May 26, 2008 (the date of publication in Russian)
PARADOXES OF RUSSIAN INFLATION. Part 1
It is not true that pricing in Russia is wholly determined by global tendencies
"Our economic policy is most important today. In case we solve this problem, we'll win on an international scale for sure and forever". This quote from Vladimir Lenin's speech of 1921 surfaced in memory when Moscow journalists attributed the 1921 definition of "new economic policy", NEP, to the times of today. This parallel followed Vladimir Putin's transition to the post of Prime Minister, and President Dmitry Medvedev's speech on combating corruption.
In brief, Vladimir Putin's government encounters three major tasks in economic policy: to create preconditions for an accelerated growth of economy; to overcome inflation; and to use economic progress for improving quality of life.
From a formal monetarist standpoint, the three tasks contradict to one another. Economic growth requires surplus of investments, therefore increase of monetary mass, and therefore inflation.
In fact, the Russian economy's real problems lie in a different dimension. Speaking about Russia's unique way of development, romantic patriots like Alexander Prokhanov are right. Still, in case the same way is followed for decades longer, it may lead into a deadlock.
In economic dictionaries, inflation is determined as "flooding of circulation by excessive monetary mass, not supplied with a proportional increase of goods, with consequent devaluation of currency; it is expressed in increase of prices for goods and services without improvement of their quality". Handbooks differentiate:
- inflation of costs, expressed in the increase of price of resources and factors of production;
- inflation of demand, emerging from excess of demand over supply;
- inflation of supply, resulting from increase of production costs;
- administrative inflation, emerging from deliberately established prices in a market economy;
- imported inflation, caused by excessive inflow of foreign currency and increase of import prices;
- credit inflation, emerging from increase of prince for consumer goods and productive resources.
In addition, the dictionary discerns explicit inflation, emerging from increase of consumer prices and productive resources, and implicit inflation resulting from deficit of goods determined with efforts of the state to rein in the price hike.
At the first glance, Russian inflation is a combination of the abovementioned types. However, some additional elements have got a different origin.
Between March and May, prices form AI-95 gasoline rose by 13%, while Surgutneftegaz's Kirishi Refinery elevated the price even higher – by 17.9%. Pavel Strokov, director of Cortes expert firm, explains the increase of Russian gasoline prices with the tendencies at the global markets. He explains that taxing of Russian oil companies depends on global prices, and therefore, domestic prices steadily grow.
Oleg Ashikhmin, president of St. Petersburg Oil Club, expects gasoline prices to increase during summer. He indicates that during spring, the price hike was constrained with the political factor of elections.
Is the domestic market of oil really "pegged" to the global prices? One of the major taxes – Natural Resource Extraction Tax (NDPI) is calculated by multiplication of the fixed rate of 419 rubles per ton to the ratio, characterizing the dynamic of Urals oil at Dutch and Mediterranean oil stock markets.
In May 2008, the average amount of NDPI was equal to 4276 rubles per ton. The average price of supply was about 8500 rubles per ton. Thus, the tax makes up 50% of the price of one ton.
One more method of subtracting oil trade superprofits is more logically based on the difference between costs and global prices. Superprofits from foreign oil trade are really increasing. Only in the first quarter of this year, the net income of Russian oil companies increased in 2-4 times.
In particular, Lukoil's net income increased between January and March in 2.77 times as compared with the first quarter of 2007. Surgutneftegaz reveals a 2.4 increase, and TNK-BP raised the income in 4.6 times to the amount of $1.5 billion. However, all the three companies decreased extraction (resp. by 2.9, 4.2 and 1.8%).
The explanation lies in the so-called "Kudrin's scissors": the increase of export duties for oil lags behind the increasing prices for two months. In the first quarter, the stock prices of Urals oil rose by 15% while the export duty increased only by 2% (making up $338 per ton). During the first quarter of the current year, global oil prices were twice higher. This tendency does not change, allowing oil producers to derive even higher superprofits.
The paradox is that the inflation burden, generated by taxing, is laid upon the domestic market, while the share of incomes, invested in new extraction, is gradually declining. Could the calculation of NDPI be revised so that the major fiscal burden be transferred to exports?
