Apr 22, 2015 | 09:15 GMT

9 mins read

How Russia Is Lowering Its Food Prices

In Russia, Contraband Eases Food Price Spikes

Russian food prices are relatively high, and likely to remain so in the near to medium term. The Kremlin has pledged to stem price hikes, increase domestic production and import food from new sources, but the situation could contribute to social unrest. Nevertheless, redirected goods from the European Union will give Russian consumers some relief. Russia imposed a ban on Western foods as a response to EU and U.S. sanctions, but allowing some black market imports helps Moscow prevent the rise of a mass protest movement. Despite desires to become less dependent on the West, in order to maintain stability, Russia will continue to rely somewhat on Europe.  

Food prices have risen significantly in Russia. The price of cabbage, a staple food in Russia, has risen by more than 60 percent since the beginning of 2015 alone. In the three-month period between January and March, the average price of potatoes rose 36 percent, while beef prices rose 10 percent. These increases come after overall food prices rose 15 percent in 2014.

The price hikes are due to both the introduction of a ban on high-end commodities from a host of Western countries and the weakening of the Russian ruble. Russia's currency fell by more than 40 percent in 2014 before beginning to rally slowly over the past months. But that rally has not yet reversed food price increases.

On Aug. 7, 2014, Moscow imposed a one-year ban on a range of food products from the European Union, United States, Canada, Norway and Australia. The import ban came after Western governments imposed a round of significant sanctions on Russia's economy following the downing of Malaysia Airlines Flight 17 and the intensification of fighting in eastern Ukraine. Among the products banned are everyday higher-value foods such as beef, pork, poultry and vegetables. Prior to the ban, Russia imported about a quarter of all meat consumed domestically, as well as about 70 percent of fruits. Many of these imports came from countries such as Canada, Finland, France and Poland.

At the same time, the fall in the value of the ruble is affecting the fertilizer industry. Some types of fertilizer sold in Russia have become more expensive for Russian domestic food producers. Meanwhile, domestic fertilizer producers, benefitting from the fall of the ruble, are boosting fertilizer exports abroad. Russia's Agriculture Ministry has tried to introduce a 35 percent export tax on fertilizers, but the government — fearing the political clout of large Russian fertilizer exporters — has opposed the proposal.

Prime Minister Dmitri Medvedev did announce, however, that domestic customers would be able to receive new discounts. Still, Russian families are now projected to spend more than 50 percent of their income on food by the end of this year because of the import ban and higher production costs, compared to 36 percent in 2013.

Government Efforts to Reduce Prices

Russian authorities have taken some steps to attempt to mitigate the effects of the ban and the weak ruble on food prices, but with only limited success. Medvedev has sought to empower the Federal Antimonopoly Service to act as a check on food producers and provide greater transparency for food prices, but he has opposed proposals that would formally cap food prices. In late February, 12 of Russia's top supermarket chains — including Magnit, which has more than 7,000 stores across Russia — announced that they would voluntarily freeze prices for 20 "socially important" food items for two months, likely under government pressure.

However, food inflation in March was 1.6 percent higher compared to February and 23 percent higher year-on-year, signaling that Russian consumers are still facing high prices in stores. In fact, there is anecdotal evidence that some Russians are considering growing more of their own food now that spring is approaching, as they did in decades past, instead of shopping in stores.

Trade with large Middle Eastern and Latin American markets has increased because of the ban on Western food imports as well. Turkey has been one of the main producers to boost exports to Russia. Between August and December 2014, Turkish fruit and vegetable exports to Russia rose by 140,000 tons, or 25 percent, year-on-year. Throughout the year, Russia imported about 1.38 million metric tons of fresh fruit and vegetables from Turkey — more than 17 percent of its total fruit and vegetable imports. In the first three quarters of 2014, Turkey's white meat, poultry and seafood exports to Russia increased by more than 400 percent.

Simultaneously, Russian authorities took steps to lift regulatory restrictions and encourage greater imports from Latin American markets. In 2014, Russia approved 90 Brazilian meat plants for exports to Russia. Brazil's meat exports to Russia spiked. Pork exports alone from Brazil to Russia grew by 76.8 percent year-on-year in September 2014. Nevertheless, these new exports have not been sufficient to meet Russian demand and replace lost imports from the ban.

The Costs of Domestic Food Production

Russian officials have argued that the ban on European imports would spur more domestic production. Although production of some foods has indeed increased since the imposition of the ban, much of it is not cost effective. Russia is a competitive producer of grain but not of higher-end commodities. Moscow has long subsidized the agricultural industries, but the agricultural sector is still in dire need of large-scale investment. Also, given Moscow's implementation of budget cuts, funds for subsidies could be reduced eventually. Ultimately, growing reliance on domestic production that is less cost effective than imports could be a contributing factor in the rising cost of food.

