/ world today news/ The increase in hydrocarbon prices brings Russia a solid income. The budget earns tens of billions of dollars more, and gold and foreign reserves reach historic highs. However, everything has a flip side. The increase in the prices of oil, gas and coal will become another reason for the acceleration of world inflation, which will be “imported” to Russia with imports.
This year, the Russian budget may earn 50 billion more than in 2020 – almost 125 billion dollars, or 9 trillion rubles, according to the international rating agency Fitch. The international reserves of the Russian Federation reached a historical record level of more than 618 billion dollars. It is the fifth largest in the world.
Such a large cushion for Russia will be enough for 19 months of life in the absence of export earnings. Only a few can boast of such savings. To understand: Germany, Great Britain and the USA, for example, have reserves for only two months of life without exports. In general, the income of Russian exporters is growing due to the rise in the prices of raw materials, and the Russian stock market is at its maximum.
However, there is also a flip side of the coin – inflation. Annual inflation in Russia has already increased to 7.5% against the target level of 4%. No one expected this at the beginning of the year. The main danger is not that inflation in Russia will rise, but that it may remain at a high level of 7-8% for a long time. Analysts expect 7-8% by the end of the year, while in July the CBR expected no more than 6.2%.
Inflation has become a challenge for all countries – for the USA, China, the European Union, Russia and others. Russia’s regulator fears an accelerating inflationary spiral, and Central Bank Governor Elvira Nabiulina is trying to explain to Russians why the personal consumer basket could rise more than official inflation. Because it all depends on what’s in that basket. If you buy food, it will become noticeable that the bill grows above official inflation, because food is more expensive than, for example, services. Official inflation takes into account not only food, but also services and other goods. That is, it is a more average value.
Inflation is now at multi-year highs in the US, Europe, UK and most emerging markets. Only in China the situation is a little different. There, consumer inflation in September amounted to only 0.7% on an annual basis. But inflation in the manufacturing sector is record high in the entire history of observation, since 1996 – 10.7%. But over time, inflation is likely to start rising in China as well, says Olga Belenkaya, head of macroeconomic analysis at Finam.
“For a long time, the heads of the world’s largest central banks assured that inflation should not cause fear, as it will “pass” itself. But now they are beginning to doubt it more and more,” says Belenkaya.
“Inflation is now seen everywhere as a wake-up call. The most important concern for the US and the Eurozone is that the increased inflation may not be a temporary phenomenon, but last for a long time, “said Exant analyst Vladimir Ananiev. Federal Reserve Bank of St. Louis President J. Bullard recently stated that he estimates the probability of US inflation to increase to 50% for a long time. Now it is, according to various indicators, 3.6–5.4%.
The acceleration of inflation was started by the US and other developed countries that started flooding their economies with money. The US alone has directed about $6 trillion in fiscal support last year and this year. On the other hand, during the pandemic, production and supply chains were disrupted, so there was a supply shortage. So far, many circuits have not been restored.
Food, medicine and car prices have soared around the world, threatening the global economic recovery, the IMF has said. Thus, the IMF price index for food and beverages rose by 11.1% from February to August, for meat and coffee – by 30% and 29%.
There was also the problem of labor shortages, which forced companies to raise wages. “In the US, for example, the number of employees is now about 5 million lower than before the pandemic, while the number of vacancies is near a record level and significantly exceeds the number of unemployed,” says Belenkaya.
Finally, the situation was worsened by the sharp rise in global energy prices. The current rise in the prices of oil, gas, coal in Europe and China in a few months will lead to an increase in the prices of European and Chinese goods, the increased prices of imported goods will come to Russia and stimulate inflation in our country. Rising oil, gas and coal prices could boost inflation over a period of several months, experts say.
“Hydrocarbons are the basis of organic chemistry, rubber, plastics, etc. It’s hard to imagine a modern product that doesn’t use some of them. In addition, oil, gas and coal are fuel for transportation, if they become more expensive, transportation costs also increase, which ultimately leads to higher prices of goods on the shelves in China, Europe and other countries, “says Ananiev.
Some industrial enterprises may leave the market altogether, increasing the imbalance between supply and demand, and the increase in the price of fertilizers and fuels in agriculture may trigger a new round of food price increases, warns Belenkaya.
“For now, Russia is more likely to benefit from high commodity prices, which is already leading to a stronger ruble. But on the other hand, as an importer of many types of food, feed, finished industrial products and components, Russia will obviously also import inflation,” the interlocutor noted.
The IMF hopes inflation will return to pre-pandemic levels by mid-2022. However, if pandemic-related supply chain disruptions are prolonged and disruptive, then inflation will have a negative impact on the economy. The fund is urging policymakers to prepare for swift action if inflationary risks escalate.
If high inflation doesn’t subside by mid-2022, that could force central banks, primarily the Federal Reserve, to stop seeing inflation as temporary and start raising rates earlier and faster than the market now expects, says Belenkaya. As a result, she continued, this could strengthen the dollar and slow the growth of the global economy, as well as reduce demand and prices for commodities and increase turbulence in financial markets.
“For Russia, this means a decrease in demand for raw material exports, a deterioration in foreign trade conditions and an increase in capital outflows, which will negatively affect the exchange rate of the national currency and may increase the cost of borrowing.” However, the margin of macroeconomic stability in Russia is much higher than that of most developing countries, Belenkaya concludes.
Translation: V. Sergeev
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