From Volume 7, Issue 20 of EIR Online, Published May 13, 2008
Russia and the CIS News Digest

Prime Minister Putin Addresses Inflation Crisis

May 8 (EIRNS)—Russian President Dmitri Medvedev accompanied his nominee for Prime Minister, Vladimir Putin, to the State Duma today, where Putin was overwhelmingly approved. The large Communist Party group in the Duma, however, voted against him. Medvedev spoke only briefly, leaving Putin to make a 45-minute presentation and take questions, in a discussion that was heavily colored by the way in which global food price inflation, is hitting Russia.

Putin said that the priority areas for his government are three: 1) education, health care, science, culture, and social policy for the benefit of the population; 2) shifting to an "innovation" economy; and 3) developing infrastructure: transport, housing, utilities, energy, social, financial, and information.

But, "as the first order of business," Putin said, there is "an economic, social, and political task of the highest importance"—stabilizing the food market. Putin acknowledged that the "difficult situation" in global finance, and especially the "steep climb of world food prices" since last year, are hitting Russia's markets and its citizens' welfare. He pledged greater state support to domestic food production (as a priority sector, alongside infrastructure and high-tech industries), which is still far from recovered from its devastation during the shock therapy of the 1990s. Even as Putin boasted that Russia shares second place with Canada among the world's grain exporters, he admitted that its cities are 70% import-dependent for food. Putin insisted that Russia's large financial reserves, which derive from its raw materials exports, "are the firm basis that we are confident will enable us to get through this period of instability in the world economy."

Communist Party members of the Duma, especially, peppered Putin with questions about inflation, especially the just-announced intention to raise charges for goods and services provided by the state-owned "natural monopolies"—like electricity, natural gas, and railway fares—toward world levels. It was pointed out that last year's overall 12% inflation rate and the 6.4% inflation for four months of 2008 are far exceeded by the rates of inflation for food and other basic necessities, so that the poorest citizens are hardest hit. Putin sounded testy as he replied, making a reference to the serious work stoppage on the state-owned railways in recent weeks, "Do you think it's fun, raising prices and rates, especially for the natural monopolies? So, why don't we go tell the striking rail workers that they'll have to wait. Or, let's take some of the money earmarked for various things, and spend it to support sectors like rail. Where will we get the money? Out of the budget? At the expense of education, state-sector workers, education, defense. If you like, we can do that. But it will be your decision."

At the outset of his speech, Putin stated that he will need to be able "to completely count on the legislative branch," in order to run the government. He will be announcing the government's structure and job assignments over the next week. Before leaving the Presidency, Putin signed a decree that makes the governors of Russia's regions accountable to the prime minister, rather than the President's staff at the Kremlin.

Russian Government Tries To Guess Inflation

May 6 (EIRNS)—The outgoing Russian government of Prime Minister Victor Zubkov announced that prices for natural gas, electricity, and railway transport will rise in the range of 40-100% in the next four years, Deputy Minister of Economic Development and Trade Andrei Klepach told the press. The government wants it known that the price growth will be "really noticeable," Klepach said. But, in a world gripped by hyperinflation, the projected price hikes—stemming from a policy of seeking to operate domestically at price levels closer and closer to "world market prices"—could well end up being low estimates.

Klepach said that electricity rates "will practically double" by 2011. For the general population, the regulated rates are supposed to rise 14% in 2008, and 25% each year 2009-11. Business users will see their rates rise by a factor of 2.5, "or even higher," he said, blaming the surge of world energy costs. Natural gas prices are not supposed to rise as much until 2011, when both the population and industrial consumers will face a 40% price rise.

Russian natural monopolies reform aims at the "equal profitability principle," meaning that revenue from domestic sales should match the earnings to be had if the same products were exported (minus shipping and other costs). Economist Stanislav Menshikov, among others, has pointed out that attempting to implement this principle under current world price conditions threatens to simply cancel all of Russia's plans for an "innovation economy" with significant manufacturing growth.

Rail transport rates will rise twice as much in 2009 as originally planned, according to Klepach. In 2009, their growth will be at least 17.1%, against the earlier planned 9%. Prices may go even higher, if the cost of investment in new rail facilities is added. Klepach claimed that inflation "should stay within 10%," but the risk of exceeding this "is big."

Medvedev Inaugurated as Prices Rise

May 7 (EIRNS)—In his inauguration speech today, as President of Russia, Dmitri Medvedev focussed on ensuring the expansion of political and economic freedom.

