VZCZCXRO5371
PP RUEHDBU RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHMO #5373/01 3180400
ZNR UUUUU ZZH
P 140400Z NOV 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 5208
INFO RUCNCIS/CIS COLLECTIVE
RUEHXD/MOSCOW POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC

UNCLAS SECTION 01 OF 03 MOSCOW 005373 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAGR ECON EFIN PGOV PINR RS EINV
SUBJECT: RUSSIA - THE POLITICS OF INFLATION 
 
REF: A. (A) MOSCOW 5200 
 
     ¶B. (B) MOSCOW 5007 
     ¶C. (C) MOSCOW 5133 
 
Summary 
------- 
 
¶1. (SBU) In a campaign that many here characterize as a 
referendum on Putin and his policies, few expected that the 
problem of inflation would emerge to distract the public's 
attention from the broader economic stabilization that has 
succored the president's popularity.  Putin's team, which was 
apparently unable to keep this from becoming an election 
issue, has been compelled to react with "stabilization 
measures" and its own information campaign to convince voters 
that it is able to resolve the issue.  Recent polling data 
suggest that these measures have been only partly successful 
and political pundits here are linking an October drop in 
United Russia's popularity with the increase in prices.  The 
central leadership, however, appears divided on the best way 
to handle the problem.  Premier Zubkov and others are 
advocating populist "Soviet" solutions of greater government 
intervention, while cooler heads of the economic leadership 
like Deputy Premier and Finance Minister Aleksey Kudrin 
promote market-based solutions.  END SUMMARY. 
 
The Issue 
--------- 
 
¶2.  (SBU)  The prospect of high inflation in September 
overshadowed the economic highlights of the first half of 
2007 -- record private net capital inflows, record initial 
public offerings (IPOs), and stronger than expected GDP 
growth -- and undermined Kremlin hopes for another 
"successful" year.  Official statistics for September put the 
year-end goal of 8 percent inflation out of reach and 
threatened to exceed the 2006 result of 9 percent.  Consumer 
prices on a host of core food products skyrocketed in 
September according to the Russian Statistics Agency. 
(reftel b.)  The price of vegetable oil rose 13.5 percent and 
the cost of dairy products by 7.5 percent during the month, 
elevating inflation's status in the public discourse from one 
of perennial aggravation to that of a political issue in the 
upcoming elections. 
 
¶3. (SBU) Press reports link the decline in United Russia's 
popularity, which fell from 56 percent to 50 percent, 
according to a survey by the government-owned polling company 
VTsIOM for the second half of October, to the increase in 
prices and people's anxiety about inflation.  Food security 
issues are still relevant to many Russians, for whom memories 
of Soviet scarcity are not all that distant. A decade or so 
beyond since the difficult Gorbachev and Yeltsin eras, during 
which shelves were emptied of food supplies or when goods 
were priced beyond the reach of average citizens, questions 
about rising prices on food continue to have special 
resonance, particularly among those on fixed incomes.  In 
2005, pensioners took to the streets in a number of towns 
across Russia to protest administrative reforms that sought 
to monetize social security benefits, which many then saw as 
a threat to their personal economic security. 
 
¶4. (SBU) Survey data from the Levada Center polling company 
in October showed that 82 percent of respondents viewed 
inflation as "very high," up from 52 percent in June.  Half 
of the respondents could not answer why inflation had jumped, 
but the "monopolization and greed of traders and producers" 
and "government inactivity" topped the list of explanations 
(with 12 and 8 percent of respondents, respectively).  Many 
Russians want their government to take a more active role: in 
a separate Levada poll, 64 percent of the respondents said 
that they would more likely vote for a party that was for 
"strengthening the role of the government in the economy and 
in regulating market reforms." 
 
Field Day for Leftist Parties 
----------------------------- 
 
¶5. (SBU) Russia's "opposition" parties seized upon the issue 
as a chink in the armor of the seemingly invincible United 
Russia, with left and right blaming the administration for 
allowing inflation to "threaten" society again.  While there 
is little risk rising food prices have the ability to change 
the political landscape substantially, the issue may well 
have significance on the electoral margins.  To the extent 
that they are successful in turning concern about prices into 
dissatisfaction with "Plan Putin," parties like the Communist 
Party of the Russian Federation (KPRF) or even "For a Just 
Russia" (SR) may hope that they can leverage the issue into 
more votes. 
 
MOSCOW 00005373  002 OF 003 
 
 
 
¶6. (SBU) Chairman of the Federation Council and SR leader 
Sergey Mironov has eschewed direct criticism of 
administration policies, reflecting his party's support for 
Putin, but has poured vitriol on "greedy" middlemen and 
called for more government regulation of food prices.  In a 
press conference in mid-October, Mironov impugned "the 
scandalous practices of re-sellers" for artificially driving 
up prices and he advocated making the government the primary 
purchaser for food supplies to stop the "speculation" in 
prices.  Mironov has advocated re-nationalization of the 
wholesale and retail food industry. On October 30, he further 
called for compensating families for the increased costs of 
food. 
 
¶7. (SBU) Public concern about rising food prices has provided 
grist for the Communist Party, which has gleefully used the 
media attention to the issue to blame the Putin 
administration and promote its "socialist" economic agenda. 
According to the KPRF's Center for Research of Political 
Culture of Russia, in October there were more than 20 
demonstrations across the country protesting the increase in 
prices on food, many of which were organized by the party. 
The largest protests -- involving between 1,000 and 1,500 
citizens -- took place in Krasnodar Kray, Novosibirsk, 
Astrakhan, and Moscow city.  The rise in prices for basic 
goods hits hardest those on a fixed income or pensions; 
Communist campaigning on this issue helps to mobilize the 
party's core constituency.  Party chairman Gennadiy Zyuganov 
and others in the KPRF leadership have leveraged concerns 
about rising prices into a rallying cry against liberal 
economic policies, including moving to market prices for 
electricity, gas, housing, and railway transportation. 
Indeed, the party's platform calls for the restoration of 
collective state farms. 
 
