Russia fears one potato, two potato, three potato more

By bne IntelliNews February 8, 2011

bne -

Commentators obsess over the impact of oil prices on the Russian economy, but it's soaring potato prices that are threatening Russia's recovery and could spark social unrest this year.

As the world emerges from the frying pan of the 2008 global economic crisis that followed the collapse of Lehman Brothers, it has fallen straight back into the fire of skyrocketing agricultural prices, which had been affecting the global economy in the summer of the same year.

The economic crisis temporarily stymied this rise in food prices as demand collapsed. But with the developing markets of Asia recovering swiftly, and Russia's economy doing better than expected, prices of various agricultural products are already spiking.

Oil prices, of course, remain key to the health of the Russian economy and already broke through the $100 per barrel mark in January. The consensus amongst analysts is for an average price of oil between $80-90 per barrel this year - ahead of the federal budget's assumption of $75. This means the economic outlook for Rusia is good. Deputy Prime Minister and Finance Minister Alexei (Mr Prudence) Kudrin crowed to delegates at an investment conference at the start of February that GDP growth for this year had already surpassed the state's forecast of 3.8%, running at 4.0%, and the budget deficit for 2010 was a mild 3.9% of GDP - much less than the 6-7% forecast at the start of 2010.

Certainly, the Russian economy will do a lot better this year than the government is expecting - barring a car wreck in the Middle East, or other such surprises. Economists' predictions for growth are mostly north of 5% and a few are even whispering that the budget deficit could be cleared entirely by the end of the year. The black cloud on the horizon of an otherwise sunny forecast is inflation.

Consumer price inflation came in at a disappointing 2.4% in January (equivalent to an annualised rate of 9.6%) and twice the rate seen a year previously. The Central Bank of Russia has already reversed its almost two-year run of cutting interest rates to hike them twice since December in a move that will head off more price rises, but will smother growth. More rate hikes are on the cards. However, the real shocker was that Russian potato prices rocketed 22.8% month on month in January, causing a shortage of the most basic foodstuff in the country after bread.

Spud Russians like

A potato crisis is cooking. Russia has already started importing Scottish and Indian potatoes to meet a large shortfall that has been caused by last summer's extreme weather. The shortfall on the Russian market is so big, say experts, that no one country can meet the gap, so Russian traders have fanned out across the world.

Robert Doig, who is on the board the Scottish Potato Council, said in an interview with The Scotsman in February that European continental buyers were flocking to Scotland to fill shortages. Doig estimated that there is a 4m-tonne shortfall in the Russian potato crop in 2010 that is hitting the market now.

Likewise, Russian buyers have also been in India's Punjab region where they are negotiating for exports of up to 10,000 tonnes of potatoes for the first time, reports Agribusiness Market. "We are likely to finalise the deal within a day or two with Russian traders who have approached us for supply of potato crop to Russia," a potato grower from Jalandhar district, told the trade publication.

While the deal has yet to be done, just the reported negotiations have already sent the cost of potatoes in the Punjab soaring six-fold. The cost of potatoes in Russia is currently about £250 per tonne, more than double the £100 per tonne in Scotland, reported the Scotsman.

Mark Prentice, head of seed and exports for Scotland's Potato Council, confirmed that he had been receiving a large number of enquiries from Russia and also from Poland, normally a major producer of potatoes, the paper added.

And it is not just potatoes: oil may have risen from a low of about $40 per barrel in 2009 to around $100 now, but it's sugar that's been the commodity with the fastest growing price in the world this year, reports Business Insider.

These are serious problems. Protests in Algeria this year are drawing inspiration from Tunisia and Egypt, but the protesters were shouting: "Give us sugar!" after prices for the key ingredient for the tea-addicted nation soared. Likewise, ballooning foodstuff prices have been an important factor in sparking all the protests in North Africa this January.

The soaring cost of food is creating a potentially volatile situation in Russia. The cost of the basic basket of consumer goods in Russia also shot up by a quarter in 2010. With Duma elections due in December that could act as a seed crystal, the chance of the social unrest seen in North Africa occurring in the countries of the former Soviet Union are rising rapidly.

The summer of 2008 was marked by bread riots across Central Asia, leading the governments of Kazakhstan and other countries to contemplate nationalising bread production and the situation in Russia is already sufficiently serious that Deputy Economic Minister Andrei Klepach said in the last week of January that the government could impose administrative price controls on basic goods including potatoes.

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