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 
------- 
 
¶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. 
 
-------------------------------------- 
Food and Agricultural Commodity Demand 
-------------------------------------- 
 
¶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. 
 
------ 
Supply 
------ 
 
¶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. 
 
----------------- 
Domestic Politics 
----------------- 
 
¶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 
------- 
 
¶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. 
 
------------ 
GOR Policies 
------------ 
 
¶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 
------- 
 
¶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