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The large scale of agricultural productionin Russia conditions accumulation of a great number of land shares in one hands(a person or a legal entity). This accumulation can be attained by eitherpurchase or rent, the latter being spread much wider. In both cases theexisting practice of conditional shares has advantages. It presumes that anowner of such a share has the absolute right to parcel out a physical landplot, but until he does that the location of his plot is not specified. A landshare is a sort of option to be sold, purchased, rented, inherited, etc. Thismechanism enables an entity wishing to acquire a large land area foragricultural production to accumulate the needed number of shares and only thento apply for parcelling out a land plot (or several plots). As a result theproblem of land plots’ consolidation (that is inevitable in case of acquiring physicalplots22) is evaded. Consolidation requires time and funds and thus canavert potential investors from the agrarian sector.

The second advantage of renting a shareover renting a physical plot is its preferability for the share owner makinghim more willing to rent out. In case a share is rented, the tenant can get thecorresponding land plot that is most suitably located (consolidated with otherrented or purchased plots). After the term of the rent is over, the share ownermay wish to parcel out a plot for his own needs. If the location of formerlyrented plot doesn’tsuit him, he can return it to collective land use and to parcel out anotherplot. In case the location of a rented plot is specified once and forever, itsowner may not wish to rent it out or its location may not suit the potentialtenant and he will refrain from renting.

One more shortcoming of the governmentconcept is the setting of upper limits on individual and corporate landownership. The alleged reason for that is the need to exercise antimonopolycontrol. But, first, ownership of land doesn’t presume market monopoly;second, limits on land ownership will have no antimonopoly effect given thelack of limits on land tenancy; third, these limits will be hard to control andwill become one more source for corruption.

Taxation inagriculture

At the end of December 2001 the Presidentof the Russian Federation signed the Federal Law "On introducing amendments andsupplements to Part II of the RF Tax Code and to some other RF legislative actson taxes and duties". This document authorizes the transition to singleagricultural tax, the rationality of which has been debated in the agrarianestablishment and the RF Legislative Assembly for several years. Farm producerswill now have to pay a special single agricultural tax that replaces the bulkof former taxes and duties and the amount of which depends on land area. Landis appraised on the basis of cadastre values. The single agricultural taxincorporates all taxes (except VAT, personal property taxes, various duties andexcises) and transfers to the Pension Fund. The newly set tax period is threemonths.

In fact, this tax basing on land area inhectares is a sort of presumptive tax. In the world the latter is usuallylevied on small enterprises. There are few small producers in the modernRussian agriculture. It's true that up to one half of gross (but notcommodity!) agricultural output is produced in individual household plots.However, the absolute majority of them are legally not subject to taxation. Theshare of private farmers in the sector's gross output is only 7-8%. Besides,the most productive private farms are relatively large cultivating thousands ofhectares and employing dozens of workers. The basic agricultural producers arelarge-scale enterprises. Moreover, the number of very large farms incorporatedin agroholdings (controlling hundreds of thousand hectares) in the past 2-3years notably grew. Now they will also pay the new single tax.

Since Part II of the Tax Code does notenvisage any profit tax exemptions for agriculture, this tax is also includedin the single tax. The amount of single agricultural tax is based on theprevious period performance, i.e. it includes tax that agriculture should have(but legally did not) pay on profits actually received in 2001. As a resultfarms that were most profitable last year will now bear the heaviest taxburden.

Moreover, the new law doesn't treat"agricultural entities of industrial type (poultry, greenhouse, fur farms,livestock complexes, etc.)" as agricultural producers despite their being themost intensive ones. This means that beginning from 2002 their tax burdenbecomes much heavier since they start to pay profit tax and lose social androad tax privileges.

The federal legislation doesn't enumerate"industrial enterprises" - this work is to be done by legislative bodies of theFederation's constituent members. Since inclusion into such a list deprives afarm of noticeable tax privileges, this procedure becomes a rather powerfultool for influencing large agricultural enterprises. By the way, it came upquite in time: in recent years the effectiveness of pulling such strings ascommodity credits, leasing arrangements and other subsidy mechanisms in regionsgreatly diminished and now they are being replaced with the "taxbludgeon".

One more provision of the law also causesconcern. It states that the single agricultural tax is imposed on "agriculturalland being owned, possessed and (or) used" (i.e an agricultural producer hascorresponding titles to land). In other words, rented land areas are notsubject to taxation. But nowadays most agricultural producers rent farmland byrenting land shares. Land shareholders are not agricultural producers: they areeither employees, or pensioners, or rural social workers, renting their sharesto farms. This means that all land rented in the form of shares gets exemptedfrom taxation and an agricultural enterprise pays the single tax only on ownedor used land areas the share of which is relatively small.

And finally, the rational for establishinga 3-months tax period is arguable. In case the law-makers really wanted toimprove taxation in agriculture, they would have proposed to change the paymentperiod for all taxes rather than to introduce the single agricultural tax to bepaid every 3 months. It's a common knowledge that agricultural production isseasonal. Producers get major money receipts in the second half of a year afterthe crop is harvested and marketed. In the first half of a year they primarilyspend their funds. Thus it would be most adequate to collect the bulk of taxes(or the single agricultural tax) at the end of a marketing year. (By the way,this is the case in Ukraine - the only country of the world (except Russia)applying the single agricultural tax). The transition to 3-months period of taxpayment in agriculture doesn't improve the situation in this regard and thereasons for altering the traditional monthly period are not clear.

In other words, the special regime oftaxing agriculture creates new problems for the agrarian sector rather thansolves the existing ones. Thus we dare suppose (and hope) that it won't beeffective for long.

