Kostin talks about “big import component” in Russian inflation

Andrei Kostin, head of VTB, stated in an RBC channel interview that the import of high prices from abroad is one of the key factors to the acceleration of inflation. Despite being one of the strictest in the world, the Russian Central Bank might shift to a milder policy by late 2023.

Andrei Kostin, chairman of the board of VTB, said in an RBC channel interview at the “RUSSIA CALLING!” forum that policies of the Western Central Banks play a substantial role in Russia’s high inflation.

The position of the Russian Central Bank at the moment is “probably one of the strictest worldwide”, whereas “neither Federal Reserve System, nor the European Central Bank adopt strict policies”, remarked Kostin.

“Generally, we are taking this damage as well because there is a big inflation import component due to high world prices. And the essence of high world prices is that today money is virtually worth nothing worldwide, which, of course, adds to the inflation factor. Although the American government is cutting down its support, the rates are not moving anywhere in the grand scheme of things”, noted Kostin. On November 30, the head of FRS Jerome Powell announced that the regulator will be considering the acceleration of the QE (quantitative easing) program closeup in December. Within this program, large volumes of bonds are bought out of the market to provide liquidity and stimulate the economy.

According to the assessment by the Ministry of Economic Development, as of November 24 inflation rate was higher than 8% per annum (*.pdf). This is twice as high as the Central Bank’s target of 4%.

Given that, the Bank of Russia is constantly toughening its monetary policy: last time in October, the key rate was raised by 0.75 percentage points to 7.5%.

«We [the Russian Central Bank] are probably taking the strictest approach, which causes criticism from businesses. But I’m on the side of our Central Bank», noted Kostin. Oleg Deripaska, businessman and founder of UC Rusal made critical statements about the regulator’s policy on the first day of the “RUSSIA CALLING!” forum. “I can guarantee you that with your rates there will be no growth of supply, especially if you are worried about underlying inflation”, said Deripaska to Elvira Nabiullina, the head of the Central Bank. She replied that “if a business gains profits, and the dividends are rising, but it chooses not to invest, the key rate is not the sole issue”.

Quoting Kostin, “Russia and the West are historically different after all”: “While inflation in the West has lately been almost nil, and they even wanted to accelerate it because stagnation and deflation are also a big scourge <...>, we in Russia remember quite well what it is to live with a two-digit inflation».

“But, naturally, like all strict measures, the decisions of the Central Bank have a flipside which is lower economic growth rates due to the increase of borrowing costs. We in the banking sector expect a reduction of credit rates growth in both retail and real sectors by a third. Of course, that leads to a drop in investment even with high prices for Russia-produced raw materials.”, added Kostin. He believes that the Central Bank will be able to slow down inflation rates by as early as the end of next year, “and after that we can probably expect the key rate to decrease – not later than 2023”.

On November 30, Nabiullina announced that the board of directors of the Russian Central Bank will most likely raise the key rate at the next meeting on December 17, with the biggest considered value being 1 percentage point. She called keeping of the key rate at current 7.5% “the least likely scenario”. Kostin noted that VTB anticipates the key rate to increase by the mentioned 1 percentage point.