Russian producers feel heat as price cap bites

Russian government has drafted a bill to restrict price rises on key foods including bread, milk and sugar to as little as 3% this year. But experts warn this could choke food producers, who are facing double digit increases in their own production costs.

The amount and range of products the state wants to restrict has shocked Russia’s food producers and shops. The government's draft law includes bread, milk, butter, tea, cooking oil, beef, pork, chicken, eggs, salt and sugar.

It comes at a time when food production prices for manufacturers are soaring. Fertilizer prices have already jumped 15% this year.

Russia’s top juice and dairy producer Wimm-Bill-Dann revealed how many millions of dollars it has lost from the current price freeze, due to expire in a month.

“In our EBITDA we lost 25 million, and the major part of it was because of the price freeze,” Wimm-Bill-Dann’s Chief Executive David Yakobashvili said.

Russia’s President-elect Dmitry Medvedev claims he put no pressure on food producers to freeze their prices, but sent this warning if they failed to cooperate in the future.

“The price freeze wasn’t forced by government laws, it came from voluntary agreements between traders and food producers. And include only 10-15% of products. But the problem is foodstuffs make up a large proportion of Russian peoples’ expenditure, and we just can’t ignore that,” Medvedev said.

Experts say price controls have already proven a failure, not least in solving Russia’s biggest macroeconomic problem today, inflation.

“Freezing prices hasn’t stopped inflation. Official figures show producer prices have continued to soar, and price rises on bread and cooking oil should be passed on to consumers,” Andrey Sizov – a farming analyst for Sovecon – said.

With the government’s official predictions for 2008 inflation creeping up every month, everyone agrees something needs to be done, but there is widespread disagreement on the methods.

The conflict over how to fight inflation extends to the top. This week Prime Minister Victor Zubkov said price freezes had failed, but called for different state intervention through export tariffs and restrictions on the sale of fertilizer.