1 Agricultural Economy in Transition

/,amf I STUDIES OF ECONOMIES IN TRANSFORMATION

Food and Agricultural Policy Reforms

Public Disclosure Authorized in the Former USSR An Agenda for the Transition Country Department III, Europe and Central Asia Region

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THE WORLD BANK

STUDIES OF ECONOMIESIN TRANSFORMATION PAPERNUMBER 1

Food and AgriculturalPolicy Reforms in the FormerUSSR

An Agendafor the Transition

Country Department III Europe and Central Asia Region

The World Bank Washington, D.C. Copyright C) 1992 The International Bank for Reconstruction and Development/THEWORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A.

Papers in the "Studies of Economies in Transformation" series present the results of policy analysis and research on the states of the former USSR. The papers have been prepared by World Bank staff and consultants and issued by the World Bank's Europe and Central Asia Country Department III. Funding for the effort has been provided in part by the Technical Cooperation Program of the World Bank for states of the former USSR. In light of the worldwide interest in the problems and prospects of these countries, dissemination of these findings is encouraged for discussion and comment. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. Any maps that accompany the text have been prepared solely for the convenience of readers; the designations and presentation of material in them do not imply the expression of any opinion whatsoever on the part of the World Bank, its affiliates, or its Board or member countries conceming the legal status of any country, territory, city, or area or of the authorities thereof or concerning the delimitation of its boundaries or its national affiliation. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to the Office of the Publisher at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, 27 Congress Street, Salem, Massachusetts 01970, U.S.A. The complete backlist of publications from the World Bank is shown in the annual Index of Publications,which contains an alphabetical title list (with full ordering information) and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, Department F, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'Iena, 75116 Paris, France.

ISSN: 1014-997X

Libraryof Congress Cataloging-in-PublicationData

Food and agricultural policy reforms in the former USSR: an agenda for the transition / Country Department III, Europe and Central Asia Region. p. cm.- (Studies of economies in transformation ; paper no. 1) Includes bibliographical references (p-. ISBN 0-8213-2261-3 1. Food supply-Former Soviet republics-Congresses. 2. Food supply-Russia (Federation)-Congresses. 3. Agriculture and state- Former Soviet republics-Congresses. 4. Agriculture and state- Russia (Federation)-Congresses. I. International Bank for Reconstruction and Development. Eurcipeand Central Asia Region. Country Dept. III. II. Series. HD9015.F67F66 1992 338. 1'9'0947-dc2O 92-32834 CIP Foreword

Policies of the last seven decades in the former sector from central planning to reliance on mar- USSR weakened incentives, created highly cen- ket principles. The policy reform agenda for the tralized and inefficient food production and dis- short term focuses on a strategy to ensure an ade- tribution systems, and distorted retail food prices quate supply and distribution of food, appropri- and consumption patterns. Since the mid-1960s ate price, subsidy, trade, and credit policies dur- sustaining these policies required increasingly ing the transition, and initial steps needed for larger budgetary subsidies and resulted in severe land reform and privatization. The policy reform structural imbalances in the food and agricultural agenda for the medium term outlines a strategy sector. The combination of rising macroeconomic aimed at restructuring farms and enterprises and instability, breakdown in the food procurement establishing the necessary conditions for a well and distribution system, balance of payments functioning market system. This agenda includes problems, and rapid decline in interstate trade reform of trade policy, development of a diversi- culminated in the food crisis of fall 1991. fied rural credit system, and appropriate institu- In November 1991, the government of the tional and infrastructure support from the gov- former USSR invited the World Bank to assem- emient. The report also outlines an agenda for ble a team of international experts to develop an the international community to provide neces- action plan for food and agricultural policy re- sary financial and technical assistance in trans- forms, in collaboration with the Commission on forming the food and agricultural sector. Technical Cooperation with the World Bank, The study is intended for policymakers and which was specifically established by the gov- their advisors in the Russian Federation and other ernment for this purpose. The European Bank states of the former USSR. All those who are inter- for Reconstruction and Development (EBRD), ested in the leading role of the food and agricul- the European Community (EC), the Organiza- tural sector in facilitating a successful transition to tion for Economic Cooperation and Develop- the market economy should find the study useful. ment (OECD), and the International Monetary Fund (IMF) were invited to participate in the study. This report is based on a collaborative effort by a team led by the World Bank. The study reviews the state of the food and agricultural economy, outlines policies needed to Russell J. Cheetham prevent its total collapse and foster an early re- Director covery, and develops guidelines and an action Country Department III plan for transforming the food and agricultural Europe and Central Asia Region

iii The initial missions for this project were led by D. Gale Johnson. Richard Burcroff II was the Bank Coordinator for the project and a major contributor. Mohinder S. Mudahar was the Task Manager for the project and prepared the final version of this report.

We are grateful to Victor Dmitriev and Michael Dmitriev from the Commission for Technical Cooperation with the World Bank for their valuable contributions. This report is based on the background Working Papers prepared jointly by the World Bank and the Commission. We gratefully acknowledge the support provided by the European Bank for Reconstruction and Develop- ment (EBRD), the European Community (EC), the Organization for Economic Cooperation and Development (OECD), and the International Monetary Fund (IMF).

An interim version of the report was discussed at an international conference chaired jointly by Aleksandr Shokhin (government of the Russian Federation) and Wilfried Thalwitz (World Bank). Valuable contributions by Edward C-ook and by Karen Brooks, Csaba Csaki, and Michael Gould from the World Bank are gratefully acknowledged. Valuable contributions were also made by the authors of the background Working Papers whose names are indicated in the references section of this report. The report was reviewed by Hans Binswanger, Joseph Goldberg, and Odin Knudsen (World Bank). Data processing support was provided by Brenda Manuel and Sivaguru Balaku- mar. This report was edited by Meta de Coquereaumont. Secretarial support was provided by Peggy Bonnell and Tracy McTernan.

We also wish to acknowledge the advice and valuable comments received from Claude BlanchLi, Jonathan Brown, Bernard Drum, Gershon Feder, Prem Garg, Wafik Grais, Parvez Hasan, Manuel Hinds, John Holson, Jane Holt, Yukon Huang, Gordon Hughes, Lars Jeurling, Adil Kanaan, Daniel Kaufmann, Timothy King, Harinder Kohli, Robert Liebenthal, Millard Long, Constantine Michalopoulos, Michel Petit, Enrique Rueda-Sabater, Jit Srivastava, Everardus Stoutjesdijk, Jacques Toureille, Paulo Vieira da Cunha, Dennis Whittle, Kevin Young, and K. Tanju Yurukoglu of the World Bank; Clell Harral of the EBRD; Knud Munk of the EC; Julian Berengaut of the IMF; and from Dale Adams, Martin Evans, Ken Gray, S. S. Johl, Stanley Johnson, Alexander McCalla, Harold Riley, Stefan Tangermann, and C. Peter Timmer (consultants). Contents

Glossary xii

Acronyms and abbreviations xiv

Overview 1 Objectives 1 Major economic problems and needed policy reforms 1 Recent reforms in the Russian Federation 3 A short-term strategy and agenda for reform 5 A medium-term strategy and agenda for reform 7 Long-term outlook and program implementation 9 1 Agricultural economy in transition 15 Background 15 Place of agriculture in the economy 15 Macroeconomic context for agricultural reform 17 Food problem and supply prospects 21 Objectives and organization of the report 22 2 Trends in agricultural production, consumption, and trade 23 Recent performance in agriculture 23 Crop production 25 Livestock production 31 Trends and patterns in food consumption 36 Trends and patterns in agricultural trade 39 3 A development strategy for food and agriculture 43 Perspective on agricultural and economic reforms 43 Elements of an agricultural strategy 45 Recent economic reforms in the Russian Federation 47

v 4 Measures to improve food supply in the short term 53 Outlook for crop production 53 Outlook for livestock production and adjustment 57 Food imports and international trade policy 59 Food procurement and distribution 64

5 Measures to improve agricultural production and efficiency 69 Farm ownership, organization, and restructuring 69 Land use, soil fertility, and irrigation 77 Supply of critical agricultural inputs 82 Agricultural research and technology transfer 91

6 Policies on food distribution and marketing 95 Evolution of the food distribution system 95 Food wholesaling and retailing 97 Food processing industries 103 Food storage and handling facilities 105 Food transport systems and policies 109 7 Agricultural price policy ancdterms of trade 119 Price policy prior to liberalization 119 Price liberalization and its impact 122 Energy price policy and its impact 129 Agricultural price distortions and terms of trade 131 Market adjustment and price prospects 134

8 Income support policies and the role of subsidies 137 Incomes during the transition 137 Subsidy policy before liberalization 138 Current income support and subsidy situation 140 Subsidy options for the transition 142 Protecting the poor during reform 149

9 Credit policy and financing agriculture 153 Structure of agricultural banking 153 Agricultural credit policy in the short term 154 Financial sector reform over the medium term 157

10 Role of governments and the international community 159 Strategic roles to promote reforms 159 Role of national governments 159 Role of the international community 162 Technical assistance and training 163 Investment in the food and agricultural sector 166

Text tables 171 Annex tables 221 References 241 List of background working papers 242 vi Boxes 1 Summary of selected recommendations 10 2.1 Regional grain production in the Russian Federation 29 3.1 State procurement quotas for selected agricultural commodities in Russia, 1992 50 4.1 Types of state trade in the former USSR 60 5.1 Traditional farm enterprises in Russia 71 5.2 Contribution of personal household plots to agricultural production in Russia, 1989 72 5.3 Private farming and efficiency 73 5.4 Decline in farm machinery fleet in the former USSR 82 5.5 Agrochemical (active ingredients) use in the former USSR 88 5.6 Decline in fertilizer deliveries in the former USSR 90 7.1 Interrepublic dispersion of average procurement prices in the former USSR, 1990 121 7.2 Price liberalization and price determination in the longer-term 123 7.3 Increases in and international parity of retail food prices in Russia 126 7.4 Relative increases in livestock product prices at the farmgate and retail levels in Russia from March 1991 to March 1992 127 7.5 Impact of higher energy prices on food processing costs 130 7.6 Domestic prices, exchange rate unification, and trade liberalization 132 7.7 Barter terms of trade for the crop sector in Russia and the United States 134 7.8 Barter terms of trade for the livestock sector in Russia and the United States 134 8.1 Estimated agricultural producer subsidies in Russia, 1992 141 8.2 Projected total subsidy cost in the food and agricultural sector in Russia, 1992/93 148

Text figures 2.1 Total grain production (bunker weight) in Kazakhstan, Russia, and Ukraine, 1955-91 25 2.2 Area under grain crops in the former USSR, 1955-91 26 2.3 Composition of grain utilization in the former USSR, 1989-91 average 27 2.4 Crop yields in the former USSR and selected countries, 1988-90 average 27 2.5 Total grain area in Kazakhstan, Russia, and Ukraine, 1955-91 28 2.6 Average grain yields in Kazakhstan, Russia, and Ukraine, 1955-91 28 2.7 Regional grain yields in Russia, 1989-91 average 29 2.8 Share in annual cotton production in Azerbaijan and Central Asia republics of the former USSR, 1990 32 2.9 Average livestock feeding requirements in the former USSR and Germany, 1990 36 2.10 Per capita food consumption in the former USSR and selected countries, 1984-86 average 37 2.11 Average per capita meat consumption in the former USSR, 1990 38 2.12 Volume of annual grain imports of the former USSR, 1985-91 40 2.13 Share of selected commodities in annual agricultural imports of the former USSR, 1987 and 1990 41 4.1 Composition of grain production in the former USSR, 1989-91 average 54 4.2 Share in feed consumption by livestock categories in Kazakhstan and Russia, 1990 57 4.3 Estimated annual food imports of Russia and the former USSR, 1989-92 64

vii 4.4 Share of procurement in girain production in Kazakhstan, Russia, Ukraine, and the former USSR, selected years 1987-91 65 4.5 Annual grain procurement and imports of the former USSR, 1986-91 65 5.1 Number and size of state and collective farms in the former USSR, 1960-90 70 5.2 Contribution of household plots to gross value of agricultural production in the former USSR, 1989 72 5.3 Distribution of arable land in the former USSR, 1990 78 5.4 Trend in area under grain crops in the former USSR, 1955-91 78 5.5 Cropping pattern in Russia, 1988-90 average 79 5.6 Estimated irrigable area in the former USSR, 1990 81 5.7 Sources of livestock feed in the former USSR, 1988-91 average 84 5.8 Delivery of agrochemicals to the agricultural sector in Russia, 1986 and 1991 88 5.9 Production and deliveries of fertilizer in the former USSR (in terms of nutrients), 1.986-91 89 6.1 Overview of the food distribution system in the former USSR 97 6.2 Net grain trade in the former USSR, 1987/88 107 6.3 Transport of grain and grain products in the former USSR, period averages 108 6.4 Imports of grain and milled products by seaport in the former USSR, 1988 108 7.1 Procurement prices for selected agricultural commodities in the former USSR, 1981-91 121 7.2 Changes in retail prices for selected food commodities in Russia after price liberalization, 1992 125 7.3 Increase in retail food prices in Russia from March 1991 to March 1992 126 7.4 Increase in agricultural farmgate prices in Russia from March 1991 to March 1992 128 7.5 Farmgate prices for selected livestock products in the United States and Russia, March 1992 132 8.1 Retail food subsidies in the former USSR, selected commodities and years, 1970-90 1.39

Text tables 1.1 Distribution of employment in the former USSR, by sector, selected years, 1975-89 173 1.2 Capital investment in agriculture in the former USSR, 1971-90 173 1.3 Distribution of net material product in the former USSR, by sector, selected years, 1970-90 173 1.4 Distribution of net material product in Russia, by sector, 1985-90 174 1.5 Distribution of employment in Russia, by sector, 1985-90 174 2.1 Grain production in the former USSR, 1976-91 174 2.2 Grain utilization in the former USSR, 1989-91 175 2.3 Composition of grain used as food and feed in the former USSR, 1986-91 175 2.4 Area under grain crops in t-he former USSR, 1955-91 176 2.5 Crop yields in the former UJSSRand in selected countries, 1988-90 average 177 2.6 Annual potato production in the former USSR, 1970-91 177 2.7 Annual oilseed production in the former USSR, 1971-91 177 2.8 Annual sugar beet production, sugar production, and sugar imports of the former USSR, 1971-91 178 2.9 Annual cotton production in the former USSR, 1971-91 178 2.10 Annual livestock population in the former USSR, 1986-92 179 viii 2.11 Private livestock as a share of total livestock population and production, selected years, 1970-91 179 2.12 Average livestock productivity and feeding efficiency in the former USSR, Germany, and the United Kingdom, 1990 180 2.13 Average per capita availability of major food items in the former USSR and a group of other industrial countries, selected years, 1976-88 181 2.14 Annual average per capita food consumption in the former USSR and selected OECD and Central and East European countries, 1984-86 and 1985 182 2.15 Annual per capita food consumption by republic in the former USSR, selected years, 1970-90 183 2.16 Volume of annual agricultural imports of the former USSR, 1985-91 185 2.17 Value of annual agricultural imports of the former USSR, 1987-90 186 4.1 Annual composition of grain production in the former USSR, 1989-91 187 4.2 Regional grain area, yield, production, and procurement in Russia, 1989-91 average 187 4.3 Projected grain production scenarios for the former USSR for 1992 187 4.4 Estimated grain supply and utilization in the former USSR, 1987/88-1992/93 188 4.5 Estimated grain supply and utilization in Russia, 1987/88-1992/93 188 4.6 Share of total feed consumption by livestock on state and collective farms in the former USSR, by republic, 1990 189 4.7 Estimated production of principal livestock products in the former USSR, 1986 to 1992 189 4.8 Production of principal livestock products in the former USSR, 1986-92 190 4.9 Annual distribution of livestock inventories in Russia, by region, 1990-92 average 190 4.10 Estimated food import requirements of the former USSR, 1989-92 191 4.11 Grain production and procurement in Russia, Ukraine, and Kazakhstan, 1987-91 191 4.12 Annual grain procurement and imports for the former USSR, 1986-91 191 5.1 Number and size of state and collective farms in the former USSR, 1960-90 192 5.2 Contribution of household plots to gross value of agricultural production in the former USSR, by republic, 1989 193 5.3 Regional land use patterns in the former USSR, by republic, as of November 1, 1990 193 5.4 Share of production of major agricultural commodities and population in the former USSR, by republic, 1986-90 average 194 5.5 Cropping patterns in Russia, 1988-90 195 5.6 Distribution of agricultural, arable, and irrigable lands in the former USSR, by republic, 1990 195 5.7 Production of major agricultural inputs in Russia, 1980-91 196 5.8 Size of agricultural machinery and equipment fleet in the former USSR, end-year 1986-90 196 5.9 Deliveries of grain combines, feed harvesters, and corn harvesters in the former USSR, by republic, January-October 1991 197 5.10 Interrepublic trade in tractors in the former USSR, January-October 1991 198 5.11 Interrepublic trade in grain combines in the former USSR, January-October 1991 198 5.12 Interrepublic trade in feed harvesters in the former USSR, January-October 1991 199 5.13 Deliveries of gasoline and diesel fuel to the agroindustrial complex in the former USSR, January-September 1991 200 5.14 Feed supplies in the former USSR, in oat-unit equivalents, 1976-91 201

ix 5.15 Area under fodder crops in the former USSR, by republic, 1990 and 1991 202 5.16 Area under silage crops in the former USSR, by republic, 1990 and 1991 202 5.17 Delivery of agrochemicals to the agricultural sector in Russia, 1986-91 203 5.18 Fertilizer production ancl deliveries to agriculture in the former USSR, 1986-91 203 5.19 Interrepublic trade in fertilizers (nutrients) in the former USSR, January-October 1991 204 6.1 State procurement of selected agricultural products in the former USSR, 1980-90 205 6.2 Overview of estimated losses of agricultural products in the former USSR 206 6.3 Production of major food. commodities in the former USSR, selected years, 1980-90 207 6.4 Production of major food commodities in the former USSR, January-October 1991 207 6.5 Grain production, consumption, and net foreign trade in the former USSR, 1987/88 208 6.6 Transport of grain and grain products in the former USSR, 1986-89 208 6.7 Grain and milled products handled by seaports in the former USSR, 1988 209 6.8 Transportation of food products by mode in the former USSR, 1989 210 7.1 Average retail food prices in the former USSR, 1970-89 211 7.2 Retail prices in state and cooperative trade and in collective farm markets in Russia, 1990 211 7.3 Procurement prices for selected agricultural commodities in the former USSR, 1981-91 212 7.4 Farm input prices paid by a typical state farm in Russia, 1988-89 and 1991 212 7.5 Marketing margins for selected food commodities in Russia, 1990 212 7.6 Retail prices for major food commodities in Russia, by week, 1992 213 7.7 Growth in retail food prices in Russia, 1990-92 213 7.8 Growth in agricultural farmgate prices in Russia, 1990-92 214 7.9 Marketing margins for selected commodities in Russia, March 1992 214 7.10 Comparison of energy intensities in the former USSR and selected countries, 1990 215 7.11 Food processing costs in the former USSR as a share of the total value of output,1987 215 7.12 Cost of production and financial profitability for selected livestock products in Russia, March and May, 1992 215 7.13 Farmgate prices for selected agricultural commodities in Russia, 1990 and 1991 216 7.14 Farmgate and international prices for wheat and maize in Russia, March 1992 216 7.15 Farmgate prices for selected livestock products in Russia, March and May 1992 217 7.16 Farmgate and international fertilizer prices in Russia, March 1992 217 8.1 Retail food subsidies in the former USSR, selected years, 1960-90 218 8.2 Explicit food and agricultural subsidies in Russia, 1988-91 218 8.3 Subsidies as a share of retail prices in the state trade network for major food commodities in the former USSR, 1989 219 8.4 Retail food price subsidies in the former USSR, by republic, selected years, 1970-90 219

