The OECD Observer
October/November 1998, No. 214

 

The Slow Transformation of Russian Agriculture
By Andzrej Kwiecinski

 

The story of Russian agriculture since the collapse of the Soviet Union has been one of sharp declines in production, share of GDP, labour productivity, capacity utilisation, food consumption and wages. And although these adverse trends have been seen in other transition economies, they have lasted much longer in Russia. The most substantial impediment to the development of the agricultural sector has been the absence of a sound macro-economic environment and institutional framework. (Reviews of Agricultural Policies: Russian Federation (http://www.oecd.org/scripts/publications/bookshop/redirect.asp?141998041E1), OECD Publications, Paris, 1998.)

Russia is the largest country in the world in size and sixth in terms of population. Its vast land resources—221 million hectares, or about 1.5 hectare per capita—favour extensive farming practices. But soils are generally of low fertility and the predominantly continental climate is prone to drought, including those areas where the land is richest, such as Krasnodar.

The Russian agro-food sector has been through a difficult period of adjustment since the transition to a market economy began in 1991. There have been dramatic macro-economic shifts, as well as institutional and structural reforms. Costs of inputs rose more quickly than the rise in output prices, while privatisation of agricultural enterprises coincided with a sharp decline in demand for livestock products. The share of agriculture in the economy has diminished considerably, falling from 15.4% of GDP in 1990 to 6.5% in 1997. The proportion of the total working population in agriculture grew from 13% to about 14%, but the rise was the result of larger falls in employment elsewhere in the economy. The fall in agriculture’s economic importance and its higher share in employment indicates a marked drop in output per worker since 1991 and suggests growing hidden unemployment in rural areas. Indeed, in absolute terms, employment in agriculture fell by 7% between 1990 and 1997, and the volume of agricultural production by 36% over the same period (Table).

A key reason behind these problems was the relative decline in farming prices compared with other sectors after the removal of price controls in 1992. In the early years of reform (1992-93), despite huge inflationary pressures, cuts in subsidies to consumers and the fall in real incomes precipitated a sharp decline in demand for agricultural produce, holding down agricultural prices. But input prices, by contrast, soared towards world-market levels. Meanwhile, inefficient producers in food processing simply attempted to pass on their extra costs to agricultural producers and consumers.

At the beginning of the transitional period, some regional administrations, such as in Tatarstan, tapped into funds from their sizable oil and gas deposits to prevent a substantial decline in agricultural output in their regions. Their Soviet style agro-food policies, such as large-scale state procurement and production subsidies, have been costly for taxpayers and consumers alike, and have probably stored up difficult and costly adjustment for the future.

 

Farm Privatisation and Restructuring

The Russian agricultural privatisation programme can be traced back as far as 1989-90 when Soviet legislation allowed, first, the creation of a non-state enterprise as a co-operative; second, the denationalisation of land and non-land assets by transferring them legally from the state to kolkhozes (broadly speaking, co-operative farms) and sovkhozes (state farms); and third, the establishment of a legal basis for individual (family) farming. After the dissolution of the Soviet Union, the programme was intended to allow those who wished to run privately-owned farms to do so. It facilitated the transfer of land and other assets to those who lived and worked on the large farms at the time of the reform, and the transformation of kolkhozes and sovkhozes into market-oriented agricultural enterprises. No restitution of land to the heirs of pre-Revolutionary landowners or to those of peasants collectivised in the 1930s was provided for. These efforts to introduce fundamental change in land tenure, in large-scale farm organisations and management and in legal ownership were fiercely resisted by local administrations, managers and others seeking to resist change and preserve the status quo.

With the introduction of the Law on the Peasant Farm in December of 1990 and subsequent laws and decrees defining the legal forms of large agricultural enterprises and of land ownership and the procedures for certifying and exercising ownership rights, it was expected that private holdings would be created in rural areas and the kolkhozes and sovkhozes would be restructured. But as it turned out few peasants were interested in establishing individual farms, and management and operating practices inside large agricultural enterprises remain largely unchanged. Clearly legislation was not enough to bring private agriculture into being. Too many barriers lay in the way: lack of capital, unfavourable input and output price ratios and uncertainties about reform were just a few. Moreover, apart from the resistance by local and regional officials, there was no tradition of family farming to spur the reforms on.

