About the Russian Central Bank

 In June comes to an end of the second term of office of Sergei Ignatiev, the last 11 years headed the Russian Central Bank. As you might imagine, his approaching departure caused a bitter fight between potential successors, and God knows how many political maneuvers to be held in Moscow, starting today and ending with the time when this place will be assigned a new person.

Courtney Weaver and Charles Clover did a fine job in the Financial Times outlining the basic outline of the history and the fundamental conflict between people who want to uphold the anti-inflationary policy of "hard money" Ignatieff, and those who favor a more challenging, growth-oriented measures.

To Western ears it sounds painfully familiar, even banal. Some people in the central bank petrified of inflation, and are willing to tolerate moderately slow economic growth in order to more successfully fight it and keep within limits. Other people, usually politicians, but also some less orthodox figures in the Central Bank, are willing to tolerate moderately higher inflation, provided that it is accompanied by more rapid economic growth. In the United States, a similar argument could be news of a hundred years ago, but Russia is still present raid radicalism. No need to go too far in the history of Russia, to find in it a time when inflation was, by Western standards, it is absolutely and completely out of control, and the debate about the appropriateness of monetary tightening or easing was not in sight. In the late 1990s and early 2000s, even the most stupid, it was clear that the first, second and third priorities for the Russian central bank was to curb inflation.

Take a look at the following chart.

The inflation rate in Russia in goods and services during 1998-2012

In the West, 10 percent inflation is now considered as only slightly better option than nuclear war, but in Russian inflation is permanently below this level only in 2009. And then, in 1998, which by and large was not so long ago, Russia was a 84-percent inflation. 84 — Interest! Since Obama took office, the advocates of "hard money" in the Republican Party came in very strong excitation due to inflation around 2 percent. Just imagine what would have been their reaction if the United States was inflation, which would amount to even half of the Russian level in 1998. This would have started! And if it ever happened if Obama and his horrible carefully selected central banker ever screwed up monetary policy to the extent that the United States would experience for yourself the 42-percent inflation, these people would rightly deserve any negative political consequences, because inflation in the 40-50 percent (much less than the range of 80-100 per cent) — this is a disaster that exists for ordinary citizens and a real reflection of the elementary incompetence on the part of the central bank.

As can be seen from the graph, subdued inflation in Russia, if not completely, then at least, as to the level at which there may be present disagreement about the need for tightening or easing of monetary policy.

In essence, the parties determining the rate of the Russian Central Bank need to find a balance between growth and inflation — monetary policy, which is: a) does not allow prices to go racing, and b) does not stifle economic growth. Their Western counterparts stew in this mess for a long time, and this task is by no means easy or simple. But before Ignatieff when he first came on the scene, there was a different problem. When inflation is around 20 percent, is not particularly podiskutiruesh — you need to tame prices, fast. When it is in the region of 6 per cent, already have real options to choose from.

Therefore, the debate in Russia reflect the degree of maturation of the economy, which it reached in the last 15 years, and I would add, show that it is increasingly confronted with problems of the economy, which is more like those faced by developed countries than the countries of the Third world. In 1998, Russia has been a phenomenon that we would have considered hyperinflation — the figures that you would expect from a failed state or a banana republic. In 2012, it occupied a much more familiar balancing act between inflation and growth, which does not have any obvious answers and conclusions.

In conclusion, the struggle for a successor at the central bank also clearly demonstrates the limitations faced by the Russian economy. There is no such policy, which will at the same time: 1) accelerate growth, 2) reduce inflation, and thus 3) to be devoid of adverse effects to powerful groups with their own interests. Everything suggests the balance of pros and cons, and in the decisions to be taken by the political leadership of Russia, it is not "easy". You can spend mitigating reform "with a focus on the proposal," which would have fulfilled the requirements of paragraphs 1 and 2, but is likely to fail in step 3. You can organize the quantitative easing, which would have coped with the tasks of paragraphs 1 and 3, but it is very likely to stumble in paragraph 2. You can arrange a tightening of monetary policy, which has reached the objectives set out in paragraphs 1 and 3, but probably did not satisfy the conditions of paragraph 2. Which way will Russia? We shall see. But there is no free lunch, and although since then, the Russian economy has reached a low point in 1998, it has achieved great success, the road ahead does not involve a free lunch, and no easy solutions. Whoever took the reins of the Russian Central Bank, he will have to tread carefully.


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