Russia's Dependence on Food Imports and the Economic Crisis

"Oil-for-Food" When Oil Is Down (and the Ruble Is Weak). By Leon Aron
Russia's Dependence on Food Imports and the Economic Crisis
AEI, Mar 17, 2009

[Full article w/notes in the link above]

Although it contains millions of acres of some of the world's most fertile soil and has implemented the world's largest land privatization reform, Russia imports food in amounts that are inordinately high for a country of its size and per-capita GDP. The reliance on imported meat and poultry is especially large. Already under strain from rampant inflation, a very significant proportion of Russia's population will find its access to food further diminished by deep depreciation of the ruble as well as such inevitable consequences of the crisis as unemployment and still higher inflation. While widespread hunger is not likely, the constraints on food consumption could add yet another perilous dimension to a political crisis that is bound to unfold alongside the economic one.

Russia inherited from the Soviet Union a failed state-owned agriculture: backward, wasteful, and utterly unable to motivate the workers. Every fourth kolkhoz (collective farm) or sovkhoz (state farm)[1]--6,500 out of 26,000--lost money, often for decades.[2] Their overall debt approached 140 billion rubles, or over 15 percent of the Soviet Union's GDP.[3] Despite "free" (that is, state-owned) land, low salaries, and billions of rubles in state assistance, kolkhozes and sovkhozes were so inefficient that their output, especially meat, required enormous price subsidies and ration coupons to make them accessible to the majority of Russians. Half of the money the Soviet state raised through its single largest source of internal revenue--the so-called turnover tax, levied against the total monetary value of the goods produced--was spent on food subsidies, up to 50 billion rubles a year.[4]

Every fall, tens of thousands of city dwellers--workers and engineers, surgeons and lawyers, college students and art critics--were dispatched, sometimes for several weeks, to local collective farms to dig potatoes. Still, an estimated 60-70 percent of the potatoes were left in the ground to be snowed over and plowed under the next spring.[5] In just three months in 1988, nearly eight hundred thousand tons of potatoes, fruits, and vegetables "rotted away."[6] Around 20 percent of the annual grain yield was also lost every year: left unharvested in the fields, spilled by trucks on the way to the elevators, and allowed to rot in uncovered heaps under rain and snow. Beginning in the early 1960s, the Soviet Union bought increasingly large amounts of wheat abroad, reaching 30 million tons in 1987.[7]

By President Boris Yeltsin's decrees in the 1990s, most collective farms were turned, at least nominally, into joint-stock companies, and 12 million of their workers became shareholders and, thus, landowners. Although fierce resistance by the leftist parliament between 1995 and 1999 prevented Yeltsin from privatizing agricultural land, the last free parliamentary election in December 1999 resulted in a proreform legislature, which, on June 15, 2001, passed the Land Code, allowing for the first time the sale of land.[8] Although the code did not mention agricultural land specifically, soon collective farm workers' shares in land could be sold, rented, used as mortgage collateral, and passed on to heirs.


Enforcement, Values, and Demography

The reform's enforcement was not effective. In most cases, collective farms' "red directors" were left in control of the land and equipment (tractors, seed, and harvesters) necessary for the peasants' livelihoods.[9] The plots of land to which their shares entitled farm workers were badly demarcated, and it was up to former kolkhoz-sovkhoz authorities to decide who owned what. Needless to say, those seeking to strike out on their own were given far from the finest land, equipment, and livestock. In some regions, authorities openly violated the laws, allowing only the leasing of land but not its purchase.[10]

As with other areas of the economy, the Putin presidency (2000-2008) brought about more red tape and "bureaucratization of the land privatization process."[11] For those outside the nexus of power and property--another hallmark of Putinism at every administrative level--navigating the complexities of acquiring or selling land without paying thousands of rubles in bribes became virtually impossible. Always starved for capital, the new private farmers found most banks unwilling to accept land and equipment as collateral for loans. Farmers also complained of being pressured to pay otkaty (kickbacks) to the banks of as much as 10 percent of the loan amounts--and "even that [was] sometimes not enough," as one of them recently told a Russian sociologist.[12] With no perceptible improvement in infrastructure, rural roads continued to turn into impassable mud rivers at the worst times--spring sowing and fall harvesting and storage--further driving up the costs and the risks of independent farming.