Annex tables A1.1 Area and population of the former USSR, by republic, as of January 1, 1991 223 A1.2 Average annual growth in net material product in the former USSR, by sector, 1981-89 223 A1.3 Average annual growth of net material product in Russia, by sector, 1986-90 224 A2.1 Annual growth of agricultural production in the former USSR, 1981-90 224 A2.2 Gross value of agricultura[I production in the former USSR, by republic, 1981-90 225 x A2.3 Production of major agricultural commodities and gross agricultural output in Russia, 1981-91 225 A2.4 Cultivated area for selected crops in the former USSR, by republic, 1989-91 average 226 A2.5 Yield of selected crops in the former USSR, by republic, 1981-91 227 A2.6 Production of selected crops in the former USSR, by republic, 1981-91 228 A2.7 Production of selected livestock products in the former USSR, by republic, 1986-90 average 229 A2.8 Annual feed consumption per kilogram of livestock production on state and collective farms in the former USSR, by republic, 1981-85 and 1986-90 averages 229 A2.9 Net imports of selected livestock commodities in the former USSR, by republic, 1990 230 A4.1 State procurement of selected agricultural commodities in the former USSR, by republic, 1986-90 average 231 A4.2 Annual state procurement of selected agricultural commodities in Russia, 1976-91 232 A4.3 State procurement of selected agricultural commodities in Russia, by region, 1990 232 A4.4 State procurement of selected livestock products in Russia, by region, 1990 233 A5.1 Distribution of land by farm organization in Russia, as of November 1, 1990 233 A5.2 Distribution of cropped area under irrigation in the former USSR, by republic, 1990 234 A5.3 Cropped area under irrigation in Russia, selected years, 1980-90 234 A6.1 Industrial enterprises in the former USSR, by sector, 1970, 1980, and 1987 235 A6.2 Average number of employees by type of industrial enterprise in the former USSR, 1970, 1980, and 1987 235 A7. 1 Share of collective farm markets in total retail trade in Russia for selected commodities and years, 1985-90 235 A7.2 Average annual price increases in the former USSR, 1971-90 236 A7.3 Monthly retail price indices of consumer goods and services in Russia, 1991 236 A7.4 Average procurement prices for selected crops in the former USSR, by republic, 1990 237 A7.5 Average procurement prices for livestock products in the former USSR, by republic, 1990 238 A8.1 Average monthly nominal wages in Russia, by sector, 1985-91 239 A9.1 Outstanding debt of state and collective farms in the former USSR, end of year, 1960-90 239

xi Glossary

Agroprom Agro-industrial organizations (previously affliated with the former Gosagroprom) Agroprombank Agricultural Bank (existed at All-Union and republic levels from 1987 to 1991) Argumenty ifakty Arguments and facts (weekly newspaper) Avtokolum An operating subdivision of an avtokombinat Avtokombinat NMegatrucking enterprise Billion 1,000 million Birzhi Commodity exchanges (singular - birzha) Centrosouyz The Central Union of Consumer Cooperatives Ekonomicheskie nauki Economic sciences (monthly journal) Fermer Private farmer support program Gosagroprom The State Agroindustrial Committee (an amalgamation of the Ministry of Agriculture, various ministries associated with the food industry, and the State Committee for Procurement. It existed at All-Union and republic levels from 1985 to 1990) Gosbank Central Bank (of the USSR and subsequently of a number of successor states) Goskomstat State Statistical Committee (existed at All-Union and republic levels; former republic statistical committees now function independently from one another) Goskomtsen IJSSR State Pricing Committee Gosplan IJSSR Central Planning Agency Gossnab IJSSR State Supply Agency Kefir B3uttermilk Kolkhoz Collective farm Kombinats Large conglomerates of enterprises Minmorflot Ministry of the Sea Fleet (Merchant Marine) Nomenklatura Refers to administrators of political, social, and economic affairs in the command system Oblast I'rovince Planovoe khozyaistvo I'lanned economy (monthly journal renamed Ekonomist in 1991) Rayon District

xii Rosavtotrans Russian Road Transport Conglomerate Rosrechflot Russian River Transport Fleet Rosselkhoz Bank Agricultural Bank of Russia (ABR) Sberbank Savings Bank (of the USSR and subsequently of a number of successor states) Selskaya zhizn Rural life (daily newspaper) Sotsialisticheskaya industria Socialist industry (daily newspaper) Sovkhoz State farm Uslovnye pai Conditional shares (used in farm privatization) Vaskhnil All-Union Academy of Agricultural Sciences Vestnik statistiki Official monthly statistical journal of the former USSR Vestnik sel'skhozyaistevnnoy nauki Journal of agricultural sciences (monthly) Vladenie Limited proprietorship

xiii Acronyms and abbreviations

ABR Agricultural Bank of Russia AKKOR Association of Peasant Farms and Cooperatives of Russia CIS Commonwealth of Independent States CMEA Council for Mutual Economic Assistance c.i.f. cost, insurance, and freight EBRD European Bank for Reconstruction and Development EC European Community FAO Food and Agriculture Organization of the United Nations f.o.b. free on board GDP Gross domestic product GKI Russian Committee for the Management of State Property (in charge of privatization) GNP Gross national product IBRD International Bank for Reconstruction and Development IFC International Finance Cooperation IMF International Monetary Fund IPM Integrated pest management MHE Mechanical handling equipment NBSR Non-Black Soil Region (region of northern half of European Russia encompassing Moscow and St. Petersburg and extending east to the Urals) NMP Net material product OECD Organization for Economic Cooperation and Development R Ruble RIB Rosinterbank (specialized bank for agribusiness within the Russian Ministry of Agriculture) UN United Nations USDA United States Department of Agriculture USSR Union of Soviet Socialist Republics VAT Value-added tax

xiv Overview

Objectives was unable to attract food supplies at official procurement prices. Heavy annual food imports of The policies of the last seven decades in the $15 to $20 billion since 1980 contributed to a bal- former USSR weakened production incentives, ance of payments crisis in early 1990 and closed created highly centralized and increasingly ineffi- off access to commercial credits for commodity cient production and distribution systems, and imports. distorted retail food prices and consumption pat- The 1991/92 food crisis was the result of both terns. Since the mid-1960s, sustaining those price supply and demand related problems. Agricul- and consumption patterns has required larger tural production declined by 7 percent (grain and larger subsidies and has resulted in severe alone by 26 percent) owing to poor weather and structural imbalances in the food and agricultural deterioration in the terms of trade for agricul- sector. This study was undertaken to review the ture. Food imports fell 18 percent as internation- state of the food and agricultural economy of the al creditworthiness was lost in 1991 and trade in former USSR,to advise on policies needed to pre- the Council for Mutual Economic Assistance vent its total collapse, and to foster an early recov- (CMEA) contracted sharply. The volume of food ery during the transition. The study outlines a commodity sales by farms dropped because of program to guide agriculture from central plan- the unrealistically low prices offered by the state ning to reliance on market principles and devel- procurement system. ops an action plan for reforming the food and The state attempted to reverse the accelerating agricultural sector in the Russian Federation and growth of excess demand for food by raising other states of the former USSR. prices in April 1991,but the accompanying package of income supplements more than compen- Major economic problems and needed policy sated for the price increases. Excess demand for reforms food grew even larger, reaching crisis propor- tions. Local governments instituted tight con- Origins of the 1991/92food crisis trols on the export of food and agricultural commodities to other regions, making the market sit- The financial flows needed to sustain growth in uation in food deficit areas that much worse. production and consumption in the 1970s and 1980scontributed substantially to macroeconom- Nature and scopeof neededreforms ic instability in the 1990s.The resulting inflation was an important factor behind the breakdown in The states of the former USSR are initiating major the food distribution system in 1991 as the state economic and agricultural reforms to improve

I economic efficiency and address the underlying economic activity. Extensive work is required in economic problems that led to the food crisis. reforming, and where necessary, creating the legal This process entails macroeconomic stabilization and regulatory framework appropriate for a mar- and economic restructuring, includitig land re- ket economy. There is a need as well to create prod- form, privatization, enterprise reform, and a uct and factor markets, physical marketing infra- greatly reduced role for the government in con- structure, market information systems, and a-ppro- trolling economic activity. Appropriate economic priate conditions for these markets to functicn. decisions will depend on individual producers, Furthermore, integration of the economies of consumers, and traders pursuing their own inter- the former USSR into the world economy is es- ests in the context of well-functioning, competi- sential to realize potential efficiency gains. Inte- tive markets. gration implies the transmission of world price signals into the domestic economy through uni- Macroeconomic stabilization. The options for fication of exchange rates, elimination of tradi- achieving macroeconomic stability are limited. tional state foreign trade monopolies, reason- Monetary policy is intrinsically weak, since all able use of tariffs, and large cutbacks in quotas the states of the former USSR still lack the basic and other quantitative trade barriers, including monetary arrangements necessary for a market the elimination of excessive licensing and regu- economy. Fiscal policy is therefore the key to sta- latory impediments to trade. bilization. The budget deficit must be reduced by both increasing revenues and reducing Sectoral reforms. The food and agricultural sec- expenditures. tor will play a crucial role in economic reform. Producer and consumer subsidies must be The sector accounts for approximately one-third strictly limited. Import subsidies, though justifi- of employment, investment, and output, and able in some circumstances during the transi- over half of consumer expenditures are devoted tion, should be reduced and then gradually elim- to purchases of food and fiber commodities. inated. Ultimately, fiscal adjustment hinges on Price liberalization is needed to correct the se- the ability of governments to stop financing en- vere price distortions that are characteristic of the terprises, whether directly, through hidden sub- command economy throughout the agro-0ood sidies, or through the banking system. complex. For decades the government supported But there are limits to how much spending can the agricultural sector, which was highly ir[effi- be cut. Basic social programs must be protected, cient in its use of labor and capital, by maintain- and investment in the economy is already peril- ing favorable terms of trade and an ad hoc ously low. It is likely that public investment in system of differentiated producer prices. As a re- infrastructure has to rise soon. Revenues can be sult, any price liberalization will entail major increased by raising energy prices and improv- shifts in the pattern and location of agricultural ing the tax system. production, the choice of technology, and the Though sustainable stabilization calls for a fis- structure of farms. cal-first approach, monetary policy cannot be ne- Farm structure and agricultural support sys- glected. Strict controls on credit expansion are in- tems throughout the former USSR are geared al- dispensable for avoiding hyperinflation. In this most entirely to large-scale state and collective sense the explosive growth in interenterprise ar- farms. Property rights are poorly defined, and rears in 1992 is worrisome. Exchange rate expec- management practices preclude effective linking tations are unmanageable without credit limits of remuneration with productivity Fundamental and positive real interest rates. Expectations of changes are needed to improve agricultural effi- cheap, easy credit encourage inventory accumu- ciency Farm restructuring and land reform will lation, currency substitution, and arrears, all of have major implications for resource use, supply which delay adjustment. response, and agricultural production patterns. Monopoly structures predominate in input Structural reforms. Widespread and deep struc- manufacturing and supply and in food procure- tural reforms are required in all the economies of ment, processing, and distribution. Further- the former USSR. Foremost are the breaking up of more, the agro-food system is not designed to existing monopoly structures, encouragement of satisfy consumer preferences in terms of packag- the entry of new firms, and diversifiication of ing, product quality, variety, or availability.

2 Similarly, farmers' preferences have long been rates will reduce the profitability of farms, par- neglected by input manufacturers and distribu- ticularly those with large livestock operations. In tors. Changes would require not only procompe- the long run, however, the agricultural sector tition programs, antimonopoly policies, and eni- can recover, and the potential of the vast and terprise reforms but major new investments in rich agricultural natural resource base can be re- food processing and marketing as well. alized. However, recovery will require restruc- While problems with credit and the banking sys- turing of agricultural enterprises, reducing pro- tem are serious throughout the economies of the ducer subsidies, and linking the remaining sub- former USSR, they are particularly severe in ag- sidies to the curtailment of activities with riculture. Credit discipline in agriculture is ex- negative value added and the adoption of pro- tremely low because for decades the government duction practices consistent with new output has used the credit system to channel subsidies and factor prices. to inefficient farms and allowed the banking system to regularly write off outstanding farm Need for programs during the transition debts. And the rural economy, because of its remoteness, poses special problems for the devel- A coherent program for the transition to a more opment of a diversified banking system. efficient and sustainable growth path is necessary because the market, as it is known in the West, Likely consequences of economic refonns does not yet exist in the states of the former USSR. Several years will be required before the prereq- In the initial phase of economic reforms and uisites for such a market system are in place. macroeconomic stabilization, farms, enterpris- Agricultural sector strategy must ensure finan- es, consumers, and traders are facing, or will cial profitability for average producers but also likely face, the following shifts in economic encourage appropriate structural reforms, facili- parameters: tate contraction of the livestock sector, and instill * Decline in average real per capita income financial discipline and responsibility among the * Reduction in demand for food at higher array of farms and food sector enterprises that prices and lower real incomes emerge. These programs must be accompanied * Shifts in the composition of foods pur- by a progressive reduction in the role of the gov- chased in favor of commodities with low income ernment during the transition. elasticities (bread, potatoes, fruits and vegeta- Within the limitations of state budgetary capa- bles, fluid milk) and away from those with high bilities some financial cushioning will be re- income elasticities (meat and poultry) quired to mitigate hardships during the transi- * Higher relative prices of agricultural in- tion. As a general principle subsidies should be puts of industrial origin, such as machinery, vet- focused on activities that have a future in the erinary medicines, fertilizers, and chemicals market-oriented agricultural economy. The en- * Higher interest rates, and consequently couragement of efficiency and growth must be higher costs for capital-intensive production the ultimate objective. processes, such as the livestock industry How long the transition will last is difficult to * Higher transportation costs that will radi- predict. What is clear is that the structural adjust- cally change regional comparative advantage in ment of the real sector will not be instantaneous food production and processing and will require and may take several years. A phased reduction of substantial shifts in land-use patterns and loca- government intervention in the agricultural sector tion of agroindustries thus offers the best chance of success for the over- * Higher energy prices and hence higher costs all economic reform process. Since the first few of agricultural production and distribution, re- years of the transition are critical, a transitional sulting particularly from energy-intensive mech- strategy should focus particularly on the coming anized operations and agricultural inputs three agricultural years (1992/93-1994/95). * Much higher prices for imported agricultural inputs and output, and increased economic in- Recent reforms in the Russian Federation centives to export. Reduced demand, higher interest rates, rising Confronted with macroeconomic instability and input and energy prices, and higher exchange the possible collapse of food availability in 1992,

3 the government of the Russian Federation added. As of July 1, 1992, about one-third of responded forcefully to the crisis. It liberalized state and collective farms had reregistered; 44 most retail prices in January and March 1992 and percent of those chose to maintain their current liberalized foreign trade and payments, includ- organization. ing unification of the ruble exchange rate on July 1, 1992. The government introduced a stabiliza- Enterprise reforms and privatization tion program that is expected to bring the fiscal deficit down from 31 percent in 1991 to less than Privatization guidelines were announced by the 11 percent by the fourth quarter of 1992. It also Russian Committee for the Management of State initiated structural reform in a number of areas, Property (GKI) for the reform and transfer to including land reform, privatization, market de- private ownership of most state-owned enter- velopment, measures to promote entry and com- prises. Ambitious targets were set in the food petition, financial sector reform, and safety-net sector, notably the intention to privatize at least policies. half the small-scale enterprises in wholesale and retail trade, agricultural and food processing, Price liberalization and food transport by December 31, 1992 through vouchers and competitive auctions. Af- Following liberalization of prices for most agri- ter some initial delay the privatization of iretail cultural inputs and outputs on January 2, 1992, food outlets, agricultural input dealerships, and the food economy has undergone major adjust- several trucking enterprises is now underway. ment in its price structure. The primary exceptions to the general price liberalization were Marketing reform and market development energy prices (which were increased but not freed in May) and prices for a limited :number of To stimulate market development and rapid food commodities (milk and bread). commercialization of farm-to-market and inter- The increases in retail prices in 1992 had a regional transfers, commodity exchanges have marked impact on consumer behavior. The ex- been allowed to expand ahead of supporting treme disequilibrium evident in retail trade in laws and regulations, and the entry of new pri- December 1991, just prior to liberalization, sub- vate firms has been encouraged. However, much sided. Despite price liberalization, however, of the supporting infrastructure remains in the some prices are still heavily influenced by the hands of state-owned enterprises. Thus most state through procurement quotas, monopoly marketing, especially of staple foods, will re- and monopsony powers, and lack of alternative main in the public sector for the next two or marketing channels. three years, managed by large enterprises serving traditionally segmented markets and con- Land reform and farm restructuring fronting little effective competition. The Russian government has retained the sys- Agricultural land reform began in the spring of tem of state procurement orders, but state agen- 1991. A State Committee for Agrarian Reform cies are required to procure agricultural com- was established in March 1991 to oversee the modities at prevailing market prices. In the ab- transfer of land to private farmers. The number sence of robust markets, however, state of registered private farmers jumped from 4,500 procurement prices may be lower than market in January 1991 to 132,000 in August 1992, al- prices and thus provide disincentives to farms to though private farms still account for cinly about sell their marketable surplus to state agencies. 2.5 percent of agricultural land in Russi.a. Abetted by inflationary pressures and local gov- At the heart of land reform is the reorganiza- ernment intervention, the process may lead to tion of state and collective farms. On December problems similar to those of last year. 29, 1991, the Russian government issuedl a decree to reorganize state and collective farrns on the Credit and banking system reform basis of joint-stock companies or cooperatives or to dissolve the farms in favor of the creation of Agricultural banking reform began with liquida- private farms. Subsequently, the option of main- tion of the arrears of the former Agroprombank taining the current organizational structure was and its reorganization into the Agricultural Bank

4 of Russia (ABR). The ABR provides about 60 per- Food production. Grain production for the recent of the total credit for agriculture. It has just gion as a whole should at least equal last year's begun to organize its deposit-taking function production and could be as much as 10 percent and still depends on the Central Bank for the higher. A particularly large increase is expected bulk of its loan funds. in Kazakhstan, but declines are probable in the Since the recent banking reforms the Savings Baltic states and Belarus because of drought. Bank of Russia is permitted to lend to commer- Food uses of grain will increase modestly this cial banks and to handle small amounts of pref- year in response to the shift in domestic relative erential lending to priority sectors, including ag- prices and incomes. Use of grain for livestock feed riculture. The ABR and the Savings Bank will be- is expected to fall because of continued drawdown gin to compete with each other and with the in animal inventories. Seed use and industrial use small but expanding commercial banking sys- will remain stable, but there will be increases in tem for deposits and loans. Interest rates for ag- grain losses in storage, transport, and processing ricultural loans remain subsidized, however. because of worsening infrastructure problems. Production of potatoes and vegetables will de- Producer and consumer subsidies cline on state and collective farms, but anticipated increases on private farms and plots should more Partly in recognition of the need to phase in the than compensate. Though yields for sugar beets transition from plan to market in the food sector, and oilseeds are not expected to recover from last but also in response to political pressures, the year's disappointing levels, production of these Russian government in the spring of 1992 rein- crops is not expected to decline drastically. troduced subsidies (which were reduced sub- On balance, livestock production is expected stantially in January 1992) for producers and to be down 10 to 20 percent this year. Declines consumers. The subsidy program is intended to are particularly severe in Armenia. Increases in improve the financial position of farms and agri- producer prices of livestock products will be cultural enterprises, to limit consumer price in- constrained by lower consumer demand and creases for some staple commodities, and to monopolies in processing. Feed prices and inter- accelerate the creation of private farms. est rates will continue to rise. Terms of trade in the livestock sector can thus be expected to A short-term strategy and agenda for reform worsen even more in the year ahead. Following a very poor feed harvest in 1991, feed supplies will remain tight into 1993, particularly in The sectoral adjustments required in the states of Russia, Belarus, and the Baltic states. the former USSR are enormous. The short-term strategy and agenda for the remainder of 1992 Foodimports. Only Kazakhstan may be in a po- and for 1993 should include actions to ensure ad- sition to add to its grain stocks or to export grain equate food for everyone and to set in motion the this year. The other countries of the region will necessary structural reforms for the food and ag- need to import grain to fill the gap between esti- ricultural sector. mated requirements and domestic production. Grain imports into the region are estimated at 33 Adequate supply and distribution of food million tons in 1992/93, a drop from the 38 million tons in 1991/92. Total food imports of about Except for livestock production (which may de- $11 billion are required for all the states of the cline 10 to 20 percent) food production in 1992 is former USSR in 1992. expected to be similar to that in 1991. Demand is To support adjustment in the livestock sector, expected to fall for income-elastic food products import policy should promote substitution of pro- and remain unchanged or increase slightly for in- tein meal for coarse grain imports and provide fi- come-inelastic food commodities. Assuming im- nancing for imports of veterinary pharmaceuti- ports of grain and other food products in 1992/93 cals. Livestock inventories ought to be reduced by are not significantly below those in 1991/92, the as much as 15 to 20 percent from 1991 levels. Im- aggregate food supply should be adequate to plementing these measures will reduce demand meet food requirements. However, regional for feed grain, improve the health of livestock, shortages are developing. and boost animal productivity.

5 Food distribution. The food distribution and Enterprise reform and privatization marketing system needs to be strengthened to ensure that food is available in the main centers So that price increases at the retail level are of demand. Governments must be prepared to passed on to producers, competition must be monitor food availability and prices in "hot strengthened in the marketing chain through de- spots" and to transfer food to those areas should monopolization and privatization. The first Fhase serious shortages develop. To be able to do this, of the structural transformation of the food pro- the government must retain access to food assis- duction, distribution, and marketing chain tance to sustain food imports. Imports will be should include the following steps: needed as an interim measure to strengthen the * Accelerate privatization for small-scale en- capability to deliver food to areas where food is terprises, retail stores, and truck transport in short supply and to maintain adequate nutri- * Minimize licensing requirements, operating tion levels among vulnerable groups. standards, and other impediments to new firm entry and enterprise diversification Supply of critical agricultural inputs * Redefine the role of enterprise associations to head off the formation of regional cartels or The use of farm machinery, fertilizer, pesticides, monopoly structures and veterinary supplies has declined in the last * Rescind traditional territorial restrictions on year. This decline is consistent with the worsen- state input dealerships, procurement, transport, ing in agricultural terms of trade and the deteri- processing, and marketing enterprises oration in interstate trade and the distribution a Reduce state procurement quotas for agri- system. The lack of foreign exchange has re- cultural commodities effective January 1993, with duced the availability of imported inputs to the aim of eliminating them by 1994/95 critical levels. Foreign assistance is needed for * Permit the leasing or lease-purchase of financing these agricultural inputs in the short- some state-owned assets, particularly trucks, term. Since the cost of imported inputs will be warehouses, and retail space in public buildings. affected by the exchange rate, the stability of the rate is a key factor in the success of the short- Trade liberalization term program. At an exchange rate of 125 rubles to the dollar, a subsidy would be re(quired on As a matter of urgency the new states need to col- imported inputs during the transition to com- laborate in eliminating barriers to interstate pensate for radically higher domestic prices fol- trade. Governments may need to intervene di- lowing the exchange rate unification. rectly during the early transition to ensure adequate trade flows of bulk commodities, suc:h as Land reform and farm restructuring grains, other food commodities, and agricultural inputs. But in all such cases new firms must be The land reform program is one of the crucial encouraged to engage in trade operations, and factors in building a new incentive framework state trading should stop once private firms and for increasing agriculture production. Land distribution channels have taken hold. To en- reform will take years to complete, so the courage the growth of private trading, govern- process must begin in earnest now. At the same ments may need to make trade credits and other time, it is important that this process not disrupt incentives available to private traders so that this year's winter planting or the spring they have an equal opportunity to participate in planting in 1993. To minimize disruption, rural trading activities. people should be thoroughly informed of their options through widespread public information Credit policy and financing agriculture campaigns, and the transfer of management and the exercise of the option to leave state and Credit for agriculture is seriously constrained by collective farms should be encouraged only the general credit contraction and the reluctance after crops have been harvested, although the of banks to lend to agriculture during this peri- allocation of land and other assets can begin od of uncertainty. The short-term agenda should immediately. include actions to:

6 * Direct credit to agriculture (within existing Food and agricultural policy group fiscal and monetary constraints) as a temporary measure All types of price information need to be widely * Eliminate subsidized interest rates to agri- disseminated at the producer, processor, and re- culture by raising interest rates for agricultural tail levels, along with information on commodi- loans to commercial levels ty stocks and production forecasts needed for * Allow land to be used as collateral in se- informed market decisionmaking. Such infor- curing agricultural loans mation will also assist in monitoring market in- * Take strong measures to enforce loan col- tegration and detecting monopolistic behavior. lection, including enactment of legislation on It is further recommended that a high-level loan collateral. Food and Agricultural Policy Joint Working Group be formed in each country to assess vari- Producer and consumer subsidies ous policy options based on sound economic analysis. Such a group should include represen- The decision to reinstate producer and consum- tatives of the ministries of agriculture, finance, er subsidies could endanger the stabilization economy, the Central Bank, other relevant program and dampen the incentives to adjust. agencies, and a select number of foreign experts While some transitional subsidization is neces- on food and agricultural policy. sary, a different approach-and a smaller volume of subsidies-is needed. Three actions are A medium-term strategy and agenda for reform recommended: * Cut back the volume of producer subsi- Over the medium term a strategy for strength- dies to no more than 5 percent of GDP and con- ening the food and agricultural sector would sumer subsidies to no more than 2 percent of include continued land reform and farm re- GDP in 1992/93 structuring; progress on enterprise reform, e Establish targets to phase out transitional privatization, and market reform; improve- subsidies completely by the end of the 1994/95 ments in agricultural research and extension; agricultural year, except for income support for development of sound land and water use poli- the truly poor and vulnerable cies; further reform of trade and rural financial e Delink subsidies from volume-based, policies; and the harnessing of public expendi- open-ended measures such as price ceilings and tures to development programs that support guarantees, to improve transparency and mini- the private sector and advance the objectives of mize dilution of incentives to adjust. urban and rural incomes policies.

