By Neil Buckley in Moscow and Javier Blas in London
October 23 2007
SourceRussia is introducing Soviet-style price controls on some basic foods in an effort to prevent spiralling prices from denting the Putin administration’s popularity ahead of parliamentary polls in December.
The country’s biggest food retailers and producers have reached an agreement, expected to be signed with the Russian government on Wednesday, to freeze prices at October 15 levels on selected types of bread, cheese, milk, eggs and vegetable oil until the end of the year.
Russia’s move is the latest sign of surging agricultural prices becoming an international political issue. Big retailers will limit their mark-up on those goods to 10 per cent.
China has also agreed to food price controls; Egypt, Jordan, Bangladesh and Morocco are increasing subsidies or cutting import tariffs to lower domestic prices. Rich countries are not immune: Italian consumer groups organised a pasta boycott last month in a protest over prices.
The Russian economy ministry is also examining whether to increase a 10 per cent export tariff on wheat planned for November to 30 per cent to keep its domestic market well supplied. That prospect has pushed wheat prices up 6 per cent in Chicago in the past week, giving Moscow’s fight against rising food prices an effect beyond its borders.
Russia’s agriculture ministry said the food pricing arrangement was voluntary. But industry insiders said they had come under heavy pressure. “We were told in no uncertain terms that we have to freeze prices on certain products,” said one Russian food industry executive, who asked not to be named. “Everybody understands what the government is doing. It is part of their election campaign.”
Russian food prices rose steeply in September, with vegetable oil up 13.5 per cent, butter up 9.4 per cent and milk 7.2 per cent, thanks to global agricultural price increases. Given a big low-income population and meagre pensions, the price rises are among the few factors capable of deflating President Vladimir Putin’s 80 per cent-plus approval ratings.
Mr Putin’s decision to head the ticket for the dominant United Russia party has transformed parliamentary elections on December 2 into a referendum on his personal popularity.
Russia has fought off inflation in recent years but rising food prices mean it has already exceeded this year’s 8 per cent inflation target, with the final figure likely to top 10 per cent.
Food prices have risen globally thanks to increasing demand and changing diets in developing countries, more frequent floods and droughts damaging harvests, and the biotech industry’s growing appetite for grains.
Russia, like many countries, faces the additional challenge of fighting food inflation while pumping money into the financial system to combat the global credit squeeze.
But, as Izvestia newspaper commented, Moscow has “found its solution in the past”, with price freezes harking back to Soviet times.
“The reaction of the Russian authorities to the recent inflation spike has been even more predictable than the price surge that triggered it,” Dresdner Kleinwort said in a note to investors.
Industry insiders said price freezes might restrain headline inflation but would not reduce the overall rate.
Copyright The Financial Times Limited 2007