Cablegate: Russia - the Politics of Inflation

VZCZCXRO5371
PP RUEHDBU RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHMO #5373/01 3180400
ZNR UUUUU ZZH
P 140400Z NOV 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 5208
INFO RUCNCIS/CIS COLLECTIVE
RUEHXD/MOSCOW POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC

UNCLAS SECTION 01 OF 03 MOSCOW 005373

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: EAGR ECON EFIN PGOV PINR RS EINV
SUBJECT: RUSSIA - THE POLITICS OF INFLATION

REF: A. (A) MOSCOW 5200

B. (B) MOSCOW 5007
C. (C) MOSCOW 5133

Summary
-------

1. (SBU) In a campaign that many here characterize as a
referendum on Putin and his policies, few expected that the
problem of inflation would emerge to distract the public's
attention from the broader economic stabilization that has
succored the president's popularity. Putin's team, which was
apparently unable to keep this from becoming an election
issue, has been compelled to react with "stabilization
measures" and its own information campaign to convince voters
that it is able to resolve the issue. Recent polling data
suggest that these measures have been only partly successful
and political pundits here are linking an October drop in
United Russia's popularity with the increase in prices. The
central leadership, however, appears divided on the best way
to handle the problem. Premier Zubkov and others are
advocating populist "Soviet" solutions of greater government
intervention, while cooler heads of the economic leadership
like Deputy Premier and Finance Minister Aleksey Kudrin
promote market-based solutions. END SUMMARY.

The Issue
---------

2. (SBU) The prospect of high inflation in September
overshadowed the economic highlights of the first half of
2007 -- record private net capital inflows, record initial
public offerings (IPOs), and stronger than expected GDP
growth -- and undermined Kremlin hopes for another
"successful" year. Official statistics for September put the
year-end goal of 8 percent inflation out of reach and
threatened to exceed the 2006 result of 9 percent. Consumer
prices on a host of core food products skyrocketed in
September according to the Russian Statistics Agency.
(reftel b.) The price of vegetable oil rose 13.5 percent and
the cost of dairy products by 7.5 percent during the month,
elevating inflation's status in the public discourse from one
of perennial aggravation to that of a political issue in the
upcoming elections.

3. (SBU) Press reports link the decline in United Russia's
popularity, which fell from 56 percent to 50 percent,
according to a survey by the government-owned polling company
VTsIOM for the second half of October, to the increase in
prices and people's anxiety about inflation. Food security
issues are still relevant to many Russians, for whom memories
of Soviet scarcity are not all that distant. A decade or so
beyond since the difficult Gorbachev and Yeltsin eras, during
which shelves were emptied of food supplies or when goods
were priced beyond the reach of average citizens, questions
about rising prices on food continue to have special
resonance, particularly among those on fixed incomes. In
2005, pensioners took to the streets in a number of towns
across Russia to protest administrative reforms that sought
to monetize social security benefits, which many then saw as
a threat to their personal economic security.

4. (SBU) Survey data from the Levada Center polling company
in October showed that 82 percent of respondents viewed
inflation as "very high," up from 52 percent in June. Half
of the respondents could not answer why inflation had jumped,
but the "monopolization and greed of traders and producers"
and "government inactivity" topped the list of explanations
(with 12 and 8 percent of respondents, respectively). Many
Russians want their government to take a more active role: in
a separate Levada poll, 64 percent of the respondents said
that they would more likely vote for a party that was for
"strengthening the role of the government in the economy and
in regulating market reforms."

Field Day for Leftist Parties
-----------------------------

5. (SBU) Russia's "opposition" parties seized upon the issue
as a chink in the armor of the seemingly invincible United
Russia, with left and right blaming the administration for
allowing inflation to "threaten" society again. While there
is little risk rising food prices have the ability to change
the political landscape substantially, the issue may well
have significance on the electoral margins. To the extent
that they are successful in turning concern about prices into
dissatisfaction with "Plan Putin," parties like the Communist
Party of the Russian Federation (KPRF) or even "For a Just
Russia" (SR) may hope that they can leverage the issue into
more votes.

MOSCOW 00005373 002 OF 003

6. (SBU) Chairman of the Federation Council and SR leader
Sergey Mironov has eschewed direct criticism of
administration policies, reflecting his party's support for
Putin, but has poured vitriol on "greedy" middlemen and
called for more government regulation of food prices. In a
press conference in mid-October, Mironov impugned "the
scandalous practices of re-sellers" for artificially driving
up prices and he advocated making the government the primary
purchaser for food supplies to stop the "speculation" in
prices. Mironov has advocated re-nationalization of the
wholesale and retail food industry. On October 30, he further
called for compensating families for the increased costs of
food.

7. (SBU) Public concern about rising food prices has provided
grist for the Communist Party, which has gleefully used the
media attention to the issue to blame the Putin
administration and promote its "socialist" economic agenda.
According to the KPRF's Center for Research of Political
Culture of Russia, in October there were more than 20
demonstrations across the country protesting the increase in
prices on food, many of which were organized by the party.
The largest protests -- involving between 1,000 and 1,500
citizens -- took place in Krasnodar Kray, Novosibirsk,
Astrakhan, and Moscow city. The rise in prices for basic
goods hits hardest those on a fixed income or pensions;
Communist campaigning on this issue helps to mobilize the
party's core constituency. Party chairman Gennadiy Zyuganov
and others in the KPRF leadership have leveraged concerns
about rising prices into a rallying cry against liberal
economic policies, including moving to market prices for
electricity, gas, housing, and railway transportation.
Indeed, the party's platform calls for the restoration of
collective state farms.

