The start of presidential election campaign in Russia will be overshadowed by rising prices

Russia’s Economy Ministry has raised its inflation forecast for 2007 to between 11 and 11.5 percent, which is indicative that the ministry’s officials do not expect inflation to drop in December. However, another surge in inflation coinciding with the start of the presidential race could prove irksome for the authorities, reports Analytical department of RIA RosBusinessConsulting.

Meanwhile, prices continue to rise, and not just due to external factors. “In October, food prices soared along with prices for non-food products,” said Valery Mironov, at the Development Center economic research foundation, pointing to the growing role of monetary factors in addition to external influences.

Monetary factors will become even more important in December. From January to August, average budget spending stood at RUR 380 billion (approx. $15.6bn), and is expected to climb to RUR 650 billion (approx. $26.7bn) this month to rise further to RUR 1.3 trillion (approx. $53.4bn) in December. This cash injection will inevitably cause another surge in inflation, although it could take effect in January.

“The budget does not spend money on end consumption,” Evgeny Nadorshin at Trust Bank told RBC Daily. “This year, more money will be spent at year-end because of the change of government,” said Mironov. “But this will just compensate for a decline in demand in the autumn,” he noted.

Traditional year-end price increases could be lower this year as a result of restricted consumer lending by banks, due to the liquidity squeeze and the Central Bank’s decision to raise interest rates. But even this is unlikely to stop the galloping price hikes. “Among the products that have not been affected by inflation so far, vodka and meat could rise in price in December,” Mironov said. “We expect a 1 to 1.1 percent inflation in December, which is above last year’s levels,” Narorshin added.

However, this does not fit into the government’s plans to stabilize the country’s economy during the election period. It is not coincidental that ‘socially responsible’ retail chains froze prices until December 31. “The price freezing agreement will have a positive effect in the short term, but in the long term, growing demand for these products will drive prices up,” Mironov believes. The presidential election is scheduled for March, but a new surge in inflation is inevitable in January, if not earlier.

In such a situation, the authorities could resort to an artificial reduction of the money supply, which would cause an economic slowdown. Indeed, the inflation rise in the autumn was partly provoked by Russia’s robust economic performance this year. Such an effect was last seen seven years ago. Now, again, soaring inflation is the price Russia pays for its speedy economic growth. The authorities have to choose between strong growth and low inflation. With elections on the horizon, the latter seems to be a more preferable choice.