ECONOMY
How the Government is Fighting Rising Food Prices
May 14, 2024
Tatiana Rybakova
Journalist and writer
Journalist Tatiana Rybakova talks with economic experts about what is behind spikes in food prices in Russia and how officials’ measures to combat food inflation differ from those used in other countries.
Wholesale prices for lamb have soared 30-40% this year. Before that, there was an “egg rush” at the end of last year, as well as a sharp rise in prices for sugar, chicken and pork. Food inflation is now rising all over the world, but what makes it different in Russia is the magnitude (an increase of up to 10% is expected this year) and the fact that the prices of one or another popular product frequently spike. Why is this?
A supermarket in Novocheboksarsk, Chuvashia, 2023. Source: VK
Conspiracy theories
Three popular versions about the food price spikes can be seen on Russian social networks.
The first: retailers and middlemen are driving up prices. This version has always been a favorite, supported not only by ordinary people but also by officials and the media controlled by them. Officials look to remedy the situation by insisting that retailers limit markups on products that are rising in price.
Retailers, highly dependent on regional authorities, generally listen, and inscriptions like “special price” or “people’s price” appear on price tags in stores. But such measures are nothing more than PR. It is the least popular categories that get the special prices – for example, the smallest eggs. In addition, the quantity of these products is often limited. There might be a price tag but no product. So, after some time, prices either stop rising (or even reverse, as happened with buckwheat and salt) or continue rising, just more gradually, and officials are no longer blamed for this.
The second version is that the problem is with producers. Due to sanctions and the weakening ruble, they have been cut off from imported feed, veterinary drugs, seeds and breeding stock. On top of this, their costs for wages and fuel have increased.
It was in rural areas that the largest percentage of able-bodied men were mobilized for the war, while agriculture and food processing rely relatively heavily on migrant labor, and migrants began to leave after the war started. Initially that was because of falling wages in foreign-currency terms and the danger of ending up in Ukraine, though recently,following the terrorist attack at Crocus City Hall and anti-migrant raids this spring, the governments of Tajikistan and Kyrgyzstan warned their citizens about the danger of staying in Russia.
As for fuel prices, besides the usual factors, inflation has been affected by increasingly frequent attacks by Ukrainian drones on oil refineries. Throw in rising utility bills, primarily for electricity (for example, poultry farming is a very energy-intensive industry), and the concentration of production at large holdings, whose owners are used to maximizing profits.
Three popular versions about the food price spikes can be seen on Russian social networks.
The first: retailers and middlemen are driving up prices. This version has always been a favorite, supported not only by ordinary people but also by officials and the media controlled by them. Officials look to remedy the situation by insisting that retailers limit markups on products that are rising in price.
Retailers, highly dependent on regional authorities, generally listen, and inscriptions like “special price” or “people’s price” appear on price tags in stores. But such measures are nothing more than PR. It is the least popular categories that get the special prices – for example, the smallest eggs. In addition, the quantity of these products is often limited. There might be a price tag but no product. So, after some time, prices either stop rising (or even reverse, as happened with buckwheat and salt) or continue rising, just more gradually, and officials are no longer blamed for this.
The second version is that the problem is with producers. Due to sanctions and the weakening ruble, they have been cut off from imported feed, veterinary drugs, seeds and breeding stock. On top of this, their costs for wages and fuel have increased.
It was in rural areas that the largest percentage of able-bodied men were mobilized for the war, while agriculture and food processing rely relatively heavily on migrant labor, and migrants began to leave after the war started. Initially that was because of falling wages in foreign-currency terms and the danger of ending up in Ukraine, though recently,following the terrorist attack at Crocus City Hall and anti-migrant raids this spring, the governments of Tajikistan and Kyrgyzstan warned their citizens about the danger of staying in Russia.
As for fuel prices, besides the usual factors, inflation has been affected by increasingly frequent attacks by Ukrainian drones on oil refineries. Throw in rising utility bills, primarily for electricity (for example, poultry farming is a very energy-intensive industry), and the concentration of production at large holdings, whose owners are used to maximizing profits.
