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 Front Cover
 Front Matter
 Title Page
 Table of Contents
 Foreword
 Policy then and now
 The long-term outlook for production...
 Concluding remarks
 Reference
 Back Matter
 Back Cover






Title: Russia's food economy in transition : current policy issues and the long-term outlook
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 Material Information
Title: Russia's food economy in transition : current policy issues and the long-term outlook
Alternate Title: Food, agriculture, and the environment discussion paper ; 18
Physical Description: Book
Language: English
Creator: von Braun, Joachim
Serova, Eugenia
tho Seeth, Harm
Melyukhina, Olga
Publisher: International Food Policy Research Institute
Place of Publication: Washington, D. C.
Publication Date: October, 1996
Copyright Date: 1996
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Table of Contents
    Front Cover
        Front Cover 1
    Front Matter
        Page i
    Title Page
        Page ii
    Table of Contents
        Page iii
        Page iv
    Foreword
        Page v
    Policy then and now
        Page 1
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
    The long-term outlook for production and consumption
        Page 9
        Page 10
        Page 11
        Page 12
        Page 13
        Page 14
        Page 15
        Page 16
    Concluding remarks
        Page 17
        Page 18
        Page 19
        Page 20
    Reference
        Page 21
        Page 22
    Back Matter
        Page 23
    Back Cover
        Page 24
Full Text












Russia's Food Economy
in Transition: Current Policy
Issues and the Long-Term
Outlook
Joachim von Braun
Eugenia Serova
Harm tho Seeth
Olga Mel'yukhina








2020
VISION








































"A 2020 Vision for Food, Agriculture, and the Environment" is an initiative of
the International Food Policy Research Institute (IFPRI) to develop a shared
vision and a consensus for action on how to meet future world food needs
while reducing poverty and protecting the environment. It grew out of a
concern that the international community is setting priorities for aJJreimin
these problems based on incomplete information. Through the 2020 Vision
initiative, IFPRI is bringing together divergent schools of thought on the-e
issues, generating research, and identifying recommendations.

This discussion paper series presents technical research results that encom-
pass a wide range of subjects drawn from research on policy-relevant
aspects of agriculture, poverty, nutrition, and the environment. The discus-
sion papers contain material that IFPRI believes is of key interest to those
involved in addressing emerging Third World food and development prob-
lems. These discussion papers undergo review but typically do not present
final research results and should be considered as works in progress.





Food, Agriculture, and the Environment Discussion Paper 18


Russia's Food Economy

in Transition: Current Policy

Issues and the Long-Term

Outlook

Joachim von Braun
Eugenia Serova
Harm tho Seeth
Olga Melyukhina









International Food Policy Research Institute
1200 Seventeenth Street, N.W.
Washington, D.C. 20036-3006 U.S.A.
October 1996














Contents


Foreword v
Policy Then and Now 1
The Long-Term Outlook for Production and Consumption 9
Concluding Remarks 17
References 21















Tables



1. Structure of explicit state subsidies to agriculture, 1993 8
2. Components of agricultural production, 1980-94 9
3. Expenditures for food by population groups, 1991-94 15
4. Projected food consumption, 1995-2005 17
5. Grain production, consumption, and net trade, 1993-2005 20



Illustrations

1. Meat consumption in the Soviet Union and Russia, 1950-93 3
2. Consumption of milk and milk products in the Soviet Union and
Russia, 1950-93 4
3. Consumption of cereal products in the Soviet Union and Russia,
1950-93 4
4. Structure of production by type of farm, 1987-94 10
5. Potato output by type of farm, 1980-94 11
6. Meat output by type of farm, 1985-94 11
7. Milk output by type of farm, 1985-94 12
8. Production of grain and potatoes, 1980-94 13
9. Production of milk and meat, 1980-94 13
10. Population growth in the Soviet Union and Russia, 1950-93 14
11. Price ratios between different food products, 1993 15
12. Production of meat, 1980-2005 18
13. Production of milk, 1980-2005 18
14. Production of grain, 1980-2005 19
15. Production of potatoes, 1980-2005 19















Foreword



The transition to a market economy now taking place in the countries of the former Soviet
Union naturally has profound implications for the region's agriculture sector. In this discus-
sion paper, Joachim von Braun, Eugenia Serova, Harm tho Seeth, and Olga Melyukhina focus
on the food economy of Russia in particular, to see what effect reforms are likely to have on
Russia's ability to produce food and feed its people. Though this discussion paper is part of
IFPRI's 2020 Vision initiative, which seeks to develop an international consensus on how to
meet future world food needs while reducing poverty and protecting the environment to the
year 2020, its forecasts extend only to the year 2005, for longer-term projections are
exceedingly difficult to make in Russia's volatile economic environment.
Since the breakup of the Soviet Union, agriculture has been driven by a mixture of market
and state forces. Production of major food items-grain, potatoes, milk, and meat-has
generally fallen. Household plots, which grow food largely for the household alone, account
for an increasing share of production. Meat consumption in Russia-traditionally considered
an indicator of living standards-has declined, in favor of greater consumption of bread
and potatoes.
Agroecologically, the country has the capacity to greatly increase its agricultural produc-
tion; whether it does so or not depends on whether policymakers can create appropriate
incentives. Their success or failure has implications not only for Russia, but also for the rest
of the world, for the outcome will determine whether Russia becomes an important importer
or exporter of food. "Russia's Food Economy in Transition" sheds light on this rapidly
evolving situation.

Per Pinstrup-Andersen
Director General, IFPRI




















ussia's food economy is undergoing a funda-
ental transition. Rapid changes and adjust-
ments are still taking place in the market and pricing
systems, in the subsidies to output and input markets
and the credit market, and in the process of privatiza-
tion and other structural reforms. These transforma-
tions have far-reaching effects on domestic supply and
demand relationships. And, as part of the still greater
economic changes taking place in the former planned
economies of central and eastern Europe, these
transformations may have extensive ramifications for
international food markets. This paper has two aims:
First, to provide a basis for understanding the nature,
scope, and depth of the changes that have occurred
thus far and, second, to analyze the long-term trends in
production and consumption, as well as the breaks in
such trends caused by the above changes, and to
discuss their implications.
The paper starts with a brief description of the
point of departure for the reform, that is, the former
Soviet Union's agricultural policy system and con-
sumption trends. It then examines in somewhat
greater depth the current system of pricing, subsidi-
zation, and credit in the Russian food and agriculture
sector as it has taken shape following several years
of reform. While this paper is part of IFPRI's 2020
Vision for Food, Agriculture, and the Environment
initiative, the projections presented here have a time
frame limited to the year 2005, because of the highly
dynamic and uncertain nature of the changes taking
place in Russia's food economy.'


Policy Then and Now
System and Trends before Reform
Agricultural Policy before Reform. In the Soviet
Union's centrally planned economy, agriculture func-


tioned in an environment in which virtually every
economic parameter was distorted in some way. In
most cases, prices (both levels and ratios), interest
rates, and profitability were centrally administered
and existed as planned norms rather than as indicators
of scarcity and performance. There was hardly any
relationship between world and domestic prices.
There was no realistic exchange rate. The economy
was closed, except to other socialist economies.
Domestic producers and buyers had no access to
markets abroad, and the access of foreign producers
and buyers to the Russian market was restricted to
government contracts.
In addition, throughout the 1980s the agriculture
sector continued to suffer from a number of negative
hidden trends, including inefficient use of resources,
especially labor; migration of the most productive
population to cities; soil degradation; high output
losses; backward social infrastructure in rural areas;
and poor-quality foodstuffs.
Nonetheless, the performance of the agrarian
sector in the second half of the 1980s revealed no
obvious catastrophic situation. Gross output grew
slowly (average annual rates of growth from 1986 to
1990 exceeded rates of the previous five years),
though there were signs of recession in 1987 and
1990. The output of main agricultural products also
grew slowly, and energy and capital use per employee
in agriculture increased. Per capital consumption of
main foodstuffs reached the levels of the leading
industrial countries of the world (Serova 1995).
Maintaining the growth of agricultural output
and consumption required a growing and dispropor-
tionate share of the financial resources of the state.
Since the early 1970s, the state had simultaneously
subsidized the consumption of foodstuffs and the
development of an agroindustrial complex, in pursuit
of the objective of providing cheap food, especially


'The study draws on ongoing research at the Institute for the Economy in Transition, Moscow, and the Chair for Food Economics and
Food Policy, Kiel University, supported by the Volkswagen Foundation.










sociologically and ideologically important meat
products, to the Soviet population. These subsidies
had sharply increased as a share of total state
expenses. While investments in agriculture grew by
22 percent and subsidies for foodstuffs by 77 percent,
the average index of agricultural output in Russia
grew by only 12 percent in 1986-90 in comparison
with the period 1980-85. Per capital consumption of
meat and dairy products also grew by 12 percent
(Goskomstat 1995).
To increase output of meat, milk, and eggs, the
Soviet state invested in the development of large
feedlots. That approach caused an increase in the
share of expensive grain in feed in the mid-1980s.
Grain accounted for more than one-third of all feed
used, and two-thirds of the country's grain was
directed to cattle and poultry.
The theory of centrally planned economies
stipulates that everything produced is needed by the
society. Thus the production costs of every Soviet
enterprise had to be "covered" by price. Accord-
ingly, state purchase prices were differentiated to
take account of costs of production in different pro-
duction zones, which were based on geographic,
climatic, soil, and other criteria. For instance, in the
late 1980s there were 8 price zones for cattle,
11 zones for milk, 3 to 4 zones for various cereals,
and 4 zones for sugar beets.
The system of differentiated purchase prices
undermined regional specialization and, together
with the centralized planning of production, empha-
sized regional self-sufficiency. Purchase prices were
also differentiated by product quality, but the scale
of such differentiation was very small. To stimulate
the growth of production, state-defined purchase
prices had been enhanced through the creation of a
number of premiums, such as a 50 percent premium
for deliveries above the producer's average annual
level during the preceding five-year period.
The major flaw in these attempts at economic
stimulation was that they provided producers with
no reward for profitability. As a result, the system of
differentiated purchase prices and price premiums
distorted the actual performance of the collective
farms (kolkhozes) and state farms (sovkhozes). The
situation worsened in 1988, when all existing pro-
ducer subsidies were integrated into the procurement
prices. These subsidies included special deficiency
payments to unprofitable and low-profit enterprises,
investments for developing rural areas, compensa-
tion for insurance payments, and compensation for
fertilizer and machinery expenses. Also, differenti-
ated prices were set at all levels within the food


chain, intended to give all agricultural enterprises a
certain margin of profits over costs (in the national
accounting system, costs did not include land or
interest rates). Therefore procurement prices did not
act as market signals for producers.
In addition to the state-set procurement prices at
which most agricultural output was sold, there ex-
isted contract prices at which enterprises could sell
any output they had produced over and above their
plan target. However, after 1986, this also became
part of planned production to be delivered to the
same state procurement agencies or to Potrebkoop-
erazia (supply-marketing, quasi-cooperative sys-
tem). Free prices did exist in the kolkhoz markets,
where the main sellers were not kolkhozes and
sovkhozes, but persons selling excess produce from
their household plots.
Main inputs were supplied to the kolkhozes and
sovkhozes at subsidized prices. Since most of the
capital goods required on kolkhozes and sovkhozes
could be acquired on the basis of planning figures
irrespective of the financial capability and economic
profitability of the agricultural producers, producers
fought for figures in plans instead of for real profits.
Until 1988 the so-called double tariffs-the special
low prices on main inputs-were maintained for
farms. The main output-input price ratios at the end
of the 1980s were kept at a much lower level than in
Western countries. For instance, to purchase one
grain harvester, Russian agricultural producers had
to sell only about 160 tons of wheat, whereas Ameri-
can farmers had to sell 740 tons; to buy a tractor, it
was 26 tons compared with 127 tons respectively; to
buy 1 ton of urea, 0.39 tons compared with 1.24 tons;
and to buy 1 ton of mixed feed, the Russian producer
needed to sell 0.06 tons of beef, and the American
farmer 0.13 tons (Widekin 1994). The relative
cheapness of machinery, fertilizer, and feed for
kolkhozes and sovkhozes, together with the absence
of effective incentives for farm labor, resulted in
inefficient use of inputs.
Credit was also distributed to all kolkhozes and
sovkhozes in accordance with production plans. The
interest rate for short-term loans was 2 percent, and
for long-term loans 0.75 percent. Debts to the gov-
ernment budget or to suppliers were recovered from
the accounts of enterprises without their approval.
Enterprises were not allowed to withdraw funds
from their accounts freely, but only after obtaining
special permission from the regional financial
authorities and then only for purposes approved in
the plan. At the same time, writing off debts was
commonplace.










Consumption Trends before Reform. Russia and
the other countries of the former Soviet Union have
been affected by several severe food crises in this
century, particularly in 1921, 1932-34, and 1945-
47. These crises, mainly the results of ideologically
motivated policy failures and war, have little in com-
mon with the recent supply crises in the transition
period. However, the earlier crises may have had a
substantial impact on Russian consumers' consump-
tion behavior and attitudes toward risk-effects that
may be relevant even today (Dando 1980).
In the 1980s food consumption reached high
levels. For instance, calorie consumption in the
Soviet Union in 1981 was estimated to have aver-
aged 3,250 calories per capital per day. Of this
amount, 47 percent was accounted for by cereal
products and potatoes. (Comparable figures for the
United States were 3,410 calories per capital per day
and 23 percent cereal products and potatoes.)
Figures 1, 2, and 3 show food consumption
trends since the 1950s for both Russia and the Soviet
Union as a whole; later this paper will focus exclu-
sively on Russia. In Russia, meat consumption is
considered an indicator of living standards. Con-
sumption figures for meat, as well as those for milk
and dairy products, from the time of the planned


economy may therefore have been influenced to
some extent by politically motivated exaggeration
(Penkaitis 1992).
The consumption of cereals and cereal products
was very high during the 1950s and 1960s and re-
mained high by international standards even after it
had declined in the 1970s and early 1980s, perhaps
partly because of consumption habits in Russia. In
comparing the cereal consumption statistics with
those of other countries, it is important to note that
pulses are included as cereals in Soviet and Russian
statistics.
In general, the decline in cereal product con-
sumption and the concurrent increase in meat and
dairy consumption can be interpreted as a result of
improved income and living conditions in the Soviet
Union during the observed period. The causes of the
most recent developments in consumption will be
analyzed later.


Policy Reform and the Transition Process
Main Elements of Change. Following the disinte-
gration of the Soviet Union, economic reforms
assumed a more radical nature, encompassing the
liberalization of pricing and foreign trade, changes in


Figure 1-Meat consumption in the Soviet Union and Russia, 1950-93

Annual Per Capita
Consumption
(kilograms)
80 ,I


00 o0o *E
000
E]OnE]m
000000 N
0 00N


m*m


1955 1960


I I I I I I I I I I I I I I I I I I


I i I I I I I I I I I I I I I I I I I
1965 1970 1975 1980 1985 1990


0 Soviet Union


[ Russia


Source: tho Seeth and von Braun 1995, 317


70

60-


50 --


I 19
1950


"' ' ' ' ' ' ' ~ ' ' ' ~ ~ ~ ~ ~ ~


ZU i


. . .











Figure 2-Consumption of milk and milk products in the Soviet Union and Russia, 1950-93

Annual Per Capita
Consumption
(kilograms)


O*
ME


0O


O .
[]u a
mm- []


001 1sileIIIIsissillinese l l I I I I I I I I I I I I I I I I I I I I
1950 1955 1960 1965 1970 1975 1980 1985 1990


0 Soviet Union


] Russia


Source: tho Seeth and von Braun 1995, 317.





Figure 3-Consumption of cereal products in the Soviet Union and Russia, 1950-93

Annual Per Capita
Consumption
(kilograms)
180 ,


E


140 4-


N*OEm


OD


1 II.l. !! 1 1111111111111111111111111111111


1955 1960


1965 1970 1975


M Soviet Union


1980 1985 1990


[ Russia


Source: tho Seeth and von Braun 1995, 317.


350


300-


250


200


I 1 1 1 11 1 1 1 U1


160 --


1950
1950


m l m m m m m m l m m . . . '


'"'


.^^









the tax system, and privatization in every sector. In
1992 and 1993, the main components of the central
planning system were dismantled, and the national
economy developed in the direction of a market
economy. Since then, the customary shortages of
daily necessities have disappeared. Food shortages
at the household level due to poverty, however,
affect a segment of the population.
A price structure has emerged, with new incen-
tives for producers and stimuli for a new production
structure. The ruble, although inflating rapidly, has
acquired features of a genuine currency. The first
stage of privatization using vouchers has been com-
pleted; most of the enterprises in every sector have
become privately owned. Trade, banking, and finan-
cial institutions, though underdeveloped in the past,
have spread rapidly. Yet macroeconomic stabiliza-
tion has not been achieved; the fall in gross domestic
product (GDP) and industrial output has continued
for several years, and investment is declining.
General economic reform provided the frame-
work for reforms in the agriculture sector. The first
stage of agrarian reform was aimed at creating pro-
duction units capable of operating under market con-
ditions. This meant that the initial phase of the re-
form focused on establishing the legal bases and
incentives for private farming.
From the very beginning it was clear that kol-
khozes and sovkhozes would remain the principal
units of agricultural production over the medium
term. It was thus necessary to transform them into
independent, market-oriented units. To achieve this
goal, the government introduced special measures
for reorganizing kolkhozes and sovkhozes at the end
of 1991 and beginning of 1992 and stipulated the
mandatory reregistration of all farms. Each public
farm was required to decide whether it would retain
its old status as a public enterprise or become a
private one (such as a joint stock company, partner-
ship, or cooperative). It was a formal step that initi-
ated real adjustment. Of the kolkhozes and sovkhozes
in existence at the beginning of reregistration, 34 per-
cent opted to retain their old status. The share of all
agricultural land held by kolkhozes and sovkhozes
decreased from 98 percent in 1990 to 45 percent in
1993 (State Committee for Statistics of the Russian
Federation 1994a, 18, 27). As a result of the reregis-
tration, the new private enterprises were formally
separated from the state's financial, supply, and pro-
curement systems. They were allowed to become
independent decisionmakers in principle, but in
practice state influence remains strong, especially
through public credit and input supply mechanisms.


The structural changes in agriculture also in-
cluded rapid growth in the private family farm sec-
tor, consisting of the household plots of rural people,
private farms, and dachas (private plots) of the urban
population. From 1991 to 1994, small family farms
made a growing contribution to total agricultural
output for all products, and by 1994 these farms
produced 89 percent of all potatoes, 68 percent of all
vegetables, 44 percent of all cattle and poultry, and
40 percent of all milk (State Committee for Statistics
of the Russian Federation 1994a, 30-32).
At present, Russian agriculture is in disarray as
a result of the general economic crisis and the
restructuring of the national economy. It appears that
overall structural changes in the economy cannot be
implemented without causing a drop in production.
Despite their severity, the downward trends in agri-
culture are less drastic than those in other sectors;
Russia's GDP in 1994 was estimated to have fallen
39 percent below that of 1991, with industrial pro-
duction falling by 44 percent, and agricultural pro-
duction by 21 percent. There was a 20-30 percent
drop in livestock levels after the end of 1991, a great
reduction in agricultural investments (which fell by
22 percent in terms of constant rubles from 1991 to
1993), rapid degradation of social infrastructure in
rural areas, and growing rural unemployment (State
Committee for Statistics of the Russian Federation
1994b, 3, 34; 1994a, 14).

Price and Trade Policy. In January 1992, Russia
embarked on a new policy of price liberalization,
departing from its former system of generally
administered pricing and starting the transition to
free, or market, prices. A free price was defined as
"a price set by an agreement between equal parties
depending on the current market situation (supply/
demand situation), quality, and consumption charac-
teristics of the commodity" (Government of the
Russian Federation 1991). State price regulation has
continued in certain sectors of the economy, includ-
ing the agriculture and food sector, until the present,
although regulation has largely shifted from central
to regional authorities.
Agricultural prices and state purchases. The
volume of agricultural products delivered to the state
stocks started to decline in 1992 but still represented
a dominant share of marketed output. That year it
accounted for 70 percent of total marketed output for
cattle and poultry, 93 percent for milk, 91 percent for
eggs, 34 percent for grain, and 67 percent for sugar
beets (State Committee for Statistics of the Russian
Federation 1995, 88). State purchasing activity had









an extensive influence, therefore, on the formation of
agricultural prices and the profitability of producers.
Deliveries to state stocks actually resulted from vari-
ous forms of procurement through different channels
(such as procurement agencies, processing plants,
and retail stores). These deliveries were mainly
made by order of the regional authorities.
State stocks are divided into federal and regional
stocks. As a rule, federal stocks cover the needs of
the army, northern areas, and critical reserves of the
country. Regional stocks have a wider scope, consti-
tuting a substantial part of the food supply of a
region, and are intended to guarantee its food secu-
rity. Defining the food security level is a matter left
entirely to the regional administration, and this con-
cept varies from region to region.
During 1993 and 1994, state purchasing under-
went transformation. First, in 1993, deliveries to state
stocks ceased to be compulsory, and deliveries made
under order by the state were placed on an equal
footing with any other marketing (President of the
Russian Federation 1993). Second, pricing practices
changed. Before 1993, federal and regional admini-
strations had supported high prices in order to stimu-
late deliveries to state stocks, either by administra-
tively compelling buyers to pay a particular price or
by subsidizing producers or buyers. Because of severe
budgetary constraints, however, federal and regional
authorities appeared to be unable to fulfill price obli-
gations and finally refused to announce support or
index prices on products delivered to state stocks. The
government declared that sales to state stocks were to
be made at "the prevailing market price."
Today, federal and regional purchasing agencies
set the target amounts for state stocks and prepare
delivery orders but have no formal tools to compel
producers to deliver and cannot guarantee the pur-
chase of the products delivered or the purchase price.
In practice, regional administrations use a variety of
informal tools to channel products according to their
orders: for example, they exert purely administrative
personal pressure by, for instance, refusing or grant-
ing loan guarantees or preferential loans, or they
grant or withhold funds for long-term investments.
Input prices. The liberalization of prices was
accompanied by the elimination of nearly all subsi-
dized prices for agricultural inputs (except for elec-
tricity). Input prices shot up, and at the same time
agriculture and the food industry were confronted
with a severe drop in the purchasing power of the
population, which limited any scope for higher out-
put prices. Agriculture and the food sector were thus
put under growing pressure from both ends-the


input sector and the consumer market-which led to
an input-output price disparity. In 1992, output
prices increased on average by a factor of 9.4, while
input prices increased on average by a factor of 16.2.
This trend continued in 1993 and 1994, although the
gap between input and output prices narrowed until
the second quarter of 1994.
During price liberalization, the agriculture and
food industries are among the first economy sectors
to face limited demand. Livestock producers and
meat and milk processors appeared to be affected
most and were rapidly forced to adopt more efficient
modes of production.
Food prices. During the first two months of
price liberalization, the federal government enforced
food price controls by limiting the rates of price
markups among food wholesalers and retailers.
These restrictions related mostly to staples such as
milk, meat, and bread. Since March 1992, all food
price controls have been delegated to the regional
authorities except for bread prices, which remained
under federal control until the end of 1993. The
federal government set a "fixed" price for grain
used to make flour for bread and compensated the
milling enterprises for the difference between the
fixed price and actual grain purchase price from the
federal budget (Council of Ministers of the Russian
Federation 1993). In addition, the bread producers'
margin was limited to 15 percent. Since the flour
subsidy came to an end in 1993, there has been no
regulation of food prices at the federal level.
One of the important effects of the reform has
been not to eliminate price regulation activities totally,
but to shift them to the oblast level (a subdivision
of government corresponding to a province or
state). Early in 1992, regional governments were
empowered to regulate pricing (or in other words, to
cushion the negative effects of free pricing) at their
own expense. To do this, regional governments can
directly administer retail food prices, set maximum
margins for and subsidize processors, and set maxi-
mum markups for wholesalers and retailers. Since
that time, food prices have been regulated to vary-
ing extents and in different ways in different
regions, determined primarily by the current budget
and policy of the region.
Nizhny Novgorod oblast and Ulyanovsk oblast,
for instance, exhibit two different approaches to re-
gional food price regulation. The Nizhny Novgorod
administration has chosen a policy of free pricing
and ceased to control consumer prices, while sup-
porting low-income groups through direct subsidies.
There are no regional restrictions on the movement









of goods in and out of the region. The oblast admini-
stration does not build up public regional food
stocks, and no delivery orders for agricultural and
food producers have been introduced. Most of the
regional food supply is left up to the free interaction
of food producers and sellers. At the opposite end of
the policy spectrum, the Ulyanovsk model provides
an example of strong control over the principal food
prices, with substantial consumer price subsidies be-
ing paid for milk, kefir, cottage cheese, and bread.
Several products (meat, butter, vegetable oil, sugar,
eggs, and confectionery) are rationed. This policy
must be supplemented by the restriction of trade of
the subsidized products out of the region. The
regional administration also sets maximum profit-to-
cost ratios for certain producers and controls trade
and transportation markups.
Trade regulations and pressures for protection.
In 1992, the government continued to regulate prices
for imported agricultural and food items; about
36 items, including butter, cheese, milk powder,
meat and meat products, vegetable oils, fruits and
vegetables, sugar, and flour were subsidized on
the domestic market. Imported agricultural inputs,
such as pesticides, veterinary medicines, and hy-
brids, were sold to producers at highly subsidized
prices. Estimates suggested that subsidies for food
and agricultural imports exceeded direct subsidies
to agriculture threefold. Export quotas and licensing
for some agricultural products have continued to
exist until recently, but the list of items has been
shrinking throughout the reform years. Today,
licenses are abolished.
In June 1993, subsidies on the main imported
foodstuffs were removed. At the close of 1993, when
internal prices approached the international price
level, Russian agricultural circles decided it was im-
portant to protect domestic producers. Moreover, the
agrarian lobbies insisted on introducing import tar-
iffs on the main agricultural products in late 1993.
The government adopted 15-20 percent tariffs on
meat, dairy products, and vegetable oil and 30 per-
cent tariffs on sugar and wool. These tariffs were to
be introduced on March 15, 1994, but this plan
caused increases in retail food prices in Moscow,
St. Petersburg, and some other large industrial cen-
ters even before March. Protests by the mayors of
these cities prompted the government to postpone its
decision and later to reduce the level of tariffs (the
highest level of 20 percent was set for sugar). This
decision took effect only on July 1, 1994, and has
been sharply criticized by food importers and con-
sumer representatives since then. In April 1995, a


value-added tax (VAT) for imported foodstuffs was
introduced, and in July 1995, new and higher import
tariffs were introduced (for example, 15 percent for
meat, 20 percent for butter, and 25 percent for
sugar). The main objective of these new tariffs may
have been not to support domestic producers, but to
enlarge budget revenues and to increase initial levels
of import tariffs before joining the World Trade
Organization. Russia's present agricultural protec-
tionism is thus an outgrowth of a political struggle
between a variety of forces. Food policy is still
dominated by the old idea of national or regional
self-sufficiency.

State Support to Agriculture and the Food Sector.
The share of federal support devoted to agriculture
amounted to 39 percent of all expenditures for sup-
port of the economy in 1993 and exceeded 54 per-
cent in 1994. In addition to the regular budget
resources, a special federal fund to support agricul-
ture (and the coal industry) was set up in 1994 and
existed until 1995. This fund was financed from an
additional 3 percent on top of the regular 20 percent
VAT rate imposed on all businesses operating in the
country. Extensive funds are also being channeled to
agriculture at the oblast level, primarily as subsidies
to livestock and poultry producers. Major elements
of state support are direct (explicit) input and output
price subsidies, investments in fixed assets, subsi-
dized state imports of agricultural inputs, and loans
to wholesale agencies for procurements of federal
and regional stocks.
The importance of explicit subsidies started
growing rapidly in the early 1980s. By 1989, they
made up a third of all agricultural producers' reve-
nues (Serova and Melyukhina 1995). Thereafter, this
share declined substantially because the government
attempted to impute some direct subsidies into dif-
ferentiated prices, and economic reform brought a
new set of subsidies.
The subsidy for livestock and poultry producers
is presently the largest explicit subsidy, accounting
for 80 percent of the total (Table 1). This was the
first subsidy to be introduced after the start of re-
form, as the livestock sector faced the problem of
shrinking demand in the spring of 1992 (Govern-
ment of the Russian Federation 1992a).
This subsidy is paid for each ton of livestock and
poultry output delivered to state stocks (either federal
or regional). It is paid at a fixed rate for milk and milk
products, cattle, poultry, meat and meat products,
eggs, and wool, irrespective of the actual selling price,
provided that the product is of standard quality. Late










Table 1-Structure of explicit state subsidies to agriculture, 1993
Percent of
Type of Subsidy Total Subsidies
Compensation of expenses for inputs 16.0
Purchase of inputs and machinery 6.2
Heating of residential and social infrastructure dwellings 8.3
Other 1.5
Agricultural product subsidies 84.0
Livestock products sold to federal reserve 80.8
Other 3.2
Total compensation and subsidies 100.0
Source: State Committee for Statistics of the Russian Federation 1994a.


in 1992, the state decided to move this subsidy from
the federal to the regional level. Since then, special
sums for this purpose have been transferred from the
federal budget to the regional budgets, and regional
authorities can use them at their discretion (for
instance, some local governments use these transfers
to subsidize consumers instead of producers).
Input subsidies accounted for about 16 percent
of all explicit state subsidies in 1994. Subsidized
inputs for agricultural production are primarily
energy, fertilizers and chemicals, and machinery.
Beginning in 1991, Russia initiated policies
designed to facilitate the emergence of privately
owned, market-oriented individual farms and to
stimulate structural change in the rest of the sector
(Government of the Russian Federation 1992b).2
Support to individual farms has been diminishing
from year to year owing to the tightening of the budget,
the passing of the euphoria about the rapid develop-
ment of small family farming, and the political oppo-
sition of certain groups in legislative and executive
bodies. For example, state-backed credit to individ-
ual farms (expressed in constant rubles) amounted to
30,000 rubles per farm in 1991,4,500 rubles in 1992,
and 1,000 rubles in 1993 (AKKOR 1993).

Public Investments and Credit. Past shortages and
inefficient use of capital have resulted in an agricul-
tural capital stock that is in urgent need of modern-
ization, if not replacement. Machinery and buildings
are worn out and obsolete, and a lack of means of
repair and reinvestment is causing inefficient use of


existing capital and losses in production and pro-
cessing (OECD 1991). In 1992, centralized public
investment in the agriculture sector decreased in real
terms by almost 60 percent-substantially more than
the general decline in aggregate investments in the
economy. Public investment in agriculture was
equivalent to 20 percent of all investments in the
national economy in 1992 (compared with 31 per-
cent in 1991).
In the current agricultural credit system, the
Central Bank allocates credit resources to the local
branches of Agroprombank or to any other bank
dealing with the agricultural producers in accord-
ance with the targets developed by local agricultural
authorities. Banks are free to lend these resources for
agricultural purposes only.
Loans are usually secured by collateral in the
form of livestock and machinery. Since local banks in
agricultural regions have no clients except agricultural
producers, however, the banks are compelled to lend
money even in uncertain situations in order to keep a
clientele. Moreover, it is unclear what to do with the
collateral in cases of default, as it is usually very
difficult to convert it to liquid funds. The undeveloped
rural credit system may hamper the response to incen-
tives for production for some time.
Farms are financially hampered by the poor
functioning of the agricultural credit system and by
the general payment crisis in the economy. The
nominal interest rate for agriculture and related busi-
nesses increased after 1992 but still remained below
the inflation rate until 1994. Agricultural enterprises


2This program presently includes subsidies for families for settlement in rural areas and for setting up private farms; interest rate
subsidies; tax benefits for private farms, small agricultural cooperatives, and farmer associations and cooperatives; investments in
social and production infrastructure (such as road construction, electrical transmission lines, land improvement, and gas and telephone
lines); and development of a farmer insurance system.










could borrow from commercial banks at "market"
interest rates (which were negative in real terms
during the period 1992-94). In 1992-93, the state
allocated investment credit on special privileged
terms to the agroindustrial complex (agriculture, the
food industry, and some related businesses).
In reality, the soft credit (theoretically repay-
able) granted by the state to agricultural producers
prolongs the old system of distributing financial
resources. Initially, the privileged terms of this credit
did not include the deferral of payments for at least
six months, which is why part of the loans was
immediately used to service debts. This certainly
increased the total demand for credit.
In light of the severe inflation and the absence of
a real mortgage system, commercial banks were un-
willing to give loans in the agriculture sector.
Among 122 commercial banks surveyed in 1993,
only 39 percent dealt with the agroindustrial com-
plex, and a further 8 percent intended to have deal-
ings with it. It seems fair to assume that most of these
banks are lending chiefly to related agribusinesses,
rather than to agricultural producers.


The Long-Term Outlook for
Production and Consumption

The Transition in Production
Structures and Supply
As already noted, the transformation of the Russian
food and agriculture sector entails substantial struc-
tural change. A simple decomposition of output
changes into area and yield effects (or, in the case


of milk and meat production, into herd size and
per-animal yield effects) would fail to capture the
fundamental structural change taking place in Russian
agriculture (Table 2).
Today, it is possible to distinguish three broad
types of farms: large-scale farm enterprises that
emerged from former kolkhozes and sovkhozes, pri-
vate farms, and household farms. As of January 1994,
95 percent (24,300 enterprises) of the former kol-
khozes and sovkhozes had undergone the reregistration
process: One-third decided to continue under their
previous legal status; 11,000 were registered as part-
nerships, 2,000 as cooperatives, 300 as open share-
holder companies, 400 as industrial companies, 1,000
as associations of farms, and 2,000 as other forms.
At the same time, privatization measures accel-
erated the development of private farms. By the end
of 1994, about 279,000 such farms had been formed.
They averaged 43 hectares, cultivated about 5 per-
cent of Russia's farmland, and employed about
9 percent of Russia's agricultural labor force.
Furthermore, household plot production ex-
panded substantially. Estimates suggest that 16.6
million Russian households cultivate an average of
0.37 hectare each, largely in support of home con-
sumption (State Committee for Statistics of the Rus-
sian Federation 1995, 49, 57, 59). These household
plots account for a significant share of total agricul-
tural output (Figure 4).
These structural changes in the farm sector have
already had a substantial impact on the volume of
output and the form of marketing. The effects, how-
ever, are still taking place and are very different for
the various commodities. Grain production has
remained predominantly in the hands of large-scale


Table 2-Components of agricultural production, 1980-94
Component 1980 1985 1990 1994

Grain production
Area (millions of hectares) 75.47 68.14 63.07 56.20
Average yield (kilograms per hectare) 1,290 1,450 1,850 1,400
Potato production
Area (millions of hectares) 3.79 3.54 3.12 3.35
Average yield (metric tons per hectare) 9.8 9.6 9.9 10.2
Meat production
Number of cattle (millions) n.a. 59.6a 58.8 48.9
Number of pigs (millions) n.a. 39.0a 40.0 28.5
Number of sheep and goats (millions) n.a. 63.4a 61.3 43.6
Milk production
Number of cows (millions) n.a. 21.60 20.60 19.00
Average yield (kilograms per cow) 2,122 2,327 2,781 2,253
Source: State Committee for Statistics of the Russian Federation 1995, 60, 68, 75, 80.
Note: n.a. indicates not available.
'1986.










Figure 4-Structure of production by type of farm, 1987-94

Share of Total
Agricultural Production
(percent)
nn0 ---


60-


40--


20-


1987


1988


l Large-scale farm enterprises


E Private farms


I Household farms


Source: State Committee for Statistics of the Russian Federation 1995, 47.

farm enterprises. The winter crop has been reduced
substantially, and fallow land increased, perhaps
owing in large part to input shortages. Potato output
has increased substantially in household plots, which
now account for 90 percent of potato production, up
from 67 percent in 1990 (see Figure 5).
It is often pointed out that in 1989, before the
beginning of policy reform, the private production
sector used only 2 percent of the agricultural area but
accounted for 22 percent of output (World Bank
1992). These figures can be misleading, however,
because private households often use the equipment
and inputs of big farms. By 1993, private farms
produced 36 percent of total agricultural output, and
in the case of potatoes and vegetables, more than
80 percent and 65 percent, respectively. Households
in rural areas now produce about 50 percent of their
food, and in the case of members of former kolkhozes,
this proportion is even higher (OECD 1991).
Radical changes are taking place in the structure
of milk and meat production: livestock herds have
declined sharply in large-scale farm enterprises but
increased in the household production sector. Conse-
quently, meat and milk output has declined in the
large-scale sector, while increasing somewhat in the
household production sector and in private farms
(Figures 6, 7). These developments have resulted in


the overall decline in meat and milk output in Russia.
The share of household farms in meat production
rose from 23 to 42 percent during 1990-94 and in
milk production from 24 to 41 percent.
The process of structural change will continue
for some time, as will its effects, in terms of reduced
output from large-scale farm enterprises and acceler-
ated production in household farms, including the
home-based production of animals, and in the nas-
cent private farm sector. Projecting these structural
changes and the future of productivity in these vari-
ous farm types remains difficult, if not speculative.
These changes are policy-driven and depend heavily
on the efficiency of the input and output markets, as
well as on the evolution of the as-yet-undeveloped
rural financial markets and the intensity of local
government intervention in form of production sub-
sidies. Taking into account these limitations, this
study offers a brief overview of the aggregate pro-
duction developments and some potential trends
under various assumptions. This discussion is based
on developments in the 1980s and takes into account
especially the policy reforms of the early 1990s, yet
refrains from unduly extrapolating short-term crisis
symptoms into the future.
In the staple food sector, production of grain
shows no clear trend until the late 1980s, when a


17~


L II II I I I I I


100


/j:












Figure 5-Potato output by type of farm, 1980-94

Million Metric Tons


30


25


20 -------------------------------
20 T -------------------------------- .....


15


10 -...





0 I I I I I I I I I I
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

A Household farms ] Large-scale farm enterprises Private farms


Source: State Committee for Statistics of the Russian Federation 1995, 50, 53, 57.
Note: Dashed lines indicate missing data.





Figure 6-Meat output by type of farm, 1985-94

Million Metric Tons
8

7

6

5

4

3

2





1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

O Large-scale farm enterprises A Household farms Private farms

Source: State Committee for Statistics of the Russian Federation 1995. 50, 53, 57.









Figure 7-Milk output by type of farm, 1985-94

Million Metric Tons


1986 1987 1988 1989 1990 1991 1992 1993

EJ Large-scale farm enterprises A Household farms Private farms


Source: State Committee for Statistics of the Russian Federation 1995, 50, 53, 57.


decline set in, whereas in the important potato sector,
production declined in the second half of the 1980s
and then began an increasing trend (Figure 8). Milk
and meat output each showed an overall steady in-
crease until 1990, followed by a steady decline with
no sign of a turnaround thus far (Figure 9).
Substantial change in the food sector is occur-
ring not only at the farm-production level, but also in
the downstream food industry, currently considered
the weakest link in Russia's food chain. Production
in the food industry registered annual declines of
between 10 and 20 percent from 1991 to 1994 (Centre
of Economic Analysis 1994). The overall decline
between 1991 and 1994 ranges from 30 to 70 percent
in the various subsectors of the food industry.

Consumption Trends and the
Impacts of Change
The longer-term consumption trends for major food
items in the former Soviet Union and Russia have
already been discussed. Now it is worth analyzing the
major forces of change in consumption levels and
structures as they came into play during the economic
transformation. This analysis will provide a basis for
long-term projections of consumption trends.


Population Growth. In 1991/92, population growth
in Russia reached its lowest level since World War
II. Since 1991, the number of births has fallen below
the number of deaths (Figure 10).
The "crisis" in demographic development
seems to be an outgrowth not only of the transforma-
tion process, but also of economic and social
changes that started in the second half of the 1980s.
Although life expectancy increased significantly be-
tween 1984 and 1987, it declined at alarming rates
thereafter. The declining quality of health and social
service systems during the transition may have con-
tributed to this rapid decline (Centre of Economic
Analysis and Forecasting 1993).

Income Growth and Distribution. The composition
of income and income sources has recently changed
substantially. Notable increases have occurred in
official payments in kind or barter trade, as well as in
income-generating activities based on households'
own production, including household plots (Mroz
and Popkin 1995, 26). A second important trend is
the growing gap between food prices and wages: In
1992 and 1993, wages fell behind food prices, induc-
ing major adjustments in the food-consumption
bundle and overall expenditure patterns of the popu-











Figure 8-Production of grain and potatoes, 1980-94

Million Metric Tons
120


1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

] Grain Potatoes


Source: Goskomstat 1995.




Figure 9-Production of milk and meat, 1980-94

Million Metric Tons
60


50


10



1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

0 Milk ] Meat (slaughter weight)


Source: Goskomstat 1995.









Figure 10-Population growth in the Soviet Union and Russia, 1950-93

Percent


44
0 .














90 1955 1960 1965 1970 1975 1980 1985 1990


- - Soviet Union


- Russia


Source: Goskomstat 1995.


lation. The old social safety net was inadequate for
the new circumstances (Mroz and Popkin 1995, 24).
At the same time, overall income distribution
rapidly became more unequal. The Gini coefficient of
the distribution of income increased from 0.26 in
1991 to 0.35 in 1994, and the ratio between the top
and bottom income deciles increased from 5.4:1 in
1991 to 11.2:1 in 1994 (Centre of Economic Analysis
1994). In addition, regional income disparities in-
creased. The ratio of per capital income between the
poorest and richest regions increased from 1:3.3 to
1:6.5 between 1991 and 1993. Incomes of rural wage
earners are at the bottom of the income scale; in 1994,
industrial workers earned 54 percent more than farm
workers (Goskomstat 1995). Payments in kind by the
former kolkhozes and sovkhozes, however, have be-
come more widespread, which helps to explain why
the average total income of the rural population has
not deviated further from average urban income. The
incidence of poverty among households whose head
is working in the agriculture sector is still above
average (World Bank 1995, 32).
Since 1987, the share of the average household's
expenditure for food has increased steadily, as
should be expected when incomes decline. Real con-
sumption expenditures declined between 1991 and


1992 by about 30 percent. The poorer segments of
the population, as shown by Group II (families of
pensioners) in Table 3, and children are particularly
affected by the relative increase in food prices (Mroz
and Popkin 1995, 22).

Prices. Price levels of food and agricultural com-
modities changed substantially with price liberali-
zation in the early 1990s. Agricultural prices fell
behind prices for industrial products; while agricul-
tural prices increased by a factor of about 8.5 in
1993, industrial prices increased by a factor of
about 12.5 (Agra Europe 1994). Food prices that
were regulated to some extent by the government
increased by about 7.5 times between December
1992 and December 1993, while unregulated prices
increased by about 6.7 times (Centre of Economic
Analysis 1994). At the same time, price ratios be-
tween different food commodities changed signifi-
cantly (Figure 11).
These average price trends provide only a highly
aggregate picture of the diverse trends within the
large country, because large price differentials exist
between different regional markets in Russia. The
price differences are due not only to high transport
costs, the partial lack of information on prices, and


1.5


1.0










Table 3-Expenditures for food by population groups, 1991-94
1991 1992 1992 1993 1994"
Food Item Group I Group II Group I Group II All Groups
(percent of food expenditures)
Food products 37.3 61.0 43.3 76.7 47.1 46.0 45.9
Nonfood products 48.9 22.3 44.9 10.2 41.2 42.6 42.7
Alcoholic beverages 3.9 6.7 3.5 5.7 4.0 2.6 2.3
Services 9.9 10.0 8.3 7.4 7.7 8.8 9.1
Source: Koen and Phillips 1993, 35; Centre of Economic Analysis 1994, 90.
Note: Group I consists of families of workers. Group II consists of families of retired workers.
'Preliminary estimate.
bServices are all nonproduct expenditures, including food from canteens and restaurants.


regional tendencies toward monopolization in spe-
cific markets, but also to the specific policies at the
oblast level described earlier. An analysis of con-
sumer price differentials between Russian cities by
Gardner and Brooks (1994) shows that regional
oblastt) levels of supply are significant determinants
of price differentials, but that spatial factors and
income levels are not. Oblast-specific regulation of
markets appears to be the main determinant of price
differentials.

Household Agriculture. The increased role of
household agriculture in Russia is a result of disrup-


tions and related perceived risks in food and labor
markets as well as deficiencies in social security
systems. A 1995 survey by the Institute of Food
Economics (Kiel) in cooperation with the Centre of
Economic Analysis (Moscow) in three oblasts shows
that, on average, per capital income in cash and kind
from the household plot represents 26 percent of
income. Contrary to what one might expect, this
share increases with income: In the lowest income
quartile it is 8 percent, whereas it is 32 percent in the
top income quartile. Thus, while household agricul-
ture is important for many, it is not as important a
source of income and means of food access for the


Figure 11-Price ratios between different food products, 1993


Index (January 1992= 100)
250 .


0 -
First
Quarter


X Vegetable oil


Second Third Fourth
Quarter Quarter Quarter

0 Bread (first quality) 3 Pork Potatoes Butter


Source: Goskomstat 1995.









poor as it is for the middle class. The poor are also
poor in household agriculture. A less risky food and
employment environment and more job prospects
should finally reduce household agriculture quickly,
but that will be a function of scale and nature of
economic growth and food sector development. In
the meantime, this large sector deserves much more
attention in terms of public services such as exten-
sion and research for its efficient operation in pro-
duction and marketing.
In summary, a number of short-term and long-
term factors affecting consumption have changed in
the transformation period. The chief long-term fac-
tors include the changes in demographic trends,
income distribution, and market institutions. The
short-term factors, which may sooner or later be
stabilized, are high levels of price inflation and price
risk situations, which, together with the prevailing
income risk in the current state of the economy,
causes many households to make substantial invest-
ments of time and other resources in home produc-
tion of food.

Scenarios of Future Food Consumption
and Production Trends and Implications
How will the transformation of the Russian economy
affect future levels of food consumption and produc-
tion? This question is relevant not only for Russia
itself, but also for the rest of the world. Will Russia
continue to be a major net importer of food com-
modities, a marginal exporter, or even a significant
exporter of food? The answer will be as much a
function of trends in demand as of trends in produc-
tion. Domestic institutional issues will also be piv-
otal. Agricultural trade policy and pressures for pro-
tection may significantly affect the outcome as well.
At this point, the transition process is far from fin-
ished. Anyway, as a result of price liberalization,
reduced subsidies for food commodities, and declin-
ing incomes, the consumption of animal products
has declined and that of staple foods, especially
bread and potatoes, has increased.
The topic of future food trends in Russia has
attracted increasing attention. Penkaitis (1989),
Alexandratos (1990), and Shockley (1991), for in-
stance, provide estimates, but these studies do not
reflect the most recent developments in the former
Soviet Union and Russia. Projections for the former
Soviet Union as a whole (including the Balkans) are
modeled in a study by Tyers (1994). Tyers concludes
that liberalization in the region could result in a
change from a net cereal deficit to a net surplus of


30-50 million tons per year by the end of the decade.
In Russia, overall food self-sufficiency would
increase under different growth scenarios from 87 to
101 or 104 percent by the year 2000. Russia's pre-
dicted net grain exports in the year 2000 under
Tyers's model results would amount to approxi-
mately 32-38 million tons. Tyers also points out,
however, that if the governments of the countries of
the former Soviet Union continue to keep domestic
prices low, these changes may never emerge (Tyers
1994, 44).
In considering the transformation of the Russian
food and agriculture sector, two economic effects
can be distinguished: an efficiency effect and a system-
change effect (Noleppa 1994). The efficiency effect
results from the more efficient allocation of
resources within the context of a market-oriented
environment, other things being equal. This effect
will substantially increase cereal production in the
long run, given the existing resource endowments.
The system-change effect is the effect resulting from
the shift from a planned economy based primarily on
average costs (rather than on marginal costs) of pro-
duction toward a market system. Marginal costs in
cereal production tend to be higher than average
costs. The system-change effect, which leads to the
equation of marginal costs with prices, will-other
things being equal-have a negative effect on pro-
duction volume. The net effect of the two is probably
positive over the long term (Noleppa 1994). No
doubt, potential for major production increases
exists in Russia, as well as in some of the other
former Soviet Union countries, especially Ukraine
and Kazakhstan. One need not be overly optimistic
to assume that this potential will be used in an effi-
cient way over the long term. Over the medium term,
however, institutional constraints, friction in finance,
land, and labor markets, and infrastructure limita-
tions will probably prevent strong response to incen-
tives, should they actually be offered effectively to
farm producers and the processing sector. The evo-
lution of input use is telling: fertilizer use, for in-
stance, dropped from 9.8 million tons to 2.1 million
tons between 1985 and 1994 (Goskomstat 1995).
In view of the many uncertainties, the projection
here is limited to an exploration of trends under
alternative assumptions to the year 2005. Because of
the multitude of micro- and macroeconomic factors
that determine production and consumption trends,
as well as the political and institutional uncertainties,
any attempt to make a specific prognosis would
hardly be meaningful. A suitable approach to projec-
tions would be to attempt to forecast the factors










Table 4-Projected food consumption, 1995-2005
Consumption Projected Consumption
Income in Base YearProjected Consumption
Product Elasticity 1993 1995 2000 2005
(kilograms per capital) (kilograms per capital)
Meat and meat products 0.4 66.0 62.9 59.0 62.6
Milk and milk products 0.3 319.2 307.8 293.3 306.6
Cereal products -0.1 128.4 129.9 132.0 130.2
Potatoes -0.1 124.8 126.3 128.3 126.6
Source: Authors' calculations.
'Income growth scenario: 1994-98: -6 percent; 1998-2002: +1 percent; 2003-2005: +3 percent.


underlying the consumption trends described earlier,
to base projections on each of the determinants of
consumption, and to take account of their interac-
tions. Given the limitations of the information avail-
able at this early stage of the transformation and
uncertainties about medium-term developments, a
simple approach toward scenario development has
been chosen here. This section presents some scenar-
ios for various important food groups at an aggregate
level, based on simple, transparent assumptions. For
both consumption and production, it would be un-
realistic to project past trends across the structural
break brought about by the transformation of 1991 to
1994. Instead, the changed situation after 1991 is
taken into account by positioning the start for projec-
tion scenarios after the transformation as it has
occurred thus far.
The future consumption scenarios, for instance,
are built on past trend lines (1980 to 1993) and then
projected from 1994 onward on the basis of assumed
economic growth (income growth) and assumed
income elasticities for major food commodities
(Table 4). For the income growth scenario, it is
assumed that a J-curve of initially negative eco-
nomic growth will continue into the second half of
the 1990s, to be followed first by a bottoming out of
economic development and then by positive eco-
nomic growth.
According to the J-curve scenario, the consump-
tion of milk and dairy products will remain at a level
comparable to the 1970s over the next decade. Con-
sumption of cereal products, on the other hand, may
increase above the level of the early 1980s.
The production scenarios presented in Figures 12
through 15 portray two alternative extremes: a long-


term trend based on the period 1980-93 and a continu-
ation of the generally disappointing trend experienced
during the 1989-93 transition, in which the decline is
expected to gradually taper off. More realistic projec-
tions of the supply and trade tendencies of the grain
sector for 1995 and 2000 were developed based on the
mean between these two extremes. The production
projection for 2005 somewhat optimistically returns
to the 1995 level (Table 5).3
Projections for grain production and for food- and
feedgrain demand lead to a projection of net grain
trade, a much-debated issue. In a scenario that incor-
porates the trends in consumption of cereal products
and feed use as derived from projected consumption
of meat and milk products (assuming continuous im-
provement in the efficiency of the feed used in milk
and meat production), Russia's demand for cereal
imports may be expected to decline in the future.
These assumptions do not, however, suggest that Rus-
sia will soon become a large net exporter of cereals.


Concluding Remarks
Given the structure of the cereals balance, the devel-
opments in livestock feed efficiency will be central
to determining Russia's net trade in grain. Rapid
improvement in the competitiveness of meat and
dairy production should not be assumed, however.
The production of these items has shifted signifi-
cantly to the smallholder sector. Thus far, this sector
has received almost no institutional support such as
financing or extension services, and the agricultural
research system and rural transportation system are
not designed to meet the needs and potentials of this
growing subsector of Russian agriculture.


3The actual figure for 1995-less than 70 million tons-was largely a result of weather, and this paper therefore uses the trend point
of 90 million tons for 1995.











Figure 12-Production of meat, 1980-2005

Million Metric Tons

14

12

10 X X X

8 -..-X-X.- ) *
XX
6

4

2

0 I I I I I I I I I I
1980 1982 1984 1986 1988 1990


X Actual production (slaughter weight)


1992 1994


m m Trend (linear)


1996 1998 2000 2002


Trend (exponential)


Source: Goskomstat 1995.


Figure 13-Production of milk, 1980-2005

Million Metric Tons

70

60

50

40 2 -X (-X-X- A X-- -

30

20

10



1980 1982 1984 1986 1988 1


X Actual production m


Source: Goskomstat 1995.


990 1992


m m Trend (linear)


1994 1996 1998 2000 2002


Trend (exponential)


- -- -- -


2004


-- -- - - -
m I I n mm n mm m









! ) ! _m ) .' .


2004











Figure 14-Production of grain, 1980-2005

Million Metric Tons


140





S XX X x
100 2- X

80 X

60

40

20

0 I I I I I I I I


1980 1982 1984 1986


X Actual production


1988


1990 1992


m m Trend (linear)


1994 1996 1998 2000 2002 2004


Trend (exponential)


Source: Goskomstat 1995.


Figure 15-Production of potatoes, 1980-2005

Million Metric Tons


55

50
45 X
40 X X


30 X X
25
20
15
10
5
S I I I l l Il I I I I I
1980 1982 1984 1986 1988 1990 1992 1994


X Actual production Trend (linear)


Source: tho Seeth and von Braun 1995. 317.


1996 1998 2000 2002 2004


Trend (exponential)


S- m m -


. .


1 1 1 1. m










Table 5-Grain production, consumption, and net trade, 1993-2005
Indicator 1993 1995a 2000a 2005a
(thousand metric tons)
Total grain production 99,094 90,000 84,000 90,000
Total domestic demand
(use + losses) 106,125 95,467 90,201 90,496
Grain used for feed and
mixed feed production 58,534 49,722 44,750 44,750
Grain used for seed 16,395 14,756 14,756 14,756
Grain used for food 26,942 27,224 27,229 27,225
Grain used for other industrial
processing' 2,578 2,341 2,185 2,341
Losses' 1,676 1,424 1,281 1,424
Projected balanced -7,031 -5,467 -6,201 -496
Actual net trade' -11,200 -8,000 n.a. n.a.
Sources: Manellya 1995; FAO 1993, 89; authors' calculations.
Note: n.a. indicates not available.
'Forecast/estimate.
bNumber of cattle and pigs is assumed to be 10 percent below 1995 estimates.
'Losses are calculated as a share of estimated production, based on 1993 proportions.
dimport requirements and/or stock change.
'May include losses beyond the official loss figures stated above.


Much will depend on how well incentives to
increase agricultural production are transmitted to
the farm sector and on the opening up of inter-
regional trade opportunities. Incentives remain weak
because of ineffective price information systems and
high transaction costs in the food system. The oppor-
tunities for trade are unlikely to be exploited rapidly
given the increased segmentation of food and agri-
cultural policy as authority has shifted to the regions
(oblasts), the state of infrastructure, and frictions in
the marketing system. Rather it seems likely that the
large metropolitan areas, such as Moscow and
St. Petersburg, will become increasingly dependent
on food imports instead of stimulating the acceler-
ated development of domestic food industries. In an
urban society where income distribution is increas-
ingly skewed and time for food preparation is short,
the demand for high-quality and convenience foods
will lead to increased import demand.


Russian agriculture will remain in transition
for a long time. Risky labor and food markets and
the inaccessibility of financing are causing the
expansion of small-scale farming and the home
production of food. Managerial deficiencies and
market imperfections are hindering a revitalization
of large-scale farming. The former public food-
processing industry has yet to adjust to consumer
needs and preferences and is hamstrung by man-
agement and technology problems. Small-scale
processing is developing rapidly but is not yet in a
position to cater to the needs of the larger urban
centers. Thus, while agroecological conditions
may permit agricultural output to show a strong
response to deregulation and related incentives in
the long run, institutional and policy constraints
and poor capital use in agriculture continue to
inhibit the efficiency and growth of the Russian
food economy.
















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Joachim von Braun is professor for food economics and food policy at Christian-Albrechts-University, Kiel,
Germany. Harm tho Seeth is a researcher at Christian-Albrechts-University. Eugenia Serova is director of the
Agriculture Division and Olga Melyukhina is a researcher at the Institute for the Economy in Transition,
Moscow.







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