Streetwise Professor

August 11, 2014

That Was Fast: Both the Price Controls and the “Speculative” Response

Filed under: Economics,Politics,Russia — The Professor @ 7:31 pm

In my post on the Russian food import ban, I predicted that Russia would impose price controls. And wouldn’t you know, on Saturday, only a few days after the ban was announced, Reuters reported that the government was “negotiating” price control agreements with domestic producers:

Russia may negotiate a price control agreement with domestic food producers to prevent speculative price hikes that would affect inflation after it banned half its agricultural imports from the West, the agriculture ministry said late on Friday.

Russia banned meat, fish, dairy, fruit and vegetables imports from the United States, the European Union’s 28 member states, non-EU member Norway, Canada, and Australia on Thursday in retaliation against sanctions over the Ukraine crisis.

Agriculture Minister Nikolai Fyodorov has acknowledged the ban would cause a short-term spike in inflation, but said he saw no danger in the medium or long term as Russia started to look elsewhere for substitute imports.

The ministry, referring to a meeting with food sector unions, said: “Participants at the meeting discussed the possibility of signing with producers and agricultural products processors an agreement on … price policy, to prevent any speculative rises in prices for agricultural products.”

You know how voluntary these “negotiations” are. And yeah, it’s a problem with “speculation.” No. It’s a problem with supply and demand. Speculation is just the messenger that delivers the bad news. Moreover, the speculation that is going on now (more on that below) is as much about the coming price controls as much as it is about the import ban itself.

The “negotiated” price controls are not a new innovation in Russia. The government did the same thing in 2007*. It is revealing of the nature of the regime, though. Communists would have imposed controls by fiat. A more corporatist regime, with fascist overtones, “negotiates” with corporations to achieve its objectives.

The Russians-and some commenters here-claim that alternative supplies will mitigate the effect of the ban on prices. There will be some response in the medium term, including finding alternative sources of supply as global trade flows adjust. Firms that now sell to Russia will sell to other markets, and some of the sellers in those markets will shift their supplies to Russia. But this process takes time, and what’s more, the fact that this pattern of trade flows isn’t in place now, means that it is costlier than the existing pattern. So even after the adjustment process is completed, food costs in Russia will be higher. This is especially likely to be the case for dairy and vegetables.

The time-limited nature of the ban, to the extent that market participants believe that it will indeed be lifted in a year, will limit the supply response. Suppliers must make investments to adjust flows, where investments include things like identifying new suppliers, negotiating agreements, and other transactions costs, as well as investments in plant, equipment, and people. Time limiting the ban reduces the return on these investments, reducing the amount of investment. Moreover, the uncertainty surrounding the ban, which is reinforced by its self-damaging nature, which raises questions about the rationality of the Russian government, as well as the inherent volatility of the Ukrainian criss. also tends to suppress investment. Why invest now? Why not wait and see what Putin does and how the situation develops?

All this means that the cost increases are likely to persist.

In the face of higher costs, price controls will lead to shortages, and declines in quality. In addition to reducing output, Russian producers, especially those selling value-added, more extensively processed or packaged goods, can respond to the combination of costs and controls by reducing quality, by using lower quality inputs, adding fillers, utilizing flimsier packaging, selling past sell by date goods, taking less care and expense in preserving perishable goods, and in a thousand other ways. It is impossible for the government to negotiate or enforce arrangements that eliminate these sorts of stealth price increases.

Russians-speculators!-apparently know what is coming. They are starting to party like it’s 1989. Shelves in some stores are emptying. The imposition of controls, negotiated or not, will mean that they will not be refilled, or that they will be stocked with inferior products.

Putin will have to crank up that propaganda machine, and quick.

*Post 134. Hard to believe. Well over 2500 posts as of today.