Social safety net Land reform and farm restructuring

To maintain support for price liberalization, For land reform and farm restructuring in the measures are needed to ensure that a carefully medium term: defined safety-net is in place to cushion low- * Establish full rights to own, buy, sell, and income groups from the full impact of food mortgage land without any restrictions price increases. In this regard, the following * Eliminate legal restrictions on farm size recommendations are made: and the right to hire labor * Provide financial assistance for food im- * Put in place clear procedures for allocating ports to ensure adequate food stocks land holdings and the physical assets of state * In the absence of well-developed market and and collective farms among workers (farmers transport links build up government capability to should be free to select the farm organizations deliver food quickly to regions of the country that of their choice based on appropriate informa- experience acute shortages of food tion about options) * Design programs to establish a rural safe- * Introduce legislation on farm bankruptcy ty net for the transition period and beyond to by mid-1993, and force financially nonviable replace pensions and social services that have farms into bankruptcy proceedings or liquida- traditionally been provided through the struction by the end of 1993 tures of state and collective farms. * Establish procedures for land auctions

7 * Revise legislation to facilitate the forma- * Reassess the ecological and environmental tion of voluntary, commercial cooperatives, par- aspects of large-scale irrigation systems, partic- ticularly on the basis of the labor and capital of ularly in Central Asia state and collective farms * Rehabilitate and develop the vast pasture * Initiate work to transfer governmental and and grasslands base in the former USSR, to re- social service functions from state and collec- balance the animal feed supply, provide a:lter- tive farms to local governments. natives for the use of expensive concentrate feed, and end the diversion of wheat from hu- Enterprise reform and privatization man to animal consumption.

Programs and policies to extend or complete Trade liberalization the transition to a market-based system in tranport proessig,ad th sal of ood Continued progress in promoting and facilitat- transport, processing, and the sale of food ing trade among the states of the former USSR as well as international trade will be important. the medium term. This would involve the In the medium term this will require: privatization of most processing enterprises, * Decisions on currencies and, possibly, on wholesale and retail trade in food, and small- multilateral clearing arrangements among the scale transport activities. Policies to promote states of the former USSR competition and efficiency would also need * Alignment of domestic prices with world continued attention and strengthening. prices A central recommendation for prormoting the * Elimination of excessive barriers to trade, expansion of market-based transactions in the including elimination of traditional state trad- food sector is to eliminate the system of state ing monopolies orders. The rights of local and regional govern- . Reliance on tariffs rather than quotas or ments to interfere in food markets will also other physical barriers in formulating trade need to be clarified and minimized. The report policy. contains a large number of recommendations on enterprise reform and privatization which Credit policy and financing agriculture are essential to ensure that unduly high transport, processing, and marketing margins do not Improvements in rural finance need to be part persist and undermine the new production pos- of the general reform of the financial sector. In- sibilities in the food and agricultural sector. terest rate and loan recovery policies and the composition of bank portfolios deserve part:icu- Agricultural research and extension lar attention. Recommendations for the medium term are to: Agricultural research, education, technology * Clarify the financial and legal status of the transfer, and extension services need to be new state banks created after the breakup of the adapted to the requirements of a market econo- USSR and the dismantling of the former Soviet my. As a start many of these services should be banks * Strengthen the Central Bank and improve privatized, and those that remain in the pzublic suevso ofcmeca.ak domain need to be improved. Priority should su Develop a pogram fonrs be given to thebe gienneedseeds tothe off priateprivate farrnersarmer and privatizing* Develop the bankinga program system, for restructuringwhile encourag and ing firms involved in marketing, input distribution, the development of new rural banking institutioagns and agricultural foreign trade. * Rationalize the structure of interest rates and make deposit and lending rates positive in Land and water resource management real terms as soon as possible * Undertake extensive programs of institu- The main recommendations with respect to tional development and training land and water use are: . Establish procedures for prudential regu- * Develop and apply low-input, sustainable lation of rural financial institutions, and ini- agricultural practices tiate a system of periodic reports to the

8 commercial bank supervisory authorities at lic investments and for recovering some of the the Central Bank. costs of these investments from beneficiaries should be developed. Technical assistance and training Long-term outlook and program A supporting aspect of the medium-term strat- implementation egy involves the development of a program of technical assistance to the states of the former Over the longer term the transformation of the USSR that can be supported by the interna- food and agriculture sector along the lines out- tional community. Broad areas for technical as- lined in this report will bring profound struc- sistance and training would be financial sector tural changes that will have broad development, research and extension, land re- implications. To take one example, the move to form and privatization of farms, privatization market-determined prices, including the pric- of other parts of the food processing and mar- es of transportation and energy, will have sig- keting chain, development of capacities for nificant long-term effects on the viability of evaluating economic policy options and in- agricultural production in various locations. vestment proposals, implementation of the so- As a consequence, patterns of land use are cial safety net, and establishment of legal and likely to change substantially over time. In foreign investment codes. some locations, land use will undoubtedly in- In conjunction with this program of techni- tensify; in others, where the profitability of cal assistance and training, there is a need to crop production is already marginal, the area develop a technical assistance program to for- under cultivation will continue to contract. mulate and evaluate a specific set of invest- The challenge will be to implement policies ment proposals that could be supported by the that combine these shifts in land use with an international financial community. Substantial environmentally more sustainable approach investment will be needed in rural infrastruc- to the management of land and other natural ture and agroindustry. In particular, rural resources. roads are required for efficient distribution At the same time profound changes can be and marketing, and there are serious problems expected in the distribution of incomes and with existing irrigation and drainage systems. employment. About 20 to 25 percent of the 290 Training requirements for some areas of tech- million people who live in the states of the nical assistance are large. Purchases of foreign former USSR depend primarily on agriculture equipment and supplies will also be required. for their livelihood. As the food and agricultural sector adjusts to the realities of market Public and private investment forces, agriculture will gradually release labor for reemployment elsewhere in these econo- An investment strategy for the food and agri- mies. cultural sector that addresses the need for pri- Not all of the unemployed and underem- vate investment (domestic and foreign) and ployed will migrate to large urban centers; for supporting public investment should be some will find opportunities in service-based developed and introduced in the medium industries in rural areas and smaller towns. term. Formulating an appropriate legal and These longer-term secular changes in the dis- policy framework supportive of private in- tribution of employment and population will, vestment should be part of this effort. of course, have much wider implications for The proposed Foreign Investment Law in the management of these economies. These Russia should be amended to minimize gov- shifts may also create hardships in the short ernment discretion over foreign investment term for producers, consumers, and enterpris- decisions and to relax restrictions on convert- es, arousing resistance to the reform program. ing rubles to foreign exchange. The govern- The recommendations in this report, sum- ments of the newly independent states should marized by chapter in Box 1, are designed to also draw up plans for public investment in strengthen the bold initiatives being intro- basic infrastructure for the food sector. Criteria duced by the Russian government and to has- and procedures for evaluating alternative pub- ten the process of stabilization and adjustment

9 in the food and agricultural sector. Most of the during the transition. It could as well have a recommendations could usefully be imple- profound influence on the volume and direc- mented in the other states of the former USSR tion of the world's agricultural trade. As it as well. evolves, this kind of program would be fully The strategy for reform of the food and agri- deserving of support by the international com- cultural sector, if applied fully and consistent- munity during the transition, in the formn of ly, will not only lead to higher living standards food assistance, technical assistance, financial and sustainable consumption levels for the assistance, or direct investment in the newly population but will also minimize hardship independent states of the former USSR.

Box 1 Summary of selected recommendations

1. Measures to improve food supply in the short term

Food imports. Governments should work with the international community to ensure adequate food imports consistent with the emerging market orientation of their economies. Food assistance donations should be sold, and the proceeds used to finance poverty assistance programs. Food distribution. To ensure adequate food supply, government will need to monitor food availability and prices in hot spots and strengthen its capacity to transfer food to these spots in case serious food shortages develop. Social safety net. A combination of cash benefits, in-kind food assistance, and price subsidies will be needed until a comprehensive means-tested program is in place. Critical agricultural inputs. Supplies of pesticides, certain types of seeds, veterinary medicines, protein feeds, and machinery spare parts are dependent on imports. These inputs have an important bearing on agricultural production, and controlling the impending decline in supply can be managed only under special provisions negotiated with the international community. International trade policy. Trade among the states of the former USSR should be as unencumbered as possible, and integration into the world economy as rapid as possible. In the short run, there is a need for liberalization of domestic prices, arrangements for currency clearing and convertibility among the states of the former USSR, elimination of trade restrictions (quotas, licenses, and other trade barriers), and implementation of a unified exchange rate policy. Market information. Market and price information needs to be collected and disseminated at the producer, processor, and retail levels. Information on commodity stocks and production forecasts is also needed to assist producers, processors, and traders in making informed decisions. Livestock sector adjustment. The transition to a market-oriented livestock sector requires shifting the composition of feed imports away from grain in favor of protein feeds, relying more on grazing and domestic roughage feeds, reducing livestock inventories by as much as 15 to 20 percent from 1991 levels, facilitating the transfer of inventories from high-cost to low-cost producers (including sales to the private sector), and increasing imports of veterinary medicines.

Credit policy. Preferential credit for agriculture may need to remain until restructuring of the banking system is sufficiently advanced. Interest rates should be moved toward real positive levels, and loan collection should be strictly enforced.

10 Box 1 Summary of selected recommendations (continued)

2. Measures to improve agricultural production and efficiency

Private land ownership. Legislation should be adopted to ensure full rights to own, buy, sell, and mortgage land without restriction. Limitations on farm size and the right to hire labor should be eliminated.

Restructuring socialist sector farms. Procedures need to be established to restructure state and collective farms and allocate their land and physical assets among workers. Farmers should be free to choose the form of farm organization they prefer. Farm workers should also have the option to exchange their share in land and other assets for easily marketable stocks or debt certificates.

Farm bankruptcy law. Farm bankruptcy legislation should be implemented during 1993, and financially nonviable farms should be forced into bankruptcy proceedings by the end of 1993. The state land committees or similar bodies should have procedures in place to auction land and other assets of bankrupt farms.

Agricultural cooperatives. Legislation to facilitate the development of voluntary, commercial agricultural cooperatives (service, supply, marketing, production) should be revised. The formation of such cooperatives on the basis of available labor and capital resources of state and collective farms should be encouraged.

Rural social services. The restructuring of farms will require that the quasi-governmental and social service functions of state and collective farms be transferred to local and municipal governments.

Soil and water management. Development and application of low input, sustainable agricultural practices need more attention. Reassessments of the economic and environmental impacts of large irrigation schemes, particularly in Central Asia, to improve the efficiency of water resource and agro-chemical use is of high priority

Agricultural inputs. The changing economic situation and heightened environmental concerns will greatly influence the level, pattern, and productivity of input use in agriculture:

Farm machinery. Encourage the establishment of farm service enterprises and cooperatives to pool available machinery.

Livestock feed. Shift feed rations in favor of protein feeds, expand the area under perennial forage legumes and early-maturing forage maize, and eliminate cost-plus pricing and state quotas in the mixed feed industry

Crop seed. Establish a national seed policy to encourage joint ventures and clarify the roles of government and the private sector in the seed industry.

Agrochemicals. Arrange for joint inspection with foreign experts of pesticide production facilities and the distribution networks to improve practices and make recommendations on closing inefficient or unsafe facilities.

Fertilizer. Evaluate the energy efficiency of nitrogen fertilizer plants and implement needed modifications to improve energy efficiency.

Researchand technology transfer. There is an immediate need for full access to data and information throughout the system. Research, education, and technology transfer have to be reoriented to meet the needs of commercial agriculture. Extension services need to be developed according to the changing production technology and the emergence of a large number of small private farmers.

11 Box 1 Summary of selected recom:mendations (continued)

3. Policies for food distribution and marketing

Enterprise privatization. Privatization should move forward for small-scale enterprises in wholesale and retail trade (including input dealerships), farm service organizations, procurement, food processing, and transportation. Programs and timetables are also needed for privatizing larger enterprises in food processing, input manufacture, and wholesale trade.

Enterprise diversification. Licensing requirements, operating standards, and other impediments to new firm entry and enterprise diversification should be minimized. Restrictions on enterprise trade activity should be limited to health, safety, and environmental considerations.

Enterprise associations. New legisla,tion should redefine the role of enterprise associations, speci- fying the steps needed to free enterprise management from top-down control by such associations and prevent their behaving as regional cartels or monopoly structures.

Regional marketing restrictions. The traditional market boundaries of state input dealerships and of procurement, transport, processing, and marketing enterprises should be officially rescinded. Local and regional government interference in food marketing and input distribution should be minimized. Procurement quotas. State orders and procurement quotas for agricultural commodities should be severely reduced and eventually eliminated. Enterprise bankruptcy. Enterprise bankruptcy law should be adopted and implemented as socn as possible. It should apply to all types of enterprises, including private enterprises.

Fostering private retail trade. The leasing of space for retail food outlets should be authorized and encouraged. No restrictions should be placed on the resale of facilities and equipment. Small business credits should be made available to private food retailers, within the confines of national credit policy.

Fostering private wholesale trade. New, privately run wholesale markets are needed. Wholesale- retail transfers in the cities and farm transfers to wholesale assembly and processing facilities in rural areas need to be strengthened. Agroprocessing industries. Although the food processing industry can benefit from modern technology, it would be unwise to promote broad-based investment until technology, scale, and siting appropriate for a market economy become clearer.

Grain storage. Low-cost storage facilities at the farm level need to be expanded. These facilities should be constructed using international designs and equipment, then offered to farmers on a lease-buy arrangement. Food transport. Free and open entry into the trucking industry should be encouraged to improve efficiency in food transport and to improve the preparation of food products for transport and the conditions under which it is transported, particularly for perishables and non-bulk shipments. A government food inspection and grading service needs to be established and properly supervised.

4. Price and income support policies and the role of subsidies

Price liberalization. Prices should be liberalized. Market-determined prices are a necessary condition for transforming agriculture and for integration in the world economy. Some states of the former USSR have already liberalized most prices.

12 Box 1 Summary of selected recommendations (continued)

Producer subsidies. Total producer subsidies should be limited to 5 percent of GDP in 1992/93, with all but a limited number of targeted subsidies phased out by 1995/96. The various policy instruments to allocate producer subsidies need to be evaluated.

Input subsidies. Input subsidies should apply only to energy and a limited number of imported critical inputs (such as pesticides, fertilizers, veterinary medicines, machinery spare parts, protein feed, certain crop seeds) to compensate for higher exchange rates.

Credit subsidies. Interest rate subsidies should be reduced in a phased manner consistent with broader financial sector reform.

Consumer subsidies. Retail price and exchange rate subsidies should be limited to a very small number of staple commodities and should not exceed 2 percent of GDP. Retail prices for bread and wheat should be increased substantially from their July 1992 levels. Imported wheat should be subsidized to compensate for higher exchange rates. These and other non- targeted consumer subsidies should be phased out by 1995/96.

Social safety net. Several steps are needed to put an adequate safety net in place: define a subsistence minimum below the present "social minimum" as the basis for compensating poverty groups; use the existing cash-benefit system to compensate vulnerable groups; ensure that the minimum level of cash benefits is fully indexed to anticipated price changes (using a price index of commodities consumed by the poor), but finance benefits above the minimum only to the extent that budgetary resources are available; avoid further increases in payroll taxes as a method of financing the cash-benefit system; set up independent surveys to monitor nutrition levels among the poor, as an independent check on program effectiveness.

Food and agricultural policy joint working group. Establish a broad-based food and agricultural policy joint working group, with foreign participation, in each of the states of the former USSR to assess the consequences and carry out economic analysis of various agricultural policy options and to provide necessary guidance and consensus for policy formulation.

5. Credit policy and financing agriculture

Agricultural credit policies in the short term. Directed credit to agriculture should continue as a limited and interim measure. Strong measures are needed to enforce loan collections and credit discipline. The use of agricultural land as collateral in securing loans should be legalized and legislation passed providing unambiguous rights for banks to take legal security for their loans in the form of pledges, guarantees, or other contingent liabilities acceptable to the banking system. Agricultural lending rates should be raised to commercial lending rates over a clearly defined time frame.

Financial sector reforms over the medium term. Financial sector reform requires a diversified rural commercial banking system, clarification of the financial situation and ownership of the state-controlled banks resulting from the dismantling of the former Union institutions, a stronger role for the Central Bank and supervision of commercial banks, a new system of accounting and auditing, and procedures for the prudential regulation of financial institutions. A system of periodic reports to the commercial bank supervisory authorities at the Central Bank should be instituted.

13 Box 1 Summary of selected recommendations (continued)

6. Role of governments and the international community

Legal and institutional framework. Government needs to establish appropriate legal codes, policies on property ownership, foreign investment law, land titling, and clarity with respect to tax treatment of investors to support domestic and foreign private investment.

Public infrastructure. A program of public investment in infrastructure needs to be designed that can support the development of the food and agricultural sector and facilitate private sector participation, including foreign investment.

Role of the international community. The international community can contribute by continuing to provide food assistance and to finance imports of critical agricultural inputs, initiating technical assistance to formulate and implement key economic reforms, and providing capital or facilitating the inflow of foreign investment for quickly gestating investments in assembly, storage, trucking, and the renovation/rehabilitation of key food industries and urban marketing facilities.

Technical assistance and training. A technical assistance and training program needs to be developed for the early stages of the reform process to support the transformation of the food and agricultural sector into a market economy.

Foreign direct investment. Government should work with foreign experts to identify most viable areas for foreign investment in food production, processing, and distribution and input manufacture and marketing. Doing this will require establishing a comprehensive foreign investment law and providing needed incentives for direct foreign investment in priority activities. Opportunities also exist for foreign investment in agricultural inputs, including the manufacture and distribution of agricultural machinery, agrochemicals, hybrid seed, and fertilizer.

