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momagri, movement for a world agricultural organization, is a think tank chaired by Christian Pèes.
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The resorption of the Russian agri-food trade deficit: a result of the embargo on European agricultural products?



Marina Divangin and Frédéric Courleux

September 4, 2017

The Russian embargo on European and American exports was recently extended. Analysis of the Russian trade balance shows that a major rebalancing operation has been effective since 2013 in the agri-food sector: the trade deficit has been virtually eliminated. However, imputing this development simply to the 2014 embargo appears excessive as growth in agricultural production is strong in most sectors. At issue is a proactive agricultural policy based on aid for inputs and investment as well as appropriate trade pricing policies. Indeed, the Russian market will no longer be the market it once was for European livestock.

On 30th June a presidential decree signed by Vladimir Putin extended the embargo on agricultural produce from Europe, the United States, Norway, Australia and Canada until 31st December 2018
1. Implemented on August 7st 2014, this disruption of trade relations is a response to the economic sanctions imposed on Russia against the backdrop of the crisis in Ukraine2.

Originally issued for one year, this ban applies to a wide range of produce (beef, pork, poultry, fish, cheese, milk and dairy produce, vegetables and fruit). An important outlet for Europe, particularly for meat and dairy produce, the closure of the Russian market was one of the reasons for the economic downturn. This embargo, which Alexander Tkachev the Russian Minister of Agriculture, said last March could be extended by ten years in order to meet the need to modernize the Russian agricultural sector
3, raises question of the future of the outlet within this sector since Russia, like other countries, stepped up its agricultural aid long before the embargo.


Russian agriculture, left to collapse after the fall of the USSR

With the implosion of the USSR, the complex Russian agriculture, which was already in bad shape, collapsed: the post-1991 Russian state opened the country to massive imports in favour of the forced liberalization of its economy. It would not take long to see the results: agricultural production was in free fall and, despite its enormous potential, the country was importing more than 30% of its food. Shortly after the economic and financial crisis of 1997, the first realization of the importance in reconsidering this strategic sector began to emerge. It did not fall within the responsibility of the central government, but the federal regions and other territorial authorities (republics, kraïs, oblasts or districts). Each of these entities enjoys more or less autonomy with regards Moscow in their support for their local agriculture, notably through subsidies for production or inputs.

In March 2005, the Decree on “the creation of sustainable development for rural territories” was prepared by the Ministry of Agriculture and approved by the Government Commission. Agriculture became a national priority. This decree was based on a program which comprised of three main pillars: poverty, demographic problems and stagnation in production. It would be necessary to wait until 2008 and the global food crisis for a new policy explicitly aimed at food security to take shape
4.

Adopted by presidential decree in 2010, the “doctrine on food security” established the minimum thresholds of self-sufficiency that Russia had to achieve: 95% grain, 80% sugar, 85% meat, 90% milk, etc... The program was explicitly based on the concept of food sovereignty and was therefore a genuine substitution policy for imports. In addition to market support measures through tariff and non-tariff measures, a budget of $29 billion was mobilized for agriculture over the period 2008-12.


An agricultural policy that is booming

As a continuation, the 2013-2020 State program “agricultural development and regulation of commodity markets, agricultural produce and agri-food produce”, aims to achieve the country’s near food-self-sufficiency by 2020. In this program adjusted each year according to the emergence of new objectives
5, we find all types direct aid for agriculture. Coupled aid for production chiefly concerns livestock, the dairy sector in particular; aid per hectare only appears in 2013.

Aid for inputs, in particular fertilizers and fuel, make agreements with companies within these sectors which grant more favourable prices to Russian agriculture. In a country marked by financial instability and periods of high inflation, investment is also stimulated with a significant part of the budgets devoted to the improvement of borrowing rates but also for financing Rosagroleasing, which offers leasing for equipment in particular. Finally, agricultural taxation is also directed towards this development objective. By opting for the agricultural tax system, agricultural activity is taxed at 6% of the added value it creates and is exempt from income tax, property tax and general VAT .