“So, products are becoming more expensive, especially those included in the basic food basket.”
Dmitri Patrushev has been promoted to deputy prime minister. From 2018 until May 2024, he served as minister of agriculture. Source: Wiki Commons
Finally, there is a “political” conspiracy theory: all this media noise about rising prices for eggs, meat and bread is an attack on Minister of Agriculture Dmitri Patrushev, the son of Nikolai Patrushev, the secretary of Russia’s Security Council, whom some analysts have called the éminence grise and who is said to be especially trusted by Putin (note: after Putin’s inauguration in early May, Dmitri Patrushev was promoted and appointed as a deputy prime minister; his father was replaced as Security Council secretary by Defense Minister Sergei Shoigu and made a presidential aide).
When there is no balance in the system
It is certainly not about Patrushev Jr, laughs Oleg Buklemishev, who leads economic policy research in the Economics Faculty at Moscow State University. “I suspect that everything is simpler: the conditions in which the Russian economy operates themselves produce a large number of bottlenecks and instabilities – in logistics, payments, supply chains, etc.,” he says.
In particular, explains Buklemishev, due to sanctions any import is much more difficult to replace with an alternative, so “periodically lagging product components become more expensive than under normal conditions. The system easily becomes unbalanced, and it has a harder time returning to a state of equilibrium.”
“One of the most common and constantly recurring reasons for price spikes is seasonality,” says Andrei Sizov, director of the SovEcon analytical center. It is wrong to calculate how much eggs have risen in price over a month or since the beginning of the year; due to seasonality, this is not very indicative – you need to look at how the price has changed year over year. “This applies, for example, to eggs or lamb. Vegetables historically increase in price from autumn to spring, and [in the spring and summer] they typically become cheaper. Lamb got more expensive, perhaps due to increased demand before the May holidays, when people traditionally grill kebabs. Eggs went up in price due to several reasons: the spread of bird flu, which reduced the number of laying hens, and seasonal demand,” he says. Still, Sizov admits that sugar is a different story – there really was strong price growth.
Sugar has risen in price due to the actions of the Ministry of Agriculture, according to economist Sergei Aleksashenko, former deputy chairman of the Central Bank. In 2022, there was a good harvest of sugar beet, after which the Ministry of Agriculture ordered a reduction in sown area, but in 2023 there was a bad harvest. “If you do not comply with a Ministry of Agriculture order, then you will lose subsidies. The area was reduced, and then there was a bad harvest.”
When there is no balance in the system
It is certainly not about Patrushev Jr, laughs Oleg Buklemishev, who leads economic policy research in the Economics Faculty at Moscow State University. “I suspect that everything is simpler: the conditions in which the Russian economy operates themselves produce a large number of bottlenecks and instabilities – in logistics, payments, supply chains, etc.,” he says.
In particular, explains Buklemishev, due to sanctions any import is much more difficult to replace with an alternative, so “periodically lagging product components become more expensive than under normal conditions. The system easily becomes unbalanced, and it has a harder time returning to a state of equilibrium.”
“One of the most common and constantly recurring reasons for price spikes is seasonality,” says Andrei Sizov, director of the SovEcon analytical center. It is wrong to calculate how much eggs have risen in price over a month or since the beginning of the year; due to seasonality, this is not very indicative – you need to look at how the price has changed year over year. “This applies, for example, to eggs or lamb. Vegetables historically increase in price from autumn to spring, and [in the spring and summer] they typically become cheaper. Lamb got more expensive, perhaps due to increased demand before the May holidays, when people traditionally grill kebabs. Eggs went up in price due to several reasons: the spread of bird flu, which reduced the number of laying hens, and seasonal demand,” he says. Still, Sizov admits that sugar is a different story – there really was strong price growth.