14 1

Agricultural economy in transition

Background States (CIS) was established in December 1991. These developments rendered the Union-wide di- This report originated in the joint work of the mension of the mission's mandate difficult to pur- World Bank and the Commission on Technical Co- sue. The study was thus refocused primarily on operation with the World Bank. The commission policy requirements in the Russian Federation. was established by the government of the former The international team nonetheless believes that USSR in November 1991 to collaborate with the in- the analysis and proposed actions would apply to ternational team led by the World Bank. The Euro- a large extent in all states of the former USSR. pean Bank for Reconstruction and Development The interim report on the team's findings, rec- (EBRD) contributed to the preparation of this re- ommendations, and proposals for reform of the port, particularly the sections dealing with food food and agricultural sector was reviewed at an transport. The European Community (EC), the Or- international conference in Moscow on April 2-3, ganization for Economic Cooperation and Devel- 1992. This conference was hosted by the World opment (OECD), and the International Monetary Bank and the Commission. Government officials Fund (IMF) also provided support. The objective from the newly independent states of the former of this work was to develop an action plan for pol- USSR, representatives of major industrialized icy reform of the food and agricultural sector in the countries, and several international organiza- former USSR.' tions participated in the conference. The main The broad mandate of the team was to review findings and propsoals of this report were en- the state of the food and agricultural economy in dorsed at the conference. transition and advise on policies to prevent its to- The report was revised to incorporate com- tal collapse, to foster an early recovery, and to ments made during the conference and during guide agriculture from central planning to reli- the review process at the Bank, as well as more ance on market principles. Management of inter- recent data and information on agricultural sec- state trading relations in agricultural commodities tor reforms. The report provides a policy frame- and production inputs was also to be considered, work for transforming the food and agricultural together with the design of policies on income sector into a more efficient and dynamic sector support and subsidies associated with food and based on the principles of a market economy. agricultural sector during the transition. During the course of the study, the political Place of agriculture in the economy foundations of the former USSR shifted fundamentally, and the political and administrative Agriculture has an important position in the shell for the Commonwealth of Independent economies of the former USSR. Its share of

15 investment and labor is much higher than in de- shares are large despite very low levels of labor veloped Western economies and its level of pro- and capital productivity in agriculture. ductivity much lower, providing ample room The importance of agriculture to the ecorLomy for relatively quick efficiency gains. Agriculture extends beyond farming. Procurement, process- is the cornerstone of a large agroindustrial coming, transportation, and wholesale and retail trade plex that includes agricultural input industries, of agricultural commodities are important down- food and fiber processing, transportation, and stream activities associated with agriculture, wholesale and retail trade in agricultural com- while manufacturing, distribution and servicing modities and inputs. Major shifts in employ- networks for agricultural inputs are important ment among these subsectors and throughout upstream activities. This broader agroindustrial the rural economy generally will be an essential complex accounts for nearly one-third of employ- outcome of economic reform. Consumers allo- ment, investment, and NMP in the states of the cate as much as 50 percent of disposable income former USSR. Thus, the importance of the agricul- to food, so agriculture strongly affects consum- tural sector lies not only in its positive contribu- ers' perception of their own well-being and of tions to economic development but in the the economy's overall performance. Agriculture potentially disastrous socioeconomic consequenc- and the food industry have also been a large net es of a collapse of this inefficient sector. drain on hard currency reserves, with imports Compared to Western countries, the former greatly outstripping exports. For all these rea- USSR allocated small shares of investment and sons, agriculture represents a crucial area in the labor to downstream activities, and their contri- overall economic reform effort. Success or fail- bution to value added remains quite small. Many ure in agricultural reform will strongly influ- aspects of the rural economy-such as consumer ence future economic development, particularly and producer services and small-scale industry- during the transition. were deliberately left underdeveloped to narrow the alternatives to agricultural employment in ru- Former USSR ral areas and thus to guarantee adequate labor for crop and livestock production. In 1990 nearly 20 percent of the labor force in the These neglected activities now represent prime former USSR was employed in agriculture (Table areas for expansion of employment in the medi- 1.1; also see Annex Table A1.1 for the share of the um term. They should be capable of absorbing rural population). Agriculture accounted for 16 excess labor released from other sectors as re- percent to 20 percent of total investment in the forms are introduced. Although labor in agricul- 1970s and 1980s, about two-thirds of it for farm ture is almost certainly in excess, subsistence equipment and machinery, land improvement, ir- farming, small-scale agroindustry and the service rigation and drainage, and construction of live- sector are capable of absorbing some of the excess stock facilities. Adding investment in rural labor from industry during the transition. infrastructure associated with farming-on-farm Agriculture's importance to consumers is even housing, cultural amenities, rural roads, scientific greater. With so much economic activity in the research organizations-boosts agriculture's former USSR devoted to capital goods, consum- share of total investment during the last two de- ers spent roughly half their disposable income on cades to 24 to 28 percent (Table 1.2). Investment in products of agricultural origin (food and fiber). social infrastructure in rural areas accounted for Unusually low consumer spending on housing, more than 25 percent of total state investment in health, and education probably biased this figure agriculture. upward while extensive food subsidies biased it Agriculture's contribution to gross national downward. In the short to medium term, food product (GNP) in the former USSR is difficult to and agricultural commodities are expected to estimate because of distorted domestic pricing continue to account for as much as half of all con- and accounting systems. Official statistics put sumer spending. that contribution at 18 percent in 1989, a rise from Agriculture has been a large net drain on 13 percent in 1980. Agriculture's share of net hard currency reserves. The former USSR's material product (NMP) was 25 percent in 1990, agricultural imports fluctuated between $15 bil- up from 15 percent in 1980 (Table 1.3; also see An- lion and $20 billion in the 1980s, with their nexTableA1.2forannualgrowthinNM4P).These share of total imports rising as high as 28

16 percent in 1981, then falling to less than 20 per- agricultural commodities from other republics cent by the second half of the decade. 2 Agricul- (for example, cotton from Central Asia, grain tural imports accounted for an estimated one- from Kazakhstan, livestock products from the fifth to one-quarter of all imports paid for with Baltics, Belarus, and Ukraine). Russia's agricul- hard currency in the 1980s. Agricultural exports tural exports in sharp contrast, including those remained fairly constant in the 1980s at $2.5 bil- within the former USSR, have been negligible. If lion to $3 billion. Cotton alone accounted for the Russian Federation maintains past trade pat- half of these exports. Virtually all Soviet agri- terns and if trade among the states of the former cultural exports were traded on a soft currency USSR is carried out on a hard currency basis, basis, mostly to the other countries in the Coun- agriculture could represent a net hard currency cil for Mutual Economic Assistance (CMEA). drain for Russia of as much as $10 billion annual- On balance, therefore, agriculture was a signifi- ly. An efficient agricultural sector has the poten- cant net drain on both hard currency reserves tial for reducing agricultural imports and saving and trade balances. With most of agricultural substantial foreign exchange. trade now conducted on a hard currency basis, improving agricultural trade balances is even Macroeconomic context for agricultural reform more important to the improvement of the hard currency position of the states of the The macroeconomic situation will seriously limit former USSR. the options for reform in the food and agricultural sector in 1992 and beyond. The states of the Russian Federation former USSR now find themselves in deep economic difficulty. Problems associated with ineffi- Russia has relied even more on large agricultural ciency and imbalances had been building for imports to meet its needs than did the former decades within the old Soviet economy and were USSR overall. Agriculture accounts for a smaller integrally linked to its command-administrative share of the Russian economy, and agricultural system. Attempts to address basic economic imports account for a larger share of food con- problems by making marginal adjustments in sumption. Agriculture's smaller share in the that system were bound to fail, and such efforts economy reflects both Russia's agroclimatic dis- had reached a dead end by 1991. Inflation surged, advantages relative to other parts of the former output fell, and the republics moved to take con- USSR and the relatively greater importance of in- trol of their own economies. dustry In 1990 agriculture in Russia accounted The Russian government initiated an impres- for 17 percent of total investment, 18 percent of sive program of reforms in 1992, but the structur- NMP, and 14 percent of total labor (Tables 1.4 and al problems of the economy caused a continuing 1.5; also see Annex Table A1.3 for the annual drop in output, an acceleration of inflation, and growth in NMP). an unsustainably high budget deficit. Without The agroindustrial complex is also a somewhat decisive fiscal adjustment in all the states of the smaller part of the Russian economy than it was former USSR, stabilization efforts will fail and of the economy of the former USSR as a whole. hyperinflation could ensue. In conjunction with a This complex accounted for one-quarter of all stabilization program, major structural reforms employment and 28 percent of investment in are required to put these economies on a path of Russia in 1990. As in the former USSR certain sustainable growth. subsectors of this complex and the rural economy generally remain extremely underdeveloped. An Partial reforms and rapid deterioration in 1991 efficient and productive agroindustrial complex has the potential for leading the way to sustained In the late 1980s Soviet economic policy aimed for economic growth in Russia. greater flexibility and improved incentives by in- Russia's high levels of food consumption rela- creasing the autonomy and financial accountabil- tive to those of other states of the former USSR ity of enterprises. Essential questions of price were supported by large agricultural imports. formation, property rights, and the allocation of Approximately two-thirds of agricultural im- financial and real assets were ignored, however. ports into the former USSR went to Russia. Rus- To ease the transition to financial accountability, sia had also long been a large net importer of the government poured financial resources into

17 enterprises, mainly by reducing the taX rate on A collapse of supply rather than demand was profits. The state budget deficit rose in response behind the general contraction. Excess demand and inflationary pressures in the economy continued in the form of the large monetary over- mounted. At the same time, the foreign trade po- hang fueled by massive fiscal deficits. Despite the sition was deteriorating. Oil prices declined decline in output, employment fell by only 1.1 sharply in 1986 while imports of both. producer percent in 1991 and average unemployment for and consumer goods remained at high levels. the year was only 1.3 to 2.6 percent of the labor In response to the worsening macroeconomic force. Instead of restructuring, many enterprises trends, the Soviet government's plans for 1991 fo- were accumulating arrears in order to continue to cused on stabilization. A sharp reduction in the pay wages for their entire labor forces. fiscal deficit-from 10 to 5 percent of GDP-was Economic and political developments further to be supported by strong controls on wages and weakened the already precarious external posi- moderate expansion in credit. Fiscal adjustment tion of the former USSR. By 1990 commercial was to follow from cuts in defense and invest- creditors had eliminated $10 billion in short-term ment spending and from substantial reductions credit lines, and the country had lost about $7.4 in subsidies induced by adjustments in the struc- billion in foreign reserves, notwithstanding gold ture of prices. In addition the government sales of $2.5 billion. The crisis deepened in 1991. planned to increase the tax burden on enterprises Inter-republic trade was severely disrupted as re- and individuals. publican governments established export con- These programs were never implemented as trols to keep local production from leaving local planned. Fiscal and monetary laxity increased as markets in response to higher prices elsewhere. pnedrepublics' rebellion against central economic Trade with the countries of the CMEA collapsed. contherelitnsired.Bellio.agis entra conomi There was some shift to trade with Western in- idated deficit of the USSR had soared to 26 per- dustrial nations, but the marginal gains could not iaedeiiofteUShasore to 26 pr. outweigh the massive losses in the CMEA. Soviet cent of GDP. Russia's deficit stood at 31 percent of GDP, one of the largest government.deficits on exports fell 32 percent in 1991, and imports fell 44 recent record. percent. Exacerbated by the switching of nearly Adjustmreord. in price policy were part ofthe all CMEA trade from a soft currency, bilateral bal- Adjustments in price policy were p:>artof the ancing basis to a hard currency basis, the short- 1991 program, and prices for consumer goods age of foreign currency became acute. There was were increased substantially in April. Most con- havoc in the exchange markets. The financing sumer prices remained administratively con- gap widened and arrearages mounted as capital trolled. To cushion the impact of higher prices, flight intensified and commercial banks contin- the government raised wages and allowances to ued their unprecedented withdrawal of credits. cover roughly 60 percent of the expected loss in purchasing power. Furthermore, it increased all Reforms and economic developments in 1992 savings deposits by 40 percent. Existing household savings were already enormous (thle "mone- When the USSR was formally dissolved at the tary overhang"), and the new measures over- end of 1991, its economy could hardly have been compensated for the higher prices. Inflationary in worse shape. The most rapid and substantial pressures mounted even higher. Retail prices for response among the newly independent states of goods rose 142 percent for the year and wholesale the former USSR came from the Russian Federa- prices in industry 236 percent. tion, which immediately implemented a program As these modest attempts at reform faltered, of stabilization and reform. The centerpiece of the output contracted sharply. Though final data are reform was the liberalization of prices. On Janu- unavailable, GDP for the 15 states of the former ary 2, 1992 about 80 percent of wholesale prices USSR probably fell by 10 to 15 percent in 1991. and 90 percent of consumer prices were freed, Important shifts in the structure of prod.uction ac- and on March 7 the prices of virtually all remain- companied the decline in output. In Russia the ing consumer goods were liberalized. On May 18 share of engineering industries (including de- the government raised the wholesale price of fense and industrial machinery) in NMP shrank, crude oil from 350 rubles per ton to 2,200 rubles while that of light industries (such as textiles and per ton, a massive increase that still brought the clothing) grew. price only to about one-sixth to one-seventh of

18 the world price at the market exchange rate. The adjusted basis. There was an accelerated decline in central government now controls only the prices production of some commodities that had already of energy, certain medicines, precious metals, and undergone a sharp contraction in 1991, for exam- freight and transportation fares. Local govern- ple tractors, iron and steel, and meat products. ments may subsidize milk and bread prices and Part of the decline was undoubtedly due to the regulate housing rents and utility rates; in prac- disruption of interstate trade following the formal tice rents and utilities remain heavily subsidized. demise of the Union. Continuing problems with Russia liberalized the trade and exchange rate interenterprise supply links probably also contrib- system along with prices. While controlled ex- uted to the decline in early 1992. Official unem- change rates remained in effect for many purposes, ployment in May 1992 was reported to be only market rates applied for general imports. Imports slightly above 1991 levels, indicating that enter- were virtually free of restrictions-even tariffs prises were still avoiding adjustment. were suspended for the first half of 1992. Until a unified exchange rate was established in July, Medium-term policiesfor stabilization many inputs continued to be purchased through centralized agencies and to be sold at subsidized The options for macroeconomic policy are limit- exchange rates. Exports of raw materials and mili- ed. Monetary policy is intrinsically weak, since all tary goods (70 percent of total exports) remained the states of the former USSR still lack the basic subject to quotas and licensing requirements. monetary arrangements necessary for a market With the liberalization of prices and trade, re- economy. tail prices rose over ninefold in the first six Fiscal adjustment is therefore the key to stabili- months of 1992 (compared to December 1991). zation. The remaining consumer subsidies must Another spike in inflation is anticipated following be strictly limited. Import subsidies, though justi- the increase in energy prices in May. An eighteen- fiable in some circumstances during the transi- fold price increase is forecast for calendar 1992. tion, should be reduced, and then gradually To satisfy the stabilization objectives of the re- eliminated. Defense expenditures might also be form program, the Russian government institut- reduced further. Ultimately, fiscal adjustment ed tight monetary and fiscal policies in early hinges on the ability of governments to stop fi- 1992. Monetary policy was extremely tight in Janu- nancing enterprises, whether directly, through ary but was quickly reversed. After the monetary hidden subsidies, or through the banking system. stringency in January, there was a surge of money But there are limits to how much spending can creation in February, then continuing expansion be cut. Basic social programs must be protected, in March through May. Fiscal policy also targeted and investment in the economy is already peril- a very tight outcome for the first half of 1992. Al- ously low. It is likely that public investment in in- though not all targets were met, centrally fi- frastructure will have to increase soon. Thus nanced enterprise investment was cut from 5.5 fiscal adjustment must encompass the revenue percent of GDP in 1991 to 2.3 percent in the first side as well. Increases in energy prices and better quarter of 1992 and producer and consumer price taxation are key. As an example, if the Russian subsidies fell from 3.9 to 2.3 percent. Defense ex- Federation were to take appropriate expenditure penditure also fell sharply. and revenue measures its deficit could fall to 8 The deficit for the first half of 1992 was thus re- percent of GDP in the second half of 1992. That duced to an estimated 19 percent of GDP. Al- would bring the deficit for the year to about 11 though lower than the deficit for 1991, it is still far percent of GDP, a reduction of 20 percentage above a sustainable level. The source of the large points from its level in 1991. deficit and its means of financing were one and Though sustainable stabilization calls for a fis- the same: the foreign exchange corresponding to cal-first approach, monetary policy cannot be ne- large flows of external financing was sold to im- glected. Strict controls on credit expansion are porters at a highly subsidized exchange rate. Sub- indispensable for avoiding hyperinflation. In this sidies for imports of food and agricultural inputs sense the explosion in interenterprise arrears in were especially large. Without the import subsi- 1992 is worrisome. Exchange rate expectations are dies, the fiscal deficit would have been modest. unmanageable without credit limits and positive In the first half of 1992 industrial production in real interest rates. Expectations of cheap easy cred- Russia declined another 13 percent on a seasonally it encourage inventory accumulation, currency

19 substitution, and arrears, all of which delay ad- privatization scheme based on a voucher system justment. Since credit cannot be converted into is to be initiated in October. cash, it might allow some production to continue, A strong financial system is essential for but it will not increase final demand of consumers. building a durable rural credit system. Stricter What is required is a judicious pace in expanding regulation and supervision of the banking sys- liquidity in the economy tem and liberalization of interest rates are im- Economic restructuring will cause a realign- portant first steps. The International Monetary ment in relative prices, leading to substantial Fund (IMF) and other international institutions increases in some cases. Relative prices in all the are working with the central banks and other fi- states of the former USSR will move p:rogressive- nancial institutions in the states of the former ly closer to prices in world markets. Prices of USSR to create a stronger basis for financial sec- foodstuffs (and agricultural products generally) tor reform. A start has already been made in will rise, and further large increases are still needed in energy prices. As subsidies are re- raising interest rates. duced, major increases are also expected in both The freeing of prices in the Russian Federation housing rentals and public transportation fares. has created hardships for low-income groups. These trends imply that more time will be need- The government plans to develop a more careful- ed to reduce inflation to the modest levels found ly targeted and affordable social safety net to in the major industrial countries. cushion low-income groups from some of the harsher immediate effects of price liberalization Systemic and structural reforms and to preserve the political support needed to keep the reform program going. Because the rate Successful stabilization by itself will not generate of price increases has varied substantially in dif- growth and employment. The success of the re- ferent regions of the Russian Federation (and in form program will ultimately depend on the different states of the former USSR) and transpor- ability of governments to implement a compre- tation and marketing systems are developing hensive and complementary program of sys- only gradually, in the short run the government temic and structural reforms. Stabilization is not may need to take a hand to ensure that food sup- sustainable without structural reform and the be- plies reach critical areas. ginnings of a supply response to demonstrate Stronger social protection programs, including success. The major elements of the structural re- unemployment benefits, job retraining, ancd tar- form program include tapping the latent poten- geted intervention to protect those who fall be- tial for growth and efficiency improvements in low the poverty line, can alleviate the immediate the agricultural and energy sectors; restructuring impact of economic reforms on those most affect- industry through enterprise reform, privatiza- ed by them. But a permanent solution can come tion and conversion of the military-industrial only through the creation of new jobs and chang- complex; introducing antimonopoly measures es in the skill mix to meet the needs of a market- and eliminating unnecessary barriers to trade oriented economy. and business activity; reforming the financial sec- The Russian government has already moved tor; rehabilitating and expanding the infrastruc- on rural gorm. he atizady moved ture base; and strengthening social protection. on structural reform. The Privatization Program Food and agricultural activities will gain from for 1992 was approved by the Supreme Soviet in accelerated implementation of privatization and June, a presidential decree on bankruptcy was iS- procompetition programs, especially the elimina- sued on June 14, 1992 that will function until full tion of monopolies in transport and distribution. bankruptcy legislation is adopted, and another These measures and others to ease ent:ry into the recent presidential decree requires most large- private sector are essential to increasing competi- scale enterprises to be corporatized by November tion and efficiency in production and marketing. 1, 1992 as a first step toward privatization. The This process is likely to continue first thirough the government recently forwarded to the Supreme privatization of small-scale enterprises and shops Soviet for discussion a medium-term program and privatization and deregulation of the truck- that looks beyond the immediate problems of ing industry. Privatization of large-scale enter- macroeconomic stabilization toward measures prises will follow more graduallv; a mass requiredtoachievesustainableeconomicgrowth.

20 Major elements of the reform program Four developments in 1991 turned the long- standing problems of the food sector into an open The major elements of a successful macroeco- crisis in food markets for the winter of 1991/92: nomic stabilization and adjustment program over * Consumer incomes rose more rapidly than the next few years can be summarized in a few retail prices for food and the money overhang of points: the population reached record levels, leading to * Reduce the fiscal deficit financed by the do- highly distorted and wasteful consumption and a mestic banking system to 2 percent or less of GDP. growing excess demand for food. * Limit credit expansion to achieve a gradual * Food production in calendar 1991 fell 7 per- decline in the monthly rate of inflation so that it cent from its 1990 level because of poor weather reaches low single-digit levels. and higher relative prices of critical agricultural in- * Establish a social safety net to protect the puts. Grain production fell by even more, to only population most affected by reform. about 75 percent of the abundant crop of 1990. * Implement a substantial program of privati- * As inflation accelerated, producers refused zation backed by enterprise restructuring, finan- to market their output to the state at controlled cial sector reforms, and measures to stimulate prices. Volume increased in alternative marketing competition in product and factor markets. channels at de facto liberalized prices, but the * Initiate of sectoral reform programs, espe- quantities of food entering private trade did not cially in the oil and gas and food and agricultural compensate for reduced volume in the state trad- sector, to boost production. Support these pro- ing system. The apparatus of price controls and grams through selective investments in infra- state orders not only failed to maintain traditional structure to improve efficiency and expand trade but inhibited growth of private trade as capacity. well. Legal restrictions on private trade remained * Mobilize of external financial support for in force. The volume of food marketed fell more the reform program. than did production, as households, farms, and processors held inventories in anticipation of fu- Food problem and supply prospects ture price changes. Negative real interest rates provided further incentive to hold stocks instead Food crisis of 1991/92 of rubles. * Food imports fell by 18 percent in 1991 from The food problems of the former USSR have their the previous year as foreign exchange earnings origins in the policies of the last seven decades. shrank with the decline in oil exports, the collapse These policies provided inadequate production of CMEA trade, and the inability to obtain foreign incentives, created a highly centralized and in- credit for imports because of the deterioration in creasingly inefficient distribution system, and creditworthiness. since the mid-1960s, have distorted consumption patterns through massive consumer subsidies. To Food prospects for 1992/93 support these subsidies and relatively high levels of per capita food consumption during the 1980s, Production, procurement, imports, demand, dis- this system depended on increasingly large food tribution, and pricing all affect food prospects for imports and budget outlays. The financial flows 1992/93 in different ways in the states of the needed for food subsidies to sustain growth in former USSR. For the Russian Federation grain consumption despite increasingly inefficient pro- production in 1992 is expected to be slightly duction and distribution contributed to the mac- above 1991 levels at 90-98 million tons rather than roeconomic instability of the 1990s. The resulting 89 million tons last year. Production of other crops inflation hastened the breakdown in the distribu- is expected to be about the same as in 1991. Live- tion system as the state system could not attract stock production is expected to decline by 10-15 food supplies at official procurement prices, percent over 1991. Procurement of grain by the which lagged behind the expected market value state is expected to be higher than it was in 1991, of the food. Meanwhile, the heavy level of food though the government's plans to procure 29 mil- imports helped bring the balance of payments lion tons of grain against actual procurement of 22 into crisis in early 1990 and closed off commercial million tons in 1991 may not be realized. Actual credits for commodity imports. grain procurement in 1992, however, will depend

