The Problems of Sustaining Russia’s Growth

Here’s an interesting note from Reuters, reminding us that the most frightening prospect to siloviki in the Kremlin is not the watered down political opposition, but rather old fashioned inflation. I wonder if Putin’s brand of authoritarian capitalism is still viable when growth falls back below 5%…

Medvedev’s biggest immediate problem could be that economic planners in the government and the Kremlin are at odds over how to respond to these challenges. One camp inside the government, backed by Kremlin economic aide Arkady Dvorkovich and business lobbies, believes that the government should cut taxes to boost economic growth — a move opposed by Finance Minister Alexei Kudrin.

Kudrin argues the economy, which grew at a rate of 8.1 percent in 2007, is already overheated, a term used by economists to describe growth significantly above the historical trend coupled with high inflation.The overheating may lead to a hard landing, when the economy abruptly stops growing. Neither Putin nor Medvedev have taken sides in the debate, though Putin acknowledged that inflation, which reached 14 percent this month, was a major concern.”I think the big guys do not really want to be bogged down in economic technicalities. They simply want high growth rates, preferably with low inflation,” said Nikolai Kashcheyev, economist at state-owned VTB Bank.