More and more experts have recently been telling us about the benefits of a weaker Russian currency for the Russian economy. These talks seems to be having some effect on the government. In particular, Russian mass media report that the Russian government is ready to let inflation free and abandon targeting the rate of inflation, thereby focusing on the national currency and its exchange rate. What are the weak and strong sides of this approach toward the country's economic policy? What await the russian Ruble in the near future? Let's try to answer these questions together with Masterforex-V Academy.
Money Can Spoil People, Inflation Can Spoil Money
Sometimes, it seems that the Russian government and the local central bank somehow forgot that curbing inflation is not the ultimate goal, it is just a means. If we take this fact for granted, the only thing we left to do is to look at the result of such inflation targeting. Alas, most experts are convinced that the harm far outweighs the benefits:
Firstly, this economic policy paired with other major factors has already hit the Russian economic recovery. The local industrial production is in jeopardy. Last year, Russia's GDP growth slowed down to 1.3% straight up from 3.4% in 2012. As for this year, more and more economists say that the Russian economy will show negative performance this year.
Secondly, the policy aimed at taming inflation is jeopardising the sources of replenishing the budget.
Thirdly, if the policy continues and the economy falls into deflation, Russia may suffer more losses on servicing its external debt as the cost is going to get higher and higher. Meanwhile, Russia's external debt increased by 15% up to $732bn last year.
On top of that, lower inflation may affect Russian companies, their investment plans and incomes. Apparently, under such circumstances they will delay their investments till better time with more beneficial conditions and prospects. In simple words, deflation may change business motivation.
Another point to pay attention to is that inflation targeting may well make Russia more dependant on energy exports even though this dependancy is already excessive.
And finally, such policies will eventually result in lower consumer demand in Russia. The logic is simple: the Russians will delay big purchases till better times while expecting further price cuts.
As a result, we have a situation when the central bank seems to fight inflation, but this won't help reforms.
Still, not all experts are negative about Russia's policy. Some of them say that growing inflation is an indicator that economic is feverish and needs to be cured. How can the Russian economy benefit from lower inflation?
Firstly, the investment climate in Russia may improve in this case, thereby attracting more oreign investors. Secondly, the pace of economic growth in the country will accelerate. Without stimulation, Russia may fall into a deep economic recession, thereby affecting the national currency.
By the way, the Russian Ruble keeps devaluing against the US Dollar. Consequently, USDRUB is rallying. This is confirmed by the chart below, courtesy of Masterforex-V Academy:
Inflation devalues debt. Still, inflation targeting may bring positive results only if conducted properly under favorable conditions. And this is the very problem the Russian government is currently facing – the policy is difficult to implement properly under such conditions.
And finally, let’s look at several major factors stimulating inflation in Russia:
· The dependancy on the export of natural gas and crude oil.
· Monopoly pricing.
· The central banks’ mistakes.
Therefore, to resolve the problem, experts suggest:
· Cutting interest rates.
· Abandoning the budget rule.
· Making up for the flight of capital at the expense of stimulating domestic investment.
· Abandoning the accumulation of reserve funds.
The bottom line is that inflation targeting is a double-edged sword and therefore should be handled carefully…
