Something Is Rotten in Russia and That Keeps Rates Elevated

  • Central bank blames spike in food prices on lack of warehouses
  • Monetary easing paused in July after three straight rate cuts

Headquarters of the Russian central bank.

Photographer: Andrey Rudakov/Bloomberg

The job of central banking isn’t supposed to include worrying about storage for potatoes.

But for the Bank of Russia, the line is always blurry between the more mundane policy concerns and the issue of “non-monetary” factors -- from income inequality to utility tariffs. Which is where fruit and vegetable warehouses come into play.

Unseasonably cold weather this year exposed a deficit of storage for staples like cabbage, carrots and potatoes, sending price shockwaves that rippled through inflation expectations, which the central bank calls a “pillar” of its rate decisions. It’s such fluctuations in food costs that are forcing the Bank of Russia to keep borrowing costs higher than it would otherwise, according to Governor Elvira Nabiullina. Policy makers interrupted their easing cycle on Friday after three straight rate cuts.

Inflation expectations are especially sensitive to increases in the cost of what Citigroup Inc. terms the “Borscht Collection” of produce because they disproportionately affect the many Russians who’ve become reliant on cheaper vegetables following a collapse in incomes and standards of living during a recession. At 12.4 percent, price growth as perceived by consumers is almost triple the headline number, rising in June for the first time since winter. Inflation expectations for a year ahead stalled at 10.3 percent.

“The spike in prices is related to the lack of infrastructure, meaning farmers have to sell potatoes and cabbage for lower prices when they aren’t able to set them aside for storage,” Nabiullina said at a July banking congress in St. Petersburg. “When the stockpiles run out, prices soar suddenly.”

Without sufficient warehouse capacity, farmers risk losing as much as a third of harvested crops, according to Sergey Korolev, president of the National Union of Fruit and Vegetable Producers. The Agriculture Ministry says Russia needs to increase available storage space for produce by over 70 percent to limit the impact of seasonal cost surges.

Greater Say

Formerly an economy minister and aide to President Vladimir Putin, Nabiullina has sought a greater say in shaping policies beyond the central bank’s purview. The biggest annual surge in the cost of fruit and vegetables since 2015 has now also put the shortage of warehouse space on the agenda.

A recent government meeting led by Putin focused on the issue. The ministries of economy and agriculture are also working with the Bank of Russia on the possibility of channeling pension savings for investment to build up storage capacity because the budget doesn’t have enough funds. 

Adding to the challenges, a lot of the infrastructure developed in Soviet times has since been lost.

“It still exists today, but it’s worn-out and outdated, most of it is closed and not in use,” Korolev said. “It’s a rather costly affair and today not everyone is ready to invest the money without state support.”

Not Enough

An annual allocation in the budget provides about 1 billion rubles ($17 million) to subsidize storage construction. That’s only a fraction of the minimum of 45 billion to 50 billion rubles required by farmers to meet their most critical needs, according to Korolev, who puts the amount of vegetable warehouse capacity urgently lacking at about 3 million tons. The cost can be up to 50,000 rubles per ton of storage, he said.

The Agriculture Ministry is more downbeat. While Russia has 7 million tons of storage capacity for fruit and vegetables, an additional space of about 5 million tons is needed, with just half of it planned for construction by 2020. 

“It’s necessary to build more vegetable warehouses, which would make it possible to consume domestic goods until the summer harvest,” Agriculture Minister Alexander Tkachev told Putin this month. “We’ve never done this seriously.”

On Target?

While policy makers remain confident of hitting their target of 4 percent by the end of 2017, inflation is now predicted to close this year at 4.1 percent, according to economists surveyed by Bloomberg.

The central bank’s research and forecasting department has already drawn attention to the risk of higher price pressures as a result of possible losses sustained by this year’s fruit and vegetable harvest, which it attributed to cold weather and a low level of stockpiles extending into next year. The insufficient storage may keep price growth slightly above 4 percent in the first half of 2018 and result in higher inflation expectations, according to its report.

But as a new harvest enters the market, the cost of fruit and vegetables is “set to show a seasonal downward trend” in the months ahead, the Bank of Russia said on Friday. Despite the upbeat tone, however, the harvest outlook -- and its impact on food costs and inflation expectations -- was mentioned first in its list of short-term threats to price growth.

“Food is simultaneously the main factor and the main risk for inflation expectations,” said Dmitry Polevoy, chief economist for Russia at ING Groep NV in Moscow. “August and September will be the representative months as the real situation with the harvest will be clear only by fall.”

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