Saturday, August 16, 2014

Back to the Future: Russia threatens price controls in the face of Economic Sanctions. We know how this will work out.

Predictable consequences are playing out in the economic sanctions world---with more to come:.

Russians already hurt by Western food import ban

Russians are already paying a price — literally — for the ban on food imports from Europe and the United States that Russia imposed last week to retaliate for American and European economic sanctions.
Suppliers and consumers are facing shortages and price hikes on staples such as fish and fruit, as well as gourmet items such as Italian Parmesan and French Brie cheese.
Suppliers have raised prices for some fish by 20-36%, one of Russia's biggest retailers, X5 Retail Group, complained to Russia's government, the Kommersantbusiness daily reported on Wednesday. Suppliers reported shortages and higher prices for fruit, retailers braced for milk prices to go up, and some meat suppliers were engaging in price speculation, Kommersant reported.
Russia's Central Bank warned last week that the sanctions are likely to increase an already rising inflation rate. Even so, Russia's government has pledged that prices will not go up as a result of the import ban, promising that the Federal Anti-Monopoly Service will check reports of suppliers raising prices.
In the worst case, the government could resort to price controls, Kommersantreported.
Should Russia enforce price controls one unintended BUT predictable consequence would be the rise of Black Market activity.  Russians are used to this--they just need to brush off the rust from the old Communist days.

Below I explain the economic theory/rationale behind the rise of Black Market activity in face of Government policy to control prices.  Let me know what you think. Thanks.

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