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Besides, livestock (and especially cattle) production is characterized by a long pro duction cycle that is a serious limitation for rapid increase of output as it is. Given the depth of the sectors decline (actually total perishing of pedigree stock breeding during years after the start of reforms, long period required for restoring pedigree inventories, large in vestments needed to increase output) the market could not quickly respond by expanding production.

The 2004 indicators show that constraints on import of red meat have not resulted in growth of domestic production. In January November 2004 output of livestock and poultry for slaughter (live weight) increased by 2.1% but this increase was due to larger output of poultry that made up for the fall of beef and pork output.

The decline in red meat production went in line with a notable drop in both cattle and pig numbers. By December 1, 2004 inventories of cattle in all farms reduced by 6.5% as RUSSIAN ECONOMY in trends and outlooks compared with the same date in 2003 (of them cows by 6.3%), inventories of pigs by 11.3%. Numbers of sheep and goats grew by 3.4%.

Probably, the shown above negative dynamics reflect the general negative trend of the recent years. However, the rates of livestock inventories decrease in 2003 and espe cially in 2004 have notably accelerated as compared with after 1998 averages. Such an accelerated decrease might be a producers strategy reduction of livestock numbers in order to maximize sales at high prices.

A natural response of the market to smaller meat supplies is the growth of prices for raw meat and finished meat products as well as the search for alternative supply channels and products substitutes. The growth of prices for meat on the domestic market started in the middle of 2003 and continued in 2004.

Its a common knowledge that consumption of meat products is very price elastic.

Growth of prices for them negatively affects consumption. But at present this effect is con strained by the increase of disposable personal incomes and is mainly materialized in sub stitution of poultry meat for red meat in the daily ration. Further substitution of the kind will result in an even bigger consumptions lag behind the physiological norm 80 kg of meat per capita a year (currently the actual consumption is about 50 kg).

Given growth of prices for raw meat and high price elasticity of demand for finished products, many processors decided to create/expand their own input basis. For instance, Omsk bacon produces about 2000 tons of pork monthly; Cherkizovsky plant an nounced the purchase of pig breeding farm in Vologda oblast. High prices for meat attract large businesses to the sector: Agros and Agrico are engaged in livestock production, Rusagro reported having created the biggest pig breeding farm in Belgorod oblast that will produce up to 60 thousand tons of pork annually.

Table Price indices for selected groups of food products by the end of period (%) 2004 (as % of the previous month) December December 2004 as % of 2003 as % of October November December December December 2003 Bread and bakery products 100.8 100.4 100.4 116.7 130.Cereals and beans 100.7 100.3 100.0 111.6 117.Pastas 100.5 100.6 100.5 114.6 114.Meat and poultry 102.3 101.7 102.8 119.6 108.Fish and sea products 101.7 101.8 102.4 111.5 109.Milk and milk products 102.6 103.5 102.5 112.8 113.Butter 101.8 102.1 101.8 106.8 111.Sunflower oil 100.6 101.0 100.9 102.1 107.Fruits and vegetables 97.3 102.2 105.4 103.3 95.Granulated sugar 97.9 98.0 99.2 107.5 94.Alcoholic beverages 100.6 100.5 100.8 108.7 109.Food products 101.4 101.5 101.7 112.6 110.Source: Federal Service of State Statistics.

Active investments in domestic livestock production give grounds to forecast an in crease of meat output in the medium term. However, it should be noted that the market of meat is so attractive because of the high prices resulting from active foreign trade regula tion, i.e. current prices may give a deceptive signal overestimating the markets potential.

Growth of domestic meat supply coupled with abolition of import regulation may entail a notable drop of market prices that will question profitability of new large scale investment projects in livestock production.

Section 3.

The real sector The observed in 2004 downward trends in livestock inventories and output of beef and pork despite the effective mechanisms of foreign trade regulation do not allow to make any optimistic forecasts about domestic production of these products in 2005. As a result, there are no grounds to expect any slowing down of price growth on this market.