Yet, as usual, the decisive factors in the slow and uneven progress of Russia's post-Soviet agriculture were people's values and aspirations. Unlike in Eastern Europe or China, no living memory of private farming remains in the Russian village. It has been almost eight decades since the murderous "collectivization" of 1929-33, when millions of the most hardworking, enterprising, and successful peasants and their entire families were arrested and sent into exile, and many were starved and worked to death. Millions more died in the man-made famine of 1932-33. The human capital was further depleted by the almost half-century exodus to the cities by the young and, more often than not, most ambitious and intelligent men and women since the end of the kolkhoz serfdom in the 1960s. (The peasants were issued domestic passports that enabled them to travel around the country and were no longer required to obtain written permission by the local authorities to leave the village.)

An overwhelming majority of those still on the farm today appear content to be salaried employees while, as in the Soviet days, cultivating in their spare time tiny plots (listed as "household farms" by the Federal Service for State Statistics) and "leasing" their shares of land to their "agricultural organization"--often for a nominal fee in rubles, a few sacks of grain, hay for a cow, or a few hours of a tractor driver's time to plow the plot for potatoes. Only 5 percent of former collective farm workers have chosen to claim their shares in land and become private farmers. By 2006, they and former city dwellers who had bought or leased land for private farming owned less than 10 percent of the 120 million hectares (almost 300 million acres) that were eligible for privatization.[13]


"Organizations," "Household Farms," and "Capitalists"

With the barely refurbished kolkhozes and sovkhozes controlling four-fifths of the arable land,[14] the structure of agricultural production looks very much like it did in Soviet times: these "agricultural organizations" produce over three-quarters of the country's grain, nearly half of its beef and poultry, and half of its milk and eggs. Millions of "household farms," described by a Russian expert as "less than half a hectare of land [about an acre and a quarter] and one or two cows," turn out the other half of its meat, poultry, and milk, as well as almost all of its potatoes (Russia's "second bread") and over 75 percent of its vegetables.[15]

The only significant contribution made by those whom Russian sociologists call "capitalists" or "Western-style" farmers--designated as the owners of "private (peasant) farms" in the official statistics, they are the closest Russia has come to modern commercial agriculture--is in grain (20 percent), sunflower seeds used for Russia's most popular vegetable oil (29 percent), and sugar beets (11 percent).[16] It seems hardly a coincidence that these products are among the few in which the output in 2007 exceeded that of 1992.[17] It is also largely because of these farmers--whose land could run into hundreds or even thousands of hectares, who use "highly productive" modern technology, and who employ up to several dozen workers[18]--that Russia went from the world's largest importer of grain in the 1970s and 1980s to one of the top ten exporters, selling abroad, on average, around 12 million tons of grain a year.[19] As to overall agricultural output, the "capitalist" share thus far has not exceeded 6 percent.[20]

Another source of modernization, spurred by the spike in grain prices over the past few years, has been urban investors who bought up individual shares from the peasants and in that way took over entire "agricultural organizations," mostly in the extrafertile chernozyom ("black earth") regions of Belgorod, Oryol, Rostov, Stavropol, and Krasnodar. Often, these "agribusinesses" are "vertically integrated"[21] into the banking and industrial empires of the national or regional oligarchs, whose coffers, in the absence of modern banking and financial structures, are still by far the main source of venture capital in Russia. Helped by very propitious weather, the steady progress of the "capitalists" and the "agribusinesses" combined to make Russia's 2008 grain harvest of 113 million tons the largest in post-Soviet history and the first one to exceed the 1992 yield of 107 million tons.

Outside of grain, however, Russian agriculture cannot compete with the ultra-efficient, mechanized, computerized, and heavily state-subsidized European and U.S. private farms in either quality or quantity. The gap is especially dramatic in animal husbandry, in which Russia is still behind its 1992 production levels of meat and poultry (by 33 percent), milk (32 percent), and eggs (12 percent).[22] Under the state National Priority Project on agriculture, launched in 2006 and extended to run from 2008 to 2012, tens of billions of rubles are to be spent to speed up the emergence of modern commercial farming by facilitating farmers' access to long-term credit, modern equipment, and fertilizers; attracting young professionals to the rural areas by helping them obtain loans for home-building; and providing state support for breeding high-quality livestock and fish, among other goals.[23]

