'We are going somewhere wrong with price freeze in the 13th year of post-Soviet government '

What the government has achieved by freezing food prices, whether the 2014 embargo helped the agricultural sector, and what will happen next with prices

'We are going somewhere wrong with price freeze in the 13th year of post-Soviet government '
Photo: kommersant.ru

In April, the government extended the price freeze on sugar and sunflower oil. Why nothing good comes out of artificial price regulation, what measures really should be taken, and what awaits the prices of products in the near future — Andrey Sizov, the director of the SovEcon analytical centre, tells about in the interview for Realnoe Vremya.

“Nothing good comes out of price freeze”

For exactly four months, the country has been living in conditions of freezing retail prices for sugar and sunflower oil. The government made this decision after the instructions of the president in December and extended it a couple of weeks ago, concluding an agreement with a number of trade, production and industry structures. Is this decision justified, is it reasonable?

No, this decision can not be called either reasonable or justified, because nothing good comes out of price freeze. We see that the same producers of sugar and sunflower oil — that is, all those who process sugar beets and oilseeds — have also received the introduction of a new export duty on all types of cereals.

The manufacturer is now losing a lot of money, getting a huge risk of state intervention. It is likely that if the process of state regulation does not stop, we will see a serious reduction in investment in these sectors. And this will be a very unpleasant story — manufacturers will lose even more money.

Another serious factor that concerns me is the lack of clarity on what legal grounds all this regulation has been started.

Photo: Anton Zhuravlev
Consumer incomes in Russia have been declining for seven years — retail, suppliers, and manufacturers are well aware of this

“Producers will always shift the increase in raw material prices primarily to the consumer”

A price increase of about 10% has recently been announced by the manufacturers of confectionery products, and earlier, the same was announced by the manufacturers of sauces and mayonnaise. Is all this a consequence of the sugar and sunflower oil price freeze? At first glance, 10% of the cost of a kilogramme of candy is quite a bit...

It's all a common story. Producers will always try to shift a rise in raw material prices primarily to the consumer, it has always been so. I'm sorry to say this again, but I'll say one more important thing. Consumer incomes in Russia have been declining for seven years — retail, suppliers, and manufacturers are well aware of this. And they did everything in their power to ensure that the price of both mayonnaise and candy was low for the buyer, because fortunately, there is still competition in our food market. If you have a high price for mayonnaise, no one will buy it.

Therefore, we are not talking about some mythical price increase or the intention of market players to get super-profits. Now there is no opportunity to get extra profits or increase prices, because we have an important and limiting factor — the income of the population, which is shrinking every year.

The current increase in prices for the same candy is logical and natural, because if the prices of raw materials are rising, then, of course, manufacturers will try to shift them to the buyer. But in a limited form. Neither the producers of sweets nor mayonnaise producers will raise the price sharply and simultaneously, otherwise they will lose their consumers.

Now the state is regulating prices only for sugar and sunflower oil. But hypothetically, can the Kremlin decide to regulate the prices of other products this year?

They can, you're asking the wrong person. A year ago, it seemed impossible to me that the state would regulate the prices of sunflower oil and any other product. It is very difficult to say whether the regulation will affect other products exactly. But one thing is clear — the continuation of regulation will be a heavy blow for a number of industries, and then, perhaps, for consumers — they have now, of course, won — but they have won only in the short term. Because further, when we see a reduction in production, a drop in investment, a reduction in supply and competition, the consumer will, of course, pay for it.

Photo: Maksim Platonov
But one thing is clear — the continuation of regulation will be a heavy blow for a number of industries, and then, perhaps, for consumers — they have now, of course, won — but they have won only in the short term

We've recently learned that the state is going to still allocate nine billion rubles to sunflower oil producers to cover the losses. Will this be enough to help the agrarians, so that it does not come to such consequences as you've mentioned?

Everything is very simple here — it is necessary to remove state regulation. But it would still be optimal to assess the real losses of producers this year — and present the officials with a bill for their decisions.

“There will be no shortage in the short term, but in the long term — perhaps”

When your colleagues talk about a possible shortage of sunflower oil or sugar if the price freeze continues, do you agree with them?