Table Retail price indices for selected groups of food products (as % of previous December) 2002 2003 2004 2004/1997 2004/Food products 111.0 110.2 110.4 533.5 99.Meat and poultry 102.7 106.8 119.6 632.0 116.Fish products 112.1 107.1 111.5 566.9 99.Butter 112.0 107.4 106.8 429.9 95.Vegetable oil 106.5 107.6 100.9 512.4 94.Milk and milk products 105.9 105.7 102.5 457.1 96.Eggs 106.3 110.5 122.1 483.8 114.Granulated sugar 130.8 95.2 107.5 666.6 82.Bread and bakery products 104.9 125.5 116.7 418.4 111.Cereals and beans 126.4 117.1 111.6 554.1 88.Pastas 106.5 110.2 114.6 429.7 107.Alcoholic beverages 108.9 107.3 108.7 447.6 99.Source: calculated using data of Federal Service of State Statistics.

1,1,1,Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

0,0,2004 2003 Source: calculated using data of Federal Service of State Statistics.

Fig. 58. Ratio of monthly price indices for bread and bakery products and for food products at large RUSSIAN ECONOMY in trends and outlooks 6 5 5 4 4 3 3 2 2 1 1 Wheat No. 3 Wheat No. 4 Wheat No. Feed barley Food rye Source: Group of companies Unidell.

Fig. 59. Russia: prices for grain in 2003 (European part), rubles per ton 6 6 5 5 4 4 3 3 2 2 1 Wheat No. 3 Wheat No. 4 Wheat No. Feed barley Food rye Source: WJ InterAgro.

Fig. 60. Russia: prices for grain in 2004(European part), rubles per ton 1.08.5.12.3.01.6.11.8.05.6.06.4.07.15.08.29.08.10.10.24.10.19.12.12.09.26.09.11.04.25.04.21.11.28.03.23.05.20.06.18.07.6.08.1.10.3.09.9.01.2.04.6.03.9.07.6.02.15.10.29.10.20.08.12.12.26.12.10.12.24.12.17.09.23.01.14.01.16.04.30.04.12.11.26.11.19.03.14.05.28.05.11.06.25.06.23.07.20.02.Section 3.

The real sector 1997 1998 1999 2000 2001 2002 Bread and bakery products Fruit juices Meat, incl. sub-products Source: calculated using data of Federal Service of State Statistics.

Fig. 61. Production of selected food products, as % of the previous year 1997 1998 1999 2000 2001 2002 ---Bakery industry Meat industry Source: calculated using data of Federal Service of State Statistics.

Fig. 62. Growth rates in bakery and meat industries, % RUSSIAN ECONOMY in trends and outlooks 0 50 100 % 150 < 1500 rubles 1500-3000 rubles 3000-5000 rubles 5000-7000 rubles 7000-9000 rubles > 9000 rubles 0 20 40 60 80 100 Consumption of bread several times a day Conformity index Consumption of bread once a day Source: Comcon 2. (R TGI) 2004/3.

Fig. 63. Consumption of bread by consumers with different income levels In supermarkets In large general Income per family member stores <1500 rubles In small shops 1500-3000 rubles 3000-5000 rubles 5000-7000 rubles At wholesale markets 7000-9000 rubles >9000 rubles At street outlets Conformity index 0 50 100 150 200 Source: Comcon 2. (R TGI) 2004/3.

Fig. 64. Trade outlets where consumers with different income levels purchase bread Income per family member Section 3.

The real sector 2,livestock and poultry for cattle pigs poultry slaughter --5,-7,-Source: Federal Service of State Statistics.

Fig. 65. Growth of livestock and poultry production in 2004, % 10% 5% 0% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004* -5% -10% -15% -20% cattle cows pigs Source: Federal Service of State Statistics.

Fig. 66. Change in the total livestock inventories, as % of the previous year RUSSIAN ECONOMY in trends and outlooks 1997 1998 1999 2000 2001 2002 2003 all food products bread eggs Source: Federal Service of State Statistics.

Fig. 67. Price indices for food products, bread and bakery products and eggs (as % of previous December) 45 20 2000 2001 2002 corporate farms household plots individual private farms (left axis) Source: http://www.mcx.ru/dep_doc.htmlhe_id=797&doc_id=Fig. 68. Gross output produced by different types of farm producers (billion rubles, constant 2000 prices) Section 3.