21 upon a satisfactory resolution of current disagree- members of the international community on how ments between farms and the government they might best support reforms in the regarding 1992 procurement prices. agricultural sector. Overall, demand for income-elastic food prod- The report is organized to address basic issues ucts in 1992/93 is expected to be lower than it was that are central to the reform program it describes. in 1991/92 because of lower food subsidies, higher Chapter 2 traces trends in production, consump- prices, and lower per capita real income. Demand tion, and trade during the second half of the -1980s for income-inelastic food commodities, such as and explores the origins and nature of the food cri- bread, potatoes, and milk, may remain unchanged sis of the 1990s. Chapter 3 delineates the implica- or increase slightly. Demand for bread and milk tions of economic reform for the food and will be directly affected by any changes in the re- agricultural sector and outlines an overall strategy maining retail price subsidies for those items. for development. Chapter 4 deals with improving Changes on the demand side should reduce im- the supply of food in the short run and outlines a port requirements for most livestock products. De- short-term action program that addresses aggre- mand-side imbalances, which were a major source gate food supply and the availability of food to of food market imbalances in 1991, have largely low-income groups. been addressed by the January 1992 price liberal- Chapters 5 and 6 deal with medium-term mea- ization, though there is increasing evidence of local sures for improving food production and distribu- or regional government interference in food prices. tion and develop action programs to improve Assuming the Russian government is able to im- efficiency in production and distribution. The fol- port nearly as much grain and other food products lowing two chapters deal with major policy issues in 1992/93 as in 1991/92, the aggregate food sup- central to the reform process and the conversion to ply appears adequate. a market economy. Chapter 7 deals with agricul- Food distribution is another matter. There may tural price policy, deteriorating terms of trade, and be little improvement in 1992/93, as state control issues associated with the movement to market over food supplies remains nearly as tight as it was prices. Chapter 8 examines income support and in 1991/92. Parallel markets are expanding but still subsidy policies that will encourage restructuring account for a very small share of total food market- of agriculture and cushion producers and consum- ing, although it varies by food commodity. There ers on low incomes from the effects of price liberal- are two positive notes, however. Now that food ization. Chapter 9 deals with financial sector issues prices have been liberalized, farms have less incen- relating to the availability of finance to the agricul- tive to hoard agricultural production than they did ture sector and to the links between credit supply last year. And the government now has a monitor- and macroeconomic stabilization. Chapter 1() dis- ing system in place to track food prices and avail- cusses the changing roles of government and the ability in about 120 critical spots in the country and various elements of the international community a logistical system to respond to any impending in supporting the process of reform. food crisis. The policy on retail price subsidies for bread and milk will have to change, however. Oth- Notes erwise, as domestic prices for wheat move toward world prices, retail bread subsidies will soar out of 1. In this report, the term "former USSR" or "former So- control. One problem is that a fully operational and viet Union" refers to all fifteen republics that lay within well targeted food safety net is not yet in place to the post-World War II boundaries of the USSR.That in- protect themostvulnerable consumer groups from cludes the Russian Federation, Azerbaijan, Armenia, purotherinctrtheamostsinfoodprice Belarus, Georgia, Moldova, Ukraine, the five Central further increases infoodprices.Asian states (Kazakhstan, Kyrghyzstan, Tadjikistan, Turkmenistan, and Uzbekistan) and the three Baltic Objectives and organization of the report states (Estonia, Latvia, and Lithuania). "Interstate trade" refers to international trading relations between the fif- This report has two basic objectives. It seeks to teen newly independent states. provide policymakers in Russia and, to the extent 2. All dollar amounts refer to U.S. dollars. possible, in other states of the former USSR with a policy framework and action program for reforming the food and agricultural sector in the short and medium term. And it seeks to advise

22 2

Trends in agricultural production, consumption, and trade

The main purpose of this chapter is to provide a Despite major increases in producer prices, fi- historical perspective on the status and perfor- nancial relief for indebted farms, and continued mance of agricultural production, consumption flows of investment and inputs, however, agri- and trade. More specifically, this chapter pro- culture failed to respond. Over time a greater vides an overview of recent agricultural sector and greater share of investment went simply to performance, examines production performance replace depreciated capital, and this placed the and prospects of major crops and the livestock Soviet agricultural growth strategy in jeopardy. sector, outlines trends and patterns of food con- With the accelerating crisis in the rest of the sumption and needed adjustments in response economy, agricultural investment peaked in 1990 to economic reforms, and describes trends and and the terms of trade turned against agricul- patterns of agricultural trade, both within and ture. Agricultural production levels could no outside the former USSR. The main focus of the longer be maintained. analysis is the more recent period and the factors The lackluster performance of Soviet agricul- that led to the serious food and agricultural ture was a direct outgrowth of inappropriate problems in Russia and the former USSR. economic policies. The large investments of the past two decades were allocated administrative- Recent performance in agriculture ly, with little relationship to economic returns, consumer preferences, or cost minimization. Pro- Former USSR ducers had little incentive to use these resources efficiently. The system of cost-plus pricing and The growth rate of Soviet gross agricultural out- farm-specific producer price subsidies effectively put slowed steadily from the 1960s into the cut the link between performance and the finan- 1980s. Growth turned negative in 1990 with the cial health of farms. For the individual farm- value of gross output dropping 3 percent that worker, too, there was no direct link between year and 7 percent the next (Annex Table A2.1). productivity and remuneration. Because of the This declining performance is a symptom of lack of clear property rights, land and capital severe underlying problems. Attempts to revive were used inefficiently. the sector through large and unsustainable com- Lack of adequate support from input suppli- mitments of financial and real resources during ers and the food marketing chain also hurt agri- the 1970s and 1980s failed to achieve substantial cultural performance. Fertilizers, machinery, and growth.' other modern agricultural inputs were of poor This growth strategy relied primarily on in- quality, and farms had no real control over the creasing the quantity of agricultural inputs. inputs they received or when the received them.

23 For example, farms often had adequate tractor comes from state and collective farms. Most of horsepower, but lacked the attachments needed the rest comes from the personal household for efficient field operations, spare parts were in plots of farmworkers on state and collective chronically short supply, so machinery was fre- farms. These household plots make a particular- quently out of service. On the marketing side, ly important contribution to livestock output. state and collective farms had only one alterna- The newly created private farms continue to active: to sell their agricultural output to the state count for only a very small share of agricultural procurement system at state-set prices,. land (about 3 percent in Russia) and agricultural Agricultural performance was also affected by production. the extensive social functions of the state and collective farms. These farms functioned (and Russian Federation still function) as de facto local governments. Roughly one-quarter of investment in agricul- Despite its large geographical size only about 8 ture was used to finance social infrastructure percent of the total land in Russia (1.7 billion such as housing, schools, medical facilities, and hectares) is considered arable. The most fertile roads. State and collective farms also functioned and productive soils are in the southern half of as depositories for underemployed labor, partic- European Russia (the North Caucasus and Cen- ularly older and unskilled workers. In this sense tral Black Soils Regions) followed by the south- state and collective farms represented (and still em Urals and the southern fringe of Siberia. represent) an important rural social safety net. Many of these are also the regions most prone to And this arrangement also contributed to their drought. Much of Russia's agricultural area also dismal labor productivity, suffers from the limitations of a short growing In 1990 livestock contributed 58 percent of season and thus cannot support crops such as the gross value of agricultural output and crops corn and soybeans. contributed 42 percent. The large size of the rn aouns. ,. ,. , . ~~~~~~~~Russiaaccounts for approximately one-half of livestock sector, its poor performance in the y past, and the extensive adjustment currently ther value of agricultural production in the under way highlight the importance of live- former USSR (Annex Table A2.2). Agricultural stock now and in the coming years. These fig- growth durmig the 1980s averaged 1.6 per,ent a ures overstate the importance of the livestock year, slightly lower than for the former USSR^as a sector, however, because the domestic price whole. The economic problems that character- sectr, beausethehweve, 0nletiC rice ized the Soviet agricultural sector are even more structure overvalues livestock products and un- Ssia. Pricultygcute sures are lore dervalues grains. Moreover, measures of gross acute in Russia. Productivity measures are lower, output do not net out the contribution of the and a disproportionate share of poorly perform- crop sector to livestock production. Measures of ing state and collective farms are in Russia. Gen- value added would show a somewhat lower erally poorer agroclimatic conditions in Russia contribution for the livestock sector, although it are partly to blame, but so is the insistence of pol- would still be substantially larger than that of icymakers to bolster agricultural production in the crop sector. high-cost areas such as the Non-Black Soil Region Crop yields are lower than those of other Eu- (NBSR) through large investment programs. ropean countries, but grain yields (other than Livestock production constitutes an even larg- corn) are only slightly lower than those in cli- er share of agriculture in Russia than in. the matically similar areas of North America. Live- former USSR as a whole. Livestock accounts for stock productivity is generally only one-half to about 64 percent of the value of gross agricultur- two-thirds that in Western industrial countries. al production, and crop production accounts for Milk and beef are the most important: products 36 percent. A large share of Russia's animal pro- of the livestock industry, accounting for about 60 duction derives from cattle. The most important percent of the gross value of livestock output. commodity is milk, which accounts for more Grain crops are an important source of food and than one-third of the value of Russia's animal feed supply and account for about one-third of products. Beef is next, with a 27 percent share, the gross value of crop output. followed by pork and poultry each with a 15 to Nearly three-quarters of gross agricultural 16 percent share, and wool and sheep and goat production in the countries of the former USSR meat at 5 to 6 percent.

24 Basic yield indicators for Russian agriculture Crop production have been generally lower than those for West- ern agriculture, though there is considerable Grains variation among economic regions and commodities (Annex Table A2.3). The agricultural Grain production is concentrated in Russia, sector can be broadly divided into three compo- Ukraine, and Kazakhstan (Annex Table A2.4). nents: livestock, grain crops, and nongrain crops. Winter grains are grown in Ukraine and adjacent In the livestock sector, the amount of beef or portions of Russia, spring grains primarily in the pork produced per head is barely 60 percent of Volga river area east into Siberia and Kazakh- the U.S. level. Milk yields are only about 40 per- stan. In recent years, the bulk of milling-quality cent of U.S. yields. Egg yields are better, at about wheat has come from the spring wheat areas of 90 percent of U.S. yields. Kazakhstan and bordering regions of Russia. A In the crop (grain and nongrain) sector aver- smaller share of the winter wheat crop has been age wheat yields in 1986-90 were 1.9 tons per of high quality hectare compared with U.S. yields of 2.4 tons. Average grain production for the three major Corn yields, at about 2.9 tons per hectare, were grain producing republics of the former USSR- well below half of U.S. corn yields in the states of Russia, Ukraine, and Kazakhstan-has been Minnesota and Wisconsin-a region that is agro- very unstable over the last two decades (Figure climatically similar to the Russian corn belt. In 2.1). In 1991, average grain production in the the nongrain crop sector average yields for sugar former USSR declined by 26 percent (60 million beets and potatoes are much lower than U.S. av- tons) over the unusually large harvest of the pre- erages. Sunflower seed production fares better, vious year. Poorer yields accounted for almost with Russian yields roughly comparable to those all of the decline (Table 2.1). Among the three in the United States. primary producers, grain production from 1990

Figure2.1 Total grain production(bunker weight) in Kazakhstan,Russia, and Ukraine,1955-91 Million tons 140

120 -

100

80 - ,qi ~~~~~~~~~~~~~~~~~~~~Russia

40 w . ! ~~~~~~~~~~~~~~~~~~~~~Ukraine 20 K n

0 1955 1960 1965 1970 1975 1980 1985 1990 Source:Derived from GoskomstatUSSR data and World Bank staff estimates.

25 to 1991 declined 58 percent in Kazakhstan and 24 Since the second half of 1970s there has been a percent in both Russia and Ukraine. steady decline in the cultivated area of grain, for In the former USSR wheat accounts for about a cumulative decline of about 15 percent over 45 percent of grain production and coarse grains the period 1976-91 (Table 2.4). The Non-131ack and pulses account for the rest.Corn, its cultiva- Soil Region of the Russian Federation experi- tion restricted by climate to Moldova and the enced the largest contraction in area under grain southern portions of Ukraine and European Rus- cultivation. Despite the loss in area, grain pro- sia, has only a 5 to 7 percent share of grain production in 1986-90, at about 206 million tons duction, and its share has been declining. More bunker weight, was about the same as in 1976- of the cultivated area in the former USSR went to 80,2 because of increases in yields. Yields of wheat than to all other crops combined until the wheat are comparable to those in Argentina, early 1970s (Figure 2.2). Virtually all grain is pro- Canada, and the United States (Table 2.5 and duced on collective and state farms. Figure 2.4). Grain area and yields in the most im- Over half of grain is used as feed (Figure 2.3 portant grain-producing states of the former and Table 2.2). What is even more unusual is that USSR are displayed in Figures 2.5 and 2.6. nearly half of wheat is also fed to livestock (Table Grain is the most important crop in Russia, ac- 2.3). This share is even higher in Ukraine, Belarus counting for about 40 percent of crop produc- and the Baltic countries. One reason for the high tion. 3 Regional variations in yields are .large share of domestic wheat fed to livestock is the because of differing soil and climatic conditions lower quality of that wheat. Grain quality was (Box 2.1 and Figure 2.7). Russia produces a broad sacrificed in efforts to increase grain yields. In ad- range of grains, including spring and winter dition, approximately 8 to 10 million itons a year wheat, spring barley, oats, rye, and some corn. of milling-quality wheat was fed to animals in the Most of this grain is used as animal feed- about former USSR, about one-half of this in Russia. 65 to 70 million tons annually. Wheat accounts for

Figure 2.2 Area under grain crops in the former USSR, 1955-91

Million hectares 140

120

100

80_

S~~__ S , - ^ 60 .__,, ___>*

40 Wheat

1955 1960 1965 1970 1975 1980 1985 1990 Source: Derived from U.S. Department of Agriculture data.

26 Figure 2.3 Compositionof grain utilizationin the former USSR, 1989-91average

Food

12%~ ~ ~ ~ ~ ~ 0 Dockage/waste

Seed 10%

Industrial use 2%

Feed 56%

Source: Derived from U.S. Departmentof Agriculturedata.

Figure2.4 Crop yields in the formerUSSR and selectedcountries, 1988-90 average

Former USSR Wheat Canada

United States

-II]] Poland ig 2~~~~~~~~~~~IFrance Potatoes

Sugar beets

I I I I IIIIIIII 0 5 10 15 20 25 30 35 40 45 50 55 60 65 Tons per hectare

Source: Derivedfrom FAOProduction Yearbook and GoskomstatUSSR data.

27 Figure 2.5 Total grain area in Kazakhstan,Russia, and Ukraine,1955-91

Million hectares 90

10 Ukraine

0 I I I I I I 1955 1960 1965 1970 1975 1980 1985 1990

Source:Derived from U.S.Department of Agriculturedata.

Figure2.6 Averagegrain yields in Kazakhstan,Russia, and Ukraine,1955-91

Tons per hectare 4.0

3.5

3.0-

2.5-

1955 1960 1965 1970 1975 1980 1985 1990

source:Derived from GoskomstatUSSR data and World Bank staff estimates.

28 Box 2.1 Regionalgrain productionin the RussianFederation 1989-91 average Yield Areashare Productionshare Economicregion (ton/ha) (percent) (percent)

North 1.15 0.6 0.4 Northwest 1.07 0.7 0.5 Central 1.60 9.8 9.6 Volga-Vyatsk 1.45 5.7 5.1 CentralBlack Soils 2.31 8.3 11.7 Volga 1.47 19.8 17.8 NorthCaucasus 3.25 12.0 23.9 Urals 1.13 18.8 13.0 West Siberia 1.12 15.8 10.8 EastSiberia 1.36 6.6 5.5 Far East 1.36 1.5 1.3

Russia 1.64 100.0 100.0 (63 millionha) (104million ton) Source:World Bank1992.

Figure 2.7 Regional grain yields in Russia, 1989-91 average Tons per hectare 3.5

3.0 -

2.5 -

2.0 -

1.5

1.0

0.5

0.0 North North- Central Volga- Central Volga North Urals West East Far West Vyatsk Black Caucasus Siberia Siberia East Soils Regions Source:Derived from GoskomstatRussia data.

29 about 40 percent of Russia's grain production, northern areas of Ukraine, and much of European and winter wheat accounts for 60 percent of total Russia). Production has been declining continu- wheat production. ously during the last two decades as both yields In Ukraine grain yields averaged 3.23 tons per and area cultivated have dropped (Table 2.6). hectare in 1989-91, nearly twice as high as in Russia Production dropped 30 percent between 1986 and and comparable to those in the highest yielding re- 1991. Personal household plots account for about gion within Russia, the North Caucasus (Annex 60 percent of total potato production. Losses in Table A2.5 shows average crop yields by repub- processing, storage, and transport are as high as lics). Ukraine's major grain crops are winter wheat, 30 percent and even higher by some estimates. spring barley, and corn. Grain production technol- Substantial quantities of potatoes are grown on ogy in Ukraine benefits from generally fertile soils household plots specifically for livestock feed. As and favorable climatic conditions and involves rel- a consequence potato supplies for food are much atively intensive use of fertilizers, pesticides, and smaller than total production. The former UJSSR other modern inputs. In Kazakhstan, the third imported potatoes even though the country was largest grain producer, grain yields are generally the world's largest producer of potatoes. the lowest of any country in the former USSR, av- Potato yields have declined gradually in the eraging about 0.84 tons per hectare in 1989-91. past two decades, and variability in yields has While soils in the grain producing areas of Kaza- been high. Average potato yields have been less khstan are generally good, the growing season is than half the yields in Canada, France, and the short, and rainfall is generally low compared with United States (Figure 2.4). Cultivation of pota- marginal grain areas of North America. The major toes on state and collective farms (about 40 grains in Kazakhstan are spring wheat and spring percent of the total crop) is particularly sensitive barley. to weather conditions. In 1990 and 1991 potato The introduction of market-oriented farmgate production in the state sector was also affected pricing will improve incentives to produce and to by labor shortages at harvest time and by chang- market milling-quality wheat. More careful culties in price policy. The labor-intensive harvesting vation, harvesting, cleaning, and drying practices had traditionally relied on draft labor, but the can have a significant positive effect in the short mechanism for drafting harvest workers broke run on the quality and quantity of domestic wheat down in 1990. Centralized producer price con- production. For the long term, however, a strategy trols were removed in 1990, but many localities is needed for introducing new seed varieties and imposed retail price ceilings that did not even improving quality, bringing it up to world market cover harvesting costs. standards. Problems in the potato sector are similar to Field losses during harvesting also make a large those afflicting many other crops. Most impor- dent in grain yields in the former USSR. These tant are poor varietal selection and low-quality losses have been estimated by specialists to be as seed, shortages of pesticides and other agricul- large as 20 percent of clean-weight production in tural chemicals, inadequate weed control, labor Russia. While harvesting technology plays a role, shortages at harvest, and inappropriate price appropriate economic incentives and improved policy, particularly local price ceilings in 1990 management at the farm level could substantially and 1991. reduce these losses. Postharvest losses are unusually large as well-as much as 5 to 10 percent of Oilseeds clean-weight production. Thus grain yields for the countries of the former USSR overstate grain avail- Production of oilseeds increased gradually durability compared with yield rates for the United ing the 1980s but declined by about 10 percent in States and other industrial countries with substan- 1991 (Table 2.7). Sunflower seed and cottonseed tially smaller postharvest losses from handling, account for 80 percent of oilseed production; soy- storage, transport, and downstream processing. beans and rapeseed are also important. Con- sumption of vegetable oil is very low by Potatoes international standards and is reflected in low consumption of margarine. The increase in oil- Potatoes are an important crop in areas with less seed production during the 1980s came mostly fertile soils but with adequate moisture (Belarus, from sunflower seed and rapeseed. Total oilseed

30 production peaked in 1989 and has fallen more Cotton than 10 percent since. Yields are not low by international standards, but oil extraction rates and Cotton production increased in the early 1980s quality lag. Sunflower seed production is concen- and declined thereafter to the level of the early trated in the southern areas of Russia, Ukraine, 1970s (Table 2.9). Cotton is the dominant crop in and Moldova (Annex Table A2.6). Central Asia Central Asia, and most cotton is grown there accounts for most of cottonseed production. (Annex Table A2.6). Uzbekistan alone accounts for about 60 percent of cotton production in the Sugar former USSR, which was one of the world's three largest cotton producers (Figure 2.8). Sugar production, from sugar beets and other Expansion of area and yields of cotton is limit- sources, fluctuated around a stable trend until ed by severe natural resource constraints, prima- 1990 but declined by 20 percent in 1991 (Table rily water. The expansion of irrigated areas in 2.8). The former USSR was a major sugar pro- Central Asia to increase cotton production has ducer and accounted for approximately one- overtaxed water supplies and brought serious third of world sugar beet production. Approxi- problems of soil salinity, inadequate drainage, mately 70 percent of domestic refined sugar was and environmental degradation. The traditional produced from sugar beets and the remainder overuse and misuse of water resources in Cen- from imported Cuban raw sugar. Ukraine is a tral Asia is clearly evident in the severe ecologi- major center of sugar beet production and sugar cal problems associated with the Aral Sea. refining. Southern parts of European Russia also Profitability of cotton is declining with the intro- produce large amounts of sugar beets, though on duction of water fees and the rising relative price balance, Russia is a large net importer of sugar. of agricultural chemicals. Environmental as well Sugarimports, primarily from Cuba, averaged as economic considerations imply crop diversifi- Sugar imports, primarily from Cuba, averaged cation and a shift away from cotton mnoculture 4.7 million tons annually from 1985 to 1988 and in Central Asia. ay have been a major item in the import account. Prices paid for Cuban sugar have been much Livestock production higher than world market prices. In the past the USSR exchanged oil for Cuban sugar at over Production trends double the world price of sugar relative to oil. The area devoted to sugar beets has declined Livestock production is fairly well spread out by about 10 percent since 1980. Yields have been over most of the agricultural areas of the former stagnant since the early 1980s. Sugar extraction USSR (Annex Table A2.7). Nearly all state and rates are low by world standards and did not im- collective farms in the former USSR raise cattle. prove in the 1980s. Domestic sugar production Roughly two-thirds raise hogs, with the great- was roughly constant in the 1980s and fell by est concentration in western areas of the region. about 20 percent in 1991. At the same time, de- Poultry and egg production is concentrated mand for sugar was increasing substantially, es- around major urban centers. The absence of re- pecially in response to the antialcohol campaign gional specialization in livestock production of 1985-89, and shortages of sugar became acute. resulted from the lack of criteria for making Beet sugar production is not an efficient sub- economic decisions on the location and produc- stitute for cane sugar production or other sweet- tion structure. The tendency toward regional eners under any agrotechnical regime. It autarky in meat, milk, and egg production also survives in North America, Western Europe, and contributed to this pattern. Feed imports were Turkey only with the benefit of massive subsidi- used to support livestock production in feed- zation at the farm and manufacturing levels. deficit areas. There is thus an opportunity for substantial sav- Livestock production was overextended, mis- ings in Russia and in Ukraine through lower- developed, and centered in very large production cost sugar imports from the more efficient sugar units. It was a high priority of central agricultural producing countries as domestic sugar beet pro- planning in the 1980s, as reflected in large alloca- duction continues to contract in response to the tions of investments and subsidies. By the end of imposition of full cost pricing. the 1980s roughly half the annual investment and

