Inflation Rising

Published in Forbes Magazine, November 28th, 2007

Ten years after the Asian Crisis, the ensuing ruble default of 1998 and the Argentinean Financial Crisis of 2001, the situation in emerging markets has became more stable. Still during the last couple of months, in some emerging markets--especially Russia--inflation has become a very popular and ominous word.

I recently visited Russia a couple of times, and the empty shelves in grocery and department stores that were so prevalent in the early 1990s are now a distant memory. This is the case not only in Moscow and St. Petersburg; stores in the Siberian city of Novosibirsk, and the Caspian city of Astrakhan, are as well stocked as those of Sao Paulo or suburban America.

But prices are starting to increase at quite a rapid pace, and this has very important implications for production costs of enterprises funded by foreign direct investment. Inflation severely reduces the purchasing power of domestic currency, so domestic workers demand more. Foreign entrepreneurs and strategists need to understand and be able to react to rising production costs, and the shrinking purchasing power of locals.

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