation that accelerating inflation may cause eastern Europe's investment- led boom to fizzle (and possibly even crash to a dead stop), with the Baltics and Balkans regions already threatened by a "hard landing" according to the International Monetary Fund and Standard & Poor's.

Similar Picture in Ukraine

And, of course, as Russia's labour supply needs suck-in badly needed workers from Ukraine the problem simply extends itself there, as remittances come home to fuel consumption and less and less fresh workers are available for employment.

Unlike in Russia though, inflation was not stationary in March, and Ukraine's inflation rate rose to 26.2 percent, its fastest level in eight years, pushed onward and upward by the surge in global food prices, government repayments to people who lost savings when the Soviet Union collapsed, and remittances from Ukranian workers who are out all over Eastern Europe filling gaps in other people's local labour markets. The result of all this is that inflation accelerated from 21.9 percent in February, which was already the fastest pace in Europe for the month and the quickest in Ukraine since 2001. Consumer prices rose 3.8 percent in March from February.

Ukraine's inflation rate has more than doubled in the past year because of a surge in global food costs and rising wages produced by rapid economic growth and growing labour shortages. Consumption is also being fuelled by payments for savings lost when the Soviet Union collapsed and the state-owned Sberbank went bankrupt. Government payments alone may add 1.5 percentage points to the inflation rate this year, Economy Minister Bohdan Danilishyn said on Jan. 15. The rate, which the government aims to keep at less than 10 percent, may average 17 percent this year, according to International Monetary Fund estimates. The truth of the matter is that noone really knows at this point. Nor do we know how all this is going to end. Strangely few seem to be talking about the dangers of a "hard landing" in the Ukraine at this point, but looking how the inflation fire is now burning away out of control the danger of this must be very great indeed.

Further Reading

For more background on what is happening in Russia and Ukraine see my

Russian Inflation, Too Much Money Chasing Too Few People?


The Economic Outlook In Ukraine