Yet, even if they were not mired in corruption and incompetence like most of the grandiose state endeavors of the Putin era, these objectives of the National Priority Project do not include--critics say for political reasons--many other urgent tasks like affordable gasification of the countryside (in early 2008, Gazprom charged 100,000-120,000 rubles, or approximately $4,000-$5,000, to hook up a farm or private home); efforts to spur competition in the purchasing, processing, and sale of agricultural products, which are increasingly monopolized; and greater foreign investment.[24]


Inordinately Large Imports

These structural deficiencies help explain Russia's inordinate dependence on imported food. In early 2007, 45 percent of all food consumed in Russia was imported (compared to 20 percent in 2004), including 30 percent of meat (beef and pork) and nearly 40 percent of poultry.[25] In larger cities, according to Putin, 70-85 percent of food for sale came from abroad.[26]

Such reliance on foreign food is most unusual for a country of Russia's per-capita GDP and, even more so, its land area, which encompasses 9 percent of the world's arable acreage, 40 percent of which is exceptionally fertile "black earth."[27] With a per-capita GDP of $14,000 (in purchasing power parity), Russia imported twenty-two kilos (forty-eight pounds) of meat and poultry per capita, worth $35 in 2007 (the most recent year for which data are available).[28] By comparison, geographically and historically proximate Poland, with a per-capita GDP of $15,330[29] and about the same level of agricultural development (although far behind Russia in size of arable land and fertility), imported nine kilos (twenty pounds) and $21 worth of meat and poultry per capita, or 40 and 60 percent, respectively, of Russia's amounts. Russia's per-capita consumption of imported butter and its cost exceeded Poland's by factors of 3 and 1.6, respectively.[30] (Compared to the other three members of the emergent group of industrial giants, known as BRIC, among which Russia is proud to count itself, Russia's general dependence on foreign-manufactured consumer goods, including food, is staggering: whereas China and India import only "tiny" amounts and Brazil 9 percent, 28 percent of Russia's consumer goods are from abroad.[31]) Since these data were collected in 2007, food imports have continued to soar: in January-June 2008, those of meat and poultry grew year-on-year by 44 percent and of milk by 21 percent; sugar and vegetable oil were 2.8 times and 1.9 times higher, respectively.[32]
Inflation

Even at the height of the oil boom in the first half of 2008--when record oil prices steadily pushed the ruble upward, despite the Central Bank's efforts to depress the national currency in order to increase profits from commodity exports--the growth of food prices far outstripped the already high overall inflation; while the latter reached 13 percent in 2008, the cost of the "basket" of "essential" food items increased by 18 percent.[33]

The basket's composite, however, does not tell the whole story. Throughout 2008, the prices for many individual items grew astonishingly quickly. For instance, the price of vegetable oil went up almost 5 percent in March and almost 9 percent in April.[34] Also in April, the price of bread skyrocketed, with St. Petersburg's price increasing the sharpest--almost 24 percent.[35]

One cause of the high food prices--expensive oil--Russia shared with the rest of the world as the commodity pushed up the cost of main agricultural inputs: fertilizers, pesticides, herbicides, and fuel for tractors and combines.[36] Yet it cannot account for the prices of staples having grown more quickly in Russia than in Europe--as much as four times the European rate in the first five months of 2008.[37] Government policies and the business environment provide much of the rest of the explanation.

The effects of the centralization and interpenetration of political power and private property, so characteristic of Putin's presidency, have been no less conspicuous in agricultural production than they have been, for instance, in oil production, car-making, or aeronautics. The outcomes have been similar as well: the already mentioned, and growing, monopolization of wholesale trade, food processing, farm services, and equipment leasing; the erosion or elimination of competition; unfairly low purchasing prices for the farmers; and price fixing and collusion between buyers and distributors of food.[38] The monopolization has been blamed for the spiraling prices by commentators across the political spectrum, including Putin himself.[39] One of the many examples cited was the continuing growth in the retail price of milk when its wholesale price decreased by half in the spring of 2008.[40]

Another boost to inflation was a freeze on the prices of staples imposed by the government in the run-up to the December 2007 parliamentary elections. The results were predictable: a drop in the production of such staples as bread, sugar, and vegetable oil; a continuing increase in the prices despite the freeze; and an inflationary spike after the freeze was formally lifted on May 1, 2008.[41]