Sugar has risen in price due to the actions of the Ministry of Agriculture, according to economist Sergei Aleksashenko, former deputy chairman of the Central Bank. In 2022, there was a good harvest of sugar beet, after which the Ministry of Agriculture ordered a reduction in sown area, but in 2023 there was a bad harvest. “If you do not comply with a Ministry of Agriculture order, then you will lose subsidies. The area was reduced, and then there was a bad harvest.”
“The actions of officials to combat rising prices, the experts say, generally either have no impact or make things worse.”
Yet the authorities really like to be seen fighting rising prices and showing concern for citizens, notes Sizov. “The minister of agriculture himself is reporting to Putin from a chicken coop about how well he is doing. And indeed, prices are starting to fall. True, they are falling for natural reasons, and not thanks to his reporting from the chicken coop, but the minister scores this as a point [for himself], and the bosses think – what a great minister we have,” Sizov sneers.
“It’s like a runny nose: if you treat it, it will go away in a week, but if you do not, it will last for a whole seven days,” laughs Aleksashenko. Still, in his view, there are no systemic problems in Russian agriculture at this point. “There is no product that would rise in price for, say, three years in a row. This means that the market is working: prices have risen, demand has fallen, and equilibrium has been restored. But lately the government’s standard solution is to give orders. Order retailers and wholesalers to freeze prices for some time. And we will pay you a subsidy. This works in Putin’s administrative system, but obviously not in the real world. In America, too, from time to time some things go up in price, eggs, for example. The government does nothing about it at all – and the result is exactly the same,” he says.
At the same time, subsidies are additional budget expenditures, and, techincally speaking, injecting additional money into the economy only accelerates inflation. According to Aleksashenko, the most problematic situation now is with gasoline prices: “the Ministry of Finance offsets [the rising prices] by paying money [to oil refiners], and more and more money is being paid. Such is Putin’s whim.” Meanwhile, as Sizov notes, the rise in bread prices is primarily due to rising costs, including rising fuel prices, since the input – wheat – is now at historical lows.
Another reason, according to Sizov, is that production cycles in agriculture often do not coincide with the PR goals of officials. “It takes months and years for you to respond to changes in demand, because beef ‘grows’ for three or four years, and even to increase egg production it takes six months,” he says. “Throw in the higher labor costs due to the shortage of workers, and the higher logistics costs. By and large, nothing can be done about rising prices, but the bosses do not like them – and that’s how, for example, sanctions are imposed on grain exports. This strangled very strong exports but had no effect on food inflation.”
“It’s like a runny nose: if you treat it, it will go away in a week, but if you do not, it will last for a whole seven days,” laughs Aleksashenko. Still, in his view, there are no systemic problems in Russian agriculture at this point. “There is no product that would rise in price for, say, three years in a row. This means that the market is working: prices have risen, demand has fallen, and equilibrium has been restored. But lately the government’s standard solution is to give orders. Order retailers and wholesalers to freeze prices for some time. And we will pay you a subsidy. This works in Putin’s administrative system, but obviously not in the real world. In America, too, from time to time some things go up in price, eggs, for example. The government does nothing about it at all – and the result is exactly the same,” he says.
At the same time, subsidies are additional budget expenditures, and, techincally speaking, injecting additional money into the economy only accelerates inflation. According to Aleksashenko, the most problematic situation now is with gasoline prices: “the Ministry of Finance offsets [the rising prices] by paying money [to oil refiners], and more and more money is being paid. Such is Putin’s whim.” Meanwhile, as Sizov notes, the rise in bread prices is primarily due to rising costs, including rising fuel prices, since the input – wheat – is now at historical lows.
Another reason, according to Sizov, is that production cycles in agriculture often do not coincide with the PR goals of officials. “It takes months and years for you to respond to changes in demand, because beef ‘grows’ for three or four years, and even to increase egg production it takes six months,” he says. “Throw in the higher labor costs due to the shortage of workers, and the higher logistics costs. By and large, nothing can be done about rising prices, but the bosses do not like them – and that’s how, for example, sanctions are imposed on grain exports. This strangled very strong exports but had no effect on food inflation.”
