Russia’s answer to the surge in global commodity prices has been a mass experiment with duties, export curbs and price controls.
It’s not working. Inflation has spiked to the highest level in four years and even officials admit relief is months away at best.
Steel, nickel, aluminum and copper last week joined the long list of goods that are subject to export duties as Vladimir Putin seeks to soften the burden on consumers. Since Putin first ordered the government to do something about surging prices late last year, restrictions have spread from wheat to cooking oil to sugar and the key Russian staple buckwheat.
With polls showing inflation is a top concern, the Kremlin needs to show it’s trying to get the problem under control, even if its roots are in a global raw materials rally that Russia can’t do much about. But as more and more duties are added, risks are rising that the measures could end up undermining central bank policy and Russia’s dominance in global commodity markets.
“It’s a populist approach that’s aimed at creating an illusion of control over prices and social assistance,” said Elina Ribakova, deputy chief economist at the International Institute of Finance in Washington. “Taken to the extreme they risk contaminating price indexes and making monetary policy less effective.”
Bank of Russia Governor Elvira Nabiullina is already struggling to control inflation that recently surged above 6%. The central bank has increased interest rates by 125 basis points since March and warned that more monetary tightening will be necessary as soon as next month as price increases veer out of control.
Duties and controls on key food staples have shaved about 20 basis points off inflation this year, Nabiullina said at a news briefing in April. She has warned repeatedly that such measures can only ever be effective in the short term, and may increase inflationary pressures in the longer term due to shortages and increased trading on the black market.
The government, which is already facing discontent over a drop in incomes, insists the tariffs are necessary to protect consumers. Putin said last month that new measures need to be taken “promptly” to avoid price volatility on “socially-significant” goods. Discussions have already started about steps to curb a rise in the cost of fertilizers, with suggestions including freezing domestic prices and imposing a floating duty.
“Our economy just isn’t ready for the kind of avalanche-like shock that we’ve witnessed in the past year,” First Deputy Prime Minister Andrey Belousov said last week after the new metals tariffs were introduced.
Analysts at state-owned VTB Capital in Moscow point to a softening of prices for some foodstuffs to show that the measures are working. They also note that inflation is accelerating much faster in Brazil, which hasn’t implemented price controls, than in Russia, though that could be attributable to other factors, such as a severe drought.
Brazil has responded to the price surge by ramping up interest rates. Argentina has imposed restrictions on beef exports and Ukraine has implemented some soft restrictions on sunflower oil exports. China has started selling some of its vast metal reserves in a bid to cool global prices.
Russia consumes just 10% of the nickel, one third of the aluminum and about a half of the steel it produces, so the latest measures won’t have much impact on overall inflation, according to analysts at BCS Global Markets in Moscow. A spokeswoman for NLMK PJSC, Russia’s biggest steel producer, warned tariffs will deny investment plans of low-margin producers, which could end up hurting consumers via their incomes.