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Russian Gov’t to provide $40 mln to curb food prices

The Russian government has offered an additional 1 billion rubles ($40 million) to subsidize borrowing rates for purchases of agricultural produce, a deputy prime minister said Friday. Russia’s food prices: “The big fix” - article by Economist.

The measure is the government’s latest step to curb rising food prices, the main driver of inflation this year, ahead of parliamentary and presidential elections. Prices for some food products have recently increased by 40% due to global and domestic market trends. Inflation is expected to be 9.5-10% this year against 9% last year. Alexei Kudrin, also finance minister, told members of the upper house that a relevant bill on changes to the 2007 budget would be submitted to parliament’s lower house later Friday. He said the government was urgently subsidizing loans to try and lower interest payments paid by food processing companies and limit price rises. The deputy premier also said 5.7 billion rubles ($223 million) would be injected into the authorized capital of Rosselkhozbank, the Russian agricultural bank, to support farmers.

Another method of slowing food price growth will be grain interventions, which Kudrin said would begin October 29. “On October 29, we will start interventions on the grain market, the Agriculture Ministry is responsible for that,” he said. On other markets, import duties will be cut by 10%. “This will ease access to the domestic market for Western producers,” Kudrin said, adding that the government remained committed to reducing inflation by monetary instruments. Kudrin said higher incomes in Russia were leading to increased purchasing capacity and higher demand for food products. “Consumers have high levels of disposable income, which is boosting demand,” he said, adding that food prices are growing on this trend. The deputy premier said food prices were also up in the EU, and inflation in the EU is expected to top 2.4% this year against 2% last year.

Chinese meat to keep Russian inflation at bay
The Russian Federal Agency for Veterinary and Phytosanitary supervision has given the green light for Chinese rabbit meat, which has been on the black list of animal products importers for almost 10 years, reported Kommersant.
Besides, from now on, several other countries including Brazil, Hungary and Australia are permitted now to import meat in Russia. Within the last months lots of manufacturers were banned from importing their production to the Russian market, which caused the price increase. E.g. after the Norwegian firms were prohibited to import fish to Russia, the wholesale prices doubled. The imposed import restrictions on the Brazilian meat led to 15-25% increase of prices in the sector of economy. Willing to stop the inflation, the Russian authorities reduced duties on imported dairy products by 15%. The Russian inflation rate has amounted to 7.2% for the past 9 month, while the planned annual rate is 8%.

Energy tariffs
Kudrin moved to allay concerns over the effect on energy prices next year. “From January 1 next year, growth in energy tariffs will not exceed the general prices index, or inflation,” he said. The deputy premier said the peak in price growth in this sector would fall in 2009-11 but would be largely compensated by more efficient fuel saving schemes or by transition to energy-saving technologies. “I can cite the example of Ukraine where energy prices have increased, but at the same time fuel and energy efficiency has led to savings of 50-100%,” he said. Kudrin said transition to energy saving technologies in Russia would be covered by either the market, meaning consumers, or partially by the government. “We have been working on an energy efficiency program for some time and we should probably devote more attention to it,” he said. (rian.ru, russia-ic)

The big fix
The Russian government knew perfectly well what it was doing when it attempted to fix prices for basic foods this week. It was running an election campaign for President Vladimir Putin. A sharp increase in food prices is a lot more damaging to his reputation, especially among poor pensioners, than any concerns about freedom of speech or democracy in Russia. And Putin knows it. So the government has reached a voluntary agreement with large retailers and food producers. Voluntary, in Russian terms, means that retailers are free to turn down the government proposals if they wish to face invasive tax inspection, penalties and loss of business. Unsurprisingly, no one objected. Prices of basic foods will be fixed at last week’s levels until January 31st 2008—a period which conveniently covers the parliamentary elections in, which Putin, who heads the party list of the pro-Kremlin United Russia party, is the only plausible winner.

Price-fixing in such a highly fragmented industry is unlikely to have much impact or cause much damage to the Russian economy. Rising inflation, which has already overshot this year’s target of 8%, is largely driven by external factors that Russia cannot influence. Putin, too, is not blind to the dangers of the practice. “He could give you a half-hour lecture about the ill effects of price-fixing on the market, including deficits and the black market,” says Rory MacFarquhar, an executive director at Goldman Sachs in Moscow. The purpose of the price-freeze is to create an impression among voters of the government’s activity and efficiency.

According to a recent poll, almost half of Russia’s population believes that food-price increases are the result of a conspiracy between producers and speculators, rather than any global trends. The punishment of supposedly unscrupulous businessmen who profit from people’s misfortunes will probably be the next step. But the price-fixing show is also an alarming symptom of the governing elite’s belief in its total administrative power. The Kremlin is so used to being in charge that it feels the best response to rising prices is to tell them to stand still, argues Andrei Illarionov, a former adviser and now a fierce critic of Putin. But such mighty commands will do nothing to solve the structural problems of Russia’s economy, including the weakness of the farm sector and the banking system. (economist.com)