Why will low inflation not save Russian economy?

Read on the website Vestnik Kavkaza

The excessively rapid decline in inflation is not a healthy process, it will be rather a problem for Russia's economy, the head of Sberbank German Gref said during a broadcast on the Rossiya 24 TV channel.

According to Gref, the positive effect of low inflation is not visible immediately, but only in a few years. "Today rates have a very large positive spread, which is not very good for investment activity in general. So we should not expect return from low inflation in 2017 or even in 2018," TASS cited Sberbank head as saying.

In addition, he noted that one low inflation is not enough for stable economic growth, although it is a necessary condition for it. "The flow of investment capital will not increse just because of low inflation.The fate of economic growth is in the hands of the investment climate," Gref pointed out.

The head of Sberbank recalled that inflation is expected to be around 3.8% by the end of 2017. At the same time, the Bank of Russia promises annual inflation in May in the range of 4-4.2%. According to the Ministry of Economic Development, inflation in Russia in annual terms has already reached the level of 4% on May 15, and according to Rosstat, April inflation was 0.3%, while consumer price growth slowed to 4.1% in annual terms.

Professor of the RANEPA faculty of Finance, Money Circulation and Credit, Yuri Yudenkov, speaking to Vestnik Kavkaza, agreed with German Gref that inflation is not the only factor vital for Russia's economic growth. "For example, the volatility of the ruble is also very important, which now literally goes off scale, discouraging potential investors," the expert said.

According to him, the Central Bank has become too fanatical in reducing inflation, being convinced that this alone will make the market attractive for investments. "For example, by cleaning the banking sector, they have seriously complicated the lives of a number of enterprises that existed at the expense of credit institutions deprived of licenses," the Professor of the RANEPA faculty of Finance, Money Circulation and Credit explained.

He explained that small inflation is a normal phenomenon for any economy. "Inflation is inevitable for any healthy economy, 2-3% is quite normal, because when you make new products, the cost of materials and works is growing. Of course, when inflation is 15%, it's bad for business, although it's good for banks. But one should not give up all other factors for the sake of low inflation," Yuri Yudenkov emphasized.

A professor at the department of the stock market and investments at the Higher School of Economics, Alexander Abramov, in turn, specified that the Bank of Russia, striving to reduce inflation by all means, pursues the goal of initiating investment activity.

The expert admitted that low inflation has a number of positive moments. "With inflation higher than 4.5% per year, it is difficult to achieve a positive income portfolio on pension savings, so if there is a low inflation, there is a desire to save, because the chances of getting a real positive return increase. In addition, low inflation allows the population not to pay an indirect inflation tax in the form of increasing prices," the professor at the department of the stock market and investments at the Higher School of Economics explained.

However, today the investment climate in Russia is unfavorable, mainly due to the lack of guarantees for the safety of investments. "There are big devaluation risks due to the one-sided structure of the economy. The Bank of Russia is fully responsible for the state of the investment climate, but it does not change its direction in the last year or two. So the Central Bank took on many tasks, but wants to be responsible for only inflation," Alexander Abramov concluded.