The government has levied a "pre-election" tax on Russian citizens

28.01.2011 — Analysis

Analysts have tried for many years to understand Russia on an intellectual level and to evaluate it using conventional economic criteria. All for naught. We just might live in the world's only commercial power where prices are subject to governmental decrees, instead of the laws of supply and demand. Our country is a major oil producer, and yet gasoline here costs more than in countries without reserves of "black gold." The services provided by the Russian housing and public utilities sector seem uniquely senseless and burdensome. Only Russian stores can have retail markups of 300%, which squeezes the life from their own suppliers, manufacturers, and consumers. The journalists at "RusBusinessNews" are confident that it is officials at all levels of government who are responsible for these absurd prices. Lower-level civil servants are accustomed to living off kickbacks from sales networks, and the country's real "owners" have long been in league with the oil, gas, and energy companies, who pay for their political campaigns.

The forest fires set the store shelves ablaze

Until mid-2010, all seemed quiet on the consumer price front. Most Russians lost income because of the global economic crisis, but they kept a stiff upper lip. After all, inflation never exceeded 10% per year, and some goods even got cheaper.

But in July, everything changed beyond recognition. For several months Russia's central regions felt hot enough to melt. The fields burned, fire raged in the forests, and the peat fields smoldered.

Then the "fire" spread to store price tags and "singed" what had been relatively stable food prices. First, the prices of grain, flour, and bread skyrocketed. But officials were in no hurry to throw themselves into extinguishing this "blaze," and did not initiate any internal mechanisms to contain inflation. Government intervention, in particular, was something no one got around to trying. The Russian government stuck to half-measures, merely prohibiting the export of grain. As a result, about 10 million tons of crops piled up in the South - grain that was usually sold abroad. All the local logistics operations saw their exports frozen, while the existing infrastructure did not permit the grain supplies to be rerouted to the domestic market.

Then, the prices of other foodstuffs began to rise. Employees of the Russian Antitrust Agency had sporadic success catching suppliers and traders fixing prices, but this work brought no real results.

Soon, the wave of inflation developed into a "perfect storm" that dealt a terrific blow to Russians' wallets. In Ekaterinburg, for example, buckwheat became as expensive as chicken - a kilogram of cereals sold for over 100 rubles. Similar prices were seen for potatoes in the north of the Urals Federal District. Potatoes throughout the Urals are expected to sprout three-digit price tags by spring.

The price of milk topped 30 rubles ($1) a liter, an increase of 30%. Beef is just as expensive. Meat prices were stable in the fall; the cattle were slaughtered and supply exceeded demand. But by the start of 2011 the herds had thinned out, the internal reserves were exhausted, and a further price hike was inevitable.

The price of butter went up 50%, up to 60 rubles for a 200-gram package. Cheese is on the same fast track and can now be considered a delicacy costing about 300 rubles a kilogram. The price of flour has jumped by 33-46% and it gets a new price tag almost every week. Prices went up from 6-16.5% just over the New Year's holidays.

The analysts at the New Deal report forecast that prices aren't yet ready to settle down. Russians will feel the strongest blow of inflation in the first half of 2011.

Inflation's gas "engine"

It is not only natural disasters that can halt inflation. Its origins lie in the business monopolies that regularly raise the prices of natural gas, gasoline, and rail transportation. The directors of these industries claim that good intentions lie behind this practice. Gazprom believes that an increase in the price of natural gas promotes the adoption of energy-saving technology and enables the company to attract the needed investment to develop hard-to-reach fields.

Executives in the oil industry talk about their outdated processing facilities. Russian Railways is concerned about the creation of new infrastructure and their unprofitable suburban routes. The railroad industry would like to raise prices on their services by 23% a year, but the Russian government has restricted their demands to 6-7%.

Experts are convinced that it is possible to adopt new production technologies, build oil refineries, and modernize rail facilities, all without raising prices or rates. In order to do that, non-transparent monopolies must only optimize their expenses and free up resources for investment. But it is not in their interest to do so.

According to the WikiLeaks website, American diplomats consider Gazprom to be inefficient and corrupt. The company not only bears the burden of social expenses, but also has the final word on a number of political issues.