By the end of 1997, re-organisation in the vast majority of large-scale agricultural enterprises had still not progressed beyond the legal registration of the farms. Family farms, which in 1997 accounted for about 6% of agricultural land in Russia, are of minor importance. Most of the 62% of so-called privately-held agricultural land is still under collective share-holding, mainly as re-registered large-scale farms. Even family farms and household plots, which together make up nearly 10% of agricultural land, are constrained in exercising full ownership rights.

Moreover, despite legislation from the beginning of the 1990s providing for the transfer to local authorities of other social assets, ranging from clubhouses and recreation grounds to medical centres, schools and libraries, large agricultural enterprises are still charged with the provision of public services, such as education, medical services and recreation. The provision of electricity, gas, water and heat, roads, sewerage systems, fire stations and even telephone networks is also their responsibility. At the beginning of 1997 an estimated 70% of social assets and public utilities were still under their charge, diverting financial and management resources away from commercial functions and slowing down restructuring.

A similar picture can be painted for sectors upstream and downstream of farming, such as chemical and fertiliser producers, machinery manufacturers and food processing enterprises. Privatisation in these sectors is virtually complete, but majority control by insiders, often in coalition with agricultural producers, has held up market measures and undermined the drive to boost productivity, efficiency and return on capital. The agro-food industry as a whole remains seriously inefficient. The total number of employees in the food processing sector has not declined since 1990, though production has halved. The result is marked over-employment and low capacity utilisation.

Impetus for change has come in recent years from foreign investors, particularly in the production of high value-added agro-food products, such as confectionery, baby food, ice cream and tobacco products. By the end of 1997, the agro-food sector attracted 24% of total foreign direct investment (FDI) in Russia. Such inflows bring not only an infusion of new capital and technology, but also expertise and market-oriented leadership.

 

Trends in Trade

After the collapse of the Council for Mutual Economic Assistance (CMEA) and the disintegration of the Soviet Union, Russia was forced to negotiate new trading arrangements with each of its traditional partners. It has also had to seek to reintegrate itself into the world economy on new terms. Several new trade agreements have been concluded, in particular the Partnership and Co-operation Agreement with the European Union (EU) and various agreements with the New Independent States (NIS). Russia is also in the process of negotiating accession to the World Trade Organization (WTO). Future WTO membership will give Russia most-favoured-nation trade status, which means that any trade privilege provided to one partner has to be extended to all other partners having the same status. It will also help to drive reforms forward by providing an institutional grounding. But membership will also require Russia to abide by the provisions of the 1994 Uruguay Round Agreement on Agriculture, which fixes the maximum amount of support allowed and determines the choice among various policy measures, with some of them allowed and others, such as quantitative trade restrictions, prohibited.

Throughout the 1990s trade in food and agricultural products has represented a substantial part of Russia’s total imports, but only a small proportion of exports: in 1996, the shares stood at 25% and 4%, respectively. The agro-food trade deficit amounted to $8.2 billion, down from $10.5 billion in 1995. This fall may indicate a weakening of an initial surge in imports of selected food products, which arose to compensate for a drop in output and competitiveness among domestic producers. Another reason for the earlier rise in imports was the appreciation of the ruble. Export subsidies applied by some exporters to Russia, including the EU, were no doubt also a factor.

The recent decline in Russia’s dependence on imports seems to be confirmed by the declining ratio of net agro-food imports (valued at the annual average exchange rate) to the total value of agricultural production (valued at current prices): it fell from 24% in 1994 to 15% in 1996. Russia nonetheless remains a net importer of agro-food products from all its trading partners.

The geographical structure of Russian imports has changed substantially since the reforms were first implemented: agro-food imports from OECD countries, especially the EU, have increased, but imports from traditional suppliers, such as central and eastern European countries, have declined. In 1996, Russia’s main food suppliers were the Ukraine, the United States, Germany, Moldova, Kazakhstan and the Netherlands.

There has also been a striking shift in the composition of Russia’s agro-food imports: imports of raw agricultural products have fallen sharply and those of processed foods have increased. More specifically, grain imports declined from about 30 million tonnes in 1992 to about 4 million annually between 1994 and 1996. Imports of meat and meat products rose from 0.5 million tonnes in 1992 to about 2 million tonnes in 1995, but then declined to 1.7 million tonnes in 1996. In the 1997/98 season, which runs from July to June, following a sharp rise in grain output in 1997, Russia may even become a net exporter of feed grains.