In the short term, there will be no shortage, but in the long term — perhaps, if the regulation is not played back. Of course, we have some time to spare — we have been building the new economy for thirty years. But if they have already started to break it — they will certainly not break it in a year, but in two or three years — perhaps.

If the government stops regulating prices in the summer, they won't rise sharply anyway, will they? After all, you're saying that both retail and manufacturers are quite well aware of people's income.

Of course, the rate of price growth will accelerate. After all, if manufacturers sell a product below the market, they suffer damage. Therefore, we can not escape from an increase in prices. But it is likely to be stretched out in time.

As I said, it is impossible to do this at once, because price agreements are concluded between manufacturers and retailers for several months. Actually, a price increase is already underway, this is completely open information.

Because of inflation and te ruble exchange rate?

Over the past year, inflation has increased to 5,8 per cent — this is a serious acceleration, especially against the background of low inflation in 2019, when it was 2-3 per cent. But as recently as five or six years ago, we saw food inflation at 20 per cent due to the devaluation of the ruble and anti-sanctions, so now the price increase is not so critical. Although, of course, it is tangible.

Photo: Ilya Repin
Of course, we have some time to spare — we have been building the new economy for thirty years. But if they have already started to break it — they will certainly not do it in a year, but in two or three years — perhaps

“The impact of the embargo on the ruble is highly overestimated”

Will the new US sanctions affect food prices?

Not directly. But if we see a new round of weakening of the ruble, it will be a very unpleasant factor for food inflation. The main factor of inflation in Russia in 2020 was the devaluation of the ruble. The second factor that will affect the growth of food prices will be a global increase in prices for agricultural products in the world.

Some experts have expressed the opinion that a partial cancellation of the prodembargo, which was introduced by Russia in 2014 in response to the sanctions of the European Union and the United States, can smooth out food prices. Is it possible?

No one will do that. Against the background of the introduction of new sanctions, it is unlikely that this embargo will be lifted. Nor would its easing generally reduce inflation.

In general, the impact of these sanctions on the ruble is greatly overestimated by both critics and supporters. Supporters say the embargo has boosted the country's agriculture, but Russian agriculture was growing well without it. But the critics of this phenomenon say that because of it we have a crazy inflation — which is also, to put it mildly, not true.

But for a while, it would reduce the price increase for a number of goods. Why? Because the cost of sanctions is not so expensive, and they work very poorly in the modern world. For example, Belarus is not under any food sanctions, and they, by selling their dairy products in Russia, can actually purchase them in Europe. Therefore, all these food chains can now be only slightly rebuilt, and thus the lifting of the embargo will not lead to anything important in the food market. There will simply be higher competition, there will be more vegetables and fruits in stores, more cheeses, but the situation will not change fundamentally, because the main factors for food market, as I have already mentioned, are the ruble exchange rate and the increase in prices for agricultural products in the world. And this, by the way, affects all the world's economies. For example, recently in the United States, data has been released on a record increase in potato prices in 2020 — by 40 per cent! So it will definitely not work to fight inflation through the lifting of the embargo, even if we want to.

Photo: Ilya Repin
Lifting the embargo will not lead to anything important in the food market. There will be just higher competition, there will be more vegetables and fruits in stores, more cheeses, but the situation will not change fundamentally

The head of the Central Bank, Elvira Nabiullina, has recently categorically opposed the state regulation of prices. Could her rhetoric signal that regulation could be lifted this year?

I'm not sure. The Central Bank is the Central Bank, but the government is the government, and the decision to freeze prices was a government decision. But by starting a war on prices, the government forgot about the income of the population, although the income of the population largely determines the work of the economy, and the Central Bank is an integral part of it.

Yes, we can't afford to launch our economy to the full, but we can afford to support the poor, can't we? We can.

As for the statement of the head of the Central Bank, the only good thing here is that one of the public officials reminds us that “one plus one is two”, and that we are going somewhere wrong with the price freeze in the thirtieth year of the post-Soviet government. To understand this, it is enough to read an economics textbook.

By Sergey Kochnev