Without substantial investments in developing Russia's food production industry, domestic production in the near to medium term will not meet demand. Domestic food production is expected to rise in 2015, but it will not fully replace lost import volumes. For example, domestic pork production grew in 2014, and in 2015 pork production in Russia is expected to rise by 6.5 percent, to 2.82 million metric tons. Still, import volumes are forecast to decrease 9 percent, to 375,000 metric tons, meaning that combined domestic production and imports would not reach the 2013 domestic consumption level of 3.27 million tons.

Moreover, beef, meat and veal imports are projected to amount to only 825,000 metric tons in 2015, compared to more than 1 million metric tons in 2013. Domestic production is set to rise to 1.4 million metric tons in 2015, up from about 1.38 million metric tons in 2013. But as with pork, production is not expected to make up for the decrease in imports.

Fruit imports appear to follow a similar pattern. Following the ban, Russian domestic apple production was projected to increase by nearly 10 percent to 1.6 million tons in 2014-2015. However, this boost in domestic production does not fully compensate for the forecast 27 percent drop in imports to only 800,000 metric tons.

Geography will also complicate Russia's efforts to boost production of domestic foods. The ban has affected Russia's regions differently, with prices varying across the country. For example, it is both expensive and difficult to transport products over land to some parts of Russia's Far East; the northern Far East relied on boat shipments of food imports from the United States until the imposition of the ban.

The Role of Contraband

But illegal re-exports of food from the European Union have also somewhat ameliorated the food crisis. Since the imposition of the ban, Russia's imports from small Balkan countries that are not members of the European Union skyrocketed. Between August and December 2014, fruit and vegetable exports from Macedonia increased by more than 200 percent, while exports from Serbia grew by more than 35 percent. These rapid changes in trade patterns have led Russian authorities to suspect that food products from EU countries are being illegally re-exported through non-EU countries. Despite official threats, these exports have been allowed to continue.

Apple exports from Serbia to Russia, for example, rose by nearly 50 percent to 118,000 metric tons — the equivalent of about one-sixth of the European Union's total apple exports to Russia in 2013-2014. In fact, in 2013, Serbia's total fresh apple production was 180,000 metric tons, indicating that some of the apples exported to Russia were likely grown outside Serbia's borders. Russia's agricultural watchdog, Rosselkhoznadzor, publicly raised concerns that the apples coming from Serbia could actually be Polish and threatened to ban all Serbian food imports if Serbian authorities fail to investigate the matter. Similarly, Russia's Foreign Ministry formally warned Macedonia by providing a list of suspected re-exported items.

Members of the Russia-led Eurasian Economic Union have also become major conduits for contraband European food exports to Russia. The volume of Polish apples exported to Belarus and Kazakhstan rose dramatically in 2014, with Russian officials intercepting Polish apple shipments on the Russian-Kazakh border several times. According to a February report by the European Fresh Produce Association, EU produce exports to Belarus increased by 141 percent to 281,234 metric tons following the ban, while EU exports to Kazakhstan rose by 108 percent to 25,247 metric tons.

Considering that the exports rose at a time when the Belarusian currency underwent two devaluations, the spike in imports can be explained by Russian demand. In fact, Russian concerns that food originating in the European Union is being re-exported through Belarus likely contributed to Rosselkhoznadzor's decision in November 2014 to temporarily ban meat and milk imports from 23 different Belarusian processing plants. However, illegal re-exports flowing through the Balkans, Belarus and Kazakhstan likely curbed food price increases in Russia and reduced the potential for shortages of some types of foods.

Traditionally, whenever there has been a systematic breakdown in Russia's supply chains, the black market has filled the vacuum. During the Russian Revolution, the fall of the Soviet Union and the tumultuous 1990s, black market activity spiked. The Kremlin has usually looked the other way whenever the black market meets needs the state cannot, in the hope that the black market can help relieve the government and avoid social unrest. Currently, the Kremlin fears that higher food prices — combined with a weak ruble, contracting economy and government budget cuts — will lead to mass protests. There have already been some isolated protests over economic issues. Allowing some illegal re-exports from the European Union could be a part of the Kremlin's efforts to prevent the rise of an anti-government protest movement.

The Gap Between Supply and Demand

Government efforts to encourage domestic production and voluntary price caps are not fully compensating for the ban on food imports from Western countries. Moscow disapproves of re-exports through the Balkans and former Soviet countries like Belarus and Kazakhstan, and has taken measures to prevent the entrance of these goods into Russia. But some food shipments are making it across the border regardless.

This additional volume of food helps to at least narrow the gap between supply and demand. Without this flow of illegally re-exported foods, Russian food prices would likely be even higher than they are now. The Russian ban on food imports was designed to put some pressure on Western countries, especially in the European Union. But the Kremlin's need to avoid social unrest is forcing Russian authorities to allow illegal re-exports, preventing a further rise in domestic food prices.

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