24 July 2011, 08:07

Bank Rossii keeps inflation at bay

Bank Rossii keeps inflation at bay
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Price growth in Russia is basically at a standstill for the second week in a row, giving many hope that the central bank will indeed meet its inflation targets.

Price growth in Russia is basically at a standstill for the second week in a row, giving many hope that the central bank will indeed meet its inflation targets.

Poland gets the go-ahead from Moscow to restart vegetable shipments, but that still leaves 20 EU members on the outside looking in.

Ukraine launches renovation work on a major gas pipeline, but will that be enough to convince Moscow to forego other transit options?

Belarusian banks are forced to restrict cash withdrawals as the currency crisis in Minsk looks to be far from over.

This week we've seen more evidence that Russia's central bank has things under control, at least in terms of price growth. On Wednesday the country's official statistics office announced that for the second week in a row, the inflation rate had slowed to effectively zero. And this comes after weeks, even months, during which the average weekly rate of price growth stood at about 0.1 percent. Anyways these latest tallies, in my mind at the very least, suggest that Bank Rossii officials made the right decision to put further monetary tightening on hold at the end of June. You might recall that a few weeks ago, the nation's top bankers voted to take a break from raising borrowing costs and reserve requirements, which was the first time that the central bank left all monetary policy instruments untouched since last November. I should note, however, that move was not completely unexpected. Bank Rossii officials said at the end of May that interest rates were roughly in line with current inflationary pressures. Most analysts, quite rightly it turns out, took that to mean that officials were gearing up for a pause in tightening. According to the figures from Rosstat, so far this year prices have grown by just over 5 percent. Additionally, the year-on-year inflation figure has been creeping down to below 9.5 percent.

Russia's leaders and central bank officials have been saying all year that price growth would be contained to between 6 and 7 percent. However, after prices leapt out of the starting blocks at the beginning of the year most observers, myself included, thought that was basically an impossible target. But after policy tightening for five of the year's six months, it is starting to look like the government's goals are in fact reachable. Also, just last week Bank Rossii's First Deputy Chairman Alexey Ulyukaev said that in the third quarter prices would only grow by half a percent. Back on Monday I spoke with Elina Ribakova about these issues. Here's what she had to say from her office in London. She’s the Chief Economist for Russia and the CIS over at Citi Group.

Over the course of the past 7 days, we've also seen one more EU member gain the right to restart vegetable shipments to Russia. Poland was just the seventh country in the European bloc to get the green light from Russian health and trade officials. Back on June 2nd, Moscow hit the EU with a continent-wide ban following an E. coli outbreak that went on to infect more than 4,000 and kill around 50. At the time, European officials denounced Russia's decision as excessive and called on Moscow to change its mind. However, officials in the capital over here said that so long as the source of the bacterial outbreak remained unknown, all EU veg would be blocked. Since that time, of course, we've learned that German bean sprouts were responsible contamination. Despite that and an agreement between Russian President Dmitry Medvedev and the European Commission President Jose Manuel Barroso, the majority of EU members have not been able to restart exports to Russia.

At the end of June the Netherlands and Belgium were allowed to ship their produce, while in the first weeks of this month Spain, Denmark, the Czech Republic and Greece were given the go-ahead. And Poland was just the latest. While there isn’t likely going to be any long-term economic impact of the ban, there could potentially be some political fallout. Some in Europe have argued that Russia’s moves could hurt its recent push to join the World Trade Organization. Moscow has been involved in on again-off again negotiations with the trading group for nearly two decades now. But 2011 was supposed to be ‘the year’ that accession finally happened. So far, though, little progress has been made and the dust-up over vegetable restrictions certainly haven’t helped things.

This week we also got to see another example of just how central natural gas issues are to political life in Ukraine. On Tuesday, the country's leaders were on hand to witness the beginning of work to renovate Ukraine's vast gas pipeline infrastructure. Representatives from the region's biggest energy firms as well as Ukraine's own state-run gas giant also saw the start of modernization works on the Urengoy-Pomary-Uzhgorod pipeline. All told Kiev is going to spend more than 500 million dollars updating the link, which should increase its throughput capacity. Work got underway using 200 million dollars of Ukraine's own money, while the rest will come from international development banks, agreements for which were also signed on Tuesday.

Now what's really important in all this is Ukraine's motivation for carrying out the renovations. Kiev is basically trying to convince Gazprom to give up plans to construct a new link that would bring more than 60 billion cubic meters of gas to Europe. Instead, Kiev hopes to show Moscow that by updating its existing network, Ukraine can provide all the needed extra capacity. In response to forecast rises in European demand and following a handful of highly publicized disputes, Russia's state-run gas giant decided to build new pipelines, circumventing traditional transit states like Ukraine. In recent years Gazprom has been working to build two new massive links that could nearly equal the throughput capacity of Ukraine's existing tubes. The first of those, Nord Stream, is steaming towards completion, with the first of two tranches having already been laid. The other link, South Stream, is far less of a certainty. And Ukraine's recent moves are aimed at trying to make sure it doesn't come to fruition. Kiev has been promoting its own modernization plan as far cheaper and more effective than constructing a whole new gas link under the Black Sea.

