Russians struggle to pay for potatoes as war eats up state funds

Russia has more potential agricultural area than anywhere else in the world but it has run out of potatoes and onions.

Even President Vladimir Putin conceded there is a problem. "It turns out we are short of potatoes," he recently said, noting the lack of sugar beet and some other vegetables too.

That came after the price of potatoes soared in Russian shops, almost tripling within the last year, according to official figures. Meanwhile the price of onions has doubled.

Cabbage is now 50% more expensive than it was a year ago, says statistics agency Rosstat.

Russians had to pay around $1 for a kilogram of potatoes in June but that is a lot in a place where pre-tax incomes are around $1,150 on average, Rosstat says.

Pensions are just over $230.

Rising food prices are one of the main drivers of inflation in Russia, which is currently 9.6%, says the Economic Development Ministry.

The central bank is trying to keep inflation under control with a high key interest rate, currently at 20%. The reasoning goes, if high interest rates make it more difficult to take out loans, the amount of money in circulation will decrease. Less money means less demand and falling prices.

But that has caused further complications.

Economy minister warns of looming recession

At the recent St Petersburg International Economic Forum, Economy Minister Maxim Reshetnikov issued a rare clearly-worded warning of problems facing the domestic economy.

"According to the figures, we are experiencing a slowdown, and according to the current sentiment among entrepreneurs, we are already on the verge of a transition into recession," he said.

The current interest rate level is discouraging entrepreneurs from investing, according to Reshetnikov. He estimates that investments in the third and fourth quarters could fall below last year's levels.

But central bank chief Elvira Nabiullina pushed back the suggestion that her monetary policy is misguided, though she too predicts difficulties.

Despite sanctions imposed in a bid to halt the war on Ukraine, Russia's economy had grown for two years - thanks to Moscow's programmes to replace imports, using money from the wealth fund and capital reserves in the banking system.

"We must understand that many of these resources are indeed depleted, and we must think about a new growth model," says Nabiullina.

The fact that the Russian economy has held up surprisingly well since Putin's attack on Ukraine, despite more than a dozen rounds of Western sanctions, is mainly due to the decisive shift towards war production.

As weapons boom, civilian sectors struggle

Putin confidant Sergei Chemezov, who heads the state-owned defence corporation Rostec, recently boasted of a "tenfold increase in ammunition and weapons compared to 2021."

Critics say Russia's gross domestic product (GDP) growth does not reflect the economy's potential to produce new goods for its citizens or to raise their standard of living.

Rather, it only shows that the budget-funded arms industry is producing more and more drones, missiles and tanks.

Meanwhile, civilian sectors have long been struggling amid high costs, staff shortages and dated technology - a problem that has only been exacerbated by the sanctions.

The construction and real estate sectors are mired in deep crisis.

Car manufacturing has also stalled since Western manufacturers and suppliers turned away from Russia. And while China is selling more cars in Russia, it does not make them locally.

Avtovaz, the Lada producer which is part of Chemezov's empire, has been unable to fill the gap left by Western carmakers.

At the Economic Forum in St Petersburg, the company presented its latest model, the Lada Azimut, due to go into series production next year.

But previous models are still piling up in warehouses due to a lack of demand.

New car sales in Russia have slumped again after a brief upturn in 2024. In the first five months of this year, only around 450,000 vehicles were sold in total, a 26% drop. Avtovaz is also forecasting a 25% market slump for the year as a whole.

The crisis is also affecting agricultural machinery manufacturer Rostselmash. A maker of combine harvesters and tractors, it has imposed compulsory leave on more than 15,000 employees.

That leaves staff unclear whether they will be able to return to work afterwards. The factory had already slashed people's hours in March, and laid of 2,000 workers a month later.

Paradoxically, Rostselmash is also unable to benefit from the widespread withdrawal of Western rivals.

Sales of combine harvesters are stagnating, with the 20% market slump last year followed by a 10% to 15% decline so far this year.

Some 40% of Rostselmash's annual production is gathering dust in warehouses. Farmers lack the cash to buy new technology - pitted against high interest rates and rising production costs.

Shrinking harvests raise food security fears

That in turn is affecting harvests. The year the Kremlin launched the full-scale invasion of Ukraine, 2022, Putin proudly reported a record grain harvest of 157 million tons. But yields have dropped annually since.

Putin ordered grain harvests to be increased to 170 million tons and exports to 80 million tons by 2030. "But based on the latest trends, the movement in our country is going in the opposite direction," says Deputy Prime Minister Dmitry Patrushev, who oversees agriculture. He called for this to be swiftly corrected.

Moscow is now hoping for a better yield than last year as farmers start harvesting potatoes. A jump in supply could cause prices to fall, at least for the time being.

Otherwise, Putin may have to resort to the recipe of his long-time ally, Belarusian ruler Alexander Lukashenko, dubbed the "potato dictator."

Lukashenko - no lightweight himself - recently suggested Belarusians only eat potatoes once or twice a week at most - saying otherwise, they would get too fat.