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. Last Updated: 07/27/2016

Rising Food Prices a Political Hot Potato

Rising food prices swung to the top of the political agenda as Finance Minister Alexei Kudrin conceded Thursday that inflation could hit double digits this year, busting through the government's target of 8 percent.

"We have not yet completed our own forecasts, so I turn to experts' views, according to which inflation could be about 10 percent," Kudrin told reporters.

With the State Duma and presidential elections looming on the horizon, rising consumer costs and spiraling inflation are emerging as political hot potatoes.

Higher food prices were a dominant theme in President Vladimir Putin's televised call-in show Thursday, as several pensioners quizzed him on what he proposed to do about it.

Putin announced that the government had started to sell grain from national reserves to ease domestic prices, a measure that comes on top of cuts in import tariffs on milk and other dairy products earlier this week. Putin also backed calls for a crackdown on local monopolies in the country's food markets.

Over the last year, milk prices have risen 16.5 percent, butter has risen 20.3 percent, vegetable oil 17.1 percent and meat 7.4 percent, Russian Newsweek reported Monday.

State television this week has shown footage of Prime Minister Viktor Zubkov checking food prices in stores, a visible sign to voters that the government is taking the hikes in food prices seriously.

"I've noticed the change, but prices here are always rising," said Nadezhda Osipova, 68, a shopper at a Ramstore supermarket in northern Moscow. She added, however, that the store had "good discounts for the basics: sugar, salt and flour."

Earlier in the day, Deputy Economic Development and Trade Minister Andrei Belousov said full-year inflation could be even higher than Kudrin suggested.

Soaring food prices were the main reason behind a rise in consumer prices of 0.5 percent in the first week of October, and 0.4 percent in the second, Belousov told reporters. Food accounts for more than 40 percent of the country's consumer price index.

Analysts have said for some time that the government's 8 percent inflation target was looking increasingly unlikely to be met, but Thursday's comments were the first time officials have conceded that inflation could reach double digits.

"It's not easy to acknowledge [higher inflation], particularly in an election year, when the political aspect of low inflation is crucial," said Julia Tsepliaeva, an economist at Merrill Lynch.

Agriculture Minister Alexei Gordeyev this week said the government was in talks with retailers and producers to freeze prices on "socially significant products," such as milk, vegetable oil and butter.

Retailers have said they will introduce price freezes -- but only if manufacturers agree to do the same.

In an open letter to Zubkov this week, the Russian Union of Dairy Companies asked the prime minister to consider their position, Kommersant reported. "We think that the adoption of measures on a federal and regional level to limit prices of dairy products is undesirable, as it represents yet another attempt to solve the population's social problems at the cost of the countryside," the letter said.

Zubkov has hinted that rising food prices are down to more than rising costs, while the Federal Anti-Monopoly Service says it is investigating the country's six largest dairy companies over price collusion.

Shoppers at the Rizhsky market in northeast Moscow echoed this. "Prices have risen because the people who work at the bazaar have artificially raised them," said Valentina Maksudova, 75. "I believe in Putin. He will help fix the problem with the prices."

During Thursday's phone-in show, Putin said some local authorities had given preferential treatment to intermediary companies, which has driven up food prices. "[Authorities] must create market conditions and not protect those they have a special relationship with," Putin said.

Marina Kagan, head of corporate affairs at leading diary producer Wimm-Bill-Dann, said a lot of the talk about price collusion had been "emotional."

"We are working with the [anti-monopoly service] on this issue," she said.

Unimilk, the country's second-largest milk producer, appeared to fall into line with calls for voluntary price curbs, saying in a statement this week that it would freeze prices until the end of the year.

Producers argue that food prices have increased because of unfavorable market conditions. Kagan said the company had been affected by a particularly dry summer in the country's milk-producing regions and higher global demand for powdered milk products.

"We are in a dialogue with the government, but there are some factors that are beyond our control," Kagan said. "Currently, we are not planning any price increases before the end of the year."

But analysts said it was not so easy for producers to freeze prices as they grapple with cost rises of their own.

"All of the producers over the last 18 months have been trying to deal with rapidly rising costs: transportation, personnel, advertising," said Brady Martin, a consumer goods analyst at Alfa Bank. "Their response has been to raise prices."

While analysts concede that the government's measures on import and export duties could have an impact on inflation in the short term, there is concern that retailers are simply too numerous for any price controls to have a widespread effect.

Alexander Morozov, chief economist at HSBC in Moscow, said the price controls would have a greater impact on cities such as Moscow and St, Petersburg, where the organized retail sector -- consisting of the larger supermarket chains -- represents a greater share of the market.

The government has sought to emphasize the global factors behind inflation. "Our country is becoming part of the global economy and all that happens on the global markets affects [us]," Putin said during the program, noting that the growing use of grain in biofuel production and the lowering of agricultural subsidies in the European Union had all contributed to price hikes.

Grain prices have risen 60 percent year on year globally, as higher energy costs and increased demand for grain have coincided with poor harvests.

Economists say domestic factors are as much of an issue in pushing up inflation. In the run-up to elections, the government has increased its appetite for budgetary spending, throwing money at pensions and wages.

Recent hikes in state salaries have gone straight into consumer markets, said Tsepliaeva, of Merrill Lynch.

A more palatable measure, perhaps, would be to allow the ruble to appreciate, but the Central Bank has already indicated that it will not do this before the end of the year. A weaker ruble helps domestic industry, crucial to filling the Kremlin's tax coffers, and the government has to balance the interests of industry and those of the electorate.

Masha Lipman, a political analyst at the Carnegie Endowment for International Peace, said the government had a tendency to throw money at its problems, rather than face up to the task of carrying out difficult reforms.

"The policy of the current government is demobilization. They try to keep the people reasonably content and have pushed them further and further away from decision making," Lipman said. "This means that they can't count on the public understanding."