These measures are more or less accessible to all types of Russian production organizations. However, given their weight in the total production and in particular grain (51.5% of total production and 72.7% of grain), agro-holdings from former collective farms account for the lion's share. Other forms of farming, whether family-owned (11.1% of total production and 15.1% of vegetables) or directed towards self-consumption and subsistence (37.4% of total production and 45, 6% of milk) also benefit from support.

Répartition des productions agricoles en Russie
Distribution of agricultural production (as % of total production)
according to the types of production structures in Russia
6

The above table illustrates the diversity of the types of farm, their evolution since 1992 and their main production. As reported by Pascal Grouiez in 2012, the emergence of agro-holdings is a phenomenon that far exceeds our usual representations of agriculture. In particular, the Miratorg Agro-holding alone produced 14% of pork, 10% of beef and 5% of Russian poultry7.


Non-budgetary aid

Beyond budgetary measures, Russian authorities also use other levers. Between 2004 and 2010, 98 import embargoes were declared following health risks
8, proven or not.

We may also remember the embargo on grain exports announced on 4th August 2010, following the violent fires that hit the country
9 and which allowed major exporters to discard their contractual commitments. In October 2013, Russia imposed an embargo on imports of dairy produce from Lithuania10. In February 2014, it imposed an embargo on European pork following the discovery of two cases of African swine fever on Lithuanian wild boars. The embargo of 7th August 2014 in repercussion to the Russian crisis is therefore far from being an isolated phenomenon.

Among the range of regulatory measures underway in Russia are also interventions on the domestic market and customs barriers. The sugar sector is thus doubly protected: a deterrent customs duty of $340/tonne is applied to refined sugar, with the exception of imports from Belarus; and the import price for brown sugar is controlled by variable duties on the basis of fluctuations in the international sugar quotation established on the New York futures market.

For animal produce, tariffs outside tariff quotas are also high. These low or zero tariff quotas were rediscussed during the course of negotiations which led Russia to become WTO member in 2012. The European Union thus benefited from privileged access to the Russian market, with 72% of import quotas for fresh and chilled beef and 80% of boneless frozen poultry meat. They were not counting on the 2014 embargo.

In the case of grain and oilseeds, intervention measures had to take into account Russia’s status as exporter since the early 2000s. The principal system is that of export taxes, which permit the protection mainly of oilseed processing plants. In particular, inflation control and to a lesser extent fears on food supply pushed Moscow to increase taxes on grain exports when international prices reached very high levels as in 2012. Conversely, with the subsequent decline in prices, these tariffs were reduced to facilitate exports.

A public purchasing system directly dependent on the Russian Ministry of Agriculture has been in place since 2008: the state purchases when domestic prices fall below a predefined level. Thus, on 27th April, the Russian Minister announced the intervention price for basic quality wheat: $180.6 per tonne for third-grade wheat and $157.8 per tonne for fourth-grade wheat
11. These prices do not, however, play the role of a minimum price and the purchases do not exceed a few million tonnes.

Rather, this is strategic storage with a view to food security; it is more the development of market outlets through the very large expansion of the production of white meats which can be seen as regulator for the grain sector that has become structurally superfluous and is still growing. For milk, intervention measures to support production in 9 federal regions were also announced for 2017 without more detailed information being available at this stage.


The explosion of Russian agricultural production since the early 2000s

Using the OECD PSE (Producer Support Estimate) indicator, which records direct aid and market support, in 2016 Russia was supporting its agriculture by 16% of the total value of its production, a slightly lower level than the European Union at 20%
12. This level, which is on the rise, is explained by the important role of market support in a context of declining international prices. The subsidies for inputs ($2.08 billion), capital ($1.65 billion) and coupled aid for production ($0.843 million) accounted for only 6.4% of production in 2016.

Russia has obviously put agriculture at the centre of its priorities, and it’s paying off. This conclusion is reached when we look at the evolution of Russian agricultural production and the county’s trade balance. Production in all sectors has literally exploded, with maize and chicken meat in the lead, the production of which has multiplied by 10 since 2000, as seen in the graph below. Wheat production has doubled in 15 years, meaning the Russian Federation is the world's largest exporter of this commodity for the second consecutive year in 2016. For both sugar and sunflower production tripled over the period.

