Exposing Russia’s Fraudulent Inflation Data

Paul Goble reports:

As a result of fires and drought, this year’s grain harvest in the Russian Federation will be much smaller than normal, a development that has prompted Moscow to impose an embargo on grain exports, pushed prices for bread upwards even in the Russian capital, and sparked fears that the country faces hunger.

Such fears have no objective basis, President Dmitry Medvedev said, suggesting that recent rises in prices for bread – up 10 to 15 percent in some stores – reflected the fact that “the market sometimes behaves according to its own laws” and “psychopathic scenarios arise.”

In an interview published in Svobodnaya Pressa, Yevgeny Gontmakher, the deputy director of the Institute of Economics of the Russian Academy of Sciences, comments that “of course, there will not be hunger in Russia,” but he adds that does not mean the current situation will not have some serious negative consequences.

All the “cataclysms” Russia is suffering through “can lead to a situation in which the least well-off part of the population of Russia will have to shift to cheaper and lower quality products, eating less meat and milk” in the first instance, something that the government is unlikely to be able to prevent.

“Even if the government begins to hold prices for certain products down,” he says, “under the conditions of the Russia quasi-market economy, this will lead only to a situation in which [such products] will begin to disappear from the shelves or become a rarity,” with sellers refusing to stock them and selling instead only higher-priced and unregulated goods.

And because sellers are likely to do that, Gontmakher continues, the prices for the latter will “beyond doubt” move upwards, “all the more so because in the Russian trade system monopolies are strong and therefore the probability of a rise in prices is large,” with shortages of potatoes, feed grains and other agricultural staples feeding these increases.

Indeed, he says, all these factors will lead to “an objective growth in prices, and no administrative methods in the market economy will save [Russians] from this,” despite statements of officials to the contrary. They are trying to calm the situation, Gontmakher says, but the inadequacy of their suggestions will soon become obvious.

Moreover, Gontmakher continues, Russia’s poor are already suffering “especially in the regions” because this year, there are no mushrooms and apples and in many places, no honey. For some in Moscow, he says, it may be difficult to believe “but many Russians already have felt the consequences of the drought on their family budget and table.”

Unfortunately, the economist continues, the way Russian officials calculate inflation obscures what is going on. There should be a different index of inflation for the poor than for the well-off because the former spend a larger share of their incomes on products of first necessity like food whose prices are going up.

Asked about the embargo on exports that Prime Minister Vladimir Putin has imposed, Gontmakher notes that the impact of this measure may be different than Moscow expects. Historically, Russia has exported silage and imported finished goods. If prices go up abroad because Russia isn’t exporting, then Russia will have to pay more for the imports it consumes.

Russia’s increasing reliance on imported food is not only expensive but potentially dangerous, Gontmakher suggests. As Russia becomes “completely dependent on foreign countries for supplying the population with the most necessary things, this [could easily become] a risky dependence,” something the poorest groups will notice first.

Today, Russian officials announced that the Putin government is planning to take one step that could potentially reduce the role of speculators who many believe are already pushing prices up. The Federal Anti-Monopoly Service has proposed and Putin has approved the creation of a grain commodity exchange.

Many countries have such institutions, which in a variety of ways generate greater stability in the marketplace. The Russian Empire did as well, but it was destroyed by the Soviets and until now has not been reconstituted. Now, the economic development ministry and the tax service have been charged with coming up with plans for its re-opening.

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