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Inflation threatens Russia's economy

Inflation is expected to top 11 per cent in Russia this year. Food prices are particularly vulnerable to inflationary pressure, giving domestic retailers and supermarkets a major headache.

The food supply chain is highly complex, involving at least four parties: agricultural manufacturers, processors, wholesalers and retailers.

Price rises originate from producers and trickle down to the last link in the chain – the retailers.

Lenta Company CEO Sergey Yushchenko says inflation is the biggest fear for food sellers.

“For us any inflationary jump spells big trouble. Our market is very competitive and every retailer strives to have the lowest prices,” Yuschneko said.

While farmers, agricultural producers and middlemen are non-transparent, most retail companies operating in Russia are publicly traded.

After the inflation surge that shook Russia's economy in October, the finger of blame was firmly pointed at the retailers.  But retailers themselves say it is not rational.

“Whenever there are several elements in a bigger whole, it is always easier to look into those who are closest to the consumer, the ones who are bigger and easier for inspection,” Sergey Yushchenko said.

The Russian agriculture sector is seriously mismanaged, driving production costs even higher.

“As long as this sector is under-developed, production will have a high markup. And this mark-up does not reflect their earnings, it reflects their inefficiency,” Nikolay Vlasenko, said board chairman of Victoria Group.

New Economic School economist Konstantin Sonin says small rises in inflation can slow down the whole economy.

“Growth is mostly driven by the consumer demand. If something is bad for consumers, it is also bad for retailers. When consumers face inflation, they save more by not consuming as much,” Sonin said.

The price control agreement signed by Russia's largest retailers is seen by many as an ineffective tool to control inflation.  Most experts say it's not just useless – it could even be dangerous in the event of a food deficit.