From Russia with thoughts


Just back from Moscow, where the locals were managing perfectly well with temperatures of -18C. There must be a point about climate change there. No, I'm not saying that the freeze invalidates the idea of global warming (though you have to ask how many more years of falling world temperatures would be needed to do so). Rather, it shows just how adaptable we are. Maybe adapt (if necessary) is the best and cheapest policy after all.

The reason I was there, though, was to tell the deputy head of Russia's central bank, Alexei Ulyukayev, that he might as well take a holiday. China, not him, is going to determine monetary policy hereabouts. China is overheated, and know that they have to rein in. That means their demand for commodities will grow less fast, and the all-important oil price is likely to hover around $40pb for the next half-decade. That too suggests that Alexei could take a break, because the resulting downward pressure on the rouble makes a strong rouble policy unsustainable (you can't buck the market, after all), which will have the beneficial result of lowering inflation.

Russia has been addicted to oil, and to inflation, for too long. High inflation makes rational investment impossible, because the signal of real price changes get hidden in the noise of all prices soaring upward. And 10% annual price rises make quite a bit of noise. Dependency on oil is fine when prices are booming as they have been, but it looks pretty sick now. Output is already falling, and Russia needs to diversity – not by trying to 'pick winners' but by making it easier for people to invest in Russia and get a fair reward for their investment. But when you are around 120 out of 181 countries on the World Bank's list of good places to do business in, something radical is needed. Like asserting the rule of law, cutting back bureaucracy, standing up against protectionism, and changing the culture whereby politicians and officials think position is about lining their own pockets, rather than the country's. When things are booming, you can indulge conservatism, put off reform, and endure inefficiency and waste. In tough times, you need to be a lot keener. It is a lesson that not just Russia needs to learn.