Depreciation of the ruble, Inflation and monetary policy in Russia

Note kindly translated by Anne-Marie de Grazia

The depreciation of the rouble since the beginning of 2014 has provoked a spurt of inflation. Although it turns out to have been less strong than expected. This raises the problem of first evaluating the “pass through” inflation induced by the Ruble depreciation and second of evaluating the policies of the Central Bank of Russia, which appear today unduly restrictive and contribute de facto in prolonging the difficulties of the Russian economy.


Estimation of the inflationary impact of the depreciation of the rouble

When a country undergoes a strong depreciation of its currency, the risk of an inflationist spurt arises. This risk is more or less important in function of:

  1. The importance of imported goods in the national consumption.
  2. The impact of certain goods in production processes (energy and commodities).
  3. The capacities of salaries to resist inflationist spurts (state of the labor market).

In the case of the rouble, average depreciation reaches 56% in relation to the exchange rate at the end of 2013.

Chart 1

 A - 01 Gr1 Infla

Source : Central Bank of Russia 

Chart 2

 A - 01 GR2


Over the same period, we are witnessing (over 26 months) a cumulative increase of 27% of inflation (consumer prices). We know that inflation can have several causes :

  1. A dearth in manpower, pushing nominal as well as real salaries to increase
  2. Financing problems of companies (a shortfall of bank credits) which push companies to increase their prices in order to finance investments by themselves
  3. The currency policy
  4. So-called « imported » inflation, when the prices of imports rise in relation to domestic prices

Factors (i) and (ii) are known as possible causes of inflation in Russia, whereas the currency policy is relatively restrictive. We must therefore, over the period going from January 2014 to February 2016, distinguish between a « normal » inflation from an inflation directly or indirectly induced by the depreciation of the rouble. The problem is knowing what this “normal” level is. The Central Bank of Russia advertises an “inflation goal” of 4% per year. This can be understood as an estimate of the “normal” level. But the experts of the CBR have a tendency to minimize factor (ii), that is, the impact of investment on prices. We will therefore advance the hypothesis of a “normal” inflation rate of 6% per year, corresponding to what we have called in previous work the « structural » inflation rate in Russia [1]. We are presenting here both the inflation rate (index of consumer prices), hypothesis H1 (corresponding to the 4% rate which is the goal of the CBR) and hypothesis H2 (corresponding to the 6% defined in our prior work).

Chart 3

Evolution of the index of consumer prices and hypotheses as to inflation without the structural dimension  

A - 01 Gr3

If one carries over these rates to the movement of depreciation of the rouble, we notice a considerable inertia of domestic prices, except in the case of the speculative crisis of November 2014 to February 2015. Prices, outside of “structural” inflation, seem in fact scantily sensitive to the depreciation of the rouble. On the other hand, the disorganization of the Russian banking system since end 2014 leaves one to think that the inflation phenomenon induced by the financing of investment has certainly been important in Russia beginning in Summer 2014. The curve of hypothesis H2 appears far more realistic than the one of hypothesis H1.

Chart 4

Depreciation of the rouble and inflationist impact

 A - 01 Gr4


We then calculate a weighted average for to the depreciation, so as to take into account the fact that all the imported products do not react instantaneously to the depreciation of the rouble, and we carry over this weighted average (the so-called « adjusted » curve) to inflation « outside of structural inflation » which we have called hypothesis H2. We then notice that if the rouble depreciated by 56% since January 2014, the impact on prices has been only of about 12%, that is a relationship between both movements which amounts only of 22%.

Chart 5

Depreciation of the rouble with a «weighted average» and inflation induced by this depreciation

 A - 01 Gr5


The monetary policy of the Central Bank of Russia

This sheds a special light onto the monetary policy of the CBR. The latter is making out of the fight against inflation its main objective, if not even the sole one. But the impact of monetary policy on inflation is moderate. If the CBR was probably right to try to limit the hike during the winter 2014-2015, this is no longer the case at present. The interest rate, fixed at 11%, appears as largely abusive, and of a nature to increase in reality what we have called « structural inflation » by depriving companies of access to the banking market.

Which is clear enough and can be seen translating in the strong decrease of investment in the past two years.

Table 1

Economic data (year-on-year)

  2014 2015 12/2015 1/2016 2/2016
GDP 0,7% -3,7% -3,5% -2,5%  
Retail trade 2,7% -10,0% -15,3% -7,3% -5,9%
Real salaries 1,2% -9,3% -8,4% -3,6% -2,6%
Industrial production 1,7% -3,4% -4,5% -2,7% 1,0%


We note that industrial production presents better figures than those of the GDP and that, especially, it contrasts with the figures of retail consumption. This indicates that a certain form of substitution to imports is taking place. But it is clear that the process is far weaker than what Russian companies had been hoping for. Resorting to company surveys, we see that real interest rates are indeed too heavy for a great number of companies. This leads them to seek financing for themselves on the volume of sales, and explains the maintenance of a relatively high inflation rate. Companies increase their margins (by way of their prices) in order not to have to call on banks. They reduce investment as an adjustment variable. This translates into a very brutal drop in investment. It can, in part, explain the present relative weakness of the process of substitution to imports.

The Central Bank of Russia, because of its monetary policy, is probably today the major brake to the activity picking up, and to industrial modernization in Russia.


One can measure that the inflation induced by the « shock » of depreciation has been quite small in Russia, but one can deduce the deleterious effect of the monetary policy such as it is practiced by the Central Bank of Russia. A lowering of interest rates, fixed since August 3 2015 at 11%, down to 7% is mandatory in the shortest delay.



[1] Sapir J., « Kakim dolzhen byt’ uroven’ infljacii? (O znatchenii davnykh diskuccij dlja opredelenija segodnjachej strategii razvitija Rossii) » [Quel niveau pour l’inflation] in Problemy Prognozirovanija, n°3/2006, pp. 11-22.

Idem : « What Should the Inflation Rate Be ? (on the importance of a long-standing discussion for defining today’s development strategy for Russia) » in Studies on Russian Economic Development, Vol. 17, n°3 / May 2006.

Idem, « What Should Russian Monetary Policy Be » in Post-Soviet Affairs, Vol. 26, n° 4, Octobre-Décembre 2010, pp ; 342-372.

Idem, « Inflation monétaire ou inflation structurelle ? Un modèle hétérodoxe bi-sectoriel », FMSH WP-2012-14, juin 2012, Working Papers Series,


Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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