But these measures don’t work. Inflation has reached its highest level in four years, and even officials admit that relief will come in a few months at best.
In an effort to ease the burden on consumers, last week Vladimir Putin added steel, nickel, aluminum and copper to a long list of export duty items. After Putin first instructed the government to take measures to combat price increases late last year, the restrictions have affected not only wheat, but also vegetable oil, sugar and the main Russian product – buckwheat.
Inflation is the most worrisome in the polls, and the Kremlin needs to be shown that it is trying to solve the problem, even though it is linked to a global rally in commodities that Russia cannot do anything about. However, as new tariffs are introduced, the risks are heightened that these measures could undermine the central bank’s policies and Russia’s dominance in global commodity markets.
Bank of Russia Governor Elvira Nabiullina is already making every effort to control inflation, which recently exceeded 6%. The central bank has raised interest rates by 125 basis points since March and warned that monetary tightening will need to be tightened again next month as price increases spiral out of control.
As Nabiullina said in April, duties and controls on staple foods have reduced inflation this year by about 20 basis points. She has repeatedly warned that such are only effective in the short term and could increase inflationary pressures in the long term due to deficits and increased trade in informal markets.
The government, which is already facing resentment over declining revenues, insists tariffs are necessary to protect consumers. Last month, Putin called for new measures to be taken “swiftly” to avoid fluctuations in prices for “socially important” goods. Steps are already being discussed to contain the rise in fertilizer costs, including freezing domestic prices and introducing a floating duty.
Analysts at the state-owned bank VTB Capital have noted a decline in prices for some food products, proving that these measures are working. Inflation is rising much faster in Brazil, which does not control prices, than in Russia, although this may be due to other factors, such as a severe drought, they said.
Brazil reacted to the rise in prices by raising interest rates. Argentina has imposed restrictions on the export of beef, and Ukraine has introduced some minor restrictions on the export of sunflower oil. China began selling huge reserves of metals in an attempt to bring down world prices.
Russia consumes only 10% of nickel, a third of aluminum and about half of its steel production, so the latest measures will not have a big impact on the overall inflation rate, analysts at BCS Global Markets say. A spokesman for NLMK, Russia’s largest steel producer, warned that the duty is likely to revise investment plans for low-margin producers, which could reduce consumer income.
Since polls show that inflation is the main problem, the Kremlin must show that it is trying to get the problem under control. But as more and more tariffs are added, the risks rise that these measures could ultimately undermine central bank policies and Russia’s dominance in world commodity markets.
“This is a populist approach aimed at creating the illusion of price control and social assistance,” said Elina Rybakova, deputy chief economist at the International Institute of Finance in Washington. “In a pinch, they run the risk of spoiling price indices and making monetary policy less effective.”
Bank of Russia Governor Elvira Nabiullina is already trying to control inflation, which recently exceeded 6%. The central bank has raised interest rates by 125 basis points since March and warned that further monetary tightening will be required next month as price increases spiral out of control.
Tariffs and controls on staple foods have reduced inflation by about 20 basis points this year, Nabiullina said at a briefing in April. She has repeatedly warned that such measures can only be effective in the short term and could increase inflationary pressures in the longer term due to scarcity and increased black market trade.