Russia’s “countersanctions” represent a food embargo put in place in 2014 in response to Western economic sanctions against Russia. The chart shows the origin of imported agricultural products as of 2013 (dark green: the EU; light green: the US; gray: Brazil, brown: other countries). In 2013, 44% of all imported agricultural products were produced in the EU and the US. Source: Wiki Commons
Prices rose, are rising and will continue to rise
“If we talk about the next decade, the price of food will continue to rise due to broad inflationary processes globally,” predicts Sizov. Firstly, he is referring to a sharp rise in fuel prices and, secondly, “sticky” inflation. “Given that global inflation is unlikely to be below 3-4%, or even 5%, the rise in food prices will be approximately the same,” he says. Still, price inflation for certain groups of goods could be higher.
For example, chocolate and cocoa will see their prices rise faster because of a failed crop in the main cocoa bean production region of East Africa. “This is a pure supply shock, since the region is responsible for half of the world cocoa market,” Sizov notes. The same thing happened with olive oil, he recalls, after a crop failure two years ago in Southern Europe, the main olive-growing region.
Due to climate change and increasingly frequent weather anomalies, supply shocks look set to persist in food markets. “Mitigating this factor is globalization, which people have liked to criticize in recent years,” notes Sizov. “If you can buy here and there, then the impact of supply shocks is reduced for you as a consumer.” And, he points out, we should recall Russia’s countersanctions, which banned imported food and are still in effect. Partly due to the countersanctions, Russian poultry farmers were left without imported hatching eggs. “Those eggs were Dutch. We switched to Russian hatching eggs – and hens raised from them have 10% lower egg production,” says Aleksashenko.
Indeed, until 2014, when the countersanctions were introduced, it was fashionable in Russia to complain about Israeli carrots and Polish apples and potatoes being sold at retail chains. It turns out that local agricultural producers may have suffered from price competition back then, but ordinary people did not have to think about how hens were laying eggs in coops outside of Moscow. Back then, if there were sudden changes in demand or supply, the problem was solved quickly – by importing more; but now – prices are raised to a new equilibrium. The market just does not want to understand what “sovereignization” and “[Russia] rising from its knees” mean.
“If we talk about the next decade, the price of food will continue to rise due to broad inflationary processes globally,” predicts Sizov. Firstly, he is referring to a sharp rise in fuel prices and, secondly, “sticky” inflation. “Given that global inflation is unlikely to be below 3-4%, or even 5%, the rise in food prices will be approximately the same,” he says. Still, price inflation for certain groups of goods could be higher.
For example, chocolate and cocoa will see their prices rise faster because of a failed crop in the main cocoa bean production region of East Africa. “This is a pure supply shock, since the region is responsible for half of the world cocoa market,” Sizov notes. The same thing happened with olive oil, he recalls, after a crop failure two years ago in Southern Europe, the main olive-growing region.
Due to climate change and increasingly frequent weather anomalies, supply shocks look set to persist in food markets. “Mitigating this factor is globalization, which people have liked to criticize in recent years,” notes Sizov. “If you can buy here and there, then the impact of supply shocks is reduced for you as a consumer.” And, he points out, we should recall Russia’s countersanctions, which banned imported food and are still in effect. Partly due to the countersanctions, Russian poultry farmers were left without imported hatching eggs. “Those eggs were Dutch. We switched to Russian hatching eggs – and hens raised from them have 10% lower egg production,” says Aleksashenko.
Indeed, until 2014, when the countersanctions were introduced, it was fashionable in Russia to complain about Israeli carrots and Polish apples and potatoes being sold at retail chains. It turns out that local agricultural producers may have suffered from price competition back then, but ordinary people did not have to think about how hens were laying eggs in coops outside of Moscow. Back then, if there were sudden changes in demand or supply, the problem was solved quickly – by importing more; but now – prices are raised to a new equilibrium. The market just does not want to understand what “sovereignization” and “[Russia] rising from its knees” mean.
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