Bismarck once said that war is a too serious task to be entrusted to generals. Taxing is probably is also a too serious task to be entrusted to tax collectors, at least in the sphere of oil and gas trade. The classical inflation of costs in this sphere is predominantly administrative. Meanwhile, the rise of oil prices affects the whole domestic market.
AN OVERALL HIKE
According to Vedomosti daily newspaper, major Russian producers raised their prices within 12 months by 27.4%. For the previous period (between April 2006 and April 2007) the increase comprised only 7.8%.
The rate of increase followed the fluctuations of the global oil and gas prices. After the September hike of oil prices, practically all consumer goods became more expensive in the fourth quarter of 2007.
The international increase of prices for energy resources is favorable for companies trading at foreign markets. In January-March, the mining division of Severstal increased its income by 42.6%. Meanwhile, companies, oriented towards the domestic demand, are under pressure of increased costs. Faced with an unequal competition with importers, these companies can't significantly raise prices, and therefore have to minimize expenses for capital investment and personnel.
In April, 33% of Russian manufacturing enterprises reported of increase of prices for their production. Such a solidary increase had not happened during 42 months. It is noteworthy that 41% of enterprises complained of pressure from imports.
Prices in metallurgy are going to increase by 15-30%. In machine-building, prices cannot be raised because of earlier signed contracts. However, in agricultural machinery, they will grow by 20-40%. Under the described conditions, it is very hard to prevent growth of prices for major food products, admits Yury Ognev, Director of International Grain Company.
The state is desperately trying to reduce costs for agricultural production. According to Akron's spokesman Alexander Popov, producers of fertilizers promised to keep the same prices until the end of the harvest.
WHY DO PRICES RISE AT AN ISOLATED MARKET?
The current upswing of inflation is especially menacing at the food market. Government officials point at the increase of global prices for major food items. Still, there are at least two arguments questioning plausibility of this explanation.
First of all, the Russian food market is largely self-sufficient. Imports prevail in the sector of meat production, where increase of prices by foreigners is supposed to boost Russian domestic production, but that does not happen: after the price hike, imported meat is still cheaper than domestic analogues. In other sectors of agriculture, dependence of pricing in Russia from the European market looks doubtful. For instance, increase of prices for milk could hardly be explained with overconsumption in Asia. Even if we imagine that 1.5 billion Chinese conspiring to drink an extra glass of milk in order to boost our domestic prices, we could ask why the Government does not introduce prohibitory export duties, for instance, for milk powder.
Secondly, the overpricing of food at international markets is caused not with surplus of consumption, and not only with use of grain for production of biofuel. At least, these two reasons cannot trigger such a rapid upswing of prices for a lot of food items. Western experts believe that this phenomenon is explained with the current fever at the financial markets. The Herald's economic observer Ian McWhirter indicates that the increase of food prices is taking place on the background of massive speculation at the stock futures market after the collapse of derivatives in other sectors. Realizing that the investments into mortgage derivatives are not going to return, dealers promptly withdraw billions from the collapsing sector and invest them in food and fuel futures.
Massive financial panic, emerging from the crisis of confidence in housing securities, motivates investors to turn to more reliable spheres, ranging from gold and oil to cocoa and livestock. "Look at the financial websites: every investor prefers raw materials. However, if you belong to the 2.8 billion undernourished people of the world who can spend not more than $2 per day, you are going to pay with your life for the potential incomes", writes McWhirter, admitting that the described tendency may result in a famine of epic dimensions.
The author sadly indicates that investment funds, private pension funds and banks are motivated with profit and not with morality. The current tendency is explained by him not as a chaotic process but as a deliberate strategy, undertaken by central banks of Western countries which are now trying to help the Wall Street to rise to its feet. "In other words, banks perform as exporters of our debts to third world countries", explains the observer. His view is shared by Fernando Muraro, FAO's regional representative in Latin America, and many other analysts.
Meanwhile, the increase of quotations for wheat futures at the Chicago stock market is not necessarily supposed to reflect in prices for bread in Ryazan. In case this dependence really exists, the Russian Government has a possibility to cease exports of grain and to feed the population. It is up to the Government to make a choice between vital needs of the citizens and superprofits of a handful of agroindustrial tycoons.
(To be continued)
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