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Fig. 64. Russian exports and imports of flour, thousand tons Growing exports of oilseeds In recent years export supplies of sunflower oil are growing (Fig. 65). This trend originated in 2000 and was conditioned by expansion of processing facilities and larger domestic output of vegetable oils. As a result in 2005 Russia became a net exporter of sunflower oil while preserving its status of net exporter of sunflower seeds.

2002-2003 2003-2004 2004-2005 2005-2006 (Sept.June) oilseeds incl. sunflower seeds rapeseeds vegetable oils Source: WJ InterAgro.

Fig. 65. Exports of oilseeds and vegetable oils from Russia, thousand tons A new trend on the Russian market of oilseeds is the growing exports of rape seeds (Fig. 66, Fig. 67). In recent years the world market of this crop is intensely developing due to the expanding manufacturing of biological fuel out of it.

RUSSIAN ECONOMY IN trends and outlooks 2005-2006-Source: WJ InterAgro.

Fig. 66. Exports of rapeseeds from Russia in 2005/2006 and 2006/2007 MY, thousand tons 2005-2006-Source: WJ InterAgro.

Fig. 67. Exports of rape meal from Russia in 2005/2006 and 2006/2007 MY, thousand tons July June May April March August January October February December November September July May June April March August January October February December November September Section The Real Sector Regulation of rice import In January 2006 the import duty on rice was elevated from 10% but not less than 0.03 EUR per kg to 0.07 EUR per kg. This measure resulted in some curtail ment of imports and an upsurge of domestic prices beginning from 2006 (Fig. 68, Fig. 69). In December 2006 import of rice to Russia was banned completely entail ing one more price leap (Fig. 69).

2005 Source: WJ InterAgro.

Fig. 68. Imports of rice to Russia, thousand tons 15 14 14 13 13 12 12 Source: WJ InterAgro.

Fig. 69. Average prices for rice #1, rubles per ton EXW June July May April October January March August February September November December 09.11.12.01.02.03.05.06.07.06.07.08.08.09.10.12.01.RUSSIAN ECONOMY IN trends and outlooks We would remind that the regulation of rice import became more active begin ning from 2003 when duty thereon was raised. This measure also resulted in higher prices. Historically rice is grown in few regions of our country (primarily in Krasno dar kray) unable to meet market demand in full. Some quantities of rice have al ways been imported from abroad but they have never been large enough to de press domestic production of this crop.

Regulation of sugar import In December 2003 a new mechanism of sugar market regulation was intro duced in Russia the variable import tariff. Its effect was lessened by the actual lack of constraints on supply of sugar from the CIS countries accounting for 90% of the total Russias sugar imports. In order to settle the problem customs control over import of sugar from these countries was stiffened by means of taking sam ples to prove the commoditys origin. Besides, in order to synchronize measures designed to regulate import of selected sugar based products tariffs thereon (EUR/ton) were imposed. The mechanism of sugar import regulation resulted in lar ger domestic production of sugar beets. In 2006 sugar output exceeded 3 million tons a historical record for Russian sugar industry.

Source: New Informational Technologies.

Fig. 70. Russian imports of sugar from Belarus, tons A special problem is the duty free import of beet sugar from Belarus. Under this guise the country exported to Russia cane sugar that according to customs regulations is subject to import duty. Its obvious that such situation affected not l t r y i y y e h r er c ay n ul us pr ber ber J g ua M A Ju mb to mbe m nuar Mar e e a Au ebr J Oc ec F epte Nov D S Section The Real Sector only Russian producers but also the RF budget. After the stiffening of control over import of sugar from the CIS countries supplies of white sugar from Belarus re duced (Fig. 70). To finally settle the problem the two countries signed an agree ment according to which Belarus assumes self restriction of white sugar export to Russia: in 2007 180 thousand tons will be supplied, in 2008 100 thousand tons. In 2005 Belarus exported to Russia 346 thousand tons, in 2006 190 thousand tons of sugar19 while the total Russian sugar imports in 2005 amounted to 145 thousand tons, in 2006 to about 100 thousand tons20.

