Combating Inflation with WTO Membership

President Vladimir Putin's annual televised question-and-answer session with the nation on October 18 was a carefully staged event, but it gave Putin an unexpected opportunity to make some bold pronunciations.

Three themes stood out: the military, inflation, and international integration. The military questions concerned mainly social conditions and rearmament, which Putin called "grand," but he carefully avoided clarifying its purpose. The giveaway, however, was no fewer than three anti-US questions. Iran, by contrast, was respected and honored.

Last year, Putin's communication with the people marked a sharp turn to more state intervention and protectionism. This year, the economic rhetoric was very different. National projects were mentioned just once, and Putin suggested state financing for social welfare and infrastructure investment.

Putin's economic policy contains two constant, positive features: a strong emphasis on macroeconomic stability and high economic growth. They were present, but this time Putin expressed strong concern about rising inflation, which he admitted was not likely to stay within the planned 8 percent and might surge to 10 percent.

Putin made this topic his economic lead. Conspicuously absent was any advocacy of price regulation, a Soviet reflex reaction. But far-reaching regulation of food prices was introduced a few days later. As usual, Putin proved himself as the professional disinformer. But price regulation is no cure against inflation, only a stopgap measure at best.

Nor did Putin discuss the possibility of faster ruble appreciation, which most economists suggest. But the exchange rate of the ruble is bound to rise because of persistent currency inflows. It is the only immediate cure to inflation arising from imports.

The standard macroeconomic advice for the control of inflation is to tighten fiscal and monetary policies. For the last two years, Russia has had an impressive budget surplus of 7.5 percent of gross domestic product because of the artificially low exchange rate. After Putin's speech, the government suddenly decided to slash the budget surplus to 2.8 percent of GDP in 2007, flooding Russia with cash in the last quarter of 2007, which will send inflation soaring.

After eight years of exemplary macroeconomic policy, the country's finances remain solid. Yet the combination of a sudden fiscal spending spree in the midst of an inflationary surge and price controls is very bad policy, and it is arousing new worries. Russia's macroeconomic policy has unexpectedly fallen into disarray.

Instead, Putin focused on freer trade as a means to combat inflation. Import tariffs for several kinds of foods have been cut to reduce domestic prices. Export tariffs on grain have been tried, but they were patently ineffective.

A farmer who called in to Putin was worried about the effects of Moscow's accession to the World Trade Organization (WTO) on domestic agriculture. Putin, who usually agrees with the questioner (undesired questions are obviously not allowed), responded that the country's producers did not cope with their tasks, which resulted in rising food prices. Therefore, Russia would have to cut import tariffs further for a large number of foods.

Putin repeated his standard statement that Russia will only enter the WTO under conditions that are acceptable for the country, including agriculture, but he added that its negotiators had now achieved such conditions also for agricultural subsidies. He even pointed out twice that the European Union had decided to reduce such subsidies.

Indeed, Putin has not argued for membership in the trade organization so clearly since his annual address in 2002. He concluded, "I think that if we act accurately and attentively pursue our interests, we can attain positive results, including in WTO accession."

Considering that Putin has not said a positive word about the WTO in public for the last 18 months, this was quite a breakthrough. In June, he even called the trade organization "obsolete." Suddenly, the persistently optimistic statements by Russia's WTO negotiator, Maxim Medvedkov, that Russia can complete its accession negotiations to the organization before the end of 2007 sound plausible. His big interview in Izvestia on Oct. 23 looked like an attempt to prepare the public.

One consequence of the recent government change is that Deputy Prime Minister Alexei Kudrin gained more responsibility for WTO negotiations, while his control over finances seems to have waned. On Putin's order, Kudrin has reenergized the country's negotiation efforts, in which the president seemed to have lost interest. WTO accession seems to have become a top priority at long last.

As it stands, Russia has only two bilateral protocols left for its WTO entry-Saudi Arabia and Georgia-and about 10 multilateral issues in Geneva, mainly the reinforcement of intellectual property rights, the inspection of imported food and export tariffs. If Moscow shows some good will, it can settle these issues within two months. Indeed, it would make little sense not to do so.

Putin received numerous call-in questions about international integration, and his main theme was the need for openness. One questioner desired more protectionism for construction, but Putin objected by saying that "open competition is highly beneficial."

He also praised the convertibility of the ruble and emphasized that it had not led to any capital flight as "many experts predicted;" on the contrary, it has led to a substantial inflow. Putin took great pride in the country's large international currency reserves and warned against populist forces that aspired to dissipate them. He talked about Russia as "an open country" and encouraged people to learn foreign languages.

Apart from inflation, one of the country's new, great problems is the shortage of labor. On this occasion, Putin promoted the program on the return of "compatriots," referring to Russian speakers who live outside of the country. This was in sharp contrast to his appearance a year ago, when he initiated legal discrimination against foreign citizens in street trade. Even a week before the call-in show, Putin complained about the excessive number of foreign managers in Russian companies.

The president's latest trade statements must be welcomed, but he needs to decide where he actually stands. Most of all, he sounded as if he was debating with his own pronouncements made a year ago. Nor is it very credible to argue for discrimination against foreigners one week and for increased immigration the next. Moreover, the official neglect of hate crimes against ethnic minorities and foreigners becomes increasingly disturbing. Freedom and democracy were strikingly absent.

If Putin's conversation with the people were to be summarized in two phrases, it would be: military rearmament and the country's accession to the WTO; in some respects, the two goals contradict each other. The next couple of months may give us an indication whether the president is more inclined to international aggression or economic integration. Macroeconomic policy has suddenly become interesting again.