(Bloomberg) -- Russians are facing a surge in food prices, creating a headache for President Vladimir Putin as he tries to balance the Kremlin’s military ambitions with a need for domestic stability.
A kilogram of potatoes is at least 73% more expensive than at the start of the year, while the price of butter has increased by more than 30%, according to data released by the Federal Statistics Service on Thursday. Those two products top the list compiled by the agency, with vegetables such as onions and beets up more than 20% and sour cream, milk, bread and fish all 12%-15% higher than 2023 levels.
The price rises — which analysts say are caused in part by the impact of the war in Ukraine — are piling pressure on household budgets. Tatyana, a 72-year-old from the Russian city of Kirov, spends about two-thirds of her pension on food, up from about half previously, she said by phone. She’s had to all but stop buying expensive products such as exotic fruit, and for the first time since the 2022 invasion she won’t be able to afford the traditional New Year’s dish of red caviar.
Russians had been struggling with rising food prices even before this year’s surge, and Putin was inundated with complaints while hosting a citizen call-in event late last year. As the situation has worsened, officials from the Ministry of Agriculture to the Prosecutor General’s Office are concerned about how prices can be brought under control.
The Bank of Russia may struggle to come up with answers, having already increased its key interest rate to a record high of 21% last month. “The balance of inflation risks is still significantly tilted to the upside,” policymakers said at the time, while indicating a further increase is likely. The bank expects 2024 inflation to come in at 8%-8.5%.
In the shops of Kirov, about 1000 km (621 miles) northeast of Moscow, the situation is worse than the national statistics suggest, according to Tatyana. Staples like milk, butter, eggs and bread are at least twice as expensive as last year, she says.
Russian Prosecutor General Igor Krasnov has initiated a probe into price increases by milk producers and pledged a response. Prime Minister Mikhail Mishustin ordered the Ministry of Agriculture to ensure the availability of enough fruit and vegetables, while Deputy Prime Minister Dmitry Patrushev has demanded a daily monitoring of the food market and measures to stabilize the situation.
“All this fuss is being made so that the population associates food problems with the actions of producers and traders” and not with the consequences of the ongoing war with Ukraine, said Vladislav Inozemtsev, special adviser at the Middle East Media Research Institute. “When the price of butter was increasing even faster in 2007, no one in the government was worried.”
The Bank of Russia’s move to increase borrowing costs to cool demand is having a slight impact on inflation — annual price growth declined to 8.54% in September from 8.63% the previous month — but the ability of monetary policy to control food prices is limited. Food inflation remained above 9% in October, the FSS data shows.
While the war in Ukraine has drawn workers from every industry to serve in the military, Agricultural Minister Oksana Lut has estimated the shortage of farm laborers at 200,000. A further blow has come from the impact of fluctuating weather conditions on harvests, while a weaker ruble and disruption of traditional supply chains due to war-related sanctions have caused some imported products to become scarce and expensive.
For inflation to slow, “it’s necessary to cool down the economy, that is to see layoffs, cuts to business plans, a slowdown in income growth,” said Sofya Donets, an economist at T-Investments. “The central bank is currently following this path.” Next year, demand for all categories of goods, including food, will gradually fall, she said.
What Bloomberg Economics Says...
Russia’s surge in grocery prices are increasingly a worry for Russia’s consumers, and thus for the Kremlin. There are three drivers behind the surge. A cold snap and drought have reduced yields in agriculture. Widespread labor shortages, triggered by a military recruitment boom, are pushing costs higher all along the supply chain, while financial sanctions are increasing the cost of importing equipment and seeds for Russian producers. Russia will rely on two approaches to calm domestic inflation: keeping the policy rate above 20% to cool off demand and boosting imports to stabilize markets.
— Alex Isakov, Russia economist
At a meeting on food prices this month, the Agriculture Ministry among others recommended food producers and retail chains cut prices on certain types of goods, according to Interfax.
“The main tool of the authorities is force,” said Tatiana Stanovaya, founder of the consultancy R.Politik and a senior fellow at the Carnegie Russia Eurasia Center. “The authorities have a lot of experience in forcing producers and retail chains to adapt and adjust.”
(Updates with analyst comments from the 11th paragraph)
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