3.5.7. Agrifood policies In 2004 2006 important changes were made in the mechanism of budget support to agriculture. In compliance with Federal Law No. 95 of July 4, 2003 and Federal Law No. 199 of December 29, 2004 the subsidizing of agriculture was transferred to the competence of Federations members. These laws delineate farm sector regulation competences only for 2005 but both the 2006 budget law and the proposed draft budget for 2007 also base on their provisions. As a result the share of federal budget in the consolidated budget expenditures on agriculture fell to a record low level 23% (Fig. 71).

Jan.-Nov. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Federal Regional Local Source: www.minfin.ru Fig. 71. Structure of consolidated agricultural budget The vesting of regions with exclusive powers to regulate agriculture will have the most destructive effect on the sector. First of all, regions donors able to fi According to railway statistics of New Informational Technologies.

Since there is no customs border between Russia and Belarus, supplies from this country are not included in import totals.

RUSSIAN ECONOMY IN trends and outlooks nance support to agriculture on their territories are primarily located in the climatic zones that are the least fit for farming. The shifting of farm budget supports gravity center from the federal to regional level leads to the encouraging of agricultural production in these regions implying non efficient public resource utilization.

Second, for already many years regional support results in trade wars be tween regions, attempts to oust neighbors from the market by means of direct sub sidies to local producers, bans on agricultural and food products transit, etc. And all this took place despite high share of federal funds. The transfer of agricultural financing authority to regions will support the trend. In other words, this decision of the RF Government brings in the domestic market all the negative effects of protec tionism on the world agricultural markets that the WTO Agreement on Agriculture strives to eliminate (meanwhile Russia wants to join this organization with its anti protectionism principles).

Outcomes of transferring agricultural support authority to the regional level The share of farm sector in the economy of regions, having the highest budget capabilities to finance it, is generally low. Its objectively conditioned by the fact that these regions are located in areas with the worst natural conditions for ag ricultural production. Fig. 72 shows the distribution of Russian regions by their budget capabilities21 and the role of farm sector in the economy22. Its obvious that the correlation between these two indicators is clearly negative.

According to these indicators all Russian regions can be divided in 4 groups.

Since the area of regions in Fig. 72 stretches from the left upper corner to the right lower corner, groups 1 and 3 are more numerous than the two remaining.

Lets examine the shifting of agricultural production to non agrarian regions with high budget capabilities that started after the transfer of farm support authority to the regional level (Fig. 73). Its interesting to track the strengthening of this trend as time passes. Two years passed since the new delineation of competence was enacted. In the first year grain production was not biased at all first, regional sub sidies are primarily targeted at supporting livestock sector and, second, the time lag of policy effects in crop production is longer due to technological specifics.

However, by November 2006 the shifting of grain production to non agrarian though rich regions became apparent: their share in the total national grain output grew by 1.4% as compared with 2002 2004. The role of high income non agrarian regions in production of meat became more important as well in 2005 their share in the total Russian output of slaughter livestock and poultry increased by 3.4% as compared with the 2002 2004 average, in January November 2006 by 4%. The Index of budget capabilities: Find=EXPind+TRANSFind; EXPind=EXP2002 2004/N2002 2004, where EXP average expenditures of regional budget in 2002 2004, N2002 2004 regions population in 2004; TRANSFind=TRANSF2002 2004/EXP2002 2004, where TRANSF2002 2004 average transfers to the re gions budget from the federal budget in 2002 2004.

Index of farm sectors role in the economy: AGRind=AGR2002 2003/GDP2002 2003, where AGR2002 2003 av erage gross agricultural output, GDP2002 2003 average gross regional product in 2002 2003.

Section The Real Sector 2006 indicators displayed bias in the production of milk the share of the first group grew by 2% while that of traditional agrarian regions fell by 4%.

The presented results show just the general trend a serious shift of produc tion could not occur in just one year. But even this marginal bias resulted in a cer tain loss of the sectors efficiency and one should understand that as time passes both the bias and the efficiency loss will become greater.