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15 Comments »

  1. negotiating agreements

    And there you have it. If this was the US or (northern) Europe, it would be a simple matter to shop around, get some quotes, and form a contract on the basis of a couple of emails. Not so in Russia. Anyone who has the money, time, and patience to do business with Russians is likely doing so; any new supplier will find himself having to jump through endless bureaucratic hoops, provide bizarre pieces of paper which don’t exist outside of Russia, run into obstacle after obstacle placed in his path by a limitless supply of rent-seekers, only to find that he doesn’t get paid. The barriers to entry in Russia are so ridiculously high that you’re not going to be able to simply switch suppliers across a whole sector overnight. My guess is half the goods will merely be routed through Kazakhstan and Belorussia with a 30% handling fee added on, and the rest re-routed outside the EU and relabelled in a crude and unconvincing manner with the full knowledge of the Russian gangsters – sorry, businessmen – who control the imports and domestic distribution.

    Comment by Tim Newman — August 12, 2014 @ 12:27 am

  2. A minor note about Reuters’ translation: the Russian meaning of the word speculation was created during Soviet times and is different from its English meaning. In Russian, it refers to making a profit by raising prices. The expression “speculative price increases” is just baffling. The minister of agriculture used to be a communist party apparatchik during the 80’s, and it shows.

    Comment by aaa — August 12, 2014 @ 12:37 pm

  3. @Tim-Very helpful detail, thanks. I will write a followup later linking to your post that says the same. You mention bizarre pieces of paper, etc. Don’t forget the stamps! There must be stamps! And the right stamps. If not, go to the end of the line and start again.

    And of course I was remiss not to point out that this ban creates new corruption opportunities. Which no doubt was a feature rather than a bug to those making the decision.

    The ProfessorComment by The Professor — August 12, 2014 @ 2:55 pm

  4. Just shows you how little changed since the Soviet times, the bureaucrat-mafiosi who control the state fundamentally do not understand how economics work. The decade of Western bootlickers trying to get a piece of the oil wealth merely created a potemkin appearance of financial competence, McKinsey has an office here so we must know something! The reality is all these morons still look at a map, say something like “well this used to be a city of 2 million and now its 1.5 million, we must change this” and throw a couple billion — and tear themselves a couple hundred million as a ‘fee’ — of Russian money.

    The really smart thing the West could do right now to further undermine Russia is to create a special class of immigrant visa available for citizens of Russia with advanced degrees in STEM fields. Finish what Jackson–Vanik began.

    Comment by d — August 12, 2014 @ 7:07 pm

  5. @aaa, the Western politicos are gradually shifting the meaning of speculation to the sovok side every time they loudly blame the speculators (the enemy of the people) for causing an oil price increase etc. But yes, the sovok term “spekulatsia” means “price gouging”

    Comment by Ivan — August 12, 2014 @ 11:04 pm

  6. The way I remember “spekulatsia” is this:

    The sovoks were very, very proud of the ruble. If you went to the sovok union, you had to exchange your currency for rubles, except if you went to the special stores for foreigners that accepted only foreign currency. At that time, in 1978, the sovoks’ official exchange rate was about $1.10 to buy 1 ruble.

    But on the street, ordinary sovok citizens were willing to give you 8 or 10 rubles for $1, in addition to offering to buy jeans and the other clothes off your back.

    That was “spekulatsiya” – and as I was waiting at a train station, talking with a very pretty girl whom I had the good fortune to meet, 2 thugs clad in leather jackets walked up and accused the girl of spekulatsiya, even though nothing of the sort had occurred. I managed to hold on to her hand and kept repeating to the thugs that I was with Intourist – all tourists had guardian angles from the official tourist guides, Intourist. Naturally, all of these accusations took place in Rashan. I used English, because foreigners seemed to get some measure of deference.

    The thugs finally relented from trying to haul her away, but one of them got in her face and said “I have memorized your face forever.” And he wasn’t talking about memorizing her face because she was very pretty – it was a threat.

    Stupid f—ing rooskies.

    “spekulatsiya”

    Comment by elmer — August 13, 2014 @ 8:29 am

  7. this sort of thing always reminds me of Lord Keynes comment when shown the details of the British plans for rationing:” well, that’s one way to insure that there is nothing on the shelves.”

    Comment by sotos — August 13, 2014 @ 10:00 am

  8. Elmer, that was “valyutnaya spekulyatsiya” – currency speculation. The idea of speculation in Russia is wider in scope than just trading foreign currency at other than oficially approved rate.

