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#11 - JRL 2006-72 - JRL Home
Date: Sun, 26 Mar 2006
From: Vlad Ivanenko <ivanenko60@yahoo.com>
Subject: The February run on basic commodities ­ update and conclusions

In the mid February, many Russian regions experienced a strange run on basic commodities (salt, sugar, and matches). The run was mostly ignored by Western observers as not “newsworthy”. This is a pity because it has exposed the fragility of free market in Russia. Contrary to such economic platitudes that “markets will take care of themselves” and “there are no big bills lying on the sidewalk”, the run did require state intervention (temporary control of commodity prices and moral pressure on suppliers to increase delivery) and provided ample opportunities for local “profiteering”.

The run has alarmed public authorities. Recently, Ros Business Consulting news agency reported that the Federal Anti-Monopoly Agency (FAC) finished the first stage of its investigation of the run and concluded that no evidence existed on potential cartel agreement among salt producers.

The Russian market handles 3.6 million of metric tons of salt annually, out of which around 2.8 million is produced in Russia. The FAC evaluated price information of two main Russian producers ­ Bassol (Astrakhan, 2 million) and Iletsksol (Orenburg, 0.6 million) ­ plus main importers ­ Artemsol (Ukraine, Russian export of 0.87 million annually) and Mozyrsol (Belarus, 0.07 million annually). According to available data, delivery price ranged within 1.5-2 ruble/kg on the factory gates domestically and 2-4 ruble/kg at border on the CIF basis. Because transportation tariff did not exceed 0.5 ruble/kg for the Central Region ­ the area most hit by panic ­ the average price for wholesalers appeared to vary between 2 to 4.5 ruble/kg depending on grade and packaging. At the same time, retail price was in the range of 30 to 60 ruble/kg at the peak of the run. From the economic point of view, such a high profit margin ­ above 1000 percent ­ indicates the existence of gross market distortions with far-reaching consequences.

First, given excessive margin, it is plausible that wholesalers enjoy near absolute monopoly power in their respective areas and, consequently, set prices with little consideration for changes in demand and supply. This allegation is supported by persistent inflation of 2002-5 that cannot be explained by economic logic alone. Apart from economical inefficiency that trade monopolization introduces, the situation cannot be tolerated on political grounds. It undermines the case for free market in Russia and justifies greater state interference in market affairs. Truly, choosing between equally damaging inefficiency of private and public monopolies, public monopoly is preferable on equity ground.

Second, the run has highlighted the difference between the “new” retail sector based supermarkets and the “old” sector of “open bazaar” vintage. Anecdotal evidence suggests that supermarkets kept the price of salt stable while small retailers could not resist temptation to overprice the product. Thus, the growth in supermarket chains is likely to increase consumer power rendering state interference unnecessary. Current data are encouraging: supermarkets account for half of the retail sector in Moscow, about a quarter ­ in provinces, and their share steadily increases. The growth of supermarket chains is already felt by wholesalers who are persistently driven to reduce their price margin and, in the long run, are destined to transform themselves in competitive pro! viders of transportation, storage and packaging services.

Finally, a sudden and explosive growth in demand for basic commodities has shown that the average consumer exhibits unbelievable detachment from reality bordering irrationality. The consumer appears to respond to “rumors” better than to formal advertising with little sign of critical re-assessment of such “news”. This conclusion bodes ill for the development of democracy in Russia. Extending economic logic to politics, the revealed aberration warns against excessive reliance on “public wisdom” of the median Russian voter. One can hardly expect that a person who stockpiles unnecessary commodities responding to weird economic “rumors” behaves differently evaluating political “news”. Expectations of benevolent people’s choice “from below” assume that the median Russian voter is able to formulate rationally her political preferences. So far, such evidence has been lacking.