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Tuesday, 23 September 2014

Spectre of inflation haunts Russian bankers

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“The black cloud hanging over Russia is inflation,” said Stephen Cohen, managing director of asset management at Troika Dialog UK, a significant investor in the country. It is a problem the government is well aware of and is trying to manage it via a taskforce headed by the former deputy prime minister Alexei Kudrin. “The results remain to be seen,” said Cohen.

Russia has built up a Stabalisation Fund worth US$500bn and is on the cusp of using some of this money on an astronomical investment in its infrastructure throughout the country.

“Russia is in year two of a colossal infrastructure boom which will see it spend US$1trn by 2020,” predicted Cohen. This creates massive inflationary pressure, he said, though capex should also boost productivity growth.

Russia is buying euros and US dollars in its attempt to manage the rouble, but should probably let the currency appreciate faster, said Cohen.

“The government is not spending too much,” said Andrew Chulack, co-head of global banking Russia and CIS for Deutsche Bank in Moscow. “It is collecting to withstand shocks and allow continuity in the budgetary spend.” Norway, the UAE and Saudi Arabia all did the same, he pointed out.

Most agree this investment is sorely needed but some are also concerned about the inflationary pressures this will unleash on a country already dealing with formidable inflationary demons: it currently runs at around 10%.

“Inflation is a concern,” admitted Chulack, though he remained confident authorities can guide the country safely through the inflation minefield. The Minister for the Economy and the Central Bank have combined the budget and monetary policy with public investments to control inflation.

Chulack predicted inflation will remain at around 10% or may climb a few per cent higher, but predicted Russia can withstand these levels without adverse effects. If inflation rises higher than that, however, he conceded it will cause problems. “How Russia manages its rouble strength will be interesting,” he said.

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