The period until mid-1994 was marked by a very high inflation. Annual rates of
growth of the CPI (for the sake of simplicity in the latter part of this paper it will be
referred to as CPI_12) stayed at four- to three-digit level. This initial surge in inflation was
typical to almost all transition economies and can be attributed mostly to the price
adjustment after the price and exchange rate liberalization as well as the weak current
monetary and fiscal control (D¹browski, 1999). As these developments were, to a large
extent, confined to first years of transition, and also because through most of that period
Russia did not pursued truly independent monetary policy (due to the continued
existence of the ruble zone until autumn of 1993 – see D¹browski (1997)), the analysis
In the first months of 1994 monthly inflation was finally brought down to a single-
digit level, but in the last quarter of this year the disinflation trend was reversed –
after the first spectacular currency crisis on 'Black Tuesday', October 11, 1994 (see
Antczak, 2001). Only in March 1995 monthly inflation fell below 10% and the CPI_12
returned to a downward path only in August 1995, i.e. after the introduction of the
exchange rate band. The exchange rate based stabilization proved successful as
during the following 3 years the CPI_12 showed a stable decline to slightly above 5%
The financial crisis that erupted in August 1998 represented a major inflationary
shock. In September 1998 alone, prices rose by 38%, mainly due to the increase in
prices of imported food and non-food products as well as speculative demand and
expectations of further price hikes (D¹browski et al., 1999). In fact, prices continued
to rise sharply until February 1999. From then on, monthly increases averaged to
some 1.7% until summer 2000. In September 2000, the CPI_12 bottomed out at
18.5% and then showed a steady rise in the following month up to 24.8% in April
2001. After that CPI_12 decreased somewhat again, to the level of 18.6% in
December 2001 and 16.2% in May 2002.
This short overview allows for separating six different periods of inflation
developments, taking into account institutional arrangements and macroeconomic
background:
– up to June 1995: inflation was very high, the ruble was floating, and the authorities
pursued generally very lax monetary and fiscal policies; this period was marked by the
several unsuccessful stabilization attempts and currency crashes with the 'Black Tuesday'
of October 11, 1994 as the most spectacular crisis episode;
– after 'Black Tuesday' monetary policy became gradually tightened and starting
from June 1995 the crawling band exchange rate regime brought the annual inflation
measured by the CPI (CPI_12) slowly but continuously down; however, fiscal stance
continued to be a serious problem and authorities resorted to monetary expansion at
several occasions; this led to the financial crisis of August 1998 and brought a major
inflationary reversal;
– August 1998 – February 1999: the ruble was allowed to float (with some
interventions of the Central Bank of Russia (CBR)) and depreciated dramatically while the
monetary expansion was responding to the fiscal strands; inflation rapidly accelerated;
– March 1999 – September 2000: the ruble exchange rate remained relatively stable
(it depreciated from 24 to 28 rubles against the dollar); fiscal policy was tightened but
money aggregates expanded at a rather high pace; the CPI_12 fell gradually down to the
level of 18.5% in September 2000;
– September 2000 – end of 2001: in the environment of relatively stable nominal
exchange rate (helped by the CBR interventions) CPI_12 was on the rise again (up to
24.8% in April 2001) with strong fiscal surplus and M2 growth driven by NFA and
CPS components; the second half of 2001 brought a limited improvement in the
situation but year-end inflation figure of 18.6% exceeded significantly the
government target.
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Studies & Analyses CASE No. 241 – Inflation and Monetary Policy in Russia ...
