Russia must adopt a policy of inflation targeting in order to stem rising prices that are the “real obstruction” to long term- investment and innovation, two of the country’s leading economists and financial figures said in Astana yesterday.
Sergei Guriev, rector of the New Economics School in Moscow, told Emerging Markets that the central bank should move on to inflation targeting with a flexible exchange rate.
In 2010 Russia suffered an adverse supply shock as a result of forest fires and other post-crisis problems, Guriev said. “But this year, if nothing like that happens, I very much hope we will move on to an inflation-targeting regime.”
Sergei Vasiliev, a board member of Vneshekonombank, agreed. “Inflation is the biggest problem. It is incompatible with innovative growth and investment,” he told the seminar.
“The central bank should make up its mind, either go for a fixed exchange rate or keep inflation down. It would be better to switch to inflation targeting.” Bringing inflation down to around 3% within the next few years was a realisable target, he argued.
Speakers at the seminar focused on the means to improve Russia’s investment climate, which, as Guriev pointed out, was so poor that even with oil prices at $100/barrel there was substantial capital outflow.
Denis Morozov, EBRD board director for Russia and former general director of Norilsk Nickel, said that with its gigantic human and natural resources and reasonable tax regime, capital should be flowing into Russia like a river. “But it’s actually the opposite, because the investment climate is insufficiently developed.”
Institutional barriers were high, he said. “Corruption is a disease that has to be combated.” It is “a two-way street”, he pointed out. Not only do officials take bribes, but businesses pay them too. “Russia recognises these problems, at the highest level, and is doing battle.”
But it would take time, he said, saying there would be no overnight transformation. Speakers at the seminar underlined that investors had hugely contrasting experiences in Russia. While the problems Morozov mentioned were rife, the activity of international companies in Russia was a world away from where it had been.
Dmitry Kvitko of the economic development ministry said that, 10 years ago, EBRD seminars heard leading politicians and central bank officials pleading with foreign businesses to come to Russia. Now it could hear those businesses relating how they had grown, sometimes very rapidly.
Christopher Mackenzie, chairman of the oilfield services equipment maker Borets International, said that the company’s Russian manufacturing operations had undergone a quantum leap in the last five years.
“Our Russian plants now produce better-quality equipment, at a cheaper price, than our Shanghai plants”, he said. Moving outside Moscow and tapping Russia’s pool of highly-educated, under-utilised engineering labour had been a key, he said.