Yuri Fuchs argues that while inflation in Russia’s grain prices is the lowest it has been in years, it is showing signs of rising yet again. As Russia recovers from last summer’s drought, grain prices are seemingly going down. At the same time, the lifted ban on grain exports is having the opposite effect.
An odd preponderance of events occurred in the Russian domestic economy last summer. Amidst the global economic recession, the level of inflation in Russia, a constant sore for economists and leaders, hit a record low in July 2010. Though such a decline in inflation was an achievement given Russia’s previous economic history, it still proved domestically disadvantageous.
The decline in inflation occurred during a scarcity in Russia’s grain supply caused by unprecedented droughts in the nation. The droughts hampered domestic grain production, and forced the government to suspend grain exports in an effort to preserve domestic grain supply and avoid further inflationary pressures. Even with the suspension in grain exports by August of last year, the Russian population suffered the effects of 2010 summer drought as food prices rose to burdensome levels while the suspension itself hurt foreign consumers of Russia’s sizeable grain industry.
Global Supply Shrinks—Prices Skyrocket
In turn, by attempting to control its own price inflation, the Russian ban on grain exports contributed to the global price inflation that has continued into the present. One year later the export ban, which remained in place after the drought, is set to be lifted on July 1, 2011. The lift of the ban amidst a climate of stabilizing food prices in Russia , could be worrisome for Russia. Allowing grain exports risks a renewed inflationary spike for the Russian consumer just as food prices had become less severe. Outgoing grain shipments have already started increasing the domestic price of grain. The lift might prove even more disastrous should another drought befall Russia again this summer. However, internationally, the resumption of grain exports will provide a source of grain that eases food price inflation particularly in many neighboring European states. Furthermore, some Russian economists argue the ban does not incentivize grain producers to maximize output. Consequently, Russia is damned if it lifts the export ban and damned if it doesn’t.
Exports Return: Inflation Recedes?
Yet the ultimate result reopening grain exports may not have a drastic impact on price inflation one way or the other. Though exports will resume, the volume of grain shipped out will still fall below pre-drought levels as Russian agriculture is still recovering from the wildfires and drought of last summer. As a result, the return of exports will likely not have a decisive effect in reducing overall food prices worldwide or regionally, though the ban’s ease is somewhat of a welcome respite for European consumers of Russian grain.
Forecasting the Future…
Domestically, the resumption of grain exports will obviously do little to stem inflation in the Russian Federation and if another unforeseen drought were to occur again this summer, the action of the Russian government would seem catastrophic in hindsight. Yet forecasts do not definitively show a second drought-plagued summer. Even discounting the resumption of grain exports, food price inflation in Russia will likely continue in the near future. Inflation in other markets, Russia’s current ban on EU vegetable imports, and the leftover effects of the previous drought on other Russian food products will ensure a continuation of food price inflation in the Russian Federation. A continuation that will unfortunately affect the average Russian consumer adversely only a year after it appeared that the detrimental cycle of inflation in Russia was being curtailed.