Evolution des productions agricoles en Russie
Base 100 graph showing the evolution of Russian agricultural produce since 2000

The same applies to livestock, with the exception of dairy produce, which has been stagnating since 2000. The chart shows that chicken production has increased almost tenfold in the space of 15 years, that of pork has more than doubled over the same period. Between 2013 and 2015, trade deficits in pork and poultry meat decreased by 55% and 75% respectively.

Balance commerciale agro-alimentaire russe
The Russian agri-food trade balance since 2000

The consequences of the increase in production on the trade balance are direct. While the agri-food trade deficit exceeded $15 billion USD in 2013 as a result of the doubling in value of imports between 2006 and 2013, the contraction in imports observed in 2014 and especially in 2015 led to a spectacular rebalancing of the trade balance ($360 million US dollars according to WTO data). In 2016, Russian imports were mainly concentrated on fruit, vegetables and ornamental plants (28%), followed by meat (12%), oils and oilseeds (11%) and dairy produce (8%). Brazil for meat and in particular Belarus for milk and sugar are the first suppliers to Russia. For export, grain accounted for 37%, fish and crustaceans (18%) and oils and oilseeds (16%).


Causes and Consequences

Ultimately, the embargo imposed by Russia in 2014 can not be considered as the main cause for the rebalancing of the Russian agri-food trade balance. The development of agriculture was much earlier and is explained by the voluntarist measures taken by the Russian authorities to develop the country's great potential. The embargo certainly finalized this import-substitution policy, even if the latter also had adverse effects at least in the short term: recession, inflation, fall of the ruble could also have negative effects on the agricultural sector.

The embargo is one of the causes of the rise of Russian agriculture. Indeed, the increase in domestic production has reduced Russian dependence on animal produce in particular. Less dependent, Russia was then able to use the embargo on European and American exports as a weapon in the tug of war over the Ukraine. And as Thierry Pouch points out in a recent article
13, this strategy was undoubtedly pre-planned insofar as Russia had also already reoriented some of these import flows.

Whatever the case, if European breeders have suffered from the embargo since 2014, this market outlet now seems compromised for the European Union, if the embargo is lifted or not. With its potential and voluntarism, we do not see what could prevent Russia from achieving its strategic objective of food self-sufficiency and to continue developing its exports.


1 http://www.lefigaro.fr/flash-eco/2017/06/30/97002-20170630FILWWW00229-l-embargo-russe-agricole-prolonge-jusqu-a-la-fin(...)
2 L’UE avait imposé des sanctions économiques à la Russie dans les domaines bancaire, du pétrole et de la défense en réaction à l’annexion de la Crimée en 2014 et au soutien qu’elle a apporté aux séparatistes ukrainiens.
3 Voir http://echo.msk.ru/news/1949506-echo/comments.html (en russe)
4 http://en.kremlin.ru/catalog/glossary/37
5 Pour une vision complète du programme, voir le site (en russe) :
http://www.consultant.ru/cons/cgi/online.cgi?req=doc&base=LAW&n=221649&rnd=285391.1715423235&dst=107191&fld=134#0

6 Source Rosstat :
http://www.gks.ru/wps/wcm/connect/rosstat_main/rosstat/en/figures/agriculture/

7 Pascal Grouiez (2012) « Des kolkhozes à l’agrobusiness en Russie », Études rurales, n°190, 49-62pp.
8 Source Rosselkhoznadzor
http://www.rosselkhoznadzor.ru/fsvps/importExport?_language=en

9 https://www.lesechos.fr/16/08/2010/LesEchos/20741-035-ECH_entree-en-vigueur-de-l-embargo-sur-le-ble-russe.htm
10 http://www.momagri.org/FR/regards-sur-l-actualite/Russie-Lituanie-le-lait-de-la-discorde_1325.html
11 Cf. le rapport du Conseil International des Céréales du 25 mai 2017
12 Voir le site de l’OCDE
http://www.oecd-ilibrary.org/agriculture-and-food/politiques-agricoles-suivi-et-evaluation_22217398

13 Article Paysans et Société : "Agriculture russe : un redressement consolidé par l'embargo", Paysans et Société, numéro 364, juillet-Août 2017, p. 40-47.


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Paris, 15 December 2018