8. (SBU) Leftist candidates also have made much of Russian
imports of food from abroad, seeing this as evidence of
weakness. In a speech in Rostov oblast, given in late
October, Zyuganov denounced Putin's policies undermining the
country's "food security," claiming that 46 percent of the
country's food resources came from abroad. The mercurial
leader of the Liberal Democratic Party of Russia, Vladimir
Zhirinovskiy has long harangued the Putin administration for
allowing Russia to become an importer of foodstuffs. In a
press conference on November 8, he called it "shameful" that
Russia -- a historical exporter of grain -- no longer could
guarantee its food security.

The Kremlin Reacts
------------------

9. (SBU) The Kremlin, which was apparently unable to use its
considerable administrative heft to keep inflation from
becoming an election issue, has reacted with "stabilization
measures" and an "information campaign." During a heated
discussion with Cabinet ministers in early October, Putin
reportedly criticized Agriculture Minister Gordeev sharply
for not taking sufficient action to shore up Russia's food
supply. Gordeev subsequently teamed up with Federal Tax
Service Director Tatyana Shevtsova and Federal Antimonopoly
Service Director Igor Artemev to visit Moscow-area grocers to
assess the retailers' supply arrangements and methods for
pricing bread, milk, and cooking oils. The group's findings
informed Premier Zubkov's October 15 admonition to regional
governors and municipal leaders to "look into pricing
policies on socially significant food items and stop price
growth on them."

10. (SBU) Comments from various officials, however, suggest
that Putin's team is divided on the issue. Although Premier
Zubkov and others favor more populist and "Soviet" solutions
of greater government intervention, Deputy Prime Minister and
Finance Minister Aleksey Kudrin and other economic ministers
have encouraged a more market-friendly approach. Kudrin was
reported to have urged Zubkov and Gordeev against imposing
price controls. Media coverage of the issue quoted Kudrin as
arguing that "we have a market economy. This does not
correspond to the principles of a market economy."

11. (SBU) Already, experts here see the measures that the
Kremlin has instituted as distorting the food market and
predict they will fail to achieve any of the
inflation-reducing goals it has proclaimed. Ministry of
Agriculture foreign relations chief Andrey Vershinin told
Embassy that price freezes on 8 product categories is
pointless and will have no impact on constraining inflation.
Signatories are also under no obligation to sell products on
the list. An attendee of the meeting at MinAg at which 30
signatories agreed to freeze prices "voluntarily" for 8

MOSCOW 00005373 003 OF 003

product groups said Russian officials characterized the
agreement as "an opportunity for firms to behave in a
socially responsible way" while acknowledging the agreement
is unenforceable. To date, no list of products for which
prices are frozen has been published, and even a MinAg
department director was unable to produce a copy. The list
is reputed to include specific types of foods, such as milk
containing less than 1 percent fat, meaning that higher-fat
content milk will be sold at unregulated prices.

12. (SBU) The government measures could have some negative
unintended consequences. According to local economists, the
GOR's administration's inflation-fighting ironically may lead
to greater inflation. Renaissance Capital Chief Economist
Katya Malofeeva said the GOR's anti-inflation campaign would
have the effect of raising the shelf prices of goods not
targeted by the price agreement. As transportation and other
overhead costs continue to inch upward, retailers will
continue to pass along part of these costs to customers.
"The winners, meaning products with unregulated prices, will
have to pay for the losers, meaning products with frozen
prices and eroding margins. All of which means higher
prices," according to Malofeeva.

12. (SBU) COMMENT: The inflation issue demonstrates the
Kremlin's limited ability to control the political dialogue
in the country and could help to derail plans for a United
Russia constitutional majority in the Duma. Worries about
rising prices have cut deeply into the party's jump in the
polls that followed Putin's announcement that he would lead
the party list, indicating a trend away from YR. Moreover,
the continued prevalence of the issue, heightened by
campaigning by YR opponents, serves to strengthen public
concern and, because expectations of inflation tend to create
greater inflation, to deepen the problem. It remains to be
seen if the KPRF or other leftist parties are able to convert
public nervousness about prices into measurable electoral
gains, but the Kremlin appears concerned about this
happenstance.

13. (SBU) Moreover, it appears that the President's team sees
the emergence of inflation as an indictment of Putin's
legacy. According to Goldman Sachs Executive Director for
Economic Research Rory MacFarquhar, "Putin already thought of
the missed target as a failure." Moreover, memories of the
2005 protests against the monetization of benefits likely
haunt Putin's team, which remains neuralgic about a
spontaneous "orange revolution" in Russia and seeks to
ameliorate any social discontent that leads to spontaneous
demonstrations. There are concerns that the government will
feel compelled to implement further short-term solutions to
throttle inflation if only to demonstrate that the government
is doing "something." While administrative controls may
constrain inflation for a time, inevitably they will result
in reduced supply, leading to either shortages or higher
inflation in the long run when the government relaxes
control, likely after the December Duma elections. END
COMMENT.
BURNS

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