Streetwise Professor

October 24, 2007

Nostalgia, Stupidity, Ignorance–or Cynical Expediency?

Filed under: Commodities,Russia — The Professor @ 7:44 am

The FT reports that Russia is moving towards price controls on food:

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.

The consequences of this move are drearily predictable: shortages, empty shelves, lines in stores, black markets in foodstuffs. I expect that these developments will lead, in turn, as day follows night, to publicity/propaganda campaigns against “speculators” and “hoarders,” likely accompanied in today’s increasingly shrill and paranoid political environment by some physical attacks on enterprising black marketeers (most likely ethnic minorities.)

What is to explain this economic stupidity? Is it another manifestation of nostalgia for Soviet days, of a piece with excavations of long-buried statues of Stalin, or Brezhnev chic? Likely not, but it does reflect the economic ignorance that is the legacy of Soviet days, though it should be noted that price controls wreaked havoc in pre-Communist Russia as well. Indeed, Tsarist imposition of price controls on food during WWI was the primary cause of food shortages in St. Petersburg (and other cities) that in turn sparked the civil unrest that culminated in revolution. (See this review of Peter Gatrell’s “Russia’s First World War” for a concise overview of this history.) It also reflects the Russian populace’s longstanding hostility to market mechanisms, a hostility unfortunately reinforced by the experiences of the 1990s.

In this environment, price controls will receive popular support–at least for awhile. And maybe that’s all that Putin and the power structures are looking for–a temporary expedient that will get them past the parliamentary elections in December and March’s presidential “contest.”

But the respite will only be temporary. Price controls do not address the forces driving Russian inflation; the huge demand stimulus resulting from booming energy prices, distributed in part through increasingly generous benefits, and the conscious decision to prevent the ruble from appreciating too much in response to the rise in energy export revenues. The only way to keep the ruble from appreciating is to increase the money supply, thereby feeding inflation. But letting the ruble rise will reduce the competitiveness of domestic Russian industry. So the energy price boom is not all wine and roses for Vlad and Co. It forces adjustments that will discomfit one important political constituency or another. Price controls may kick the political can down the road a ways, but sooner or later a reckoning is inevitable.

And there is one other predictable consequence of price controls that deserves comment: corruption. Underpricing food creates opportunities for the politically powerful, the economically connected, and law enforcement personnel to enrich themselves. Price controls mean that the “official” price of food will be less than the price that consumers are willing to pay. The connected disproportionately will be able to buy at the “official” prices and resell at black market prices, with less risk of prosecution, and profit accordingly. As bad as corruption is in Russia, these controls will only make it that much worse.

I wonder whether the siloviki consider the prospect of increased corruption a bug–or a feature. Indeed, to them it may be a “twofer”; a political palliative that defuses popular discontent for awhile, which at the same time expands their opportunities to line their pockets. Cynical? Yes, indeed. But when dealing with Russia’s current rulers, one must keep in mind Lily Tomlin’s immortal words: “No matter how cynical you become, it’s never enough to keep up.”

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