Russia Profile
November 19, 2007
Inflationary Pressure
Keeping a Lid on Rising Prices
By Dmitry Babich
On Thursday, the Russian Interior Ministry came up with a draft law to penalize "artificial price rises" by up to six years in jail, declaring it a serious crime. The Federal Antimonopoly Service (FAS), whose experts co-authored the proposed legislation, reported about investigations into the activities of food-trading companies in dozens of Russia's 87 regions.
The FAS suspects these companies of entering into illegal cartel agreements, which led to steep increases in prices of vegetables, milk, dairy products and vegetable oil in September and October. At the end of last month, several of Russia's biggest food trading companies agreed to maintain a "moratorium" on price hikes on basic food staples until January 31. On November 13, David Yakobashvili, chairman of the board of directors of Wimm Bill Dann, Russia's biggest dairy and juice products manufacturer, said that the moratorium could be extended for "two more months," meaning that it would end only after the presidential election in March 2008.
Experts warn, however, that any "freeze" on prices can only have an artificial effect and that pushing back the price fluctuations can lead to long-term economic losses even if short-term political gains for President Vladimir Putin and his United Russia party are obvious.
"Prices, after several months of artificial 'freezing,' may spiral out of control," warned Arkady Zlochevsky, president of the Russian Grain Union, an umbrella organization of the country's 260 grain producers.
Government officials understand the dangers of price freezes. "You cannot "stop" the process of price growth at the regional level, you can only slow it down," said Ilya Klebanov, presidential envoy to the Northwest Federal District. "Agreements with suppliers, freezes on prices and other temporary measures may stabilize the situation for a while, but later on a sudden deterioration may occur."
In fact, a sudden deterioration has already occurred in early autumn. The absence of obvious domestic reasons for it made Agriculture Minister Alexei Gordeyev seek out an explanation beyond Russia's borders. "In the countries of the European Union, bread and meat went up 45 percent a year ago, while prices of vegetable oil and dairy products soared by 60-65 percent," the minister said in an interview to the official Rossiiskaya Gazeta. "Food is getting more expensive worldwide and we are a part of this process."
In Russia, the situation with the food market started to raise concerns in September, when prices for vegetable oil jumped by 13.5 percent and prices for milk soared by 9.4 percent, followed by dairy products that became 7 to 8 percent more expensive. Eighty-two percent of Russians surveyed by VTsIOM polling agency said they noticed a considerable increase in prices, an unsettling trend for the ruling United Russia party on the eve of the parliamentary elections.
Could this situation be explained only by external factors? Novye Izvestia daily, traditionally critical of President Putin and his policies, points its readers' attention to the budget spending in recent months, putting the recent budget spending in the social sphere (for example, raising pensions for the retired military) at 1 trillion rubles (around $40 billion). Even if the daily exaggerates the spike in government spending, it is becoming clear why Finance Minister Alexei Kudrin failed to keep inflation at 8 or even 11 percent, as he had pledged to do.
However, the ruling party may be partially reassured by explanations given to this unfortunate state of affairs by most of VTsIOM's respondents. Only 8 percent of the people polled by the agency tied the sudden price hike to the mismanagement or inaction on the part of the authorities. Twelve percent relate the problem to monopolization of the market by some "greedy" traders and intermediaries, while 7 percent blame everything on the pre-eminence of imported goods, and 3 percent emphasize the rising oil prices - in these respondents' opinion, the influx of petrodollars into the country, coupled with the absence of growth in the domestic agricultural production, has led to inflation.
In fact, all of these explanations are partially correct; the problem, however, soon also took on political importance on the eve of the parliamentary elections in December.
In this situation, the government seems intent on postponing the inevitable crisis, preferably to push it back to the period after the presidential election next March. However, since the current ruling team hopes to keep the reins of power and to fulfill "Putin's plan" after the elections, the government has set out in search of solutions compatible with a market economy.
First, the FAS started investigations into the activities of regional food trading companies across Russia, alleging that a secret pact between them has led to a price hike. Second, the government lowered the import duties on milk, vegetable oil and vegetables from the previous 15 percent to just 5 percent. Prime Minister Viktor Zubkov called for giving easier access to Russian markets to food products from the neighboring republic of Belarus. The government also raised the customs duties for exported wheat and barley and subsidized loans for food processing companies, thus encouraging domestic food production.
In the opinion of Finance Minister Kudrin, commonly seen as a staunch supporter of economic liberalism, these measures allowed the government to stem the growth of food prices without breaching the rules of a market economy.
"Freezing the prices by a government order would be a mistake," Kudrin said in an interview to RIA Novosti new agency. "However, we have the right to soften price shocks by sending messages to food producers and food traders. The government fights not against price fluctuations in principle, but against sudden shocks, when a price hike threatens to exceed 40 percent."