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3. The conclusion of the Ukraine accession to the WTO progam, which is ahead of ours, is highly possible. It is also possible that the signing of the bilateral agree ments with the Ukraine will be a difficult process.

The situation with the negotiations on the system questions, i. e. the discus sions on the Working Party report, which is the third direction, is also difficult. The latest wording of the report was presented in autumn 2004. In March 2006 the last, 30th meeting of the Working Party was conducted. The fact that, according to the information available, the date of the new meeting has not been scheduled, testifies the absence of the subjects to be discussed. It can be supposed that one of the problems with report writing is not content problem, but staff problem. Besides over the last years Russia adopted a number of laws, which were not discussed at the meetings of the Working Party but can raise the questions among its members.

These laws are connected with the Special Economic Zones, state orders, special international sanctions, new amendments to the Customs Code, Tax Code, Civil Code, intellectual property. Besides, any new legislation acts that have been or will be soon adopted should be presented by Russian side for discussion. This will also take some time.

The system of meat quotas distributions, state trade enterprises regulations, agreements on industrial assembly cause dissatisfaction of a number of partners.

The talks on the agricultural issues, comprising the fourth direction, are, in our opinion, on quite an early stage of negotiation process. The conclusion of these can be accelerated only by agreeing with the conditions suggested to us.

Section The Real Sector 3.5. Russian agrifood sector: basic trends in 3.5.1. Agricultural performance General outlook After several years of rapid recovery growth following the 1998 crisis Russian agriculture continues growing at a slower pace (Fig. 42). This growth is primarily driven by crop production (the respective indices equaling 107.5% in 2004, 103.7% in 2005 and 101.3% in 2006) while livestock breeding in 2005 2006 dis played marginal growth after contraction in 2004.

Crop production still accounts for over half of farm output although its share is gradually shrinking.

The current output of Russian agriculture is slightly over of the pre reform level. After a short decline following the 1998 crisis imports started to restore. Ex ports grow quite rapidly too but their increase is smaller. As a result the negative balance of trade in agricultural and food products continues to expand. So, the key factors of agricultural growth in 1999 2001 are exhausted and further progress re quires other stimuli.

-----Source: Federal Service of State Statistics.

Fig. 42. Russia: percent change of annual gross agricultural output in 1985 In addition to intra sector factors, growth was strongly hindered by macro economic trends. For instance, the strengthening of ruble during the examined pe riod lowered the competitiveness of domestic output on the home market (by 5%) and the competitiveness of exported products on the world markets. The rising 2006 as % of RUSSIAN ECONOMY IN trends and outlooks prices for fuels and oils strongly impaired profitability of grain production and even tually induced contraction of areas planted in grain crops.

At the same time structural shifts are taking place that enable us to speak of positive developments in the sector. As mentioned in 2005 annual survey, the process of producers bifurcation is underway some of them are actively devel oping, modernizing production and involving investments while others become more and more marginal and go bankrupt. The latter segment of the agrifood sec tor pulls the average efficiency and growth indicators down.

Producers bifurcation proceeds in line with further shaping of regions with in tensive farm production. Just 7 regions Moscow, Leningrad and Novosibirsk oblasts, Krasnodar and Altay krays, Tatarstan and Bashkortostan republics cur rently produce one third of the countrys milk output. In 2005 milk production in these regions grew by an average 0.6% (0.1% average weighted) while the total national indicator fell by 3%. 1/5 of the domestic output of whole milk products is produced in 3 regions Moscow, Saint Petersburg and Krasnodar kray10. The con centration is all the more noteworthy as in the Soviet economy production of milk was dispersed all over the country and in the last decade of Soviet period milk cat tle inventories demonstrated the biggest increase in Magadan and Murmansk oblasts, in Kamchatka and Sakhalin. In other words, zones of intensive production of some agricultural products are forming. These regions have better average indi cators of productivity and profitability; although their growth rates may be not im pressively high, its quite explainable given relatively large production volumes.

