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The Return of Soviet Price Controls

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Photo from the Digital Journalist

As we get closer and closer to the $100 barrel of oil, dutch disease is beginning to dispense havoc upon the Russian economy, driving inflation and causing prices of basic food staples to skyrocket. Today Eugene Rumer of the Institute for National Strategic Studies of the National Defense University had a rather pessimistic opinion article in today’s IHT, arguing that the huge influx of petrodollars has failed to “prime the pump” for the economy to diversify. The issue of food prices has been building for some time now in Russia, with frequent expressions of concern from officials. With a shaky series of elections coming up, the government is eager to institute temporary measures to freeze these prices, despite the long-term futility of such controls. We hope to invite an economist to this blog later in the week to comment on how Russia’s monetary policy is looking to combat inflation. From the FT: “Russia to control food prices

Russia is introducing Soviet-style price controls on some basic foods in an effort to prevent spiralling prices from denting the Putin administration’s popularity ahead of parliamentary polls in December. The country’s biggest food retailers and producers have reached an agreement, expected to be signed with the Russian government on Wednesday, to freeze prices at October 15 levels on selected types of bread, cheese, milk, eggs and vegetable oil until the end of the year. … Russia’s agriculture ministry said the food pricing arrangement was voluntary. But industry insiders said they had come under heavy pressure. “We were told in no uncertain terms that we have to freeze prices on certain products,” said one Russian food industry executive, who asked not to be named. “Everybody understands what the government is doing. It is part of their election campaign.” Russian food prices rose steeply in September, with vegetable oil up 13.5 per cent, butter up 9.4 per cent and milk 7.2 per cent, thanks to global agricultural price increases. Given a big low-income population and meagre pensions, the price rises are among the few factors capable of deflating President Vladimir Putin’s 80 per cent-plus approval ratings. … But, as Izvestia newspaper commented, Moscow has “found its solution in the past”, with price freezes harking back to Soviet times. “The reaction of the Russian authorities to the recent inflation spike has been even more predictable than the price surge that triggered it,” Dresdner Kleinwort said in a note to investors. Industry insiders said price freezes might restrain headline inflation but would not reduce the overall rate.