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The agriculture’s financial performance wasdetermined by the positive development trend in the past two years and thestart of restructuring debts to the budget. Some segments of the agrariansector became quite profitable (e.g. the profitability of grains in someregions amounts to 400%). Together with the substantial tax privileges it makesagriculture attractive for investors. Capital comes from external industries,e.g. fuel and energy. Vertical holdings continue to develop in the sector.Adoption of the new Land Code will intensify this process and encourage furtherinflow of capital to agriculture in the near future.

In 2001 investments inagriculture’s fixedcapital increased more than 4 fold as compared to 1997 (Figure 42). In thepost-crisis years they grew faster than investments in food industry and thegeneral economy.

Figure 42

Fixed capital investments,1998=100%

Source: RF State Committee forStatistics.

In the first half of 2001 direct foreigninvestments in the primary agricultural production grew by 1/3 (i.e. by 5million dollars). The major part of them came from Panama being actually arepatriation of Russian-origin capital rather than real foreigninvestments.

The outcome of implementing the program ofsubsidizing interest rate on bank credits to the agrifood sector for the firstfull year round was the boom of respective credits. They grew 6 fold ascompared to the previous year (which was not the worst one in this respect)while the total amount of bank credits in 2001 was up only 2 fold. Theenvisaged budget spendings on subsidizing the interest rate (1.3 billionrubles) were funded in full. 212 banks granted credits amounting to 16.5billion rubles to over 8 thousand agrifood enterprises. The major creditor wasSberbank16 that has never before been engaged in crediting the agrariansector (53% of the total amount of subsidized credits, or 3% of thebank’s creditportfolio), then follow Rosselkhozbank17 (7%), Alfa-Bank (4%, or1.4% of the bank’scredit portfolio) and Vozrozhdenie18 (3.2%, or 10% of thebank’s creditportfolio)19. Rosselkhozbank actually distributed in the form of credits 1billion rubles received from the budget (accounting for 6% of the totalsubsidized credit). Other banks conducted normal banking operations:accumulation of deposits and investment of funds in the form of credits toagriculture.

In 2001 the financial performance ofagricultural producers continued to improve. In the first of the year the shareof loss-making farms declined by 0.4% while the total profits amounted to 14.1billion rubles (by the end of the year the Ministry of Agriculture estimatesthem to reach 20 billion rubles, or 6 billion rubles above the corresponding2000 indicator).

On the other hand, the sector actively getsrid of failed producers. By the end of 2000 bankruptcy proceedings wereinitiated against slightly over 1 thousand agricultural enterprises and privatefarms, by May 2001 - against 26.1% more agricultural producers (totally theyaccount for 25.7% of bankruptcy proceedings in the country)20. Therestructuring of debts will accelerate the process.

Nominal budget outlays for the agrariansector grow since 1999. However, in 2002 their share in the total federalbudget expenditures is smaller (Figure 43).

Figure 43

Federal budget expenditures onagriculture

Source: RF Laws On 2000 federal budget,On 2001 federal budget and On 2000 federal budget.

Besides, the amount of federal fundsactually received by agriculture is below the budget provisions. InJanuary-September 2001 the federal financing of the sector equalled 13.8billion rubles which is only 63% of the respective amount envisaged in thebudget for this purpose. This is quite a low level (as compared to financing ofother budget items) resulting from the fact that the Ministry of Agricultureworked out funds’allocation schemes only in April-July 2001 and some of them were adopted aslate as November.

In January-September 2001 the share offederal budget in the total budgetary expenditures on agriculture amounted toabout 30% as compared to 24% in the previous year. Thus, the federal governmentregains its positions in regulating the agrifood sector.

Due to the seasonal nature of agriculturalproduction the total amount of budget spendings is not the only thing thatmatters - equally important is their distribution by months (Figure 44).It’s essential foragriculture to get budget funds before seeding. Meanwhile, in 2001 theyreached their maximum in May and June. At the year start the financing wasscarce and fell again in July. However, by the beginning of harvesting (inAugust) the sector received a large share of budget funds. Better financing inOctober-November is due to the adoption by that time of funds’ allocation schemes under manyprograms.

Figure 44

Federal budget expenditures on agricultureby months, %

Source: Ministry of Finance.

In 2001 the types of budget support toagricultural producers remained actually the same as in the preceding years.Financing of soil fertility improvement was prioritized. Crop and livestockproduction development programs also received almost the full amount ofenvisaged funds. However, most types of state support are not efficient. Amongthem is the currently prioritized program of compensating producers’ expenses on mineral fertilizers.Special studies showed that it doesn’t help to improveproducers’performance.

Budget funds are still used to compensate apart of agricultural producers’ spendings on seeds of grains and oilseeds despite their being themost profitable crops. The reasons for that are very doubtful since themarginal product in grains and oilseeds production fully covers the marginalcost of purchasing elite seeds, and thus producers are quite able to pay forthem themselves.

All the mentioned programs of supportingagricultural producers were preserved in the 2002 budget.

Agrarianpolicies

Landissues

The most remarkable achievement of 2001agrarian policies was the adoption of new RF Land Code by the StateDuma.

The fate of this law is rather dramatic:its various versions were being discussed in the State Duma since 1996 but onlynow the adoption of a more or less sound document became possible. Contrary tothe common notion there was a Land Code in the country adopted back in 1990.When the new Russian Constitution was enacted, this Code turned out to be quiteobsolete and many of its provisions were annulled by the 1993 President Decree.Still, the Code remained in force and together with other normative actsregulated land relations in the country. And what's more, the then operativelegislation declared the existence of private land ownership in the country(including agriculture) and permitted to conduct basic land transactions exceptfor farmland mortgage (that was prohibited by the 1998 Law on mortgage). It'sessential to keep all this in mind when assessing the true importance of thenew Land Code: the document doesn't signify a revolutionary legitimisation ofprivate land ownership in Russia but is a step towards comprehensive andcomplex land legislation adjusted to the new stage of the country's social andeconomic development.