The real sector 2003 38% 43% 54% 58% 4% 3% corporate farms individual private farms household plots Source: http://www.mcx.ru/dep_doc.htmlhe_id=797&doc_id=Fig. 69. Structure of gross agricultural output by types of farm producers 3.5. Research and Development Sector 2004 is expected to become a year of innovation development as based upon key strategic goals set forth by the Ministry of Industry, Science and Technologies for the same period. The goals, however, have been changed as a result of implementation of administrative reform in March and creation of a single Ministry of Education and Science:

the goals have grown in number, while the priority of the decision has become less evident.

Various concept and strategic documents were developed and revised (dramatically in some cases) during the year, and the process is still ongoing.

There are several most significant events of the previous year that are worth being focused on:

reorganizing the system of public management of science and innovations;

developing a concept of reorganization of scientific institutions;

making changes in the system of public financing of science, including that related to transition to a new budget classification and performance based budgeting;

initializing public initiatives on resolution of HR related problems;

expanding business involvement in providing financial support for science, as well as development of private charity;

developing innovations and focusing on private and public partnership mechanism and indirect regulation.

3.5.1. Administrative Reform in Science The administrative reform resulted in creating a Ministry of Education and Science as a replacement for the Ministry of Education and the Research and Development Depart ment under the Ministry of Industry, Science and Technologies. Integration of science and education can be considered an advanced step against the former administrative frame work, which testifies to the fact that the federal government has been adhering to the inte gration trend. Creation of the new ministry has shifted priority from scientific and industrial RUSSIAN ECONOMY in trends and outlooks activity to scientific and educational one. Nevertheless, it is essential that the issues of in novation development were included into the competence of the new ministry14.

Apart from the single ministry, an advisory body Council for Science, Technologies and Education under the RF President emerged15. It replaced the former Council for Sci ence and IT and took over its functions: provide the President with information on the situa tion in the sphere of research and education, develop proposals on topical issues of re search and educational policy, perform expertise of draft federal laws and other regulations. The Council is to meet at least twice a year. Composition of the Council shows that topical research and educational issues that require a principal emphasis of the Presi dent are expected to be selected exclusively by academicians of public academies, pri marily the Russian Academy of Sciences (RAS). A share of representatives from industry based science and public research centers (PRC) in the Council is miserable: wardens ac count for 20% of the total membership. Such inadequate composition may have a material effect on both the selection and fulfillment of the set tasks.

By the end of 2004, a Strategy of the Russian Federation in Science and Innovation De velopment for the Period Ending in 2010 (hereinafter referred to as the Strategy) emerged as developed by the Ministry of Education and Science. It provides for two of science and in novation development, namely inertial one and active one. It also sets up key goals and Strategy implementation periods. The list of tasks includes all aspects concerning science and innovations, which makes it impossible to prioritize. Listed among the key tasks are to strengthen support for fundamental research, improve research and development perform ance, provide integration into the global economy, and develop innovation infrastructure. At the same time, some equally ranked technical tasks are also included, namely to develop in stitution of intellectual property right protection and create technological corridors. In gen eral, the text of the Strategy is implying that political choice has already been made for the benefit of fundamental sciences. It is not, however, indicated how to assess whether a fun damental research is a world class achievement or not. Neither is indicated how one can im prove, indirectly through development of fundamental research, capitalization of perform ance of scientific and technological activity strictly by providing integration of science and education without having direct relationship with business sector.

The section of the Strategy that is dedicated to innovations, provides no mechanisms of interaction between civil and military sectors of science, while only civil science expendi tures are considered as source of financing innovations. In addition, the issues of inter action between innovation process participants (this is the basic weakness of the modern Russian innovation system); neither reorganization prospects in the sector of applied re search nor the future development of public scientific centers is described. Finally, it is not only within the scope of the Ministry of Education and Science, which has a direct control of merely 1/4 of civil science expenditures, to provide support to the innovation sector, but also other ministries. The document provides no interaction whatsoever between them.

The Strategy is likely to be updated and become an essential guideline in the devel opment of science and innovations for the nearest five years, provided that it is made co herent to the Strategies of other industries supporting innovations, as well as the Strategy of educational development. To date, however, the text of the Strategy suggests that the government has no clear picture of a consistent model for the scientific and innovation sector.

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