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Inflation, not liquidity, is the real problem

The credit crunch spreads east

By March this year, monthly inflation in Russia had crept up to an annualized rate of 13.3%. While the central bank has drawn praise for its speedy and attentive approach to reassuring the supply of liquidity to the banking system, it might be that it is fixing the wrong problem. Caught up in the national campaign to boost growth and take GDP per capita from $13,700 today to $30,000 by 2020, the central bank and the government seem to be ignoring inflation and perhaps storing up greater problems ahead.

Russia’s banks are nervous because their vulnerability to the absence of long-term funding at home has been rudely exposed. Negative real rates and high inflation make any solution to this harder to achieve, being a clear disincentive to save in any form, institutional or other.

"Our own bank has been lobbying hard for injections of liquidity and even, crazy as it sounds, to have more of the stabilization funds invested inside Russia in the hope that we may be appointed managers of this money," complains one exasperated Russian banker privately. "But they don’t seem to realize that in doing so, they risk increasing inflation and inflation expectations and even destroying the domestic bond markets in which we had a promising franchise."

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