To curry favor with domestic producers and to punish the United States for criticizing Russia's August 2008 incursion into Georgia, the Russian government announced that it would be reviewing the agreed-upon import quotas on chicken parts, three-quarters of which--almost 900,000 tons--came from the United States.[42] (Russia is the largest foreign market for U.S. poultry.) Three months later, the minister of agriculture, Alexey Gordeev, announced that the import would be cut in 2009 by 300,000 tons, or almost a quarter of the amount that was to be delivered that year in accordance with the existing contracts, which stipulated the annual increase of 40,000 tons. In the end, the quota for poultry imports from the United States was decreased by 180,000 tons and duty on imports above the quota increased up to 95 percent.[43] The reaction of the experts was unanimous: because these imports offer Russian consumers something for which there is huge demand and that the national producers cannot supply at the same prices in the foreseeable future, the reduction in the imports can lead only to shortages and price increases.[44]


Straining Food Accessibility to a Breaking Point?

Last June, the average share of food in the overall cost of the basket of basic consumer goods was 36 percent--or between 1.5 and 2.4 times higher than in Europe, where it ranged between 15 and 25 percent. At the same time, half of the respondents in a national survey supported the issuance of "food cards" (similar to food stamps in the United States) to help the poor cope with the inflation, and 28 percent said that they themselves would use such cards.[45] In November, a poll found that 37 percent of Russian families had money enough to cover only food.[46]

In the meantime, inflation has shown no sign of abating in the new year. In the first three weeks of January 2009, consumer goods prices grew by 1.2 percent, while in only a week (between January 13 and 16), staples such as beef, chicken, milk, rye bread, and tea went up by between 0.4 and 0.7 percent and sugar by 3.9 percent.[47] From the end of January to the beginning of February, 75 percent of the respondents in a national poll named inflation among the most troubling issues facing the country.[48] (The second most frequently mentioned problem was the increase in unemployment, cited by 57 percent.) The rise in prices also has led among the difficulties for which the respondents "faulted" the government (41 percent of those surveyed), while the government's other biggest setback, the inability to "overcome the economic problems," was mentioned by 28 percent.[49]

In addition to such inevitable consequences as unemployment and the general diminution of household purchasing power, access to food will be severely hampered in 2009 by the sharply declining value of the ruble, which could place food imports outside the reach of tens of millions of Russians. At its peak in July 2008, the ruble traded at 23.9 to a U.S. dollar; a dollar was worth 35.65 rubles at the beginning of March 2009--a 49 percent decrease.

If the financial crash of 1998 is to serve as an example, widespread hunger is not likely. Import substitution quickly made up for the substantial dependence on foreign food,[50] which became too expensive after the ruble was sharply devalued. Together with similar developments in other consumer goods and industrial sectors, import substitution laid the foundation for Russia's economic expansion from 1999 to 2007.

Yet, some leading independent Russian experts are uncertain about the applicability of the 1998-99 experience after "years of the enormously heavy administrative pressure" have largely put an end to the growth of small businesses, whose situation, as Putin himself admitted, was "awful."[51] Would-be businessmen ("former engineers, designers, and bureaucrats"[52]), who created businesses and jobs (and fed the nation) after the 1998 crisis, today might be less capable (or willing) to take the risk.

Gloomier scenarios have sprung up to account for this potential structural handicap. In one such hypothetical development, in a small to medium-sized Russian city of the kind in which most Russians live, supermarkets are closed and only the "most elemental" products--bread, groats, cheap sausage, and milk--are available at kiosk-like "trading points" or sold by old women on the streets.[53] As the situation continues to deteriorate and people grow desperate, the local administration, which used to rely on the Kremlin's "vertical of power" for any decision, waits for orders from Moscow. No directives are forthcoming, and spontaneous demonstrations break out.[54]

One hopes that such versions of events will not come to pass. Still, superimposed on the already substantial inflation in food prices, Russia's inordinate dependence on imported food may yet become an explosive issue when the economic crisis and the falling oil prices increase unemployment and further weaken the ruble. Alongside other key economic and political certainties of Putinism, the "oil-for-food" structure is very likely to deteriorate rapidly and even collapse.

Leon Aron is a resident scholar and the director of Russian studies at AEI.

The author is grateful to AEI research assistant Kara Flook and associate editor Laura Drinkwine for their help in editing and producing this essay.