Amid endless speculation about his potential to be "more liberal" than Putin, ex-Chancellor of Germany Gerhard Schröder was asked this same question in an interview with Novosti. "I don't see any political differences between Putin and Medvedev," Schröder replied. "So far, they have jointly determined Russia's policies. The West often misinterprets Putin's policies and convictions. There is no doubt that Russia has become a more open, democratic, stable, and successful state than it was before Putin became president.... In the last few years, Russia has been a stable factor, unlike the rest of the world."

As Medvedev took office, national attention continued to focus on the sharp price rises. Kommersant business daily emphasized that inflation can no longer be attributed to "one-time" food price increases, because fuel and transport prices are also going up sharply. Inflation rose 14.2% from April 2007 to April 2008, with food and fuel the biggest factors.

Yesterday's Cabinet meeting discussed curtailing support for the ambitious investment plans of the state-owned Russian Railways. Deputy Minister of Economic Development and Trade Andrei Klepach told the press that the Finance Ministry is not prepared to disburse 1.4 trillion rubles from the federal budget for the Russian Railways investment program. He said that Finance Minister Alexei Kudrin took a harsh position, saying that "taking 1 trillion rubles out of the federal budget will be unrealistic." Kudrin wants the funds to come from somewhere else, such as bond flotations.

Eurasian Diplomacy: Medvedev To Kazakhstan, China

May 8 (EIRNS)—Dmitri Medvedev will visit Kazakhstan and China later this month, already announced as his first diplomatic engagement as President of the Russian Federation, barely two weeks after his inauguration. He will go first to Kazakhstan, on invitation from President Nursultan Nazarbayev, May 22. Chinese President Hu Jintao, who is on a five-day trip to Japan, has invited Medvedev for May 23-24. Chinese Foreign Ministry spokesman Qin Gang announced today, "The Chinese government and people attach great importance to Mr. Medvedev's visit and we hope his visit will further promote close exchanges between the two countries, deepen our strategic mutual trust and expand our cooperation in a wide range of fields."

China Daily quoted Prof. Xu Tao of the China Institute of Contemporary International Relations in Beijing, saying that Medvedev is "giving priority to China, in Russia's foreign relations with major powers." Xu Tao emphasized that Medvedev had long been involved in promoting the China-Russia strategic partnership which was established in 2001, during Putin's administration. Medvedev's Presidency will bring more confidence to the future of bilateral ties, Xu Tao said. "Putin initiated the grand strategy, that Russia should enjoy a sound relationship with China. But a noteworthy point is that Medvedev was the one who did the concrete work to implement Putin's strategy."

Before Medvedev's trip, the foreign ministers of Russia, China, and India will meet May 14 in Yekaterinburg, with the foreign minister of Brazil—a summit of the so-called BRIC group (from the names of the four countries). Qin Gang said, "Chinese Foreign Minister Yang Jiechi will also hold bilateral consultations with his Russian counterpart on a wide range of cooperation issues." The four ministers have met before, but only in the context of other conferences. They will focus on the food crisis and financial crisis, at a time when the U.S.A. and the EU are blaming China and India for the food and oil shortages, the Indian Economic Times reports today. "The issue of biofuels, food security, global financial trends, impact of the slowdown of the U.S. economy are all on the agenda," the paper quotes an official. He said the meeting will be an opportunity for the four nations to give their own assessments of the world's key economic issues.

Russian-American Peaceful Nuclear Energy Deal Signed

May 6 (EIRNS)—Russian Atomic Energy agency head Sergei Kiriyenko and outgoing U.S. Ambassador to Russia William Burns finally signed the U.S.-Russia civilian nuclear energy agreement on May 6, after ten months of sabotage by the U.S. side. The agreement was initialled by Presidents George Bush and Vladimir Putin last July, when they met at Kennebunkport, Maine, but it was held up by U.S. attempts to force Russia to abandon its nuclear cooperation with Iran. Such tactics didn't work for Al Gore when he was Vice President, and it didn't work this time, either. The agreement allows Russian and U.S. companies to cooperate on commercial nuclear plants, gives the U.S. access to advanced Russian nuclear technology, allows Putin's international fuel bank proposal to go ahead, and opens up U.S. spent fuel for Russian reprocessing. Congress has 90 days to approve or stop the agreement, if and when the Administration submits it, and it faces a tough fight.

All rights reserved © 2008 EIRNS