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10 Apr, 2008 13:54

Russia challenged fighting inflation

As prices in Russia have risen 5% from the start of 2008, the full year target of 8.5% is in great doubt. Different ministries struggle to present a unified strategy – each in their own way.

The Economic and Finance Ministries say market regulation can stabilise inflation. But the Agriculture Ministry has pushed though a policy of price controls.

However, they have less control over the price of imported goods, which are taking a greater share of retail sales, as this week's data showed. Russian imports from non-CIS countries soared more than 50% in the first quarter.

It's a global problem, but with a Russian twist. Natalya Orlova, analyst from Alfa bank, thinks the main reason behind inflation is growth in imported inflation.

“World prices of agricultural goods are growing, and, secondly, there is the growth of tariffs on gas and electricity,” she noted.

As the Central Bank pumps money into banks to offset the liquidity crisis, it's also boosting inflation. And the tough measure of freezing food prices does not seem to have had much result.

Andrey Kostin, President of VTB bank believes that when fighting inflation a balanced approach is needed.

“My concern as a banker is that the government should not fight inflation at the expense of developing the banking sector,” he said.

But the Central Bank is running out of ammunition. Analysts expect it to raise interest rates up from 6.25 per cent.

And if that doesn't work, there's the currency. But allowing the rouble to appreciate could hurt businesses, consumers and the economy in general.