Now in my mind there are two main reasons Ukraine is fighting so hard to hold onto this gas transit business. First, the simple act of sending the blue fuel onward to European clients, Ukraine's state-owned pipeline operator earns billions of dollars in profit. The revenue from that activity likely helps the government cover holes generated from other segments of the company's business. Secondly, the fact that roughly 80 percent of Gazprom's exports to Europe have to pass through Ukrainian pipelines, in theory, should give the country significant leverage over the Russian company. Now whether or not Kiev has been able to use that power effectively is a whole other matter. And leverage is something that Ukraine desperately needs in its dealings with the Russian exporter. I say that because for the past year the authorities in Kiev have been pushing for a renegotiated gas contract. The price the country’s state-run energy giant pays for supplies from Gazprom shot up to roughly 300 dollars per thousand cubic meters earlier this year, and in the fourth quarter that could jump up even higher, up to 400 dollars. With that in mind, Prime Minister Nikolay Azarov, President Viktor Yanukovich and Energy Minister Yury Boyko have been campaigning hard either to get Gazprom to revise the pricing formula or to get the Kremlin to tinker with export duties, thereby effectively lowering the price. So far neither Gazprom nor the Kremlin has budged on the issue. But now to get a little more insight on the issue of expensive gas and Ukraine’s attempts to lower it, here’s Iryna Piontkivska. She’s an economist over at Troika Dialog’s office in Kiev.

Will they or won't they? Over the past week, that's been the question on the minds of many Ukraine watchers. Following the parliament's recent decision to raise the retirement age for women to 60, up from 55, many of us that follow the twists and turns of Kiev's political life started wondering if legislators would now go ahead and raise the price for natural gas. The reason those two issues are linked is because they were the two items holding up the latest installment of a loan from the IMF. Earlier in the year, officials from the international lender decided to withhold further payments until the government passed pension system and gas tariff reform as Kiev had promised to do.

You may know that the current government got the standby loan from the IMF in the wake of the global economic meltdown that led to a roughly 15 percent drop in Ukraine's GDP back in 2009. Since then the country's economy has returned to life, expanding by 4.2 percent last year. In 2011, most expect GDP growth to creep up closer to 5 percent. While some credit can be given to IMF loan for stimulating some economic growth, more ought to be given to rising world prices for some of Ukraine's main export commodities like steel. Anyways, to give you more insight into the IMF-driven reforms and their impact on the economy, here's Vladimir Pantyushin. He's the Chief Economist over at Barclays Capital here in Moscow.

As usual here on Russia business report, there were one or two noteworthy stories about Belarus this week. One of the bigger bits has to do with reports that banks around the country were running low on cash and had to restrict the amount that clients could withdraw from ATMs in each go. According to the Interfax West news agency, patrons of Moscow-Minsk Bank could only take out 300,000 Belarusian rubles at a time, which is the equivalent of about 60 dollars. Supposedly the lender, which is a subsidiary of Russia's Bank of Moscow, so severely limited the withdrawals because Belarus's central bank hadn't been fulfilling banks' requests for rubles. While the Interfax report was based on the case of that one bank, a representative from the lender said that others are having problems getting adequate cash from the National Bank of Belarus as well. However central bank officials in Minsk denied there was any shortage, arguing that the difficulty taking out money might be some kind of technical problem or issue at the individual banks.

As you might know, especially if you have been tuning into this program regularly, this is just the latest currency-related problem the authorities in Minsk have had to grapple with. Earlier banks and exchange points essentially stopped giving out foreign notes. That came as the government itself was trying to hold on to all the foreign currency it could amidst a worsening current-account deficit. Rising expenditures ahead of a presidential election late last year and increasing energy import costs have led to the imbalance. Instead of gradually devaluing the currency in recent years, the government has used outside financing to hide the structural problems. The situation came to a head earlier this year when fixed income investors got nervous about the worsening situation and the government temporarily loosened currency exchange controls in a bid to right the ship. Since then, the central bank devalued the Belarusian ruble by 36 percent and reinstituted tight restrictions on foreign currency swaps. Minsk also received the first 800 million dollars of a 3 billion dollar bailout loan from a regional development fund at the end of June. The authorities have also appealed to the International Monetary Fund for additional loans. In exchange for the cash from the Eurasian Economic Community, Minsk promised to privatize some 7.5 billion dollars worth of state assets and to push through some currency-related reforms. And now to get a little more insight on things there, here’s Elina Ribakova again. When I had her on the line to chat about Russia's economy, I also asked about the situation in Belarus, which she's studied in depth. She’s the Chief Economist for Russia and the CIS over at Citi Group. She joined me by phone from London.

A late week rally pushed both of Moscow’s main indices back into the black for the week. On Monday, the MICEX and RTS both gave up significant ground on the back of fears about US and eurozone debt. However, as the days passed it seems that many traders became a little more optimistic about politicians finding solutions to those problems. And on Thursday, EU leaders did just that, which led to a major rally here in Moscow. After it came out that more 225 billion in news aid was coming Athens’s way, the ruble-denominated MICEX jumped 2 percent while the RTS surged by nearly 3. And as we go in to record this broadcast on Friday morning, both indices continue to climb. The MICEX has gained about one-third of a percent by 11:00, while the dollar-denominated RTS has added two-thirds of a percentage point.

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