31 Figure2.8 Share in annual cotton productionin Azerbaijanand CentralAsia republicsof the former USSR, 1990 Turkmenistan 18%

Tadjikistan

Kyrghyzstan 1%

Kazakhstan 4%

Azerbaijan 7% Uzbekista

Source: Derived from Goskomstat USSR data.

operational subsidies to farms (about 17.5 billion of feed ingredients (feed grain and oilseed meal). rubles) was earmarked for livestock production Livestock inventories began declining in 1987 as and nearly 80 percent of annual food subsidies part of an official policy to improve feed utiliza- (amounting to about 100 billion rubles) were for tion. In combination with a significant decline in livestock products. The livestock sector is large domestic feed supplies in 1991, the decline in in- and inefficient, and its adjustment will 'bring ma- ventories accelerated and total output of live- jor shifts in land use and employment. stock products began to drop even before the Until the early 1980s livestock production in- Russian price liberalization was announced. creased mainly through expansion in the size of Overall livestock production fell about 1 percent herds and flocks. Thereafter, increases in ani- in 1990 and was down more substantially in mal productivity became the main source of 1991: 7 percent for meat, 6 percent for milk, and output growth. Substantial increases in farm- 3 percent for eggs. The decline has reportedly ac- gate prices for animal products, premium pay- celerated since the price liberalization in re- ments for heavier weight animals for slaughter, sponse to shrinking consumer demand, and large subsidies for manufactured fteedstuffs declining profitability, and worsening feed bal- made livestock production relatively more ance problems through the winter and into profitable. Restrictions on private livestock pro- spring stemming from poor domestic feed production were lifted, and contract livestock production and feed import constraints in 1991. duction on personal household plots was In conjunction with declining consumer de- encouraged. Both of these policies contributed mand, several factors associated with the recduc- to increased production. tion in livestock production can be identified: Since 1990, however, the former USSR and its shortages and high prices of manufactured successor states have not been able to maintain feedstuffs, mainly resulting from reduced the same level of livestock subsidies or imports imports of feed grain, which particularly affects

32 the poultry and pig industry; rising costs of between early 1989 and the beginning of 1992, other inputs, particularly imported inputs, such the number of cattle in the former USSR fell 6.5 as high-protein meals and veterinary supplies; percent, hogs and sheep about 9 percent each, the elimination of differential bonus payments broilers 15 percent, and laying hens 12 percent. to high-cost producers in the fall of 1990, which Further large drops in livestock numbers have had constituted roughly 20 percent to 25 per- been recorded for 1992. For example, on state cent of the income of livestock farms; and accu- and collective farms in Russia the number of mulated losses and deterioration of grassland hogs dropped 14 percent, poultry 15 percent, areas from overgrazing, erosion, and neglect, and cattle 6 percent in just one year between which is probably the major reason behind the July 1, 1991 and July 1, 1992. Similar declines are reduction in sheep. occurring in Ukraine, Belarus, and other countries of the former USSR. Productionin the socialistand privatesectors Productivityand managementsystems In 1989, when livestock production peaked, the former USSR's herds and flocks were estimated Average milk yields in the former USSR are 60 at 120 million cattle (including 42 million cows), percent of yields in the United Kingdom (Table 78 million pigs, 141 million sheep, 7 million 2.12). Egg yields are about 86 percent of those of goats, 6 million horses, and 1.2 billion poultry the United Kingdom. Daily weight gain in cattle (Table 2.10). In the northern districts there were and hog production is particularly low, as are also 2.3 million domesticated reindeer. State and poultry feed conversion rates.4 However, there is collective farms and specialized agroindustrial wide variation in livestock productivity among complexes owned about 78 percent of cattle (in- countries of the former USSR. The most efficient cluding 67 percent of cows), 79 percent of pigs, livestock producers, in terms of feed conversion, 74 percent of sheep, 20 percent of goats, 67 per- are the Baltic countries; the least efficient are the cent of laying hens, over 95 percent of broilers, countries of Central Asia (Annex Table A2.8). 10 percent of ducks, geese, and rabbits, 17 percent of fur animals and about 50 percent of bee- Cattle. About 60 percent of all cattle in the hives. Private producers owned the remaining former USSR are of three major milk-producing livestock, most of these being the personal breeds (Holstein-Friesian, Red Steppe, and household plots of workers on state and collec- Brown Swiss types); the remaining 40 percent are tive farms (Table 2.11). dual-purpose types and beef landraces. Present Collective and state farms account for about breeding policy aims to further increase the share 70 percent of meat, milk and egg production. of milk producers, though the share of beef pro- The remainder is produced in the private sec- ducers in the present herd composition is surpris- tor, primarily on the personal household plots. ingly small (only 3 percent of the national herd Milk and egg yields have been lower for ani- consists of specialized beef producing animals). mals kept on the private plots, largely because Further reducing the share of the dual-purpose of poorer access to feed supplies and veterinary breeds will undoubtedly result in somewhat low- services. However, meat production perfor- er meat production performance per animal and mance per livestock unit has been higher in the somewhat lower overall meat quality. private sector than in the socialist sector, main- More than 90 percent of all state and collective ly as a result of the introduction of contract farms raise cattle. Most dairy cattle, particularly livestock fattening with state and collective on state and collective farms, are not grazed or farms, state procurement organizations, and are grazed only during the 3 to 5 month grazing consumer associations. As land and agricultur- period. Calving rates are low, around 80 percent, al enterprise reforms take hold, the share of ani- and calves are reared mainly on whole milk mals being managed privately is expected to since milk replacers are unavailable. increase substantially. All dairy cows are milked and all surplus prog- Much of the decline in the number of animals eny over herd growth and replacement require- since 1990 has occurred in the intensified animal ments are slaughtered for meat. On average, state production units, all of which are in the socialist and collective farms have about 1,700 cattle with sector. Preliminary estimates indicate that 620 milking cows, usually distributed among

33 three to five subfarms. Annual milk production technology is reported to be obsolete, although a on state and collective farms averages about 2,800 few hundred privileged, modern dairy farms are liters per cow, but there is wide variation among equipped with costly, over-designed milking farms, regions, and countries. For example, about parlors. Milk losses throughout the chain are es- 250 large dairy farms produce more than 5,000 ki- timated at 10 to 15 percent. Dairy farms of sizes lograms of milk per cow each year, and several re- common in Russia and the other states of the gions and countries within the former USSR former USSR are rare in Western countries. average 3,500 to 4,000 kilograms. In addition to oversized management uiits, Western countries have made substantial ge- demanding logistics, and high internal transport netic progress in cattle breeding in the last twen- costs, other major reasons for substandard pro- ty years, and there is certainly r oom for ductivity in the dairy industry are the environ- improvement in the states of the former USSR. mental problems associated with manure and However, genetic potential does not appear to be slurry removal and the difficulty of hiring and a major constraint to increased productivity in motivating a reliable labor force. Where techni- the former USSR, where only about 60 percent of cally feasible, the large dairy farms should be the genetic performance potential of cattle has subdivided into smaller, self-contained units. been realized. Rather, better utilization of that Others should be dissolved, and their stock dis- potential is needed, through vastly improved tributed to smaller, private dairy farm operators. feeding and management regimes that concentrate more on available resources for forage pro- Swine. About one-third of the swine on state duction and improved grazing and less on and collective farms are kept in large, fully mech- concentrated feeds (particularly grain) and in- anized breeding/fattening complexes, some of tensified husbandry. For now, however, the prev- which produce over 250,000 pigs a year. The re- alence of low-quality diets and poor husbandry maining two-thirds are raised in smaller-scale practices suggests the wisdom of preserving or operations, most without any significant invest- only partially upgrading existing landraces since ment in mechanization except for watering these breeds perform much better under margin- facilities. Private pig producers generally have al conditions than do the exotic ones. At a later few breeding sows. stage, say in five to seven years, with expected Recently, contracts for hog fattening have been improvements in feed production and husband- introduced between private producers and so- ry practices, more attention could be devoted to cialist enterprises, which supply inputs and mar- genetic progress, through a combination of ex- ket finished animals. Most large pig farms have panded artificial insemination programs and im- up-to-date technology, but the incidence of dis- portation of frozen semen and embryos to ease is sometimes high and difficult to control, improve sires. and slurry disposal techniques have introduced Dairying is at the core of the cattle products serious environmental hazards. Attractive prices industry. Dairying in the former USSR suffers for lard, consumer preference for fatter pigs, and from the same problems of excessive scale and the prevalence of low-protein feedstuffs have re- inappropriate enterprise location that character- sulted in fatter pigs (lean meat 48-49 percent) ize other industrial activities in the former USSR. than those produced in Western countries (lean Until 30 years ago, there were many smnall dairy meat 52-55 percent). With the expected improve- plants, often attached to larger farms. F[uge, cen- ment of the feed base and the expected switch in trally located dairy plants were then construct- consumer preference toward leaner meat, breed- ed, and the smaller but better distributed ones ers could move relatively quickly to leaner pigs were abandoned. Except in the Baltic states, the with better growth performance and feed conver- bulk of dairy farms are severely handicapped by sion ratios by importing boars, expanding artifi- their distance from procurement and rmarketing cial insemination, and engaging in appropriate centers. commercial crossbreeding programs. Milk cooling and milk collection from farms have become major problems, exacerbated by in- Ovines. About 75 percent of sheep are kept on adequate rural roads, long distances from dairy large breeding and commercial socialist sector centrals, and a serious shortage of specialized farms. The rest, as well as more than 80 percent milk transport facilities. In general, milking of goats, belong to private producers. Sheep are

34 raised primarily for wool and mutton under ex- highly profitable. Private poultry producers tensive grazing systems in Kazakhstan, southern raise chickens with backyard technology Russia, and the countries of the Transcaucasus primarily for egg production, with an average of and Central Asia. Sheep milking was once com- 130 to 140 eggs per hen per year. mon but is rare today, one reason being a lack of milking equipment. Feed base and feeding efficiency Sheep breeding suffers in many regions from shortage of feed. Large pasture areas of the A program to reduce herd size was begun in 1987, steppe and semiarid zones have increasingly and the rate of decline has accelerated with recent been degraded by overgrazing. This has been ag- feed shortages (Table 2.10). The livestock sector is gravated by inadequate supplies of winter feed, large and inefficient, and herd size will have to be leading recently to a significant reduction in the further reduced if the current waste of scarce feed sheep population. Although priority has been is to be stopped. About 56 percent of grain in the placed on attaining self-sufficiency in wool pro- former USSR went to livestock feed and only 20 duction, prevailing world market conditions to- percent was used directly as food (Table 2.2). The gether with increasing privatization, suggest expansion of the livestock industry in the past that the meat and milk production aspects of two decades has been associated with increased sheep raising will receive increasing attention. dependence on concentrate feed, much of it im- The former USSR was a renowned producer of ported, while domestic pastures and grasslands cashmere and mohair despite a relatively small remain poorly tended and under-used. goat population of only 7 million head. While in- Livestock productivity is only about 50 per- creasing goat production might be justified on cent to 60 percent of Western European levels. economic grounds, goats seriously degrade pas- Feeding efficiency, the most important bioeco- ture lands and contribute to soil erosion. Thus nomic parameter in livestock production, is very the environmental sustainability of large-scale low by any standard. The consumption of manu- goat production should be carefully weighed be- factured feed per unit of output averages almost fore major expansion programs are introduced. twice the level in Western countries, although some countries of the former USSR, primarily Poultry. Most poultry production in the former the Baltic states, come closer to Western stan- USSR is based on integrated breeding and pro- dards (Annex Table A2.8). duction programs, with breeding farms that pro- Compared with feed conversion coefficients vide hatching eggs to state and collective farms. in Germany, feed concentrate requirements in Basic breeding and selection programs are well the former USSR for beef, pork, broiler, and developed and managed and use pure lines. milk production are much higher (Table 2.12 Large socialist sector farms typically have 1.0 to and Figure 2.9). Under the prevailing condi- 1.5 million layers or produce 6 to 10 million tions of poor-quality pig rations, for example, broilers per year. Layers and slightly more than one additional kilogram of soybean meal could half of all broilers are raised in fully mechanized replace about 2 kilograms of wheat, barley, or cages. Producing broilers in cages instead of on maize and also significantly increase fertility deep litter is wasteful and needs to be corrected. rates and daily weight gains. Moreover, if opti- For both egg and broiler production, three- or mal feed formulas were applied, fattening peri- four-line crosses are carried out based on im- ods for pigs and broilers could be shortened by ported pure lines and grandparent stock. Pure as much as one-third, thereby significantly re- lines are no longer sold to states in the former ducing fixed and variable costs per unit of ani- USSR, and insufficient grandparent stock was mal product. Broiler production is especially imported in the 1980s. As a consequence sensitive to protein deficiency. "closed" lines are commonly used, and feed con- More efficient feeding of fewer animals with version potentials suffer accordingly-over 3 ki- more balanced rations could maintain current lograms of feed per kilogram of live-weight gain outputs of meat and milk at lower levels of grain for broilers compared to less than 2.0 kilograms utilization. Mixed feed is low in protein and of feed in Western countries. Importing grand- lacks ingredients essential for animal health and parent stock and forming joint ventures with for- high productivity. Because of shortages of many eign poultry breeding enterprises could prove of the ingredients needed to improve feeding

35 Figure 2.9 Average livestock feeding requirements in the former USSR and Germany, 1990

Oat units per kilogram of livestock products 14

12 - Former USSR Germany 10 _

0 Cattle fattening P g fattening Poultry fattening Milk production

Source: Agroprom and USSR Statistical Yearbook.

efficiency, local supplies need to be supplement- coccidiostats, reagents and chemicals, and sup- ed by importation. In the past, low-quality plies for vaccine preparation. No immediate re- mixed feed was overpriced relative to grains, so lief of these shortages seems likely because of the farms often produced their own feeds (also of lack of foreign exchange. low quality) rather than purchase mixed feed. Thus it would make sense to increase production Trends and patterns in food consumption and imports of protein meals and reduce the number of livestock to make more economic use Food consumption trends of limited protein-feed resources. Also, after years of neglect of pastures and grasslands, Food consumption throughout the territory of yields of grasslands lag world levels more than the former USSR is comparable to that of coun- do grain yields. Thus there is substantial scope tries in Central and Eastern Europe (Table 2.13). for improving the quality of locally produced Average availability of calories and protein has roughage feeds. equalled or exceeded levels in OECD countries. Per capita food availability in the former USSR Veterinary supplies was about 3,400 calories a day in 1985 (Table 2.14 and Figure 2.10). These data are based on do- Veterinary supplies are in short supply because mestic disposition, however, not on actual con- of lower levels of domestic production and of sumption, and may overstate caloric intake by as imports. Reduced trade between the states of the much as 25 percent. Part of that difference former USSR and the East-Central European derives from the diversion of bread to feed pri- countries has hurt imports of veterinary sup- vate livestock, the diversion of sugar for the pro- plies. Drugs are needed for treatment of internal duction of alcohol, and unrecorded losses in and external parasites, as are antibiotics, wholesale and retail trade.

36 Figure2.10 Per capitafood consumptionin the formerUSSR and selectedcountries, 1984-86 average

Thousands of calories per day

Former Japan Finland United France Poland Hungary United USSR Kingdom States

Grams of protein per day

120

100

0 Former Japan United Finland Hungary Poland United France USSR Kingdom States

Source:FAo Production Yearbook, 1988.

37 Average consumption levels mask wide vari- sumption exceeds that in market economies with ations in geographic distribution that reflect comparable levels of income. Dietary shifts from different income levels, demographics, and di- potatoes and cereals to meat, fat, and sugar usual- etary preferences, as well as the effects of ad- ly accompany economic growth and migration to ministrative management of interregional urban areas, but in the former USSR this shift: was trade. Consumption of livestock products is exaggerated and stimulated by administered pric- high in the Baltic states, Ukraine, Russia, Be- es and trade. The food consumption patterns at larus, and in large urban centers elsewhere. In the start of the transition in the Baltic states, Rus- the Caucasus and Central Asia, there is less sia, Ukraine, and Belarus are not those that con- consumption of meat and milk and correspond- sumers will choose once they face high ingly more of bread. In 1990 per capita meat unsubsidized prices and reduced real per capita consumption was 75 kilograms in Russia, about incomes. 85 kilograms in the Baltic states, ancd about 30 An OECD report published in 1991 provides an kilograms in Central Asia (Table 2.15 and Fig- analysis of recent changes in the pattern of food ure 2.11). Annual consumption of meat by the consumption in the former USSR (Table 2.13). The rural Uzbek population is reported to be only analysis is based on FAO data that provide esti- about 10 kilograms per capita. Differences with- mates of per capita food availability rather than in states are also large. In Russia, for example, actual food intake. As already noted, there is rea- meat consumption in Moscow is three times son to believe that food intake is less than food that of areas of the Caucasus. availability, and this should be kept in rnind Consumption of meat and dairy products in- when considering the following historical trends creased throughout the former USSR in the 1970s in consumption suggested by the OECD study: and 1980s except in parts of Central Asia. In Rus- * There has been a declining trend in per cap- sia, Ukraine, Belarus, and the Baltics meat con- ita consumption of cereals, potatoes, and pulses.

Figure2.11 Average per capita rneatconsumption in the former USSR, 1990

FormerUSSR Latvia Lithuania Estonia Russia Belarus Kazakhstan Ukraine Moldova Armenia Kyrghyzstan Georgia Turkmenistan Azerbaijan Uzbekistan Tadjikistan I I I I I 0 10 20 30 40 50 60 70 80 90 Kilogramsper capita Source:Derived from GoskomstatUSSR data.

38 * Per capita consumption of sugar has risen for sugar. Consumption of tropical products has and is at levels considerably higher than in other been severely constrained by trade policy When industrial countries. imports are liberalized and the economic situation * Per capita consumption of meat has risen stabilizes, consumption of coffee, tea, cocoa, and modestly, although it is still below the level in in- tropical fruits is expected to increase. dustrial countries. Per capita consumption of sea- These medium-term changes in consumption food has also risen moderately and is at a higher in Russia, Ukraine, Belarus, and the Baltics differ level than in industrial countries. from the sometimes severe changes associated * Consumption of milk and dairy products with the current disruption of internal trade. The other than butter declined in the early 1980s, and medium-term adjustment will derive from new although it has recovered somewhat since then, it decisions on the part of consumers as incomes, is still below levels in other industrial countries. prices, and the availabilities of other foods change. Given already high caloric and protein Expected changes in consumption patterns availability, the probable substitutions are unlikely to represent a deterioration in the general Several consequences of price liberalization in level of nutrition. Russia can be anticipated with some accuracy, at Adjustment of consumption patterns in the least for the near term. Per capita demand for Caucasus, Central Asia, and Moldova may not meat will decline significantly The decline in be as large as in other areas, since consumption consumption in the early months of 1992 will of livestock products- for which price distor- probably be less than in the later months because tions were the greatest- was low initially. Given the reduced availability of feed compared to the lower level of income and the limited scope 1991 will result in some additional slaughtering for substitution in the bread-based diet of rural of livestock. The per capita consumption of Central Asia, however, small changes in con- bread, cereals, fruits, vegetables, and potatoes sumption are more likely to create nutritional will increase. risk. Programs of nutritional monitoring and in- Assessment of likely changes in demand over tervention will be needed in rural Central Asia the medium-term is more speculative. None- throughout the agricultural transition, and per- theless, changes in direction and orders of mag- haps thereafter. nitude can be foreseen. The share of consumer expenditures devoted to food increased be- Trends and patterns in agricultural trade tween 1990 and March 1992, as subsidies were eliminated, prices rose, and growth in wages Tra did not keep pace. This share is expected to depatterns in theformer USSR decline over time, but not to return to its 1990 level in the near future. Thus as real per capita The emergence of the USSR as a major agricul- incomes rise and privatized food production tural importer in the early 1970s followed from and distribution systems respond to consumer slow growth in supply, rapid growth in de- demands, the variety of foods available will in- mand, and the government's decision to use increase and consumption of higher-valued fresh ternational markets to augment domestic produce will increase substantially. supply. In the last half of the 1980s, imports of In Russia, Ukraine, Belarus, and the Baltics de- food and agricultural products ranged from $15 mand for meat could fall as much as 25 percent billion to $19 billion annually, or about 15 per- given the current decline in real incomes, high in- cent of total imports. Imports in current prices come elasticity for meat, and the increase in the did not fall below $15 billion annually in the relative price of meat. Demand for fluid milk 1980s. Approximately one-quarter of agricul- products and cheese may rise, but substitution of tural imports was grain, most of it from hard margarine for butter will reduce demand for raw currency markets. Another quarter was ac- milk. Demand for bread and potatoes should in- counted for by sugar, imported primarily from crease further. Consumption of fruits and vegeta- Cuba at overvalued soft currency prices. The bles is still very low, despite the rise in recent value and commodity composition of Soviet years, and can be expected to increase further. Bet- agricultural trade through 1991 is shown in ter availability of fresh fruits will reduce demand Tables 2.16 and 2.17.

