Russia is set to ban companies from unreasonably raising prices.
On any company that jacks up the price on food products by more than 30% within two months without a significant economic reason. The Federal Antimonopoly Service (FAS) proposed this measure to the Russian government.
It is expected that this innovation will be effective until the end of the next year, and fines will be imposed for non-compliance.
To curb the unjustified rise in the cost of socially significant food products, authorities proposed amendments to the “On Protection of Competition” law. The main reasons for sanctions will be speculative price increases and cases of creating an artificial shortage of essential goods. If the violation is not rectified after the issuance of the order, the violator will face a fine, which will be 0.03% of the revenue from the sale of the product, but not less than 50,000 rubles.
Businesses will not face issues if the price increase occurs due to changes in market demand or supply, seasonal factors, and fluctuations in prices for tariffs, components, or raw materials. The Ministry of Economic Development will determine the list of such goods and the degree of unjustifiability, relying on data from Rosstat and regularly informing the government about it.
According to Egor Obolensky, the head of Cornette Group, “In my opinion, the intention is extremely simple—to reduce the expenses of Russians. Due to the instability of the dollar exchange rate, prices for goods are rising rapidly, while the growth of salaries significantly lags behind. As a result, the purchasing power of the population is significantly reduced. It is assumed that the decision will temporarily lower prices and maintain balance.”
The move by the FAS was likely prompted by the recent price hikes for chicken meat and eggs in some retail chains, where their prices increased by tens of percent. This led to a shopping frenzy in some regions, with people queuing secretly to buy products from local poultry farms at the “old” price.
In response, local administrations had to take urgent measures, limiting the sale of goods to one person and increasing the capacities of relevant enterprises urgently. At the same time, regional authorities stated that there was no reason for the expected deficit, and the availability of eggs was up to 200% of the required volume.
The situation prompted the antimonopoly service to take action, proposing to limit the markup on these and other socially significant products. After interdepartmental coordination, it was decided to rectify the emerging problem systematically by introducing restrictions through legislative changes. The initiative was supported by First Deputy Prime Minister Oleg Belousov, who directed the FAS to make the relevant changes, which were also supported by the Ministry of Industry and Trade.
As a result, the antimonopoly authority publicly announced plans to curb unjustified price increases on food products. Specifically, if the regulator notices such violations, a prescription will be issued to remove the created imbalance. In case of no response, an administrative case will be initiated, and a fine will be imposed. Although two decisions have already been made in Russia to curb prices (governmental restriction of the maximum permissible price in case of a sudden increase by 10% and the voluntary initiative of retailers not to raise prices on social goods by more than 5%), it is expected that the new amendments will restore the balance between businesses and authorities.
President Vladimir Putin acknowledged the problem in this area. During his annual press conference, he stated that the issue lies in the increasing demand for products against the backdrop of insufficient production: “There is a small increase in income… Demand has increased. It was a relatively cheap protein. And popular among citizens.”
The Ministry of Agriculture has also joined the efforts to solve the problem—prices for eggs and chicken meat should be stabilized in the near future, promising Russian citizens.
The FAS (Federal Antimonopoly Service) took the initiative to curb unjustified increases in food prices after the rise in prices for eggs.
Entrepreneur Expectations
Businesses have reacted ambiguously to the Federal Antimonopoly Service’s (FAS) proposal, citing vague formulations under which regulatory bodies will monitor prices. Additionally, most regions of Russia have their specific features regarding the delivery, storage, and sale of food products. There is a risk that regional authorities will blame businesses for the overall price increase, which depends on numerous factors beyond their competence. For example, the rise in the cost of gasoline, increased taxes, or rising rent rates can independently drive up the cost of goods, and inexpensive items in high demand among the majority of the country’s population will be the first to be affected.
The second factor of uncertainty may be the increased number of inspections that will follow the approval of the new initiative. Adjusting the pricing process will disrupt the competitive environment and jeopardize market mechanisms for balancing price/supply.
Simultaneously, the determination of intent, which plays a decisive role in establishing the guilt of a particular market participant in such circumstances, has been excluded.
Excluding the competitive process in the struggle for consumer wallets will create a dangerous precedent for regulatory authorities. For example, retailers often deliberately lower prices to increase the number of customers in their stores. If such cases are taken as a basis for determining the average market price, then other players can be fined simply by following the letter of the new regulation. All of this will create conditions for manipulation and put the entrepreneurial community in a vulnerable position.
“In this situation, the state must work in two directions: ensure strict control over prices for essential goods, reducing inflation to 3-5% per year (preferably less), and, on the other hand, create economic and legal conditions under which the production of these goods, their trade can do without constant budget injections in the form of subsidies, subsidies, and other types of financial assistance, bringing profit to manufacturers,” believes Oleg Matyunin, a lawyer and managing partner of the Moscow law firm “Matyunin and Partners.”
How Will the Market React?
Market participants still do not understand how the new Government proposal will be implemented in practice and believe that, for the most part, it will be declarative. Taking into account large retail chains, at existing sales volumes, the trading margin often amounts to a few percent, which, within the existing inflation, becomes only part of the product’s cost. In addition, when forming the retail price, the ex-factory cost is taken as a basis, at which the manufacturer is willing to supply his products. Here, the initiative belongs to sellers who form the assortment of their goods based on market offers.
“On the one hand, the FAS proposal is an attempt to somehow keep prices for socially significant goods within reasonable limits, on the other hand, there are high risks of returning to a situation of deficit and reducing the diversity of the assortment. In this regard, it is essential to control the entire chain of price formation, starting from the cost of energy resources, as well as the quoting of the export of mass consumer goods,” summarizes Galina Sorokina, Director of the Institute of Economics and Finance at GUU.
The temporary nature of the developed measures does not currently cause significant concern in the market. The established restrictions will likely dissolve in the information agenda and will not have a substantial impact on consumer behavior. Perhaps the sharp rise in the price of chicken meat and eggs provoked negative emotions, which this initiative was intended to “quench.” However, the initiative’s further prospects will become clear after the holidays when the New Year’s frenzy subsides, and the country returns to working weekdays.
By Alexey Zotov
Photo: Yandex