The sector structure of agriculture is shaping as well: some sectors prove their competitive advantages on international and domestic markets while others are shrinking at a higher or lower pace. For instance, the output of sunflower seeds, vegetables and potatoes is growing and is now above the Soviet period level (Fig. 43). Production of grain is primarily constrained by domestic demand limita tions and vague perspectives on the world market.

Despite generally poor performance of the livestock sector, some segments therein demonstrate very high growth (Fig. 50). For instance, the annual growth rates in poultry meat production amounted to 17%. The intensive production of pork is growing as well.

The situation in food industry is similar. Output of some products (e.g. vege table oils and white sugar) has already surpassed the pre reform level. Production of a number of food items has been nearly restored e.g. sausages, pastas, mar garine and some other products. Production of meat and milk products is con strained by populations purchasing power but is still growing (Table 53).

Real personal incomes increased by 10%, retail food turnover by 10.2%. It means that the overall elasticity of demand for food remains still rather high. This fact can also be one of the explanations of the speedy rise of prices for meat being one of the most income elastic products. The structure of meat consumption is op timizing. In Russia the share of beef in the overall meat consumption is very high. In 2005 sales of poultry grew faster than total meat sales (by 10.3% versus 5%). At Data of the Federal Service of State Statistics.

Section The Real Sector the same time, the demand for cheese and fruits (products that are largely con sumed by higher income groups) expanded even more by 10% and 11.4% re spectively11.

A positive development factor was a certain improvement in rural social sphere. For the first time wages in agriculture grew faster than in mining or manu facturing. Wages earned in farm production still constitute the basis of rural resi dents well being. Employment in rural areas was up 1.6 percent points as com pared with 2004. Although the shifts are not yet large, its the trend that is important.

All these positive processes are going on in spite of an actual withdrawal of federal authorities from the agrifood sector regulation. Budget support of the sec tor is in fact transferred to the regional level while measures still implemented at the federal level are largely non efficient.

Crop production Crop production in Russia is very unstable and largely depends on weather conditions. At the same time some sectors demonstrate high competitive advan tages both on domestic and world markets, rapidly restore production on a new technological basis while others are gradually shrinking. For instance, the output of sunflower seeds, sugar beets, vegetables and potatoes is growing at a high rate and is now above the Soviet period indicators (Fig.43). Growth of sunflower pro duction began from the very start of reforms. For the most part it was extensive, i.e.

areas planted expanded at the expense of other crops (first of all grains). From 2001 yields of sunflower seeds are growing as well producers started applying highly productive hybrids and mineral fertilizers (Table 52), i.e. transferred to inten sive production methods.

120 80 40 0 grain (left axis) sugar beets sunflower seeds potatoes vegetables Source: Federal Service of State Statistics.

Fig.43. Gross output of basic farm crops, million tons Ibid.

RUSSIAN ECONOMY IN trends and outlooks Sunflower and grains compete for the same areas and in Russia there is quite an apparent negative correlation between their acreages (Fig. 44). In the last 5 years areas under potatoes slightly decreased while gross output of this crop steadily increases beginning from 2002. Although the most part of potatoes in the country is produced by household farms (91.4%), the share of large producers in the recent 5 years is getting larger implying expansion of intensive production in potato growing as well.

6700 5700 4700 3700 2700 1700 700 2000 2001 2002 2003 2004 2005 sunflow er sugar beets potatoes vegetables grain crops * grain crops million hectares (right axis).

Source: Federal Service of State Statistics.

Fig. 44. Areas planted in selected farm crops, thousand hectares* Grains remain the basis of Russian crop production, wheat being the domi nant one. Structure of grain production varies a lot by years (Fig. 45) but an appar ent trend is the shrinking of traditional production of rye and a certain expansion of corn production. In the last 5 years gross output of corn increased 4 fold while out puts of rye, oats, millet and buckwheat reduced by 10 20%. One of the factors thereof is the situation on the world markets. The growth of demand for corn was most remarkable in the US due to the rapid development of ethanol production.

The 2005 US Energy Policy Bill stipulates wider use of biological fuel (on the basis of grains) up to 7.5 million gallons by 2012 which is twice above the 2005 level12.

