Russia worries about its high inflation

Sellers wait for customers in a market in central Moscow on July 16, where shoppers have to contend with higher prices due to spiraling inflation.
Sellers wait for customers in a market in central Moscow on July 16, where shoppers have to contend with higher prices due to spiraling inflation. Tom Lasseter / MCT

MOSCOW — Larissa Vasilyeva wound her way through a bustling outdoor food market in a working-class neighborhood in southwest Moscow, tallying in her head the rubles and kopecks she had left to spend for the week and wondering how much more food she should buy.

A year ago, Vasilyeva said, she spent about 1,500 rubles a week on groceries, some $59 at the time. Now, she spends 2,000 to 2,500, about $107 at the high end. That's steep for a country in which the average monthly salary was about $720 in May, according to official statistics.

"We have practically nothing left to buy clothes," said Vasilyeva, a retired economist. "People are very unhappy about it . . . there may be a political revolt."

Vasilyeva knows firsthand what mountains of statistics show: Underneath the booming Russian economy, fueled by large supplies of oil and natural gas, inflation is slamming many ordinary Russians.

While the strengthening ruble has helped — it's gained some 9 percent against the dollar since last July — inflation shows no sign of slowing.

Inflation last year in Russia was 11.9 percent, according to state statistics. In the United States, where inflation concerns are rampant, that figure was just under 3 percent in 2007.

"The impact is serious, it's one of the most difficult problems we have," said Tatiana Stanovaya, the head analyst at the Center for Political Technologies, a Moscow research center. "If the prices continue rising, the ruling power risks losing the confidence of a very large part of the population."

The Russian Finance Ministry said last month that it was going to be difficult to keep inflation at its target of 10.5 percent this year.

The economic pressure has further highlighted the dramatic difference between the nation's wildly affluent nouveau riche — often made wealthy by natural resources or connections to the government — and everyone else.

"Frankly speaking, I haven't felt it," said a Russian named Georgi, wearing Armani sunglasses, a Dolce & Gabbana shirt and twirling the key to his BMW. He was shopping at a market in central Moscow, not far from the Kremlin and Red Square, which are next to Moscow's Lamborghini and Maserati dealerships. Georgi declined to give his family name, saying that he didn't want to be identified publicly.

But lower and middle-class Moscovites are hurting.

Official statistics show that the price of a "bread basket" of 11 different food items jumped by about 33.65 percent from 2006 to last month. And price increases may be far higher, many Russians say. Vasilyeva said that a liter of milk that cost her 15 rubles about a year ago now cost 25 and butter was almost twice as expensive.

FBK Co., a business consulting firm in Russia, said in an assessment in mid-July that because of high food costs, those who lived below the poverty line would face inflation of at least 25 percent this year.

Alarmed by the numbers, Russian officials have raised pensions and government salaries.

Inflation is particularly troublesome for the legacy of Prime Minister Vladimir Putin, who during his eight years as president trumpeted the progress made in the country since its economic collapse in 1998.

He went out of his way to address the problem as he planned the transition from president to prime minister earlier this year. "I'm perfectly aware of everything to do with inflation, price growth and so on," he told a meeting of the State Council in February. But, Putin said, income and pensions had risen by some two-and-a-half-fold during his eight years in office. The ruling party, United Russia, which Putin heads, recently proposed to the Duma that the government hand out debit cards giving needy families 12,000 rubles of credit — about $517 — each month to buy groceries.

Financial analysts say that while there are some problems with the Russian economy, it's important to remember that there are a lot of strengths — such as quickly growing gross domestic product and vast supplies of natural resources — and the Soviet Union disintegrated in 1991, less than 20 years ago.

"It's hard to say now how normal the state of things is, and how well we're developing, because so little time has passed," said Polina Lazich, a senior analyst at AK Bars Finance, an offshoot of a large Russian bank.

While the nation's economy has experienced tremendous growth since Putin's first year as president in 2000, some Russians struggling to make ends meet have begun to question the government's abilities.

"The people think that the government is not coping with inflation," said Elena Shumnova, who was shopping recently in a working-class Moscow market. "They criticize the government between themselves."

Yevgeni Pashintsev, another shopper there, agreed.

"The government isn't dealing with inflation. It seems like it can't," he said, walking past stands of fruit and vegetables.

Dmitry Sorokin, a prominent economist in Moscow, said Russia's inflation generally was thought to be fueled by the infusion of cash into the economy as well as the higher prices of oil and gas. But lurking beneath everything, he said, is the fundamental problem that the country's infrastructure was never fully rebuilt after chronic underinvestment by the Soviets, followed by the collapse of the Soviet Union and then the 1998 economic crisis.

For instance, the total volume of agricultural production in Russia in 2007 was roughly 25 percent less than in 1989, said Sorokin, the deputy director of the economics institute at Russia's academy of sciences in Moscow.

Why, then, is Russia's gross domestic product — about $1.29 trillion last year — so high?

"The answer is obvious. It's because of high oil prices, which have given us money, but not products," Sorokin said. "I call it a GDP made of air; it's not true growth."

Vasilyeva, toting bags of cherries and apricots in the Moscow market, didn't speak of GDP or economic indicators. She did say, however, that unless things change there'll be less food on her family's table, and that, she said, never leads to anything good.