In fact, three drafts of the Code wereintroduced to the State Duma. First, the old version worked out by the Agrarianfaction back in 1996 with multiple amendments introduced later. Once it hasalready been vetoed by the President. This version was obsolete at the verymoment of its initial introduction. And these were not substantial limitationson agricultural lands' transferability that mattered - after all, they couldhave been abrogated in time, - but the imperfection of the document itself: itwas poorly written in legal terms, didn't solve all the problems of landlegislation, could not be reasonably amended afterwards and, thus, in time hadto be replaced with a new Code. Second, the bill worked out by the Right ForcesAlliance faction. By now, this Code is most complex and up-to-date,corresponding to the world trends and at the same time reflecting landtransformations that took place in the country during the reform years.Finally, the third bill worked out by the Government. This is a compromiseversion, although the compromise is attained not by averaging the first twoversions but by incorporating the basic provisions of the second version and bylaying aside the most serious drawbacks of the first one for furtherexamination. In other words, the Government version accepted the logic of draftCode proposed by the Right Forces Alliance but excluded from it issues relatingto agricultural lands' transferability.

The adoption of Land Code in its currentversion signifies a great progress in terms of politics. All the previousattempts to pass progressive land legislation failed voted down by the agrarianand communist opposition in the State Duma. The passage of the Code by the Dumaevidences a new balance of political forces in the country. Moreover, it sendsa positive signal to economic agents. Though private land ownership in thecountry has long been legitimated (as we have mentioned above), virtually bothbusiness and officials were temporizing as continuous debates on landlegislation made the situation unstable and acquired property rights were notguaranteed. So, this is the first important role of the adoptedCode.

Its second role is purely legal: it createsa legal basis for regulating land relations and brings together numerous lawsthat served this purpose earlier. The procedure of acquiring and transferringland property titles is thus simplified, opportunities for rent seekingtherefrom are largely eliminated, owners’ rights become betterprotected.

We find that the Code has two basicshortcomings.

First of all, it is primarily targeted atregulating land relations outside agriculture. At present about 2/3 offarmlands and only 6% of urban lands have been privatized. Agricultural landswere subject to large-scale land reform (here we do not speak of itsqualitative outcomes) while lands in cities and towns were not. The major partof urban land belongs to municipal authorities that withhold from selling itsince land property is an important source of local budgets’ receipts and a good mechanismfor manipulating economic entities, to say nothing of rent seeking in theprocess of allotting land plots. The new Code's adoption doesn't change thesituation: the permission to sell and to buy land in cities (by the way,already being in force) will by no means make city authorities do it at theirown will. Thus, the new Code just preserves the existing status quo in the urban land problem.In these circumstances the only way to solve the collision is to adopt anefficient law on enforcing the Code that will establish the procedure ofprivatizing land in cities.

The second problem unsolved by the Code isthe determination of lands' category. Beginning from the Soviet period acategory of land is determined by the fact of its allotment to some specificuse. For example, agricultural lands are lands allotted to farming. Given thestate land monopoly it was then logical and operational. But when land isprivately owned, plots are no longer allotted - instead, they are acquired bymeans of civil transactions (purchase, inheritance, etc.). Formally, accordingto the above mentioned rule the fact of purchasing a plot of agricultural landdiscontinues its belonging to lands for farming category. But none of the threeproposed versions of the Land Code revised the obsolete system of landsclassification and this is going to be a notable hindrance to land relationsdevelopment in the country. An up-to-date land zoning is needed and thesolution of this problem could have become a subject of another, auxiliary lawthat was also passed this summer - the law on land management. But this law isfar from being adequate to present requirements.

The year end witnessed extensive debates onfarmland transferability law. By now 4 drafts of the bill are introduced to theState Duma, the government’s concept has been discussed at several forums.

On the whole, the concept is quite aliberal document taking into account existing land practices in the agrariansector, giving full scope for further development and lifting some ungroundedand needless restrictions.

In particular, the document deprivesregions of the right to set their own restrictions on land property disposal.This provision is already included in the Land Code but there is a danger thatit will be once again brought up for discussion when examining the new landlaw. The government concept defines it as a principal one. This is importantsince different regional land regimes enlarge transaction costs of agrarianholdings often operating on the territory of several regions.

The second merit of the Concept is thevirtual lifting of skill requirements to land property owners. Practice showsthat such requirements pose financial rather than qualification barriers topotential land owners and from the point of view of society as a whole are anadditional feeder for corruption.

The right of foreign individuals and legalentities to own agricultural land is restricted in few cases. To our mind,given the permitted land ownership by legal entities, any restrictions ofpersonal foreigners’rights become a fiction since they are easily evaded. Thus, the choice betweenrespective permission or ban is actually the choice between social andpsychological appeasement of population (that is known to be generally againstforeigners’ landownership) and the international rating of the country21.

Still, we find that the most seriousbottleneck of the government’s Concept is the virtual abolition of land share tenancy practice.In case an owner of a land share wants to rent it, he’ll have first to parcel out hisphysical land plot. To our mind, this will become a dramatic hindrance toland transfer in agriculture that at present goes on primarily in the form ofland share tenancy.

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