At the same time the domestic factor is also important the growing interest of Russian livestock producers in corn as a fodder crop due to its much better nutri tion value (as compared with wheat).

USDA (2006). USDA Agricultural Baseline Projections to 2015. Baseline Report OCE 2006 1.

USDA. Washington, D.C.

Section The Real Sector 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 2001 2002 2003 2004 2005 wheat rye grain corn barley oats millet buckwheat rice grain legumes Source: Federal Service of State Statistics.

Fig. 45. Structure of Russian grain production: gross output of selected grain crops as % of the total The growth of sugar beet production (Fig. 43) started after the revision of sugar trade regime. In 2003 a new regime of regulating foreign trade in sugar was adopted envisaging introduction of variable import duty. Variable duty is bound to the difference between price at the New York Board of Trade and the domestic support price. This regime resulted in larger acreage under and bigger outputs of sugar beets; besides, the share of beet sugar in the total sugar output increased noticeably (from 26% in 2002 to 52% in 2006 see Fig. 48) surpassing the pre reform level. According to out estimates the rate of white sugar support grew from 29% in 2001 to 49% in 2004 (percent equivalent of producer support estimate PSE). However, the growth of sugar beet production in 2006 is due to higher world prices (Fig. 46) rather than the new sugar regime.

2005 Source: www.mcx.ru Fig. 46. Prices for raw sugar at the New York Board of Trade (Contract 11), dollars per ton July May June April March August January February September RUSSIAN ECONOMY IN trends and outlooks In 2006 the total area planted in sugar beets expanded by almost 24% (Fig. 44). The acreage grew in almost all traditional regions of sugar beet produc tion except Tatarstan Republic (Fig. 47).

160,140,120,100,80,60,40,20,0,2005 Source: Federal Service of State Statistics.

Fig. 47. Areas planted in sugar beets by regions, thousand hectares The productivity of sugar beet production is improving as well. Yields are growing for seven years running; in 2006 the indicator was up almost 40% and av eraged 298 metric centners per hectare.

1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 sugar beets raw sugar Source: Federal Service of State Statistics.

Fig. 48. Production of white sugar out of sugar beets and raw sugar, thousand tons other oblast kray oblast Nijny oblast Tambov oblast Belgorod Tatarstan Voronezh Novgorod Krasnodar Altay kray Mordoviya Ul'yanovsk Tula oblast Oryol oblast Penza oblast Kursk oblast KarachaevoRostov oblast Cherkesskaya Lipetsk oblast Ryazan oblast Saratov oblast Samara oblast Bashkortostan Stavropol kray Section The Real Sector The change in regulation of rice import starting from 2003 also resulted in lar ger domestic production of this crop: its gross output and yields are growing for the third season in succession (Fig.49).

685 -15 2000 2001 2002 2003 2004 2005 Area planted, thous.ha Gross output, thous.tons Yield, 100 kg per harvested ha Source: Federal Service of State Statistics.

Fig. 49. Rice: areas planted, gross output and yields One more notable trend is the rapid growth of rape production in the last three years. According to expert estimates its output in 2006 reached 0.5 million tons versus 0.1 million tons in 2004. The external factor thereof was surely the EU deci sion to enlarge production of biological fuel that in Europe is mainly made out of rapeseeds. Today the EU declares the target to expand the use of oilseeds for pro ducing biological fuel by 2010 5.75% of their gross output should be used for this purpose13. European experts forecast that by 2013 energy production will account for 30%, i.e. over 15 million tons, of the overall oilseeds consumption in the EU ver sus 3.6 million tons in 2003 and 8 million tons in 200614. This could not fail to result in higher prices for rapeseeds. Growth in domestic livestock sector is the internal factor of expanding production of rape a valuable fodder crop. One more deter minant of bigger gross outputs of rape is the fact that in the last year about thereof was produced in Tatarstan known for its rather authoritarian policies in the agrifood sector, i.e. expansion of rape growing in the republic could be due to intra regional policy eventually conditioning higher national indicators.

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