Russian budget suffers corrosive effects of inflation

Russian budget suffers corrosive effects of inflation (NSI News Source Info) 11 August 2008: Soaring oil prices have enriched Russia and seemingly allowed the Kremlin to raise defence spending to a post-Cold War high, with official expenditure on course to break RUR1 trillion (USD42 billion) in 2009. But dig below the surface of the official figures and it quickly becomes apparent that this spending bonanza is far from the full story. In fact, Russia's inability to control its oil and credit-fuelled inflationary problems has seen defence spending growth falter in real terms. Comparing Russia's inflation-adjusted defence budget growth to nominal figures demonstrates the problem. From the accession of Vladimir Putin as president in 2000, the budget increased substantially in real terms from RUR201 billion to RUR322 billion in 2006, marking a rise of 86 per cent, but since then growth has slowed. 2006 was in fact the peak year and real-terms budgets are not programmed to exceed it again until 2010 at the earliest. This is primarily because high levels of inflation in the Russian economy have eroded the real-terms buying power of the Ministry of Defence (MoD). According to GDP inflation data published by the International Monetary Fund (IMF), the Russian government has been consistently unable to control price rises in recent years. Although 2004 and 2005 saw the highest inflation with rates of 20 per cent annually, since 2004 energy prices have soared even further, enriching Russia, but at the same time further feeding inflationary pressures. This resulted in annual GDP inflation of 17.5 per cent in 2006 and 13.5 per cent in 2007. By the end of 2008, the IMF estimates inflation will have risen again to more than 16.5 per cent. This is substantially higher than CPI inflation reported by the OECD, which peaked in 2001 and currently sits at about 10 per cent.