Moscow Journal: The Flaw in the Boom

Russia's new president, Dmitry Medvedev, inherited a rising power with an Achilles' heel: galloping inflation, which threatens to undercut seven years of healthy economic growth, buoyed by ever-rising energy and commodity prices. In the first quarter of 2008, consumer prices rose 5.3 percent (compared with 3 percent in the same quarter last year), and inflation has toppled alcoholism as Russians' No. 1 worry, according to a March poll by the All-Russia Center for the Study of Public Opinion. Earlier this month, protests erupted in Moscow against high food prices and low state wages.

Vladimir Putin, who went from the presidency to the prime minister's office last week, presides over a cabinet divided as to how to handle the crisis. The veteran Finance minister, Alexei Kudrin, wants to cut state spending—some economists warn that current levels of government spending could push inflation up to 14 percent by the year-end. But the new Economic Development and Trade minister, Elvira Nabiullina, wants to stimulate the economy and appease Russia's poor by ramping up state spending. "The price of a slowdown for us is too high," she says. "When we face macroeconomic challenges, we cannot give up growth."

There are few signs that Kudrin's call for restraint will be heeded. Federal spending has doubled since 2005. Both Putin and Medvedev have committed to lavish populist spending on housing and transport, and their approval ratings are sky-high. But nothing sours a boom era like inflation.