A Russian Roulette - Agriculture

By SAM VAKNIN, UPI Senior Business Correspondent

SKOPJE, Macedonia, March 6 (UPI) -- In Soviet times, Kremlinologists would pore over grain harvest figures to determine the fortunes of political incumbents behind the Kremlin's inscrutable walls. Many a career has ended owing to a meager yield.

Judging by official news releases and interviews, things haven't changed that much. The beleaguered vice-premier and minister of agriculture of the Russian Federation admitted openly last October that what remains of Russia's agriculture is "in a critical situation," though he has since hastily reversed himself.


With debts of $9 billion, he may well be right. Russian decision makers recently celebrated the reversal of a decade-old trend: meat production went up 1 percent and milk production by 2 percent.

But the truth is a lot rosier. Agricultural output has been growing for four years, last year by more than 5 percent. Even much maligned sectors, such as food processing, show impressive results of up 9 percent.


As the private sector takes over what was formerly government-owned agriculture throughout Russia is being industrialized. Even state and collective farms are on a halting path to revival.

In a recently announced deal, Interros will invest $100 million in cultivating a whopping 1 million acres. Additionally, Russia is much less dependent on food imports than common myths report, importing only 20 percent of its total food consumption.

Despite this astounding turnaround, foreign investors are still shy. The complex tariff and customs regulations, the erratic tax administration, the poor storage and transport infrastructure, the vast distances to markets, the endemic lawlessness, the venal bureaucracy, and the questionable legal status of ownership of agricultural land keep them at bay.

The Agricultural sector is puny and disastrously inefficient, having fallen halfway since 1991. It contributes about 8 percent to gross domestic product and employs about 11 percent of active labor force.

Agricultural exports, which make up about $3 billion annually, are equal to one-fourth of Russia's agricultural imports. This is despite a fall of 40 percent after the 1998 meltdown.

The average private farm is less than 50 hectares large. Though in control of 6 percent of farmland, private farms account for only 2 percent of agricultural output.


A mass of Russia equal to about 1.8 times the area of the contiguous U.S. is lacking in soil, climate, or both. Thus only 8 percent of the land is arable and less than 40,000 sq. km. are irrigated.

Pastures make up 4 percent of Russia. The soil in these pastures is contaminated by what the CIA calls "improper application of agricultural chemicals." It is often eroded, and ground water is toxic.

The new law, which is still a long way off, permits private quasi-ownership of agricultural land and may reduce the high rents that rendered Russian farmers non-competitive.

In the meantime, general demand for foodstuffs has declined with disposable incomes and increasing unemployment.

The main problem is not lack of knowledge, management, or new capital, but an unsustainable mountain of debt. Even with a lenient "Law on the Financial Recovery of Agricultural Enterprises" currently being passed through the Duma, only 30 percent of farms are expected to survive. The law calls for rescheduling current debt payments over 10 years.

The irony is that Russian agriculture is now much more viable than it ever was. More than half of the active enterprises are profitable, compared to 12 percent in 1998. The grain harvest exceeded 90 million tons, far more than the 75 million tons predicted by the government.


The average crop yield for the years 1993 to 1997 was 80 million tons. In 1997, the yield was 88 million. But grain output was decimated in 1998, at 48 million tons, and 1999, at 55 million tons.

Luckily, grain is used mostly for livestock feed, and Russians consume only about 20 million tons annually. But by mid-1999, Russian grain reserves declined to a paltry 2 million tons, according to USDA figures.

The problem is that regions of Russia's grain belt restrict imports of this "agricultural gold" and hoard it. Corrupt officials make a quick profit from the resulting shortage-induced price hikes.

The geographical location of an agricultural enterprise often determines its fate. In a study of two Russian regions conducted by Grigori Ioffe, of Radford University, and Tatyana Nefedova, from the Institute of Geography of the Russian Academy of Sciences, in August 2001, the authors found that: "... farms in Moscow Province are more productive than farms in equivalent locations in Ryazan Provinces, while farms closer to the central city of either province do better than farms near the borders of that province."

It seems that well-located farms enjoy advantages in attracting both investments and skilled labor. They are also closer to their markets.


The vicissitudes of Russia's agriculture are of geopolitical consequence. A hungry Russia is often an angry Russia. The U.S. food aid in 1998 and 1999 was worth more than $500 million and coupled with soft PL-480 trade credits. The EU also donated a comparable value in food. Russia asked for additional aid in the form of animal feed in the years 2000-2001, and the U.S. complied.

Russia's imports are an important prop to the economies of its immediate and far neighbors. Russia also consumes up to 40 percent of all U.S. poultry exports. It is an importer of meat products from the European Union because its livestock inventory has been halved by the transition from government to private ownership.

If Russia accedes to the World Trade Organization negotiations that have dragging on since 1995 it may become even more appealing commercially.

If it joins the WTO, Russia will have to reduce its import tariffs. The current tariff on poultry is 30 percent and the average tariff on agricultural products is 20 percent.

Russia is also likely to be forced to scale down, gradually, the subsidies it doles out to its own producers. Privileged trading by state entities and non-tariff obstructions to imports would also be changed. Whether the re-emerged center will be able to impose its will on the recalcitrant agricultural regions still remains to be seen.


A series of apocalyptic economic crises forced Russian agriculture to rationalize.

Russia has no comparative advantage in livestock and meat processing. It is a small wonder that imports of meat products skyrocketed. It is questionable whether Russia possesses a comparative advantage in agriculture as a whole, given its lack of natural endowments.

Russia's insistence on producing its own food (especially the High Value Products) has failed with disastrous consequences. Perhaps it is time for Russia to concentrate on the things it does best, and agriculture is not one of them.

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