 

How Much Support?

Progress towards developing a market-oriented agricultural policy framework can be measured in part by the trend in the Producer Subsidy Equivalent (PSE). (The total Producer Subsidy Equivalent is an indicator of the total value of money transfers to agricultural producers though policy in a given year. Both transfers from consumers of agricultural products and transfers from taxpayers are included. The percentage PSE is an indicator of the value of transfers as a percentage of gross farm revenues.) This measure shows that the degree of support can be largely divided into three periods (Figure).

In the final years of the Soviet era, between 1986 and 1990, support of market prices and budgetary subsidies were high. The net PSE was about 90% of gross farm revenues, well above the OECD average.

The second period covers 1992 and 1993, when major macro-economic reforms and significant, sometimes chaotic, adjustments resulted in a substantial ‘implicit’ taxation of agriculture, with the PSEs at -105% in 1992 and -26% in 1993. This means that producers were receiving prices that were below world market prices, and that the shortfall was not compensated for by budgetary subsidies. Consumers, on the other hand, were implicitly subsidised during this period, since the domestic prices they were paying were below world-market prices. This implicit taxation of producers was not helped by inefficiencies along the food chain nor by restrictions imposed on agricultural exports, which kept producer prices down.

The third period began in 1994. The appreciation of the ruble, combined with the introduction of border protection against imports of most agro-food products pushed up the degree of support as domestic prices for most commodities moved closer to world reference prices and even exceeded them. As a result, support to Russian agriculture turned positive, reaching 21% in 1995 and 32% in 1996. However, the support fell back again to an estimated 26% in 1997, which was lower than the OECD average of 35%, because of the fall in prices of several agricultural commodities, such as grains and oilseeds, the decline in the budgetary support provided to agriculture, the government’s resistance to increase trade barriers, and the stable exchange rate.

 

Further Reforms?

In view of the long period of Soviet rule in Russia, the difficulties of restructuring and re-orienting agriculture towards an efficient, market-oriented mode of operation have been immense. Although the vast majority of state and collective farms have re-registered as private enterprises and have formally transferred ownership of collectively held land and non-land assets to workers and pensioners, the re-organisation has been mostly paper-based and has done little to improve the organisational structure, size, management and economic behaviour of the farms. The fact is that large-scale enterprises of more than 100 hectares work more than 80% of agricultural land in Russia. This creates favourable conditions for productivity growth and increased international competitiveness of Russian agriculture, but only if they are properly organised and managed.

One of the major obstacles to reform is the excessive regionalisation of agricultural policies, with unequal degrees of farm support across regions, inter-regional trade barriers and different restructuring policies. Their combined effect is to distort incentives: farm operators do not engage in the activities that would be most suitable for their location; instead, they engage in those that receive the highest support from their respective regional governments. In other words, specialisation based on comparative advantage is a concept that has yet to be driven home. Agricultural policy should focus attention on removing inefficiencies by increasing competition, introducing more market transparency and information about prices, and by providing training, education and consultancy to producers. Market-price support, on the other hand, should be reduced, since it distorts market signals and harms both producers and consumers.

Russia’s economic potential is enormous, and agriculture could play an important role in fulfilling that potential. However, if the government skews its policies to suit sectoral interests, then the types of failures witnessed in some OECD countries are likely. Russia should therefore seize the opportunity to put in place a set of policies aimed at eliminating structural barriers to help stimulate the emergence of a strong and competitive agro-food sector.

 

OECD Bibliography

Agricultural Policies in Non-OECD Countries 1998, forthcoming 1998

Reviews of Agricultural Policies: Russian Federation, 1998

Agricultural Policies in Transition Economies 1997: Monitoring and Evaluation, 1997
(http://www.oecd.org/agr/publications/age_pute.htm)

Agricultural Policies, Markets and Trade in the Central and Eastern European Countries, Selected New Independent States, Mongolia and China 1995: Monitoring and Outlook, 1995

Ferdinand Kuba, ‘The Agro-food Sector in Transition’, The OECD Observer, No. 197, December 1995/January 1996.

 

Andzrej Kwiecinski is OECD Directorate for Agriculture, Fisheries and Food.