    Comment by LL — August 13, 2014 @ 10:30 am

  9. @LL

    Yes, indeed. How ironic that today, there are signs almost every 20 feet (seems like) in Ukraine posting currency exchange rates.

    Having a home business or a business on the side was verboten – but everyone did it, just to survive. Also – everyone stole at work (from work) like crazy. Just to survive. My cousin first told me about that. He so badly wanted to get out that he cried. Everyone wanted to get out.

    Stupid rooskies – learn nothing, forget nothing.

    But hey, it’s all OK, as long as oily orthodox KGB moozer rasha is beating someone up, and they can worship rat-face psycho Putler Khuylo’s man-boobs.

    “shpekoolatsiya”

    At least the Ukrainians have learned. But the Rashans go on being brain dead and brainless.

    Comment by elmer — August 13, 2014 @ 3:45 pm

  10. So Mr. Putin promised $500 billion (20 trillion roubles) for modernization of the military. Do they even have that kind of money?

    Comment by LL — August 14, 2014 @ 8:39 am

  11. Extraordinary times justify extraordinary remedies, Putin is just warning against big price hikes , but nobody will control it in chain stores.
    Surely prices will go up somewhat but not much and it wouldn’t make any change for ordinary man, and not least because banned food was mostly sold in several cities. In regional cities they sold locally produced food . say 95 % of it.
    Yes, and strangely enough Russia’s ban may work in its favor but only if it stays not for 1 year but at least 3.

    Comment by erik — August 14, 2014 @ 11:57 am

  12. Two reporters watched a Russian military formation cross into Ukraine. Not a large invasion force, but probably routine reinforcements. They were completely open about it, as well (and why shouldn’t they, honestly)?

    http://www.interpretermag.com/ukraine-liveblog-day-178-russian-aid-convoy-on-the-move-again/#3799

    Comment by Blackshoe — August 14, 2014 @ 12:52 pm

  13. +++QUESTION: Okay. And then the last one from me was: Do you have any comment on President Putin’s visit to Crimea and the session of the Duma that he convened there? He gave a big speech.

    MS. HARF: Well, from what I hear, he’s the only tourist that’s actually gone there this summer. Their tourism industry, I think, has – I’m being serious.+++

    Ha, ha, ha. So the US has decided to ignore the gross violation of international order and just to laugh off illegal arrival of Putin and the Duma memebers on souvereign Ukraininan soil.

    How sweet.

    Comment by LL — August 14, 2014 @ 6:47 pm

  14. @LL. The mere fact that a ditz/lightweight like Marie Harf is ad libbing responses like this on behalf of the government of the most powerful nation in history is rather disturbing. Is there any better demonstration of the lack of seriousness that characterizes our political class?

    The ProfessorComment by The Professor — August 14, 2014 @ 7:48 pm

  15. Not all of the political class, just the ones we keep electing. Menken described that democracy being giving the people what they want to them good and hard. we have created a world so disoriented by Frankfurt school lite relativism, magical thinking in the Academy and 1/2 baked educated class that doesn’t know what it doesn’t know and with a sense of entitlement, particularly the right to tell others how to live backed up by sovereign force i.e. tight thinking bullies without personal courage.

    Given the above (slightly hyperbolic), perhaps, what else can we expect. I contrast our leaders with my late father in law, who would be about 100 now if he lived. Born in a small town in Abruzzo, he was taken out of school at 11 and apprenticed as a blacksmith. Served in the Italian army as a driver imprisoned in North Africa and suffered malaria. got home, ran a store and farm, gave it up so his children could get a secondary education and came to America and worked in a relative’s clothing factory. Yet his favorite composer was Hyden, and at the age of 82 read most of Mann I bought for him in Italian, as he was to embarrassed by his english to really learn it.

    In other words, a person of REAL culture and some considerable intellectual , with an understanding of life so larger and richer than our “leaders”, yet of a class that would be considered little better than meat for the welfare grinder in our current scheme of things.

    I think we have our priorities backwards.

    Comment by sotos — August 15, 2014 @ 7:23 am

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