39 Wheat for the milling industry (for human about 5 to 7 percent of their domestic consump- consumption) constituted approximately half of tion. However, some republics were more de- grain imports. The large and inefficient livestock pendent on imports of these commodities than sector also generated demand for imported grain were others. (Figure 2.12). The former USSR's dornestic pro- When trade with other republics in the former duction of wheat at about 83 million tons (clean USSR is also considered, Russia was a large net weight) was more than twice its wheat con- importer of meat and milk products; they sumption of about 37 million tons as food. Im- equaled 15 percent of domestic consumption in ported bread wheat released lower-quality 1990 (Annex Table A2.9). The Baltic countries, domestic wheat for animal feed. Belarus, and Ukraine, in contrast, have been Traditional imports of the former USSR rep- large net exporters of livestock products. Be- resented a large share of world trade for grain, cause of the severity of domestic price distor- sugar, meat and milk products, and vegetable tions there is no good single measure that oil (Figure 2.13). Because of the huge internal expresses the share of imports in properly val- market, however, even high level imports con- ued domestic consumption. It is unlikely, how- stituted only a relatively small share of domes- ever, that import dependence in aggregate in the tic utilization. Grain imports, averaging 35 former USSR, properly measured, exceeded 15 million tons in the second half of the 1980s, con- percent of domestic consumption, even though stituted about 15 percent of total grain used. imports comprised a large share of international Sugar produced from imported raw sugar rep- trade in several commodities. resented about 30 percent of domestic con- Imports of food and feed were a larger share of sumption. Import dependence for other the food supply for certain republics, especially for commodities was even lower. Imports of meat deficit areas within those republics. For example, and milk products by the USSR accounted for the Non-Black Soil Region of Russia, comprising

Figure2.12 Volumeof annualgrain importsof the former USSR, 1985-91 Milliontons 50 W Others Wheat 40

0 1985 1986 1987 1988 1989 1990 1991 Source:Derived from Goskomstat USSR data.

40 Figure 2.13 Share of selectedcommodities in annual agriculturalimports of the former USSR, 1987 and 1990

1987 1990

Coffee, cocoa, Coffee, cocoa, and tea and tea 5% 6%

O t h t 30o.6 ~~ ~ ~ ~ ~~ ~~~~ther,a 32% Sugar~~~~Sga 30%

Grain Grain Livestock proct products 1roduct 16% 17%

Source:Derived from USSRForeign Trade Yearbook.

the northern half of European Russia and includ- little grain and sugar to sell. Hungary sold grain, ing Moscow and St. Petersburg, accounted for vir- but most East-Central European traditional sales tually all the imports of meat and milk products were meat and fruits and vegetables, both fresh into Russia and therefore was particularly and processed. dependent on trade flows directed by the central These trade flows, although small to the pur- government. As inflation increased, incentives to chaser, were large to the sellers. The former USSR market output weakened, pressure to maintain re- market became increasingly important for East- gional self-sufficiency rose, deliveries to the cen- Central European food exporters with the rise of tral government fell, and the food supply in deficit agricultural protectionism in Western Europe. The areas became even more dependent on imports. collapse of agricultural trade between the former Imports rose after 1985 in part because it was easi- USSR and East-Central Europe with the switch to er for the central government to buy from foreign hard currency trading severed traditional flows suppliers than from domestic suppliers. With the from Hungary, Poland, Romania, and Bulgaria. rapid breakdown in domestic marketing in the fall The trade shock came as the agricultural transition of 1991, food security in food-deficit areas became in Hungary and Poland was creating additional even more dependent on imports. surpluses in traditional products and new nontra- Between 30 percent and 40 percent of total im- ditional exports, such as Polish grain and dairy ports had traditionally come from CMEA mem- products. bers. Over half of this (by value) was Cuban sugar exchanged for oil at from 2 to 2.5 times Tradepatterns in the Russian Federation world prices of sugar relative to oil. The share of East-Central European suppliers in Soviet food Agricultural and food imports accounted for 16 imports was modest, at 10 percent to 15 percent of percent of Russian imports from outside the former the total, largely because those suppliers had USSR and 9 percent of imports from within.

41 Russian agricultural and food exports were negli- commodities on offer in East-Central Europe, gible, accounting for only 1 percent of all exports including meat, grain, some dairy products, and outside the formner USSR and 2 percent of all ex- fruits and vegetables, can be used to dampen prices ports to other republics. Net imports of food prod- where they are unusually high or to augment food ucts in 1989 were equal to 14 percent of Russian distribution programs for the poor. However, trade gross agricultural production. This share rises to flows under these arrangements may not continue about 20 percent when imports of agricultural raw under commercial auspices because of adjustments material are included, indicating that Russia has in supply in East-Central Europe and changing de- been heavily dependent on imports of food and mand and supply patterns in the states of the other agricultural commodities. former USSR. Annual imports of grain into Russia have averaged 19 to 22 million tons, consisting of about 50 Notes percent wheat, 40 percent maize, and 10 percent barley Only a small portion of Russia's grain im- 1. Other recent studies which examine the performance ports were from other republics of the former USSR. of the agricultural sector of the former USSRinclude a Grain imports from Kazakhstan have been about joint study by the International Monetary Fund, the 1.5 to 2 million tons per year, virtually all of it wheat. World Bank,the Organizationfor EconomicCooperation Imports from other republics have been about 1 to and Development, and the European Bank for Recon- 2. milliontons, mostly from Uraine. The remaining struction and Development (1991);a study of the agro- 2 milhonmostlytons, from kraine.Theremaining food system by the Organization for EconomicCoopera- 16 to 20 mrllion tons came from outside the former tionand Development (1991);and an annual trade and USSR. Overall, grain imports accounted for nearly agriculture report by the United States Department of one-half of all grain used as food and about one- Agriculture (1992). seventh of all grain used as feed. Food import requirements for Russia in 1992 are expected to be 2. Soviet statistics traditionally reported grain produc- about $7 billion, one-third of that for grain imports. tion on a bunker weight basis, that is, the weight of the grain as it came in from the field, before cleaning and drying. In 1990 statistical methodology and reporting Triangulartrade proposal shifted to a clean weight basis, which corrects for excess moisture and extraneous matter and is comparable to in- One proposal to provide relief from surpluses in ternational grain statistics. The discount from bunker East-Central Europe and shortages in the new weight to cleanweight is typically 7 to 8 percent. states of the former USSR is a system of trianigular 3. The important nongrain crops in Russia are roughage trade. The European Community WOuLd finance crops (18percent share), potatoes (16percent), vegetables purchases of food in East-Central Europe for deliv- (8 percent), and fruits (6 percent). ery in the Commonwealth of Independent States (CIS). However, efforts to implement triangular 4. Bcause yields were low and stagnant prior to some trade shipments to Russia in early 1992 proved dif- improvement in the late 1980,increases in meat and milk filour,ficult powdeausedbecause ththe commoditiesoimodiandvegete mostmoi needed-ned t mingproductionthe number have of traditionally animals. The been large achieved herd sizes, by increas- ineffi- flour, powdered milk, and vegetable oil-did not cient feeding, and excessive use of concentrate feed correspond to East-Central European offerings. explains the large derived demand for grain as feed, Nonetheless, efforts to implement triangular trade arrangements should continue. Imports of

42 A development strategy for food and agriculture

Achieving sustainable agricultural growth in the and monetary policies to stabilize the economy states of the former USSR requires a transforma- and establish the conditions necessary for sus- tion of the food and agricultural sector from a tainable long-term economic growth. centralized command and control system to one Creating a well-functioning competitive mar- shaped by the forces of a market economy. This ket environment will require breaking up exist- chapter outlines a development strategy for the ing monopoly structures and encouraging the short and medium terms to help guide that entry of new firms and the diversification of eco- transformation. It also explores the needs, poten- nomic activity. Much work is required to craft a tial impact, and impediments to agricultural and legal and regulatory framework appropriate for economic reforms, as well as recent agriculture a market economy. Product and factor markets and economic reforms in the Russian Federation. also need to be developed, along with physical marketing infrastructure, market information Perspective on agricultural and economic systems, and appropriate conditions for these reforms markets to function. The economies of the former USSR must also Needed economic reforms be integrated into the world economy if they are to realize potential efficiency gains. World price The countries of the former USSR are undertak- signals must reach the domestic economy, which ing major agricultural and economic reforms to had been closed off from world markets in the increase economic efficiency. This process entails former USSR. Achieving this openness will re- privatization, enterprise reform, and a greatly require unifying exchange rates, eliminating tradi- duced role for the government in controlling tional state foreign trade monopolies, vastly economic activity. Appropriate economic deci- reducing quotas and other quantitative trade sions will require well-functioning, competitive barriers, making reasonable use of tariffs, and markets in which individual producers, consum- eliminating many licensing and regulatory im- ers, and traders pursue their own interests and pediments to trade. transact their business on mutually agreeable terms. This, of course, implies that prices must Potential impact of reforms be free to move in response to these forces. Since the former USSR followed a policy of low prices Implementing these economic reforms will re- and wages, any relaxation of state price controls quire major sectoral adjustments. Among the generally means a significant jump in prices. legacies of socialist agriculture are a dysfunc- This fact underscores the need for judicious fiscal tional organizational base, with poorly defined

43 property rights and weak incentives for efficien- likely soon face, several critical shifts in eco- cy and growth, and severe price distortions, re- nomic parameters: flecting the government's commitment to stable * Reduced demand for food at higher prices retail prices despite rising production costs in and lower real incomes the 1970s and 1980s. The government also sup- * Shifts in the composition of food purchases ported the agricultural sector, which was highly in favor of commodities with low income elastic- inefficient in its use of labor and capital, by ities (bread, potatoes, fruits and vegetables, fluid maintaining favorable terms of trade and apply- milk) and away from those with high income ing an ad hoc system of differentiated producer elasticities (meat and poultry) prices. Thus, liberalization of prices will bring * Higher relative prices of agricultural inputs about major shifts in the pattern and location of of industrial origin, such as machinery, fertilizers, agricultural production, the choice of technolo- and chemicals gy, and the structure of farms. However, price * Higher interest rates and consequently liberalization must also be accompanied by ma- higher costs for capital- intensive production pro- jor structural reforms. cesses such as those used in the livestock industry Farm structures and agricultural support sys- * Higher transportation costs that will radi- tems throughout the former USSR are geared al- cally change regional comparative advantage in most entirely to large-scale state and collective food production and require substantial shifts in farms. Property rights are poorly defined, and land use management patterns work against any effective * Higher energy prices and hence even higher linking of remuneration and productivity. This costs of agricultural production and distribution, system requires fundamental change to improve due particularly to energy-intensive mechanized agricultural efficiency. Farm restructuring and operations and agricultural inputs land reform will have major implications for re- * Much higher prices for imported agricultur- source use, supply response, and agricultural al inputs and food commodities and increased production patterns, economic incentiveto export. Monopoly structures predominate in input Reduced demand, higher interest rates, and manufacturing and supply and in food procure- rising input prices will reduce the profitability of processturing,andsupplydistribtion, Td arou- farms, particularly those with large livestock opment, sysis nd distribution.-Thnsumr erations. In the long run, however, the agricul- food system is not designed to satisfy consumer tural sector can recover and exploit the potential preferences for products, packaging, quality, va- of the vast and rich agricultural natural resource riety, or availability. Similarly, farmers' prefer- base. Recovery will require restructuring agricul- ences have long been neglected by input tural enterprises, reducing producer subsidies, producers and distributors. The chianges re- and linking any remaining subsidies to the cur- quired are massive and fundamental, from anti- tailment of activities with negative value added monopoly policies and enterprise reforms to and the adoption of production practices which major new investments in food processing and are consistent with new output and factor prices. marketing. A reformed agricultural sector that contributes While problems with credit and the banking to national income rather than draining it will system are serious throughout the economies of look quite different from the sector as it is now the former USSR, they are particularly severe in constituted. agriculture. Credit discipline in agriculture is ex- In the grains sector modest but widespread in- tremely low after years in which poor manage- creases in yields (perhaps on the order of 10 per- ment practices were encouraged by government cent) combined with substantial reductions in use of the credit system to channel subsidies to grain used for feed, could turn the former USSR inefficient farms while regularly writing off out- from a net importer of grain to a net exporter. standing debts. In addition, the rural economy Under this scenario wheat could be the main ex- poses special problems for developing a diversi- port grain, but the size of wheat exports is diffi- fied banking system because of its remoteness. cult to predict. The potential for increases in In the initial phase of economic reform and yields and shifts in area and location is greater in macroeconomic stabilization, farms, agrofood the nongrain sector than in the grain sector, but enterprises, and consumers are facing, or will the nongrain crop sector has a largely domestic

44 market. Adjustment here will depend on recov- extreme market disequilibrium that typified the ery of domestic demand and integration of re- situation before reform. The largest efficiency gional markets, as well as on relative prices of gains of reform, however, are tied to the process inputs. of economic restructuring, which will necessari- The largest distortions in agriculture are in the ly be protracted and difficult in Russia and in livestock industry. Within that distorted sector, other states of the former USSR. The breakdown however, is a core of potentially more efficient in traditional interstate trade links has further commercial production that will survive the ad- complicated the reform process. justment. Significant reductions in herd size, less Appropriate fiscal and monetary policies are reliance on concentrate feeds, and improvement needed to ensure macroeconomic stability, within productivity per animal will reduce the need out which economic reform cannot succeed. for feed, capital, and possibly labor in livestock These policies can impose serious constraints on production. Policy interventions should work the design and implementation of successful re- for the closure of nonviable enterprises which structuring programs for the agricultural sector. will improve the market environment for enter- Budgetary funds to assist in the restructuring prises that are less intensive users of energy, con- process or to temporarily cushion the shocks for centrate feed, and labor. producers or consumers will be limited. Tight Imports of grain and meat which have been monetary policies will result in a credit squeeze large recently can be reduced and then, as the that may seriously impair production and re- pace of reform and recovery allows, partially structuring in agriculture, a sector that depends replaced by increased imports of protein meal, crucially on short-term credit. vegetable oil, and tropical food products. For In the face of these impediments there has policy purposes the direction of adjustment is been a tendency to retreat or backslide from the more important than its end points. Thus in the reform agenda. A loosening of fiscal and mone- case of wheat, it is important that domestic tary policies and a delay in transmitting world prices be allowed to gradually approach world price signals are proposed as ways of relieving prices and massive subsidies on imported wheat current pressures faced by producers and con- for domestic resale end. sumers. The obvious danger is that the reform process could be reversed before it has had time Impediments to reform to take root. The longer-term economic prospects would then be uncertain and the transition to In the short term the costs of reform will out- market economy would drag on much longer. weigh the benefits. The first set of reforms in Thus, a reform strategy for the food and agricul- Russia have resulted in a deterioration in agri- tural sector needs to consider not only the re- culture's terms of trade and in declining farm structuring and technical change required, but profitability. This trend is expected to continue also ways to ensure safe passage through the im- with the unification of exchange rates, new hikes mediate obstacles to reform. in domestic energy prices, and higher credit costs. Retail food prices, once heavily subsi- Elements of an agricultural strategy dized, have soared. Income distribution has widened as household incomes increasingly diverge, In formulating a sustainable strategy for devel- with especially difficult consequences for the oping the food and agricultural sector, it is con- lowest income segments of the population. venient to distinguish between strategies for the Not all is bleak even in the short run, however. short-term-here 1992 and 1993-and options Some efficiency gains can be expected. As pro- for reform over the medium-term, or the five ducers face more realistic prices early in the re- years beyond 1993. form process, they will make more appropriate economic choices and be more careful in their Short-term adjustment program use of resources. The freeing of prices, by definition, brings markets into balance. This has al- The strategy for developing the food and agri- ready been a significant achievement in Russia. cultural sector during the remainder of 1992 Consumers no longer have to deal with the un- and through 1993 should center on four main certainty and other costs associated with elements:

45 * Ensuring a sufficient supply of food to meet form effort. The policy instruments for channel- the needs of the population. Achieving this will ing transitional support to producers should be require measures to moderate the expected drop compatible with the process of change in agricul- in production in 1992/93 and to ensure continued ture. The burden of consumer subsidies can be access to food imports during 1992 at a level of reduced through a well formulated social safety about $7 billion for the Russian Federation, and net. about $4 billion for the other newly independent Making the right policy decisions requires reli- states. able economic information and the means for * Substantially reducing state orders for food analyzing that information. In the immediate procurement and shifting the state's role in food term, the countries of the former USSR need to distribution to the administration of programs for improve their information base, the availability cushioning the impact of higher food prices on of information, and their capacity for policy vulnerable groups. Imported food could be in- analysis. cluded in such programs. * Strengthening the food distribution and Medium-term adjustment program marketing system to ensure the availability of food in the main centers of demand, particularly Over the medium term, adjustment programs in the hot spots. A strong food safety net needs to be the food and agri9ultural sector should serve the put in place. following objectives: * Accelerating the first phase of the structural * Expedite-and in some cases complete - transformation of the food production, distribu- the transition to a market-based system for food tion, and marketing chain. These programs must production, processing, and marketing begin soon in order to reinforce the liberalization * Improve the efficiency of production. pro- of prices and trade introduced earlier this year in cessing, and distribution of food supplies Russia. The main elements of this part of the * Improve the quality and range of food prod- strategy include: maintaining flows of essential ucts available in the marketplace farm inputs and credit; increasing the availability Within the broad framework of demand shifts of market information needed for informed eco- there will be room to improve the availability of nomic decision-making; implementing the land domestically produced foods by increasing pro- reform program without causing short-term dis- duction and reducing waste and losses. Cereals, ruptions in food production; pushing forward oilseeds, potatoes, fruits, and vegetables are par- with privatization in the food processing and ticularly good candidates. Increases in crop pro- marketing chain, starting with small-scale enter- duction and reductions in waste, combined with prises, shops, and truck transport; instituting lib- the gradual decline in the livestock industry in- eral trade relations among the 15 new states; and duced by lower consumer demand for meat, will reducing trade barriers with other countries. lead to some reduction in agricultural imports. Given the magnitude of economic shocks im- This reduction may be partially offset, at least for plied by price liberalization, increased energy a while, by increased imports of the agricultural prices, increased cost of credit, and higher ex- inputs, spare parts, and equipment needed to in- change rate, eliminating government subsidies crease domestic supply and to transform the all at once could bring about the collapse of agrifood sector. In light of these considerations a culture. Some transitional support to producers strategy for developing the food and agricultural will be required to bolster farm profitability and sector over the medium-term would involve ensure that potentially efficient farming opera- many elements. The details of that strategy are tions have a chance to survive and restructure. discussed in individual chapters. For that reason a balance needs to be struck with First is a set of policies and programs to ad- the macroeconomic stabilization program. There dress a range of issues related to the organiza- must be a cap on the total cost of agricultural tion, structure, and efficiency of the farrning producer subsidies, and producers need to know sector. Among them: that the subsidies will be phased out quickly * Land reform, including restructuring state over a specified period of time. If the subsidies and collective farms and establishing private in- become permanent, they will seriously impede dividual and cooperative farms with the legal farm restructuring and threaten the overall re- rights of full private ownership of land. This

46 includes establishing separate cooperatives or up that can be supported by the international joint-stock companies for the service assets community. Broad areas for technical assistance (equipment and buildings) or selling or reallocat- would be financial sector development, including them directly to farmers. ing rural credit; agricultural education, research, * Explicit policies on a range of supporting and extension; trade policies; land reform and services-including production inputs, agricul- farm restructuring; privatization of input supply, tural research and extension, and market infor- food processing, and marketing; public invest- mation-that will be needed to support an ment programs; and legal and foreign invest- agricultural production system built on private ment codes. ownership. In the longer term the transformation of the * More explicit land and water use policies food and agricultural sector along the lines out- that give appropriate attention to the needs of the lined in this report will bring profound structur- food production sector and the need for environ- al changes with broad economic implications. mentally sound management of the natural re- The move to market-determined prices will sig- source base. nificantly affect the long-term viability of agri- Second is the privatization (through individu- cultural production in particular locations, al, joint stock, or cooperative ownership) of most leading to substantial changes in the pattern of processing, wholesale, and retail trade in food land use. In some locations land use will un- and small-scale transport activities. These and doubtedly intensify; in others, where the profit- other programs and policies are needed to main- ability of crop production is already marginal, tain the momentum toward a market-based sys- the area under cultivation will shrink. The chal- tem for storage, transport, processing, and sale lenge will be to adopt policies that coordinate of food products and food production inputs. these shifts in land use with an environmentally Third is the need for a strong and flexible agri- sound and sustainable approach to the manage- cultural credit system. Reform of agricultural ment of land and other natural resources. credit needs to be part of a more general finan- Significant changes can also be expected in cial sector reform, with particular attention to in- employment and the distribution of income. terest rate and loan recovery policies and to bank Currently about 20 to 25 percent of the 290 mil- solvency and supervision. lionntlypletin0toe5stete ofn the 290 de- Fourth, a set of policies should be adopted to lion people in the states of the former USSR de- promote and facilitate trade among the states of pend primarily on agriculture for their live- the former USSR and with other countries. Both lihood. As the food and agricultural sector ad- tariff and nontariff policies need attention. justs to the realities of market forces, many agri- The fifth element of the food strategy for the cultural workers will be released for re- medium term is an appropriate framework for employment elsewhere in these economies. Not investment that addresses the need for private all of these people will migrate to large urban (domestic and foreign) and public investment in centers; some will find opportunities in service- the food and agricultural sector. An appropriate based industries in rural areas and smaller legal and policy framework is needed to support towns. These longer-term secular changes in de- private investment, and new criteria and proce- mography and in the distribution of employ- dures are needed for evaluating alternative pub- ment will, of course, have much wider lic investments and for recovering some of the implications for employment, social services and costs of these investments from beneficiaries. In safety net, and management of these economies. conjunction with a general program of technical assistance, a specific set of investment proposals Recent economic reforms in the Russian should be developed that could be supported by Federation the international financial community Substan- tial investments are needed in rural infrastruc- The Russian Federation has already taken ma- ture and agroindustry. In particular, rural roads jor initiatives in stabilizing and restructuring its and communication must be improved to pro- economy. Important recent reforms, underlying mote efficient food distribution and marketing. implementation problems, and the govern- Finally, a program of technical assistance for ment's future plans are discussed in the follow- the states of the former USSR should be drawn ing sections.

