Business

Russians wary as the cost of food rockets

Food market in Krasnoyarsk
Image caption Food prices rose 15% in the past year in Russia

In the dark days of winter, temperatures regularly plunge to below -20C here in Siberia.

But the locals have more than just the cold climate to contend with, they are dealing with daunting rises in food prices.

Sergey Nikonov lives in a small apartment in the city of Krasnoyarsk with his wife and two young children.

We chat over a dinner of boiled buckwheat (a staple in the diet of Russian families for generations), vegetables and chopped meat.

There is talk here of a buckwheat crisis, which has encouraged people to stockpile the crop.

Buckwheat has doubled in price over the last year. But economists say the crisis is not down to a shortage in supply, but suppliers and speculators creating rumours of shortages to push up prices.

"The most important thing is we need to spend more of our money on food," Sergey tells the BBC.

He says that the rise in petrol prices is the main reason for the growth in food prices.

"Every time you wake up, you see new prices at the petrol station.

"As for our income, we have a private business that does some repairs and construction work, so as prices rise, we need to raise prices on our own services."

Rising expenses

The annual rate of inflation in Russia fell in the first half of 2010 but has nearly doubled since then, from 5.5% in July to 9.6% in January.

The main reason was the rise in food prices, up 15% over the previous year, largely because of the severe drought which decimated Russia's harvest last July.

The cost of cereals and flour are up 70% from last year, fruit and vegetables up 51%, and milk and dairy products up 16%.

The government has capped bread prices, which is why they have risen by only 10%.

Evgeny Demidov, who is a baker, is stuck between a rock and a hard place.

He runs one of the largest bakeries in the region.

A former banker, he bought the bakery after it was privatised.

Some of the machinery is from Soviet times, but he also has the latest in Swiss technology here, shining silver machines hot off the production line, making all sorts of bread.

"When I bought the company, it was hardly functioning," Evgeny recalls.

He says that he has modernised the bakery by buying new equipment, and this has increased productivity and the range of breads he produces.

"We now have more than 60 different types of bread," he says,

This increased efficiency has helped shield him from the worst of the price hikes, but the rising cost of flour is taking its toll.

"The state's inflation figures are lower than what they really are," he claims.

"Our expenses are rising, but our income remains the same.

"We are also experiencing a rapid rise in water, electricity and heating costs, which all result in higher prices."

'Inevitable'

Although inflation is creeping up in Russia, by historic standards, it is not high.

The annual rate of inflation is currently 9%, but it has been in double figures for much of the last decade.

Many Russians remember the days of hyperinflation in the early 1990s, when prices shot up by more than 2,000% in a year.

Sergey says Russians are resigned to inflation: they just accept rising prices and deal with it.

"When you hear prices are going up again on the television, you just smile and think that it is inevitable," he says.

Prices are always rising and it makes you think about how to live, how to survive, how to break even and how to raise your income, Sergey says.

"People don't riot about food prices here in Russia. We may riot over salaries, but not food prices," he adds.

Question of rates

Nevertheless, the government is taking the issue seriously.

It is an election year after all, and earlier this month, Russian President Dmitry Medvedev described the situation as problematic.

So what is his government doing to tackle it?

Finance Minister Alexey Kudrin told BBC's Russia Business Report that the government was trying "to smoothen rising food prices" by implementing a number of measures.

Mr Kudrin also hinted that he would support a rise in interest rates by Russia's central bank to tackle the problem.

On Friday, the central bank raised its key interest rate for the first time since 2008, citing "continued high inflation expectations".

Still, raising interest rates is not without its risks.

"If you want to borrow money, it will cost you between 14% and 19% a year," says Mikhail Kobalinskiy, an economist at the Siberian Federal University.

"Interest rates are already high, so if you raise them further to tackle inflation, this could slow down productivity and economic growth."

Instead economists say Russia has used anther weapon in its armoury to tackle inflation - its currency.

Most of Russia's food is imported. A strong rouble means imported food is cheaper, but the flip side is that it pushes up the price of Russian exports.

Harvest hopes

The wild card which could destabilise inflation is government spending.

Many expect Russia to increase spending in the run-up to the election later this year, which would put more pressure on prices.

But in the end, the same factor that triggered rising food prices could stabilise them.

"The winter crops have been well protected this season because of the snow," Natalya Zagvozdina from the investment bank Renaissance Capital told the BBC.

"We are expecting a normal harvest of about 80-85 million tonnes of grain.

"Rising prices cannot go on for ever and we expect food inflation to slow down later this year."

Russia's government will certainly be hoping to reap the benefits of a good harvest.

Inflation is a political as well as an economic issue.

This year, there is a big incentive for the government to keep inflation in check.

It is an election year and escalating prices are never popular with voters.