May 23, 2022 Special Dispatch No. 9976

Russian Economist Tsyplyaev: Russia May Soon Replicate The Galloping Inflation Of The 1990s

May 23, 2022
Russia | Special Dispatch No. 9976

In an interview with Rosbalt, Sergey Tsyplyaev, the authorized representative of St. Petersburg University of Technology, Management and Economics and Editor-in-Chief of "Vlast" ["the Power"] magazine, claimed that the ruble's appreciation was due to the downturn of economic activity, wage cuts and job losses. Russians have no reason to buy dollars, they need to save their money for current expenses. There is a limit to what the government can do with price controls that will lead to shortages. If the war continues, the government will be forced to print money presaging a sharp rise in inflation. The interview with Tsyplyayev follows below:

Sergey Tsyplyaev (Source:

The Bank of Russia has published a report containing a macroeconomic forecast for the next couple of years. Although the document proceeds from the fact that sanctions won’t be lifted from us, it looks quite optimistic. Do you agree with the Central Bank’s assessment regarding, for example, a fall in Russian GDP in 2022?

First of all, I would like to say that with regards to the part on assessing the [current] situation, the report is quite realistic. We see deeply disturbing forecasts of drop in the GDP of about 10%. This is close to the World Bank’s assessment, forecasting a [GDP] decline of 12%. Naturally, they are predicting a much tougher scenario for Ukraine: there a decline of this indicator could reach 45%. It’s worth noting that global drop of GDP will be about 4%. This is an overall picture from the World Bank’s perspective.

Inflation is expected to be quite high, up to 30%. This means a serious pressure on markets. Overall, all the threats listed in the report are correct. A completely different issue is that any report prepared by government agencies is by definition optimistic. The report continues with a story about how the situation “will start to improve” but one would, certainly, find no reasons for improvement in it.

When it comes to inflation [in the report], it’s indicated that it will reach 18-23% by the end of the year. On the other hand, there are promises that there will be no inflationary spiral. Is this a realistic forecast?

Inflation can wind up reaching a hundred percent, or even a thousand. We remember this from the early 1990s, when prices went up almost 20 times at once, once [state price regulation] was lifted. That’s already 2,000%!

Inflation is high now, but not yet insane. There is one nuance as to why it’s relatively subdued: economic growth is decreasing. It’s “cooling down.” Citizens don’t possess enough money to do shopping. Businesses are shutting down, in some places wages are being cut, in others - people have simply lost their jobs. Next comes the “vertical race.” On the one hand, supply is falling. The amount of goods on the market is contracting because the economy produces less and exports are severely cut. On the other hand, purchasing power is falling too.

The experience of countries which went through a situation of severe war-related [economic] problems suggests that governments have an irresistible obsession to start printing money in order to somehow “plug” the [budgetary] holes that arise (including salaries to those who are at war). In such circumstances, inflation is more likely to spiral out of control and will depend on how long the hostilities continue.

Inflation prompts those, who still have savings to urgently seek where to invest them. Previously, foreign currency acted as such an instrument. Now the ruble demonstrates unprecedented growth. In your opinion, how will the Central Bank act in the foreign currency market in the near term?

First of all, there should be an understanding that the currency exchange rate is determined via quasi-market means. There were a lot of venues where transactions [on currency exchange] took place. This resulted in the formation of an internal price. Since the ruble is a limited convertible currency, no one will sell us anything in the West for rubles. We will have to first exchange them for a convertible currency in order to buy goods.

Let me draw an analogy from everyday life example. Imagine, you go into a shop. There’s black caviar lying there priced at “10 rubles a kilo.” You would be happy to buy it, but you are told that it is for union members only. Some come and buy it, but naturally there are very few of them, that is why there is not enough caviar at 10 rubles per kilo for “everyone.” This is what artificial pricing looks like.

Artificially limited demand allows the exchange rate to be tinkered with quite freely. There have been constant American claims against China, for example, that the latter is engaged in state-run currency exchange rate tweaking. Beijing has maintained a low yuan exchange rate in order to stimulate export aggression.

As far as the limits of the currency corridor are concerned, there are certain constraints. On the one hand, panic struck [in Russia] when everyone rushed to buy [foreign] currency. The exchange rate went up, which meant an incredible increase in the cost of all imports, a blow to the consumer market and accelerated inflation.

On the other hand, if you [meaning Central Banks] deploy a lot of artificial means in order to lower the USD exchange rate, this improves the opportunities for external competitors in relation to domestic-produced goods. In addition, opportunities to fill the budget are reduced because oil and gas are sold for foreign currency. It’s being converted and on each barrel of oil sold we get less rubles for the budget (provided there is a low USD exchange rate, which is beneficial to the [domestic] consumer).

The Russian Central Bank will at some point stop [manipulating the exchange rate] and bring it, I believe, to an acceptable level. The exchange rate has, in a sense, moved away from real economic processes and has become rather artificial. From here on, the authorities have the power to do whatever they want with it.

Meanwhile, Russians are monitoring the authorities’ actions and wonder whether or not to buy USD.

This is a very interesting question, because the sphere of [foreign] currency circulation has decreased. We used to understand that it was possible to exchange rubles at a more or less reasonable rate into euros or pounds sterling. For many people this step was logical for travelling abroad. Now it has practically stopped.

People now have less money in general. They spend it on their current expenditures. Currency used to be a means of saving, but today many people have nothing to save. We see that now, for instance, real estate transactions are sharply contracting. People simply don’t have money. And this also brings the USD down.

Share this Report: