The expenditures on implementing all measures enumerated in the Report are projected to reach about 200 billion rubles within the three years, which is 127% above indicators of the previous three years and 7-10 percent points above the anticipated inflation rate. In other words, it’s suggested to increase expenditures on agrifood policy, although this increase won’t be very significant.
Further authors of the Report detail the specified strategic goals through lower level tasks and measures, define accomplishment indicators, budget expenditures and basic outcomes. Measures are divided in two groups – program and non-program. The Report ends with estimation on budget expenditures’ efficiency.
Skipping formal logic and stylistic errors as well as drawbacks due to the Report’s format specified by the Ministry of economic development, we would like to point out its three basic deficiencies.
1. Import substitution is declared to be the main vector of agricultural policy for the nearest future.
And even the suggested growth of grain export is pre-conditioned by satisfaction of domestic livestock producers’ demand. In other words, the offensive export policy is secondary to import substitution.
But such policy dooms the country’s agrifood sector to very low growth rates in the medium term tied to the growth of incomes in lower income groups and elevation of tariffs for housing and communal services. It’s clear that after domestic production occupies the niche of ousted import, its growth will depend on the growth of incomes in those population strata that spend money increment on food products, i.e. people with low incomes. An additional curb on this demand will be higher personal spending on housing and communal services. According to our estimates the demand for food sector’s output can expand by not more than 4% per annum. Besides, the import substitution strategy proposed in the Report implies higher domestic prices (larger investments, protectionist measures, etc.) that given the big share of expenditures on food will result in shorter demand (especially for livestock products with high price and income elasticity).
The constraining of grain export with the view to cut prices for grain feeds and thus to support livestock production is also an inefficient tactic. Such an artificial lowering of costs in animal and poultry breeding at the expense of smaller profits in grain growing won’t make the agricultural sector at large more dynamic. The more so as the period free of government intervention in the price situation showed that Russia has clear comparative advantages on the world market of grain and rather vague prospects on the world market of meat. In this situation the support of export will be less costly for the budget and more efficient for accelerating agrifood sector growth than the substitution of import.
At the same time the Report pays small attention to the support of export – only grain is mentioned although Russia exports a much wider range of agricultural and food products and does it quite stably.
Besides, the proposal to support grain export looks rather strange – it’s conditioned by satisfaction of domestic requirements. Who will ascertain these requirements and the degree of their satisfaction What will be the mechanism of constraining export under this regime In any case it sets up an additional barrier to export leading to lower competitiveness of Russian grain on the world markets.
2. The Report’s authors base upon the supposition that technical modernization and investments definitely lead to the solution of all the sector’s problems, i.e. growth of production, higher competitiveness and employment. Their delusion about employment is the most evident. The history of the world agrarian development in the recent 50-70 years shows that technical modernization in agriculture entails a sharp drop of farm employment. Thus supporting technical modernization we should at the same time be prepared to face growing need for government expenditures to create alternative job opportunities in rural areas.
It’s less apparent that in the short and medium run modernization of production may and most frequently does result in the loss of market competitiveness. Our studies of agriholdings in the south of Russia showed that these biggest farm producers lose price competition just because of large investments. This in no way implies that production shouldn’t be modernized but the government support in this field should be very balanced.
There is an obvious distortion in favour of technical renovation of primary agricultural production in the Report – due to some lower mystical “inertia” processing is believed to need modernization less desperately. But in fact even the most recent developments in Russia after the 1998 crisis showed that it is the technical modernization of processing that drives growth forth all along the food chain. Food industry was the first to experience the investment boom triggered by 1998 crisis that later (both logically and historically) spread to the agricultural sector.
Finally, the Report presumes that technical modernization will diminish loss-making in agriculture.
This is all the more utopian. Modernization of the most efficient farms and the corresponding growth of their output will on the contrary result in further marginalization of less efficient farms and without a properly functioning mechanism of bankruptcy – in higher average rate of loss-making in the sector.
3. The Report clearly proclaims that due to the forthcoming accession of Russia to WTO the state support to agrifood production should be strengthened since the sector will be affected by the inflow of imported goods. Our estimates prove that this assumption is not justified.
Let’s examine outcomes of applying market access provisions of WTO Agreement on Agriculture.
At present the average import tariff on agricultural and food products in Russia is less than 15%. By the level of market accessibility we are already “ahead” of many countries: only New Zealand, Australia and Kazakhstan have lower rates. Further reduction of import tariffs will have no effect on the domestic market at large (although it can influence markets of some products). The final bound import tariff in the current negotiation position is 19%. So, even after the implementation period the average tariff will be above the current one.
There are also fears that subsidizing of export will be constrained. We’ve asked some exporters to answer the question what are the barriers to supply to foreign markets. It turned out that many of them find domestic policies to be the basic hindrance – the government not only fails to support export but hinders it in every possible way. That’s just the accession to WTO that implies lifting of all these barriers. It urges Russia to adjust national legislation to the world norms harmonized with other countries.
They stipulate support to exporters as well as domestic producers.
The third kind of fears is the lowering of domestic support as compared with the base period (indicator of aggregate measure of support) that is fraught with production decline. In this connection we would like to call attention to several figures. Our negotiation position is to set the support “ceiling” (aggregated measure of support - AMS) at 9 billion dollars by the end of implementation period. But even all the measures (both “green” and “amber box”) included, the annual federal budget expenditures projected in the Report do not exceed 3 billion dollars. Even if regional and local budgets spend on agricultural policy twice more funds than the federal budget (that is unacceptable in principle), the total expenditures on the agrifood sector won’t surpass the permitted level of aggregate support.
