Moscow Adopts Soviet Methods to Boost Economy at Potentially High Cost

Paul Goble

            Staunton, January 4 – Faced with rising inflation, the Kremlin has responded with Soviet-style price controls on some key commodities, but that decision may backfire, pushing down foreign direct investment in the economy still further and possibly slowing recovery in the coming year, Alina Musina says.

            The pseudonymous Russian journalist writes on Eurasianet that the Russian government has imposed price controls on certain food ideas much as the Soviet government before it, opening the way for shortages, adulteration of those products, and higher prices for related goods (russian.eurasianet.org/россия-власти-пытаются-поднять-экономику-советскими-методами).

            But the more serious consequence of this tilt to the past, although she does not specify this, may come elsewhere. Foreign investment in Russia has fallen 80 percent over the last year, two to three times more than in other developing economies; and any price controls will likely discourage foreigners from putting their money into Russia.

            That will have a multiplier effect as well on the other economic challenges the Russian Federation now faces. The economic situation in the regions of Russia is dire: In 13 federal subjects, all five key sectors of the economy show declines. In 25 more, four of the five do. In still others, the situation is better but still bad, Musina reports.

            The ruble exchange rates with the dollar and the euro have been relatively stable, but some analysts are warning that they are likely to enter a new era of volatility reflecting patterns of investment as well as economic activity (finam.ru/analysis/forecasts/uderzhitsya-li-rubl-v-2021-godu-20201221-171651/).

            And many economists say that Russia will face more inflationary pressures. If Moscow responds with more controls, that could lead to empty shelves as in Soviet times. If it takes no action, inflation is likely to grow, generating more anger at the government among the population (rosstat.gov.ru/bgd/free/B04_03/IssWWW.exe/Stg/d02/228.htm).

            Ordinary Russians expect a growth in inflation 2.5 times greater than does the government. If their fears are realized, that would mean an inflation rate next year of 12 percent, far higher than any Russia has faced in recent years, an even more serious problem for the Putin regime (cbr.ru/Collection/Collection/File/31785/inFOM_20-12.pdf).

            Putin and his prime minister Mikhail Mishustin have made stabilization of prices a central focus, but as Musina reports, Russian experts do not believe that price increases can be stopped by administrative means alone. Indeed, these may prove counterproductive in a variety of ways (ru.investing.com/analysis/article-200276553).

            Businesses in Russia are already in trouble, having suffered losses because of the pandemic-related economic crisis. Three out of five are not paying customary year-end bonuses to their employees and most expect that the next year will be difficult even if there is a modest recovery (press.rabota.ru/36-rossiyskikh-kompaniy-ozhidayut-ubytka-po-itogam-2020-goda).