Butter thefts highlight cost of Russia’s war economy

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Thefts of packs of butter have highlighted the impact of skyrocketing inflation on Russia’s war economy.

President Vladimir Putin’s splurge on arms and ammunition has helped Moscow to maintain an advantage on the battlefield in Ukraine, but it is increasingly coming at the cost of soaring prices for everyday essentials.

Security footage in Ekaterinburg, the capital of Russia’s defence industry, recently captured two masked men sneaking into a dairy shop. As one raided the cash register, the other made off with 20kg of butter.

Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center in Berlin said: “Your average butter churning factory would be more than happy to meet the demand and work in three shifts too. But there aren’t enough people for them to hire.”

“You can’t fight inflation and a war at the same time,” she said.

Russia’s central bank estimated inflation could reach as much as 8.5 per cent this year, double its target. Consumer goods are becoming more expensive at a faster pace: butter prices rose 26 per cent year-on-year, prompting some shops to sell it in plastic boxes with magnetic locks.

Putin has called on officials to stabilise Russia’s economy and the central bank raised the key interest rate to a record 21 points in October. But the president has shown no indication to dial back spending on defence, set for a record Rbs13.5tn ($145bn) in next year’s budget.

“This is a classic case of gunning the economy beyond its capacity,” said Elina Ribakova, a senior fellow at the Peterson Institute for International Economics.

High defence spending has led to a rush to hire in the sector, where many factories are working in three shifts.

That has sent unemployment to a record low of 2.4 per cent and forced private employers to raise salaries to compete, making it nearly impossible to increase the output of goods and services without driving huge price increases.

Central bank governor Elvira Nabiullina told parliament in late October that persistently high inflation was a signal “that demand has significantly outpaced the economy’s production capacity”.

“In some sectors, there is almost no idle equipment left, not even outdated machinery,” she said.

The defence splurge has come as revenues declines from Russia’s commodity exports, difficulties converting the rouble, and US pressure limiting payments for goods, driving costs up on the supply side for everyday items.

That has left Russia increasingly dependent on imports at a time when the country in effect has no way to limit their costs.

“A year ago, I bought the same set of winter thermals for my daughter, one size down. The price has doubled,” said Maria, a mother of a three-year-old in Moscow. “I don’t understand why some people say nothing has changed. How much reality can they deny?”

Line chart of Inflation (%) showing Russian inflation is well above the central bank's 4 per cent target

The additional defence spending means the effects of inflation are felt differently depending on Russians’ proximity to the defence sector.

In the past seven years, wages in IT, heavy industry, and construction have grown by 170 per cent, according to Russian state statistics provider Rosstat. In education and municipal services, meanwhile, they have increased 10 per cent to 20 per cent.

Nabiullina said in the State Duma: “Inflation is a direct deduction from citizens’ incomes. Wages and incomes aren’t rising for everyone, and there is a significant disparity.”

Higher interest rate rises have provoked increasingly loud dissent from powerful industrial barons such as Sergei Chemezov, chief executive of Russian state arms conglomerate Rostec, who in October said the high cost of capital was a factor limiting his company’s ability to sell weapons abroad.