One more document adopted in April 2005 is the Resolution “On setting of conditions and criteria for determining the amount of subsidies and Rules of their allocation from the federal budget to budgets of the RF constituent members for rendering state support to the agrifood sector”. According to it in 2005 regions will get federal transfers under all federal programs only in case of their co-financing from the regional budgets. The programs subject to this rule are subsidizing of pedigree stockbreeding, elite seed growing, delivery of seeds to northern regions, support to flax and hemp production, planting and maintenance of perennial plantations, subsidizing of interest rate on credits, compensation of expenditures on agricultural chemicals and insurance.
This will make all regions implement the named programs in order not to lose federal transfers (i.e.
each region will have a program of supporting, for instance, production of flax and hemp). The efficiency of respective federal programs as well as of spending regional budget funds on their cofinancing will be extremely low. Besides, regions will become short of funds for implementing their own programs that are often more efficient than the federal ones and are more adjusted to regional priorities of agricultural development.
However, one can suppose that such a proposal is an attempt to mitigate the outcomes of federal reform that deprived federal authorities of the competence to carry out their own agrifood policies.
Adoption of this Resolution is an attempt to preserve such competence at least by means of cofinancing.
E Serova., O.Shick Foreign trade Under the influence of favorable state of affairs on the world market expansion of Russian exports is continuing. As before, the ruble strengthening stimulates increase of import deliveries. Thus, the Russian foreign trade turnover growth rates remain very high.
To attract foreign investments, beneficial rates have been introduced for imported car components since April 15, 2005 for industrial assembly regime.
In February 2005, the Russia’s foreign trade turnover, calculated according to the balance of payment methodology, made up USD 25.1 bn, which is by 35,7% greater in comparison with February 2004. Exports were estimated at USD 17 bn (rising by 40,9%), imports - USD 8.1 bn (rising by 25%).
As compared to January 2005, the Russia’s foreign trade turnover increased by 14,6%, export of goods - 11,8%, import - 20,9%.
In February 2005, the Russia’s foreign trade surplus made up USD 8.9 bn, by 4,7% higher than the indicator of January this year, and by 56,1% - similar indicator of February 2004.
2000 2001 2002 2003 2004 Balance Export Import Source: Central Bank of the RF Figure 1. Major Indices of the Russian Foreign Trade (bn dollars) In February 2005, exports to non-CIS countries amounted to USD 14.8 bn, which by 46% greater than a year before. The major growth factor remains favorable (for Russian exporters) state of affairs on the world market.
According to the Bank of Russia, in February 2005, compared with January 2005, the prices, with account of the export structure as aggregated by goods, including about 70% of its cost, rose on average by 1,3%. In the first two months of 2005, compared with relevant period of 2004, the prices have risen by 30%.
Reduction of the world oil prices in the first decade of February 2005 can be explained by OPEC decision to leave without changes the oil production quota against a slight weakening of oil demand because of warming on the north-east of the USA. In the second and third decades of the month rise in oil prices continued. This was caused by reduction of the U.S. stock of crude oil and oil products and revising upwards (by 1,5 million barrels per day – to 84 million barrels), by the International Energy Agency (IEA), the forecast of growth of the world demand for energy resources in 2005. Earlier, IEA forecasted the demand growth by 1,4 million barrels per day. It had also been emphasized that the growth of oil supplies to the world market will markedly lag behind the growth of demand.
As a result, in February 2005 vs January, the average price of oil Brent increased by 4,3% - to USD 44.8/barrel, the oil Urals went up by 0,8% - to USD 40.6/barrel. In the first two months of 2005, as compared to January-February 2004, the average oil Brent price was higher by 40%, Urals - by 41%.
In February 2005, the prices of oil products were on average higher by 5,4% than in previous month (diesel fuel got up by 3,5%, gasoline by 6,1%, fuel oil - 8,9%). In the first two months of 2005, compared with January-February 2004 the prices of oil products became on average by 36% (diesel fuel - by 48%, gasoline - by 26%, fuel oil - 19%).
In February 2005, compared with preceding month, the prices for natural gas in Europe went up by 0,5%, in the U.S. went down by 0,2%. In February 2005, compared with January-February 2004, the natural gas in Europe rose by 41%, in the U.S. - by 7%.
In February 2005 vs previous month, the world prices for products of the Russian fuel and energy complex rose on average by 1,1%. Following the results of the first two months of 2005 they were by 37% higher than in the relevant period of 2004.
Rising of prices for non-ferrous metals had been caused chiefly by favorable forecasts of economic development in the countries – major consumers of these metals, raising Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Jan Apr Okt Apr Okt Apr Okt Apr Okt Apr Okt of investment demand for non-ferrous metals on the part of different funds, and also by the dollar rate dynamics with regard to main currencies.
In February 2005 vs January, the prices of non-ferrous metals rose on average by 3,6%, including aluminum to go up by 2,3% (to USD1883 per ton), copper - by 2,5% (to USD 3254 per ton), nickel - by 5,6% (to USD 15350 per ton). On average, for the first two months of this year versus JanuaryFebruary 2004, the prices of non-ferrous metals were higher by 8,3% (aluminum cost was higher by 13%, copper - by 24%; nickel went down by 1%).
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