¶8. (SBU) Leftist candidates also have made much of Russian 
imports of food from abroad, seeing this as evidence of 
weakness.  In a speech in Rostov oblast, given in late 
October, Zyuganov denounced Putin's policies undermining the 
country's "food security," claiming that 46 percent of the 
country's food resources came from abroad.  The mercurial 
leader of the Liberal Democratic Party of Russia, Vladimir 
Zhirinovskiy has long harangued the Putin administration for 
allowing Russia to become an importer of foodstuffs.  In a 
press conference on November 8, he called it "shameful" that 
Russia -- a historical exporter of grain -- no longer could 
guarantee its food security. 
 
The Kremlin Reacts 
------------------ 
 
¶9. (SBU) The Kremlin, which was apparently unable to use its 
considerable administrative heft to keep inflation from 
becoming an election issue, has reacted with "stabilization 
measures" and an "information campaign." During a heated 
discussion with Cabinet ministers in early October, Putin 
reportedly criticized Agriculture Minister Gordeev sharply 
for not taking sufficient action to shore up Russia's food 
supply.  Gordeev subsequently teamed up with Federal Tax 
Service Director Tatyana Shevtsova and Federal Antimonopoly 
Service Director Igor Artemev to visit Moscow-area grocers to 
assess the retailers' supply arrangements and methods for 
pricing bread, milk, and cooking oils.  The group's findings 
informed Premier Zubkov's October 15 admonition to regional 
governors and municipal leaders to "look into pricing 
policies on socially significant food items and stop price 
growth on them." 
 
¶10. (SBU)  Comments from various officials, however, suggest 
that Putin's team is divided on the issue.  Although Premier 
Zubkov and others favor more populist and "Soviet" solutions 
of greater government intervention, Deputy Prime Minister and 
Finance Minister Aleksey Kudrin and other economic ministers 
have encouraged a more market-friendly approach.  Kudrin was 
reported to have urged Zubkov and Gordeev against imposing 
price controls.  Media coverage of the issue quoted Kudrin as 
arguing that "we have a market economy.  This does not 
correspond to the principles of a market economy." 
 
¶11. (SBU) Already, experts here see the measures that the 
Kremlin has instituted as distorting the food market and 
predict they will fail to achieve any of the 
inflation-reducing goals it has proclaimed.  Ministry of 
Agriculture foreign relations chief Andrey Vershinin told 
Embassy that price freezes on 8 product categories is 
pointless and will have no impact on constraining inflation. 
Signatories are also under no obligation to sell products on 
the list.  An attendee of the meeting at MinAg at which 30 
signatories agreed to freeze prices "voluntarily" for 8 
 
MOSCOW 00005373  003 OF 003 
 
 
product groups said Russian officials characterized the 
agreement as "an opportunity for firms to behave in a 
socially responsible way" while acknowledging the agreement 
is unenforceable.  To date, no list of products for which 
prices are frozen has been published, and even a MinAg 
department director was unable to produce a copy.  The list 
is reputed to include specific types of foods, such as milk 
containing less than 1 percent fat, meaning that higher-fat 
content milk will be sold at unregulated prices. 
 
¶12. (SBU) The government measures could have some negative 
unintended consequences.  According to local economists, the 
GOR's administration's inflation-fighting ironically may lead 
to greater inflation.  Renaissance Capital Chief Economist 
Katya Malofeeva said the GOR's anti-inflation campaign would 
have the effect of raising the shelf prices of goods not 
targeted by the price agreement.  As transportation and other 
overhead costs continue to inch upward, retailers will 
continue to pass along part of these costs to customers. 
"The winners, meaning products with unregulated prices, will 
have to pay for the losers, meaning products with frozen 
prices and eroding margins.  All of which means higher 
prices," according to Malofeeva. 
 
¶12. (SBU) COMMENT:  The inflation issue demonstrates the 
Kremlin's limited ability to control the political dialogue 
in the country and could help to derail plans for a United 
Russia constitutional majority in the Duma.  Worries about 
rising prices have cut deeply into the party's jump in the 
polls that followed Putin's announcement that he would lead 
the party list, indicating a trend away from YR.  Moreover, 
the continued prevalence of the issue, heightened by 
campaigning by YR opponents, serves to strengthen public 
concern and, because expectations of inflation tend to create 
greater inflation, to deepen the problem.  It remains to be 
seen if the KPRF or other leftist parties are able to convert 
public nervousness about prices into measurable electoral 
gains, but the Kremlin appears concerned about this 
happenstance. 
 
¶13. (SBU) Moreover, it appears that the President's team sees 
the emergence of inflation as an indictment of Putin's 
legacy.  According to Goldman Sachs Executive Director for 
Economic Research Rory MacFarquhar, "Putin already thought of 
the missed target as a failure."  Moreover, memories of the 
2005 protests against the monetization of benefits likely 
haunt Putin's team, which remains neuralgic about a 
spontaneous "orange revolution" in Russia and seeks to 
ameliorate any social discontent that leads to spontaneous 
demonstrations. There are concerns that the government will 
feel compelled to implement further short-term solutions to 
throttle inflation if only to demonstrate that the government 
is doing "something."  While administrative controls may 
constrain inflation for a time, inevitably they will result 
in reduced supply, leading to either shortages or higher 
inflation in the long run when the government relaxes 
control, likely after the December Duma elections. END 
COMMENT. 
BURNS