Regulation of agrifoodmarkets

The key novelty of market regulationpolicies in 2001 were grain interventions.

In 2000 in the Program of social andeconomic development of Russia till 2010 the Government declared its intentionto begin interventions on the grain market. At the end of the year theconference headed by Prime Minister approved the program of developing grainproduction in the country that also incorporated intervention provisions. Itwas decided to use the receipts from selling raw sugar import quotas (thetender was held in November) for funding the interventions. In other words,grain market interventions no longer raise doubts and therefore since thecorresponding Government Resolution was adopted in summer 2000, their procedurerather than expediency is being discussed.

Indeed, the 2001 crop was rather good andprices were consequently falling. It could seem that in this situation stateinterventions on the grain market are quite justified: it's reasonable tosupport grain producers when prices slide down. But this is so only at thefirst glance. Grain was and continues to be one of the most profitableagricultural products. Lower prices will probably reduce profitability of grainproduction but not to the extent to make it low-profit and threatening theeconomic well-being of grain producers.

One more argument in favour ofinterventions is the seasonal nature of grain production. Farms usually have tosell the harvested crop in autumn. Statistics show that by December mostagricultural enterprises have no grain stocks. Traders are thus the ones whobenefit from higher spring prices. An attempt to more equally distributereturns from marketing grain between producers and traders is quite anacceptable explanation for state purchase interventions. However, they werecarried out only in November and therefore benefited grain market operatorsrather than agricultural producers.

Besides, a purchase interventionirrespective of the way it's carried out supposes the purchase of grain by thestate at the intervention price. In case the market price is below theintervention one, these purchases help to raise it up to the set level (thelevel of intervention price). In case the market price is higher nobody willsell grain to the state. It's obvious that given such a system there should bea guarantee against an unconstrained inflow of imported grain to the domesticmarket. Otherwise, the grain purchased by the state will be replaced by theimported one, the desirable growth of price won't be attained and the wholeoperation will lose sense. That's the way the mechanism of minimal guaranteedprices worked in the EU: a variable import tariff on the regulated product wasimposed in line with the intervention price. Nothing of the kind is envisagedin Russia: the mechanism of grain interventions is worked out by the Ministryof agriculture, import tariffs are in charge of the Ministry of economicdevelopment and there are no coordinated tactics in this domain. It’s fortunate that the interventionprice was set at a relatively low level and thus didn’t encourage penetration ofKazakhstan’s grain tothe Russian market.

Actually interventions were carried outwithin 6 days in November. Wheat # 3 was purchased although all expertsasserted that the price for fourage wheat (# 4) experienced the deepest drop.The intervention price interval was set at 2300-2700 rubles per ton dependingon the region. 250,200 tons of wheat were bought to the total amount of 675.3million rubles (or 33.76% of the 2 billion rubles allocated for this purpose).Only 3 companies sold grain to the state and did it expectedly at the maximumprice and from the stocks that had been built long before the interventionsstarted. Thus, these efforts didn’t really influence grain producers.

It’s still not clear what the statewill do with the purchased grain. In any case, its sale on the marketwon’t affect pricesand will only help to return the funds spent on purchase andstorage.

Inputsubsidies

In 2001 the most successful effort in thisrespect was the support of seasonal credit to the agrifood sector. The programof subsidizing interest rate on bank credits to agrifood producers (initiatedduring 2000 harvesting) was continued. Two thirds of the CentralBank’s refinancingrate as of the date of the credit’s granting are reimbursed within the limits of funds envisaged forthis purpose by the law. We have already underlined the successfulness of thisprogram (see the financial performance section). Back in March 2000 the stateRussian Agricultural Bank (Rosselkhozbank) was formed for granting softcredits to agricultural producers. But it started to perform these operationsonly in September 2001. In compliance with the government Resolution by the endof the year the bank is to spend 1 billion budget rubles on creditingharvesting works. According to preliminary estimates the bank succeeded indoing that. But as different from other banks engaged in commercial creditingof the agrifood sector, it distributed budget funds. There is a danger that incase budget transfers to this bank are enlarged, it will start to compete withcommercial banks and the process of extending normal bank credits to theagrifood sector that is currently underway will be hindered.

In June the government adopted ResolutionOn improving leasing activities in the agrifood sector. The need for revisingthe federal leasing program became evident long ago and we continuously wroteabout it. Still, the recently taken decisions aggravate the problem of inputsupply even more. The Resolution envisages creation of State Unitary EnterpriseRosagroleasing whose authorized capital will accumulate all budget fundsallocated to leasing support. The former Rosagrosnab monopoly is replacedwith a new one inheriting all the existing problems. However, the transfer ofauthorities from one organization to another requires time and seems to be thecause of an actual failure of the leasing program in 2001.

In June the government at last took thelong needed decision On the rules and terms of restructuring agriculturalenterprises’ andorganizations’ baddebts in 2001. It sets the rules of restructuring agriculturalproducers’ debts tothe federal budget and non-budget funds as well as fines and penalties imposedon them. In case the terms of restructuring the principal debt are met and thecurrent payments are made in time, all fines and penalties as of January 1,2001 are written off. This scheme detriments agricultural producers who havesettled the principal amount of debt and owe only penalties and fines. Still,we find that this decision will have a strong effect on the agrifoodsector’s performancein 2002.

Foreign traderegulation

The regulation of agrifood foreign trade in2001 remained actually the same as in the previous year: stronger tradeprotectionism on the one hand and taxation of exports - on theother.

Import duties on caramel and starch wereraised. The RF Government Commission on foreign trade protective measures foundthat the import of these items to Russia (primarily from Ukraine) detrimentsRussian producers.

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