The Parallax Brief

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Unrepentant Subjectivity on Economics, Politics, Defence, Foreign Policy, and Russia

Stagflation in Russia Now

The last week saw a barrage of apocalyptic news and data releases for the Russian economy. First, on January 30, Alexei Kudrin, the Russian Finance Minister, admitted that Russian budget revenue might this year tumble by an almost unimaginable 40%.

On the same day, while the rest of the G8 central banks engaged in frantic monetary easing to boost ailing economies, the Central Bank of Russia enjoyed no such luxury, and was forced to raise two of its key interest rates as part of a desperate rearguard action against capital outflows and a deteriorating ruble.

Shortly after, on February 2, news emerged that the Russian economy grew only 5.6% in 2008, the lowest since 2002, and undershooting the Bloomberg analysts’ consensus of 6%. Considering the blistering start to the year, it is clear that the fourth quarter was disastrous for Russia: Russian industrial output, for example, was savaged, plunging 10.3% in December, its worst monthly performance since at least 2003.

Further, VTB’s Manufacturing Purchasing Managers’ Index, in which a figure over 50 indicates growth and under 50 denotes contraction, was at a petrifying 34.4 for January, a touch over it’s alltime low of 33.8 – from December. Both months were lower than at any time during the ’98 crisis.

“The degree and pace of decline,” an S&P analyst told Bloomberg, “has exceeded historical precedents.” Quite. And just think of the kind of historical precedents there are in Russia.

The Russian government expects the economy contract by 0.2% this year. Most analysts fear at least 3% — the hardest of hard landings for an economy skimming along at over 6% growth for the best part of a decade. So given that CPI for January alone stood at around 2.5%, and some analysts believe the devaluation of the ruble will lead to inflation at 20% this year, could I venture to offer another piece of good news for the Russian economy? Stagflation is here.

Stagflation is one of the great nightmares of capitalist economies. The mighty pain of economic stagnation is compounded by inflation, which taxes the poor by eating into their already meager income, and prohibits the efficient allocation of capital and debt. But stagflation also lingers with the persistence of a lodging mother-in-law by putting central banks and governments between a rock and a hard place. Loosening monetary policy to boost the economy merely stokes inflation; tightening to crush inflation exasperates economic woes.

It is this test the Russian government now faces.

Stagflation has not been mentioned in relation to Russia in the media yet, but the Parallax Brief believes that the evidence strongly suggests it has already gripped Russia and that it is a word that will feature prominently before long.

You heard it here first.

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