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CEP Discussion Paper
Can Russia Control Inflation?
Richard Layard
September 1993
Paper No' CEPDP0170:

Russia has come near to hyper-inflation and pulled back from the brink. But the position is still delicate. In this paper we review the past history, and then what needs to be done and the difficulties of doing it. Russian monetary policy since the reform has gone through three phases - first quite tight (in early 1992), bringing inflation down to 10 per cent per month in the summer; then very loose (till late 1992), pushing inflation up to over 25 per cent per month; and then a gradual tightening. Inflation in spring and summer 1993 was a steady 20 per cent per month. But the Central Bank credit targets adopted for the year would reduce inflation progressively. The recent rise in the real value of the rouble is an encouraging sign. However there are five major question marks. (i)Can Central Bank credit really be controlled? The pressures are immense. But, on the good side, public opinion is now, since the near hyper-inflation towards the end of last year, quite hostile to inflation. It is also fairly resigned to the economic chaos involved in restructuring. However there remain massive pressures, which are exacerbated by the role of enterprises as providers of much housing and health care (where the transfer of responsibility to local authorities takes time). For these reasons Russia is not currently planning a 'shock therapy' stabilisation, which could only be mounted with massive foreign aid. There are well known difficulties in a gradual approach. But, if Russia succeeds in reducing inflation in the next year, it is quite likely to be by the gradualist route. (ii)What about credit to the rouble area? As part of the process, inflationary credit to other former republics of the Soviet Union will have to be further curtailed.

This would be easier if each country had its own currency, fully convertible with the Russian rouble. But credits will still be necessary to sustain good will and some necessary trade links. They should be directly financed by the Russian government as