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Prices in January on the rise in Russia
A bad Russian tradition to sharply lift all prices in January will be preserved in the year of presidential elections. Even tax reforms cannot overcome this. No matter how Russian Finance Minister Alexey Kudrin hoped for consciousness of vendors, the abolishment of the 5-percent sales tax beginning January 1, 2004, and the 2-percent reduction of the VAT are unlikely to affect consumer prices. The beginning of a year is a traditional period for price advance in Russia and those in the housing and communal industry most of all. For example, beginning January 1, Muscovites will have to pay more for heating, electricity, water supply, gas, and the removal of garbage. Tariffs for maintenance and repair of housing will go up, too. Residents of other regions will suffer the same. Several dozens regional governments have already announced their plans to increase energy and other tariffs. Some observers believe that the very program of keeping prices for electricity down declared by RAO UES in a number of Russian regions is open to question now. However, the majority of specialists concur that the action aimed at demonstrating the advantages of reforms in the energy industry is much more important for the energy grid’s top management than the failure of the party headed by its CEO in the parliamentary elections. At the same time energy tariffs will climb. For instance, beginning January 1, 2004, tariffs for electrical energy will be raised in Moscow and the Moscow region. The Moscow regional energy committee reported that beginning early next year, an increase in the average annual tariff for electrical energy against the basic tariff for 2003 will be 14 percent. It was reported earlier that on January 1, electrical energy tariffs would go up 16.2 percent on average in Moscow. This creates prerequisites for a traditional inflation leap in January 2004. Most experts tend to believe that the tariff factor will dominate. Its influence may surpass the tax reduction beginning January 1, 2004. “I think one should not hope that tax reforms will reduce the inflation rate,” head of the strategic analysis department of the FBK auditing and consulting company Igor Nikolayev stated in an interview with RBC. “In the end, prices will be determined by the supply-and-demand correlation. Yes, officials do play a certain role but this is not important on the local level anymore. One will hardly keep tariffs down artificially.” According to estimates of the Economy Ministry, the share of communal payments is 25 percent of the consumer basket. All the rest are foodstuffs and industrial goods. Hypothetically, prices for this category of goods should be affected by the VAT reduction and the abolishment of the sales tax. However, this effect is very unlikely to be considerable. “We do not expect tax abolishment to influence [consumer] prices,” deputy chairman of the Russian State Statistics Committee Sergey Kolesnikov said in an interview with RBC daily. “In any event, we do not believe that the impact of this factor can be significant. Strictly speaking, the Statistics Committee does not have to analyze all factors of price fluctuations. We shall not change our methodology of inflation rate calculation despite the abolishment of some taxes. Our goal is to register prices the way they finally are.” Representatives of retail prefer to keep back the fact that the abolishment of the sales tax will not impact prices much. However, answering direct questions of mass media sources, they say that price reduction cannot concern all goods. To put it in other words, only some commodity groups that are the most flexible regarding demand for them will have their prices go down. Together with the forecasted advance of tariffs, this could trigger a double inflation rate in January against the previous month. Even if the government does not want to spoil the macroeconomic “picture” before the re-election of Russian President Vladimir Putin, a deferred inflation jump is inevitable. The Central Bank’s creation of money and the Finance Ministry’s mitigation of budget policies compile a solid basis for such development of the situation. According to expert forecasts, in January 2004, the inflation rate can reach 2.5 percent against 1.0 to 1.2 percent expected this December.
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