Why Regulate Prices During an Economic Miracle?

Yuliya Latynina

Yezhednevniy Zhurnal

March 28, 2008

The Ministry of Economic Development has issued a list of goods that in the near future will disappear from Russian stores, including: bread, milk, yogurt, meat products, salt, sugar, tea, as well as beef, pork, chicken and eggs. Technically, this is the list of products on which the government will regulate prices.

In countries with market economies, the government regulates prices only in extreme situations, like during a war or natural disaster. But here in Russia, they keep telling us about Putin’s economic miracle - and suddenly introduce the sort of regulations one would expect during a catastrophe.

Let’s take a look at why prices have been rising in Russia and who has been losing out as a result.

One can distinguish three different reasons for the rise in prices. The first is that world commodity prices are increasing due to vigorous development in the countries of the Third World and resulting changes in their food preferences, as well as changes in the preferences of Europe. To put it bluntly, China, which used to stuff itself on just rice, has now started drinking milk and eating meat - making the prices rise for these commodities. Prices are rising because the peasants in China, the poor people in the U.S., and even the Arabs in Algeria, have all started eating better. But only in Putin’s Russia are rising prices not the result of an improving quality of life for poor people, but a reason for their continued decline.

Secondly, Russia is experiencing a general inflation: income from oil is rising, and as is always the case, when money flows into a country, the prices never remain the same. But the amount of money in Russia as a whole is growing faster than the amount of money in the hands of poor people. Over the past eight years the federal budget has grown from $20 billion to $200 billion - but obviously, the incomes of the poorest parts of the population have not risen by ten times. Easy money has been heating up prices, but has not been landing in the pockets of the poor.

Thirdly, the appetites of Russian bureaucrats have been growing sharply, and with them, the percentage they take from the price of all goods. Here’s just one example: Two years ago, under pressure from the FSB, the authorities announced that sales could be made only with the use of cash registers equipped with special “electronic cash register ribbon protection” (EKLZ). As FSB director Patrushev explained it in his letter implementing the regulation, these measures will help counter the cash-based black market and funding for terrorism. The FSB director failed to mention, however, one relevant detail: that the introduction of EKLZ equipment would bring in around one billion dollars per year for the FSB-controlled, government-owned company “Atlas” – the sole manufacturer of the above-mentioned EKLZ ribbons.

The $200 that it costs to equip each cash register with the tape is nothing for a wealthy supermarket, where the customers walk out with black caviar and Cristal champagne. But it is significant indeed for the small grocery store, where little old ladies come to buy bread and yogurt. This indirect tax, which is being gathered by the FSB from consumers (note too that the tape equipment is not hard to remove for an additional cost), will fall most heavily on poor people.

What will be the results of price regulation?

First, it will be murderous for the approximately 30 million Russian citizens who are associated in one way or another with agriculture. The increase in prices on agricultural products has given these people the ability to make money. The adoption of price limits imposed by the Ministry of Economic Development will mean that these people will not be able to sell the meat products, eggs or beef produced by them at prices higher than the fixed level.

Secondly, it will be murderous for the poorest of consumers. Of course, not all prices will be regulated - only those deemed “socially significant”. This means that the cheaper products, on which the prices are fixed, will disappear from the shelves, while the more expensive products remain. Poor people will either have to spend all day looking for the cheap goods that are supposedly still available, or pay for something they can’t really afford - exactly as it was during Soviet times, when people either had to stand in line for products in short supply, or else buy the exact same items at higher prices in a marketplace.

Thirdly, it will increase the incomes of government employees. The Ministry of Internal Affairs [MVD - runs the national police], which cannot find the time to search for murderers, rapists and thieves, is already quivering in excitement as it demands the right to check stores for increased prices.

It would be hard to find another measure adopted in the past year which so perfectly captures the true nature of the regime under which we live. A regime which, under the guise of caring for the population, increases the incomes of its bureaucrats and intentionally turns the government from being a system for ensuring equal rules of the game into an instrument for extorting money from those who have no rights.