Russia Sees End to Inflation

June 9, 2015Russiaby EW News Desk Team

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Since the escalating tensions around Ukraine, Russia has seen inflation rates soar and economic growth collapse, but Russia’s central bank sees an end to the troubles for the eastern nation.

Russia’s plummeting currency and soaring inflation put a halt on domestic demand, but the Bank of Russia believes inflation is set to decelerate in the future, with the worst of the trend already behind the country. “We have now gotten inflation under control, and according to our assessment, we’ve already gotten over the peak rate of inflation. Now we expect the rate of inflation to see a marked decrease in the future,” said Bank of Russia Governor Elvira Nabiullina in a statement to lawmakers.

However, Nabiullina did note that inflation remains a risk for the country, as uncertainty in energy exports and the bank’s own monetary policy may exacerbate the problem.

Easy Money

To combat a fall in local demand as sanctions from the west and a steep decline in commodity prices pinched the country, the Bank of Russia was forced to raise interest rates 6 times in the last year to stave off a collapse in the currency. The move may have helped the ruble stabilize, but the currency has still lost over 60% of its value in the last year, although it has recovered with an 8% appreciation in 2015.

Now the central bank believes it can reverse that trend as it unwinds those interest rate hikes in an easier monetary policy that is designed to stimulate growth.  Economists are mixed on the efficacy of such a policy, noting that revenues remain constrained in the undiversified economy, as gas and oil exports provide less revenue from Europe.

Low Expectations

While the improvement in inflation expectations is likely to help the Russian economy recovery, forecasts remain glum. The European Commission believes Russia’s GDP will decline by 3.5% in 2015, and will only exit recession in 2016.

Russian economists agree on the trend if not on the numbers, and policymakers have admitted sanctions and cheap oil have hurt the country. The country’s Finance Minister has said both trends have caused the country to see a contracting economy.

Sanctions Remain

Russia’s exports have largely been pressured by sanctions that were first initiated by the United States and Germany after Vladimir Putin decided to invade Ukraine, arguing Russian speakers in the east of the country were being treated unfairly and wanted independence.

Both America and Germany have asserted the sanctions will remain in place. At a G7 summit in Germany, President Barack Obama and Chancellor Angela Merkel agreed on keeping sanctions in place until Russia agrees to end fighting in Ukraine and to respect the country’s sovereignty.

“The duration of sanctions should be clearly linked to Russia’s full implementation of the Minsk agreements and respect for Ukraine’s sovereignty,” said the White House in a public statement.

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