High Inflation Raises Specter of Social Unrest

Her job is safe and her salary hasn't been cut by a single ruble, yet Svetlana Nikolayeva says she feels the effects of the financial crisis as badly as anyone. "Every time I go shopping, I can afford less and less," said Nikolayeva, a 41-year-old single mother who lives in a two-room apartment with her younger brother and autistic son. "It's not just food. Children's clothes, medicine, communal services -- it's all getting more expensive." The rising cost of goods has confronted Nikolayeva with some painful decisions, like deciding which medicine her son needs least so she can afford to buy him the ones that are crucial for his health. It has also changed her opinion of the government, which she staunchly supported less than a year ago. "There's a feeling right now like everyone is out for themselves," she said. "Putin and Medvedev don't care about my money. They're too busy worrying about their own." The inflation rate rose to a four-month high of 13.9 percent in February, from 13.4 percent in January, as the weaker ruble drove up the price of imports. Inflation for 2009 through March 10 was 4.5 percent, compared with 3.9 percent for the same period last year, according to the latest figures from the State Statistics Service. The Economic Development Ministry forecasts inflation of 13 percent to 14 percent this year, and Finance Minister Alexei Kudrin said over the weekend that he expects the rate to slow in the second half of 2009. But other top government officials, including Kremlin economic aide Arkady Dvorkovich, have said it could rise to as high as 15 percent, a number many economists see as a threshold. "When you have inflation that is higher than 10 percent, it is an economic problem," said Yevgeny Gontmakher, a sociologist and former deputy social protection minister in the 1990s. "When it is higher than 15 percent, certain vulnerable groups begin to suffer, and it quickly becomes a social and political problem." When times were good, inflation was the government's only real economic headache. Last year, the government stubbornly stuck to its inflation target of 10.5 percent, even after it became apparent that galloping growth and government spending ahead of State Duma and presidential elections would push the figure higher. Since last fall, however, the government has turned its attention to more pressing issues: billions of dollars to revitalize the financial system, help industry cover their foreign debt and allow for a gradual devaluation of the ruble. Inflation -- which is only worsening as the government heads toward deficit spending to rekindle economic growth -- is now receiving surprisingly short thrift, economist say, and it is reaching levels that could cause social unrest. Russians saw double- and even triple-digit inflation in the 1990s amid economic reforms and ruble devaluation. While the decade is remembered as a time of simmering social discontent, a young, relatively undeveloped economy with plenty of room to grow kept the situation from coming to a boil, said Alexei Makarkin, an analyst with the Center of Political Technologies. "In the '90s, inflation was accompanied by the birth of new economic sectors, new opportunities that people could pursue if they had initiative and drive," Makarkin said. "Today, there are fewer opportunities. Many of these sectors are already at full capacity, and there is nowhere for people to go but into the streets to protest." So far, anyway, the streets have been relatively calm. Even with a devalued ruble, widespread layoffs and salary cuts, unrest over economic upheaval has been muted across the country, with the biggest protests taking place in the Far East port of Vladivostok, where hundreds were detained in January demonstrations over higher tariffs on imported cars. While dissatisfaction with the government is growing, it has not yet reached a point sufficient to ignite protests. A survey released last week by state pollster VTsIOM found that one in five Russians was prepared to protest the government, but 60 percent said they thought that mass protests were unlikely. Even as frustrations rise, Russians still overwhelmingly approve of President Dmitry Medvedev and Prime Minister Vladimir Putin, who have 71 percent and 78 percent approval ratings, respectively, according to a survey conducted in late February by the independent Levada Center. "Inflation becomes a trigger for unrest when it is combined with other factors, like wage arrears or mass unemployment," Makarkin said. "Right now, pensioners are getting their money on time; unemployment is growing, but not at an alarming rate. "The threats are out there, but they haven't reached critical levels," he said. Yet the Levada survey indicated that only 40 percent of Russians thought that the country was on the right track, down 20 percentage points from September. And a separate Levada poll released earlier this month showed that more than 60 percent of Russians either "respect" or "understand" potential protesters of the government's economic policies. Almost 40 percent said protests against the state's economic policies were likely in their town or city. Discontent could be much more keenly felt in the poorer segments of society, even with inflation currently below 15 percent, because inflation tends to hit basic food and nonfood items harder, Gontmakher said. "For the poor and the needy, inflation is actually higher than for everyone else," he said. "If we have 13 to 15 percent, those who are dependent on the government will be experiencing the effects of 20 percent inflation." The Central Bank raised interest rates last month from 9 percent to 10 percent, partially to combat inflation brought about by the ruble's steep drop. A short time later, Dvorkovich said the state would spend more on pensions, child benefits and regional budgets, incrementally raising them to keep up with inflation rates. The Central Bank has also pledged to prevent further devaluation in the ruble, which leads to price increases on imported goods. A few government officials have spoken out about inflation as well, most notably about rising food prices. "If a pensioner walks into a store and sees that a loaf of bread is selling for 45 rubles and a packet of milk is selling for 35 rubles, what kind of mood will he be in when he leaves that store?" First Deputy Prime Minister Viktor Zubkov said last month. But First Deputy Prime Minister Igor Shuvalov said last Wednesday that the state would not cap food prices because "such a decision would not be wise." Shuvalov did say, however, that the government would control prices of pharmaceuticals. Not all economists think that inflation will rise this year. Yevgeny Gavrilenkov, chief economist at Troika Dialog, said he expects inflation to ease this year, although it will remain in the double digits. "A great deal depends on government spending," he said. "If the government spends generously, then that will prolong inflation." A revised budget was sent to the government Monday that envisions an 8 percent budget deficit, its first since the economic collapse of 1998. Gontmakher said the problem is not fixable by monetary policy alone. "This is all a result of incorrect economic policy, dependence on oil and rampant corruption," said Gontmakher. "Until the system changes, these problems will persist." He cautioned that "it could be as little as a few months until people are driven to do something." Nikolayeva, for her part, laughed at the idea of taking to the streets in protest. "I'm really not the type," she said. "But who knows. Maybe somebody else?"