Russians feel the chill wind of inflation

Financial News

Jason Corcoran
07 Jan 2008

Letter from Moscow
Long bread queues and rationing may be a thing of the past in Moscow but the rising price of the daily loaf is a concern for many during the long holiday season.

The Russian capital has been rated the world’s most expensive city by the Mercer Human Resources Consulting but a basic state pension of 1,260 roubles (€35) does not go far in any of the city’s new neon-lit shopping emporiums.

High international prices for crops have rippled through the supply chain since the summer, contributing to a rise in the retail price of basic foods.

Russia produces little of what it consumes. If consumers check food labels, they can see most of their fresh milk is from Finland while chocolate teacakes are imported from China.

Staple foodstuffs have been worst hit by price rises. For the first 10 months of last year, the price of bread went up 21.3%, the price of butter rose 32% and that of sunflower oil soared by 48%, according to official statistics.

Inflation was expected to reach 12% last year, four percentage points above the initial target. The central bank’s official inflation target for this year is between 6% and 7% but many analysts believe government spending promises on public salaries and infrastructure will keep inflation in double digits.

Rising inflation has led the government to freeze prices of bread, sunflower oil, eggs and yogurt until February 1, just before the presidential elections.

Moscow’s banking community is worried about domestic inflation and the impact of the US economic slowdown. Western investors have pulled billions of dollars from Russia and other emerging markets since last August to cover their global credit hits.

However, some analysts think Russia will escape the brunt of the global market turmoil, even if a slowdown leads to the price of oil nosediving to $50 a barrel.

Scares in the global banking system are pushing investors to the haven of commodities. With gold prices topping $800 an ounce and record prices for platinum, some Russian natural resources exporters seem well placed.

Waning investor appetite led to several listings being cancelled but dealmaking in Moscow picked up apace last month.

Aluminium group Rusal said it had taken a 25% stake in fellow Russian mining company Norilsk Nickel, paving the way for a potential merger between the two that would create one of the world’s biggest mining groups.

French insurer Axa took a 36.7% stake in insurance company Reso-Garantia for €810m while France’s second-biggest listed bank, Société Générale, said it would exercise a call option to take control of Russian rival Rosbank.

Banking leaders said Russia’s economy was too inter-connected with the rest of the world to escape global market turmoil.

Oleg Vyugin, chairman of MDM Bank, warned Russian businesses to be prepared for the worst. He said: “If the US enters recession, Russia will suffer a slowdown. The first wave of the credit crunch forced the likes of [steelmaker] Maxi Group to sell out to bigger rival NLMK. Everyone is thinking ‘we’ll be all right’, but a second wave will hit bigger companies and the Russian central bank needs to prepare for that.”

A leading headhunter said some bulge-bracket banks, including Credit Suisse and Deutsche Bank, had ring-fenced their emerging market operations to protect them in the event of job losses as a result of the US sub-prime crisis. He said: “Emerging market operations are usually where heads start rolling first. Some have done well out of Russia but others are struggling.”

Senior bankers suggested Lehman Brothers might be most vulnerable to cuts. One said: “It has struggled to gain scale and chief executive Richard Fuld has never been keen on Russia anyway.”