1,1,1,1,0,-0,2 0 0,2 0,4 0,6 0,8 0,0,0,y = -1,2493x + 1,-0,R2 = 0,-0,Budget capabilities to finance agriculture (index) Source: calculated using data of the RF Ministry of Finance and the Federal Service of State Statis tics.

Fig. 72. Distribution of regions by budget capabilities and the role of agriculture in their economy The need to retain at least some functions in subsidizing agriculture in order to avoid the above mentioned negative effects made the Ministry of Agriculture change the respective system by converting some subsidies into inter budget transfers to the agrifood sector. Beginning from 2006 subsidizing of pedigree stockbreeding and elite seed breeding, subsidizing of interest rate on credits, sup port to insurance and even supply of seeds to northern regions are financed only in the form of inter budget transfers. First, it makes the agricultural budget non transparent less than one half of subsidies to agriculture is financed under the sub title Agriculture of the functional expenditures classification while the rest is included into the title Inter budget transfers. Second, this type of subsidizing se riously distorts regional agricultural policies. Since federal transfers are granted on the co financing terms, all regions start to 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 pro grams as well as of spending regional budget funds on their co financing will be ex tremely 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 ad justed to regional priorities of agricultural development.

economy Role of agriculture in the regional RUSSIAN ECONOMY IN trends and outlooks Group 1. High incomes (Find>0.9), low share of agricul Group 2. High incomes (Find>0.9), high share of agricul ture (AGRind<0.2) ture (AGRind>0.2) 2005 2006 (I XI) Grain: 0.5% +1.4% Meat: +3.4% +4.0% Milk: 0% +2% Group 4. Low incomes (Find<0.9), low share of agricul Group 3. Low incomes (Find<0.9), high share of agricul ture (AGRind<0.2) ture (AGRind>0.2) 2005 2006 (I XI) Grain: 0.06% 1.3% Meat: 3.6% 5.5% Milk: 0% 4% Source: calculated using data of the Federal Service of State Statistics.

Fig. 73. The changing role of high income non agrarian regions in the national agricultural productionSo, the principal problem of agricultural budget is the provisions of Federal Law No. 95. Unless they are abandoned, it will be impossible to implement normal agrifood policies.

National Project Development of the agrifood sector 2006 became the first year of implementing the National Project Develop ment of the agrifood sector. Initially the Projects term was 2 years but later the decision was taken to extend it into 2008 2009.

In 2006 2007 the National Projects financing should amount to nearly 35 bil lion rubles (Table 67). This is quite a large sum in 2006 funds allocated to the Pro ject will account for 20% of the total federal expenditures on agriculture. In 2009 the National Project will get almost 48 billion rubles.

The priority National project Development of the agrifood sector has three components: Accelerated development of livestock sector, Facilitation of small scale farming and Providing of young specialists (or their families) with affordable dwellings in rural areas.

The following basic measures are envisaged to fulfill the task of accelerated development of livestock sector:

1. Extended availability of low interest long term (up to 8 years) credit resources for construction and modernization of livestock complexes. The principal im plementation mechanism is the subsidizing of interest rate in the amount of 2/ The role of N group in production of a selected product (Share) was calculated by the formula:

Share= (Qi/QRF), where Qi is the output of this product in i region within N group, QRF the total out put of this product in Russia.

Section The Real Sector of the Central Banks discount rate on credits to commercial banks for the term up to 8 years for construction and modernization.

2. Larger supplies under the system of federal leasing of pedigree livestock, ma chinery and equipment for livestock production. The principal mechanism is the enlargement of Rosagroleasings authorized capital. Interest on the use of Rosagroleasings authorized capital for supplying pedigree livestock is cut to 0% per annum making leasing cheaper by 20% on the average. The term of leasing machinery and equipment to livestock complexes is extended to years.

3. The guaranteed rate of foreign trade protectionism in livestock production. The principal mechanisms are the setting of quotas and customs duties on meat in 2006 2007 and further till 2009 in accordance with the existing inter governmental agreements and the abolition of import customs duties on tech nological equipment for livestock production having no domestic analogues.

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