Valery Golubev, the deputy chairman of Gazprom's management committee, claims that most of gas pipelines in the North Caucasus republics that were laid at the order of the Russian government are unprofitable. The republics of Chechnya, Ingushetia, and Dagestan owed up to 10 billion rubles for their energy supplies, and this money ended up in the pockets of the local bureaucrats, who were free to set their own rates for gas and electricity.

Mikhail Delyagin, the director of the Institute of Globalization Studies, calls this lost revenue, "tribute paid to the new Golden Horde" and a result of the Kremlin's lack of a clear Caucasus policy. In fact, Gazprom's other customers are paying to sustain the mutinous republics.

The business group continued to tie the price of gas to that of heating oil even during the economic crisis and did not alter their practice of doing business on a "take or pay" basis, which made their products unattractive in terms of both price and delivery. This prompted consumers in Europe to seek alternative suppliers. According to Mikhail Korchemkin, the director of East European Gas Analysis, last year Turkey reduced its purchases of Russian natural gas by 21% and Italy - by 48%. Croatia refused to do any business at all with Gazprom in 2011, preferring to buy liquefied natural gas from Italy. Poland is building its own LNG terminal and intends to extend the pipeline into Central Europe.

The loss of its European markets is forcing Gazprom to squeeze its missing profits out of the Russian market. They are using any means possible to force consumers to maintain their consumption at current levels. New domestic price increases for natural gas are just around the corner. According to Elvira Nabiullina, the Russian minister of economic development, by 2013 natural gas will be only 20% cheaper in Russia than in Europe (it is currently 50% cheaper).

There is a discrepancy between market realities and Russian prices for "black gold." Low import duties on heavy petroleum products are forcing vertically-integrated companies to export their unrefined raw materials. This is creating an artificial frenzy on the Russian wholesale market for light oil products, leading to an increase in gasoline prices.

The Federal Antitrust Service has looked into the oil industry's chicanery and fined them a total of 26 billion rubles. But the government has collected only a small fraction of that amount. Igor Shuvalov, the first deputy prime minister of Russia, voiced the government's suggestion to the FAS that they reach a compromise in their negotiations with industries that develop mineral resources. As a result, Rosneft paid 2.4 billion rubles instead of 5.3 billion, Lukoil knocked their fine down to 659 million rubles from 2.4 billion, and other companies also saw their penalties discounted.

Corruption vs. the free market

Prices in Russian have risen, are rising, and will continue to rise, while officials at all levels will lobby for the economic interests of their local manufacturers, intermediaries, and sales networks. This is the conclusion of Evgeny Artyukh, a deputy in the Sverdlovsk regional Duma and the director of the regional division of Opora Russia.

In some cases, intervention by the heads of these or other agencies leads to dramatically higher food prices. One vivid example was when a member of parliament persuaded Ekaterinburg city officials to object to the development of a network of collective farm markets in the Urals capital. "The villagers have no opportunity to market their products independently, and the results of this can be astonishing. Potatoes cost about 15 rubles a kilo in the Irbit region, but 50-60 rubles in Ekaterinburg," noted Evgeny Artyukh.

He claims that recently Ekaterinburg's city manager, Aleksandr Yakob, sent a letter to the regional government, requesting that they consider closing the weekly agricultural fairs held downtown that were posing serious competition to the sales networks. This type of scheming with government officials allows businessmen to use their monopoly position to sustain high food prices.

Georgy Persky, a deputy in the Sverdlovsk regional Duma, notes that corporate corruption in Russia functions alongside government corruption. "This is a pervasive social evil. Bribes and kickbacks have become an ordinary part of the purchasing process, which leads to higher prices on goods and services."

A "political tax" on the buyer

Thus, in Russia, the state has actually developed a feudal relationship with big business. The entrepreneurs are "vassals" who are allowed to break the law as long as they pay the state (their "sovereign") some kind of recompense. This compensation, in particular, includes supporting the political campaigns of the current elite.

According to Anatoly Gagarin, a political analyst in the Central Urals, some of the income the owners of monopolies receive as a result of the higher prices is spent on political projects. "This interdependence is not explicit and no one advertises it, but it exists," he noted.

Anatoly Gagarin thinks that most of their political budgets are destined to be spent in the near future. Elections for deputies to the Russian State Duma will be held at the end of 2011, and next spring Russians will have to choose a new president. Which means that consumers will have to open up their wallets even wider to pay this "pre-election" tax.

Konstantin Dzhultaev, Ludmila Maslova, Vladimir Terletsky