VZCZCXYZ0014
PP RUEHWEB
DE RUEHMO #1217/01 1211442
ZNR UUUUU ZZH
P 301442Z APR 08
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 7879
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
UNCLAS MOSCOW 001217
SIPDIS
SENSITIVE
SIPDIS
STATE FOR EUR/RUS, EEB/TPP/ABT/ATP FOR SPECK
TREASURY FOR TORGERSON
DOC FOR 4231/IEP/EUR/JBROUGHER
NSC FOR WARLICK
E.O. 12958: N/A
TAGS: ECON EFIN EAGR RS
SUBJECT: IMPACT OF RISING FOOD/COMMODITY PRICES - RUSSIA
REF: A. STATE 39410
B. GAIN REPORT RS8031
C. MOSCOW 366
D. (07) MOSCOW 5373
E. (07) MOSCOW 5200
F. (07) MOSCOW 5133
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Summary
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1. 1. (SBU) In Russia, basic commodity prices for products
have spiraled in recent months, with price increases
registered of up to 70 percent nationwide for vegetable oils,
and 50 to 100 percent for potatoes in some regions in Russia.
The poorest in Russia, who spend nearly two-thirds of their
monthly incomes on food, have been hardest hit. However,
only one known protest has been held, in Vladivostok. The
government has restricted grain and fertilizer exports as
well as imposed price freezes--due to expire on May 1--on
"socially significant" foodstuffs. Russia,s
market-distorting prescriptions have been inadequate,
however, failing to rein in inflation and to increase
production sufficiently to address domestic and export
demands. End Summary.
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Food and Agricultural Commodity Demand
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2. (SBU) The agricultural commodities that constitute the
bulk of Russia's food demand are beef and pork, poultry,
eggs, milk and dairy, vegetable oils, grains and sugar, and
vegetables. The pass-through effect that world prices have
had on these items domestically in the last year has varied
significantly. For instance, granulated sugar prices rose
6.4 percent on average nationwide from mid-March 2007 to
mid-March 2008, but bulk domestic sunflower oil climbed more
than 70 percent in the same period. The variation in prices
among regions was also pronounced, owing to differences in
preferences as well as costs associated with inputs such as
transportation. The price for a kilogram of potatoes in
Primorskiy Kray (the southern area of Russia's Pacific coast)
increased 10.3 percent during the year between March 2007 and
March 2008, whereas in Sverdlovsk Oblast' (just east of the
Urals) the price rose 98.9 percent.
3. (SBU) Spending on food consumes approximately 50 percent
of a household's income. The poorest 10 percent of Russia's
population spent RUB 1,045 per month per capita, almost USD
43 or 70 percent of monthly income, on food during 2007. The
wealthiest 10 percent, however, spent RUB 9,806 per month,
nearly USD 400 or 26 percent of monthly income. The
regressive nature of food price increases are particularly
acute for the urban poor who lack access to household garden
plots. Government officials' recognition of this
circumstance informed their decision in late 2007 to
formulate an agreement with food processors and retailers to
freeze prices for "socially significant" products.
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Supply
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4. (SBU) Grain and oilseed producers increased their supply
in response to rising world prices. The area planted last
fall marked a reversal of the steady decline that had begun
in the 1970s. According to the sowing intentions declared by
many producers, the grain and oilseed area for 2008 should be
10 percent greater than for 2007. Higher dairy prices have,
likewise, raised interest in boosting herd averages (average
milk yield per cow) by importing improved foreign dairy
genetics. Rising grain prices, however, have in turn raised
production costs and, thereby, served as a brake on the
growth of beef, dairy, and pork output. High input prices in
combination with underdeveloped marketing infrastructure have
depressed the prices paid to many producers below the
break-even point.
5. (SBU) Russia's grain crop for 2007 was high enough to
allow the country to emerge as the third-largest wheat
exporter for the year. Russia's agricultural production
overall, however, has not kept pace with the country's pace
of demand. Incomes have grown 7 to 10 percent annually since
1998, but production has grown by only 1 to 3 percent
annually during the same period. As a result, imports have
risen each year, from USD 11 billion in 2003 to USD 27.5
billion in 2007.
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Domestic Politics
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6. (SBU) In fall 2007, the perceived "food effect" on
Russia's inflation prompted senior government officials to
adopt "stabilization" measures to hinder the growth of rising
prices. The concern among some Cabinet officials appeared to
be that the inflation spike just before the Duma (parliament)
elections in December 2007 would discourage voters from
providing a constitutional majority to the United Russia
Party, whose ticket President Putin had agreed to lead.
Consequently, Prime Minister Zubkov and Agriculture Minister
Gordeyev, according to media reports, began pressuring food
processors and retailers to absorb rising food costs so
consumers would face stable prices in the run-up to the
elections. The Ministry of Agriculture also acted to
increase domestic supplies of grains and fertilizer by
raising export duties and drafted a voluntary agreement with
retailers to freeze prices on "socially significant" items
through the spring of 2008.
7. (SBU) Memories of the 2005 protests against the
monetization of benefits also probably informed the decision
to pursue these measures. The monetization effort sought to
supply certain groups, such as pensioners, with budget funds
in lieu of free services, such as public transportation,
which the groups had received as an entitlement. To date,
only one known organized protest against rising food prices
has been held, in Vladivostok on April 26, 2008.
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Economy
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8. (SBU) Russia's commodity-heavy economy has grown as world
prices of many commodities, particularly oil, have risen to
record levels. The rising tide of Russia's petrochemical
industry has lifted many boats, from government revenues, to
transportation, construction, and steel to banking, hotels,
and telecommunications. As a result of this growth,
government spending and wages have risen steadily during the
last ten years. Experts cite these monetary factors as key
causes behind Russia's 11.9 percent inflation for 2007, but
acknowledge that higher food prices helped push inflation
higher. Wages, for instance, have risen faster than
productivity in recent years. The bulk of these so-called
"salary overhangs" have gone directly into the economy in the
form of consumer spending. Increased government spending, on
public sector salaries and on the formation of state
corporations, has also driven prices up. Fiscal expenditures
equalled 20.3 percent of GDP in 2007, nearly 4 percent of GDP
higher than in 2006.
9. (SBU) Underinvestment has also exacerbated inflation.
The pace of salary increases have meant that domestic
producers of all goods, including food, have not been able to
keep pace with the demand for higher quality products.
Producers have made some investments to expand capacity, but
imports of consumer goods have filled the gap and have
exacerbated inflation. As it stands, however, imports into
Russia and their prices are growing. Domestic demand for
food has more than doubled in real terms since 2000,
according to many estimates, but domestic production has
increased only 20 percent. Russia imports an estimated 40
percent of its food supply.
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GOR Policies
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10. (SBU) The GOR's policy response to date has been a
series of attempts at "stabilization" measures to slow
inflation and shore up the domestic supply of food.
Increased export duties on wheat, barley and mineral
fertilizers as well as releases of reserve grain stocks to
selected millers have been among the government's efforts to
insulate domestic prices from the influence of global trends.
Although the higher duties are set to expire on June 30, the
duties could remain above their pre-intervention level.
Ministry of Agriculture officials are considering instituting
a program that would use grain export revenues to provide
compensation for domestic poultry producers' feed expenses.
11. (SBU) In October 2007, Ministry of Agriculture officials
implemented a voluntary agreement with producers, processors
and retail supermarkets to absorb rising food costs as a
means of ensuring consumers would face stable prices on
"socially significant" foodstuffs. In an effort to extend
and amplify the scope of this agreement, the Ministry of
Economic Development and Trade has drafted legislation for
Cabinet consideration that would cap retail price margins on
many of these same "significant" products. The Ministry of
Agriculture has also developed a program of minimum threshold
prices as an incentive for domestic producers to ensure that
the current food supply will not suffer shortages and, thus,
foist higher prices onto consumers.
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Comment
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12. (SBU) The lifting of price controls is expected to
trigger even higher inflation, now at 14 percent for the past
12 months. Russia,s government has few tools at its disposal
to rein in inflation, further ruble appreciation will hurt
exporters. As long as worldwide commodity prices stay high,
Russian inflation will remain double-digit, with Russia,s
most vulnerable populations suffering the most.
RUSSELL