47 Price liberalization and subsidy policy price liberalization, these large price increases were anticipated. The transition from plan to market in the Rus- One reason for the slower growth in farm out- sian Federation was considerably accelerated put prices is the lack of competition particularly following the liberalization of corLsumer and at the local level in agricultural marketing, food producer prices on January 2, 1992.To forestall a processing, and distribution networks. Thus the massive diversion of supplies to Russian mar- incentives resulting from higher retail food pric- kets, several other states followed suit. However, es made possible by price liberalization are not these other states of the former USSR reacted being passed fully on to producers. Marketing through price adjustments rather than general margins were traditionally very low in Russia price liberalization. (and the other republics of the former USSR) re- Effective January 2, 1992, prices for all agricul- flecting both disguised subsidies and low levels tural products and services in the Russian Feder- of value added downstream of agriculture. Mar- ation except those specifically exernpted were keting margins for food commodities have risen free to fluctuate according to market conditions. substantially, from a range of 10 to 30 percent of The liberalization decree encompassed product farmgate prices in 1990 to 50 to 70 percent thus pricing at all levels in the marketing chain, in- far in 1992.1 cluding farm produce and inputs. State orders Explicit agricultural subsidies as a share of were also to be transacted at market prices. Ex- GDP have declined in 1992 eventhough previ- emptions were decreed for all fuels and energy ously implicit subsidies for energy, credit and ex- and for some basic foods, including low-quality change rates are now being financed through the breads, skim milk and cottage cheese, kefir, baby budget. Consumer price subsidies were reduced foods, salt, sugar, lower-quality vegetable oils, substantially. At present, bread and milk account and vodka. for most of the consumer price subsidies. Under Since the January price liberalization the Rus- the original plan consumers were to receive a 25 sian economy has undergone a major adjustment percent subsidy on bread and a 50 to 70 percent in price levels and price structure. The increases wholesale price subsidy on milk and milk prod- in prices had a marked impact on consumer be- ucts. Actual subsidies for milk and bread differ havior. The extreme disequilibrium evident in across the country, however, because local gov- retail trade in December 1991 just prior to liber- ernments may waive the subsidies. As of Mav alization subsided. Prices still remain heavily in- 1992 approximately one-third of Russia's cities fluenced by the state, however, through continued to subsidize milk at the full rate, al- procurement quotas, monopoly and monopsony though the share may have declined since. Re- powers, and lack of alternative marketing chan- cent increases in the domestic and import price nels. The government continues to increase ener- of wheat threaten to push consumer bread subsi- gy prices in a phased manner. dies to unsustainable levels unless retail prices Because the state still has monopoly and are increased substantially. monopsony power in agroindustries (manufacturing, food processing, and distribution), price Enterprise reform liberalization has squeezed farms on both the input and output side and placed thern in a very The government has established ambitious tar- difficult economic situation. With output de- gets for privatization, although it has had only mand falling and production costs rising, the limited success so far. The Privatization Program profitability of agricultural enterprises is declin- for 1992 provides three separate tracks for priva- ing. On average, prices for agricultural inputs tization, depending on the size and nature of the and consumer prices at the retail level have in- enterprises. creased more than twice as fast as producer pric- * The first track covers small-scale enterprises es for agricultural outputs, although there are in wholesale and retail trade, construction, agri- large regional and commodity variations in in- culture, food processing, and transportation- all put, output, and consumer prices. However, be- enterprises with not more than 200 employees cause of large retail price subsidies and and book value of not more than l million rubles. favorable terms of trade for agricultL[re prior to The government's goal is to privatize at least half

48 of the small-scale enterprises through competi- are now to be made at "prevailing market tive auction by the end of 1992. prices." Obviously, these prices will be heavily * The second track applies to medium-size influenced by the state. and most large enterprises with more than 1,000 Despite the reductions in sales quotas the state employees and 50 million rubles in book value. continues to dominate the agricultural output These enterprises will be reorganized as joint- market. The 1992 sales quota for grains exceeds stock companies. By the end of 1992 50 to 60 per- actual grain sales in 1991 by about 30 percent cent of such enterprises are to be privatized. and would absorb virtually all of the marketable * The third track applies to very large state grain surplus in 1992. For most other important enterprises and to industries with special charac- agricultural commodities the government also teristics. Enterprises in those industries will not plans to purchase a large share of the available be privatized in 1992 except with the special ap- marketable surplus. Potatoes are an exception; proval of the Committee for the Management of the quota is small because most potatoes are State Property (GKI) of the Russian Federation. grown on private plots and consumed locally. It Major enterprises with more than 10,000 employ- remains to be seen, however, whether the gov- ees and book value greater than 200 million ru- ernment will succeed in meeting its procurement bles may be privatized only at the decision of the targets. It was unable do so for grain in 1991 and Committee. A preliminary screening has already sales to the state through mid-August 1992 were begun. lagging well behind the levels of last year. These are exceedingly ambitious goals that will probably not be fully realized within the Land reform and farm restruicturing projected time frame. Furthermore, the establishment of joint- stock companies does not in itself In December 1990 the Congress of People's Dep- constitute true privatization unless the new uties introduced a package of land reform mea- owners are allowed to freely buy and sell their sures. The laws established the right of private stock. farms to exist independently of state and collective farms and gave private farmers the right to Marketing reform hire labor on owner-operated farms. The law also gave official support to the principle of The input distribution systems still in place were equal access to credit, agricultural inputs, and not designed to meet the needs of farms in an ef- products for all farms, whether private or ficient way. Nor are these systems suitable for socialized. serving the needs of newly emerging small-scale The process of transferring land (primarily re- farmers in the private sector. Some liberalization serve land) to private farmers began in earnest in of internal trade and input distribution systems the spring of 1991. The State Committee for has already begun. In January 1992 barriers were Agrarian Reform was established in March 1991 lifted between dealerships and agricultural in- to oversee the process. ConLmittee representa- put manufacturers, allowing dealers to purchase tives, based in nearly all agricultural districts inputs directly from manufacturers. Restrictions (rayons) of the Russian Federation, are to identify on the range of inputs that an individual dealer- lands to be transferred from state and collective ship may offer have not yet been abolished, farms to private farms. The number of registered however. For example, agricultural machinery private farmers has increased from 4,500 on Jan- dealerships should be allowed to branch out into uary 1, 1991 to 132,000 on August 1, 1992. Private fertilizers, seeds, and other agricultural inputs if farms now account for about 2.5 percent of agri- they wish. cultural land in the country. Quotas for minimum sales of agricultural Land tenure associated with the creation of commodities to the state continue, although they private farms remains a cloudy issue. Land re- have been reduced in 1992 for most commodi- form is not covered by the 1992 Privatization ties-grain is a major exception. (Box 3.1 shows Program. Early in the privatization process most sales quotas for 1992 and actual sales to the state of the land was allocated for private use with in 1991 for selected commodities.) A significant less than full ownership rights, either on a long- difference between sales to the state in 1992 and term leaseholding or limited proprietorship such sales in previous years is that these sales (vladenie) basis. The limited proprietorship

49 Box 3.1 Stateprocurement quotas for selectedagricultural commodities in Russia,1992 (millions of tons)

Percentage 1992 1991 1992 change 1986-89 Quota as share of Commodity Actual sales Sales quota (%) Average production production (%6) Meat (live weight) 9.0 5.0 -44 14.4 35 Milk 34.2 18.5 -46 54.2 34 Grain 22.5 29.1 +29 104.3 28 Sugar beets 18.6 8.2 -56 32.9 25 Sunflower seeds 1.7 1.1 -35 3.1 35 Potatoes 4.7 3.0 -36 35.9 8

Source: World Bank 1992.

allows land use for an indefinite period, includ- 1990 the USSR Agroprombank had written off ing permission for inheritance but not for sale. some 71 billion rubles of nonperforming loans More recently, it seems, a greater share of land is by reducing its debt to the USSR Central Bank being allocated with the right to resell after a by a corresponding amount. Debt write-offs ten-year moratorium. In July 1992 the Agricul- continued into 1991. tural Bank of Russia was given the role of land About 60 percent of the total credit for agricul- bank for Russia. Farmers now have the right to ture is currently provided by the ABR; the bal- use land as collateral in securing loans. ance is provided by a network of relatively new The main focus of land reform is the reorgani- commercial banks. The new ABR has a legal zation of state and collective farms.. In the past mandate to function as a universal or commer- these farms performed poorly because of a lack cial bank, responsible for its own profit and loss. of incentives and accountability. Property rights It also has the role of land bank for Russia. In the to farm assets were not assigned, and financial future, the ABR is expected to handle gcvern- losses were compensated by budget subsidies ment policy loans only as an agent-the govern- and other resource transfers. Current government has agreed to absorb losses and interest ment policy represents a major break with the subsidies on policy loans. The ABR has just be- past. Under a government decree of December gun to organize its deposit-taking function; it 29, 1991, the state and collective farrms in Russia still depends upon the Central Bank for the bulk are required to reorganize as joint-stock compa- of its loan funds and on the government budget nies or cooperatives or to disband in favor of the for interest subsidies, which have increased from creation of private farms. A subsequent amend- 12 percent in early 1992 to about 52 percent of ment added the option of maintaining the cur- outstanding loans. rent organizational structure. As of July 1, 1992, The Savings Bank of Russia (Sberbank), with about one-third of state and collective farms had its headquarters in Moscow and a large network reregistered; 44 percent of those chose to main- of regional and subsidiary branches, still ac- tain their current organization. counts for about one-third of the total assets of the entire Russian banking system. Historically, Credit and barnkingreforms the Savings Bank system was used as a conduit to channel deposits of individuals to finance the Since 1988 the banking system of the former government deficit and, indirectly, the enterprise USSR has undergone major structuraLl and oper- sector. ational changes. The Agricultural Bank of Rus- Under the recent banking reforms the Savings sia (ABR) was created in January 1992 by Bank is permitted to lend to commercial banks liquidating the Russian portion of its predeces- and to engage in preferential lending of small sor, the former USSR Agroprombank (Agro-In- amounts to priority sectors. The ABR and the dustrial Bank), which had a burdensome Savings Bank will begin to compete with each portfolio of nonperforming loans. In. December other and with the expanding commercial

50 banking system for deposits and loans. This lending. Besides the ABR, the government also gradual expansion of services is expected to intends to use larger commercial banks as its slowly broaden the rural financial system. The agents to channel subsidized credit to agricul- new commercial banks are quite small, on aver- ture; smaller banks will meet very short-term age. A recent survey found that the top fifty working capital needs of borrowers at market in- commercial banks had average assets of around terest rates. Over time small cooperative banks 1.5 billion rubles. Commercial bank lending re- and other types of financial institutions are likely portedly emphasizes private enterprises and to play a greater role. farms-that is, activities outside the state enterprise sector. As the commercial banking system Note comes under improved prudential control of the Central Bank, consolidation should occur, in- 1. Marketing margins in the United States are higher for creasing the capacity to serve the expanding pri- most agricultural commodities. For livestock products vate farm sector in Russia. marketing margins range from 70 to 200 percent of farm- The ABR seems to be the only important chan- gate prices, they are 165 percent for sugar and 320percent nelthat the government could use to substantial- for flour.The most important reason for the differencesin elythpatd theagoern ntucoudiuse famsdubangtia to marketing margins is the greater amount of value added ly expand agricultural credit to farms during the downstream from the from the farmgate in the United period of economic transition and stabilization. States,not only in greater processing and quality control, The government has asked the ABR to function but also in the quality of packaging and convenience to as its agent in 1992, to administer policy lending consumers. Thus, current marketing margins in Russia for agriculture. However, such policy lending are not really comparable to marketing margins in the will be kept segregated from ABR's commercial United States or other countries in Europe.

Measures to improve food supply in the short term

Input supply shortages, worsening terms of Area planted to sugar beets and oilseeds closely trade, a potential credit squeeze, and distribution matches last year's. Though yields for sugar problems and disruptions in traditional inter- beets and oilseeds are not expected to recover state trade patterns are all weakening the short- from last year's low levels, production of these term potential for agricultural production in the crops is not expected to decline substantially. states of the former USSR. The adequacy of food Cotton production is expected to fall, with fur- supply in fall of 1992 and winter of 1993 will be ther contraction in area harvested and lower influenced by at least the following factors: yields in 1992. * Developments in domestic crop and live- In Russia, price liberalization may make grain stock production production more profitable than it has been in the * Policies toward international trade in food, past. Historically, grain prices were kept low rel- feed, and agricultural inputs, including trade ative to prices of livestock products and technical within the states of the former USSR crops, such as fiber and oilseeds. Preliminary in- * The level of food and feed imports from formation on farmgate prices throughout the world markets former USSR appears to confirm the notion of ris- * The ability to procure, distribute, and move ing relative profitability of grain, as grain prices stocks quickly into urban "hot spots" as critical appear to have increased more rapidly than live- food shortages arise. stock prices. The winter crop, which accounts for one-third of total grain production (and two- Outlook for crop production thirds of wheat production), has been harvested and the spring grain crop is now being harvested Crop Production Prospects in most areas. Wheat is a very important grain crop and accounts for 45 percent of grain produc- Estimates of overall crop prospects in 1992 for tion in the former USSR (Table 4.1 and Figure 4.1). the countries of the former USSR indicate pro- Despite the weakening production base, some duction levels close to or slightly higher than in recovery in grain production could occur this 1991. Grain production should at least equal last year. Harvested winter grain area is expected to year's production and could be as much as 10 be 10 percent (3 million hectares) larger this year percent higher. Production of potatoes and vege- than in 1991 for the former USSR as a whole. tables will decline on state and collective farms, Winter grain yields are generally higher by as but anticipated increases in private sector pro- much as one ton per hectare over spring grains duction, particularly on recently distributed planted in the same area. Preliminary informa- garden plots, should more than compensate. tion on winter grain yields indicates that they are

53 Figure 4.1 Composition of grain production in the former USSR, 1989-91average

RYE!

21 | b l Wh~~~~~~~~~~eat

Barley 25%

Oats 8% ~~Corn Other 6% 8%

Source:Derived from Goskomstat USSR and U.S. DeDartment of Agriculture date.

comparable to yields last year, with the notable worse than last year. Production of agricultural exception of the Baltic countries, Belarus, and machinery has dropped substantially, and stocks neighboring portions of Russia. of repaired and operable machinery on farmns this Last year severe drought devastated spring March were down by about 5 percent. grain production in areas east of the Volga River. All the major grain producing countries (Rus- Kazakhstan experienced grain yields just 40 per- sia, Ukraine, and Kazakhstan) have given agri- cent of normal, and neighboring portions of the culture top priority for available fuel supplies. Russian Federation were similarly affected. Nonetheless, fuel deliveries to Russian f'arms These are low-rainfall production regions that re- thus far in 1992 have fallen steadily further be- ceive very little fertilizer and are less dependent hind deliveries in 1991. For the first half of 1992 on plant protection chemicals than grain areas farms received 16 percent less diesel fuel and 14 further west and north. If normal (not ideal) percent less gasoline than in the first half of 1991. weather continues through harvest, spring grain Fuel shortages are reported to be particularly se- production may increase by 10 million- to 14 mil- vere in some major spring grain areas (Orenburg lion tons in Kazakhstan, and by 8 million to 12 Oblast and Altai Krai). The situation in Ukraine is million tons in neighboring portions cf Russia. even worse. During the first quarter of 1992 de- In grain regions west of the Volga the input liveries of diesel fuel to Ukrainian farms were supply situation threatens to be a more serious down by 22 percent and deliveries of gasoline by problem. Fertilizer availabilities were down 10 29 percent. percent in the first quarter of 1992 though radical- Some public financial assistance is being grant- ly higher prices have reduced purchases by much ed to agriculture. The Russian Federation is sub- more. Crop losses because of shortages of plant sidizing interest rates for credit to agriculture. protection chemicals were large. Machinery The annual rate charged by the Central Bank for problems were also serious, but not suibstantially interbank lending was increased during the

54 spring from 20 to 80 percent, while the rate * Availability of short-term credit and level of charged to agricultural borrowers rose only from interest rates to finance inputs 8 to 28 percent, representing a significant credit * The responsiveness of marketing and pro- subsidy. Given current inflation of 10 to 15 per- curement organizations to the new pricing recent a month these credit terms are particularly gime, in particular the degree of transmission of attractive. It appears that adequate funds have higher crop prices back to the farm level. been made available under these terms to cover Once winter crops have been planted, crop short-term borrowing needs. Other countries of yields and production depend on the availability the former USSR are pursuing similar policies, and use of agrochemicals and fertilizers. Har- necessitating continued administrative allocation vesting, the most crucial operation, began in late of credit resources. June. While current production forecasts are en- Farms have a number of incentives to maintain couraging, an inadequate supply of harvesting grain production this year. The gradual break- equipment could result in substantial losses if down in the state mixed feed industry means that crops are left standing in the field for prolonged farms are more dependent than ever on supply- periods. This situation merits careful monitoring their own feeds. With a shortage of rubles in ing, because such losses will reduce the avail- circulation, grain will continue to be important as ability of food from domestic supplies in 1992/ a means of payment for farm workers and input 93 and affect import requirements. Serious defi- and service suppliers and for obtaining necessary ciencies in the availability of harvesting equip- consumer goods. ment have long been common; and the problem In total a modest 1 percent decline in grain area is likely to worsen in the face of shortages of ma- (about I million hectares), is anticipated, with chinery spares and rising costs of fuel. lower yields than in 1991 in most areas west of The planting of the 1992 spring crop started the Volga (particularly in the drought-stricken in late March and continued into June. In Rus- Baltics). East of the Volga, a rebound in grain sia, following the announcement of the 1992 re- yields and overall grain production is expected forms, there was adequate time (at least in on the strength of more favorable weather pat- some regions) to make necessary arrangements terns. If that does not occur, grain production will for planting equipment, herbicides and other fall back toward the 1991 level of 175 million tons agro-chemicals, fertilizers, seed and farm ma- (bunker weight) for the former USSR. chinery for both planting and harvesting. To L ndataon climate indicate that the what extent such arrangements were actually chance of a repeat of last year's drought in east- made is not known. chanceaof arepat of lasotyein Grar'sdroughtioneat- Because area of winter grains increased, there in Russia is expected to increase slightly in 1992 was less area available for spring grains this year. incRussiofgainsisnex e stedrtoincreasnsl indlArea19 sown to sugar beets, sunflowers, and flax because of gains in eastern regions and a larger wa unhne.Ptt n eeal rao area under winter grain this year than in 1991 was unchanged. Potato and vegetable area on (Tbl 42 (Poece. gri prdcin.ssm state and collecfive farms was down, but the re- marized in Tables 4.3 and 4.4 for the former duction is expected to be more than compensated USSR and in Table 4.5 for Russia.) for by increased sowing on private farms and private household plots. On balance total area sown in the former USSR was down by about 1 percent this year. The largest decline came in Ukraine, where area sown was down by 2 percent. State Four factors, other than the level of economic in- and collective farms, which continue to account centives and weather, will strongly affect crop for about 95 percent of area sown, appear to be ad- production in 1992 and 1993: hering to their traditional cropping patterns. This * The actual grain harvest area, which will is not surprising, considering that crop prices were likely be slightly lower in 1992 than last year last established in the fall of 1991 and will not be * The adequacy of input supplies, including redefined until this crop is marketed. spare parts for imported machinery, seeds, fertiliz- The planting of winter crops for the 1993 harvest ers, and agrochemicals, and the impact of higher began in late August and will continue into Octo- fuel prices on mechanized agricultural operations ber. Again, there is a need to monitor the availabil- and on input costs and uses ity of critical agricultural inputs at the farm level,

55 including machinery, spare parts, fertilizers, seed, Farm credit. Until further progress is achieved and agrochemicals, if only to gain an early indica- in restructuring the financial institutions that tion of thevolumeof food importneeds in 1993/94. serve agriculture, directed credit policies will have to be retained. However, in the near future Policies to improve production prospects there is a need for reduction in interest rate subsidies and significant diversification of the rural Several policy measures are essential to improve banking system. prospects for crop production. Appropriate economic incentives and active managemernt of agri- Grain utilization estimates cultural policy in Russia, as part of the overall reform program, are needed to guide the sectoral The use of grain for food will increase modestly adjustments already underway and steer the sec- this year with the shift in domestic relative tor toward desired long-term adjustmnent. prices and incomes (Tables 4.4 and 4.5). Con- sumption data for earlier years did not correct Landreform. The uncertainties created by land for bread that was fed to livestock-all bread reform and farm restructuring, which are al- wasbred as fed to liberallzbread ready under way, could disrupt current produc- was ced sfood el iberaiz of tion. Such disruption can be minimized by fol- bread prices should eliminate this perverse lowing these guidelines: practice. * The rural population should be thoroughly The use of grain for feed is expected to fall in informed about their options through wide- the former USSR in 1992/93 because of continu- spread public education programs in rural areas ing reductions in animal inventories. Draw- * The allocation of land and other assets un- down of herds is expected for cattle, which ac- der the farm restructuring decree can begin im- count for the largest share of feed consumption mediately, but the transfer of management and (Table 4.6 and Figure 4.2). Grain for feed con- the exercise of the option to leave the land sumption could fall even more than the project- should take place only after current crops have ed 8 million to 12 million tons provided shifts in been harvested import policy favor imports of protein meal, * Private ownership, clearly defined, should high-cost livestock producers respond to vveak- be established in the first stage, but existing ar- ened demand by significantly reducing their rangements for production support should not herds, and other productivity-enhancing mea- be dismantled until alternative arrangements sures are implemented, such as effective farm have been set up. restructuring. Other uses of grain, which include losses, are Market information. The government of Russia is expected to increase in 1992/93. Seed use and reducing its intervention in agricultu.ral pricing, industrial use will remain stable, but grain loss- which should stimulate a revival of trade. Wide es in storage, transportation, and processing public dissemination of price information at the will rise because of infrastructure producer, input supplier, processor, and retail level problemsw is needed to assist producers and employees of problems. procurement agencies in making marketing deci- Adequate stock data for assessing year-end sions. Widely disseminating information on pro- ystockpositions have not been made available b ducer prices will also show whether and where lo- any state of the former USSR. The 1992/93 sce- cal authorities haveimnposed price ceilings. narios calculated in this report assume no changes in stocks; that is, there will be no addi- Critical inputs. Pesticides, protein feed, veteri- tional grain to draw on from reserves, and finan- nary medicines, hybrid seed, fertilizers and spare cial constraints will limit stock building for the parts are critical to maintaining production, yet coming year. An exception may be Kazakhstan, their manufacture and imports are declining which may be in a position to add to grain steadily. Curbing the impending decline in the stocks or to export grain this year. Other coun- supply and use of these inputs can be managed tries in the region will need to fill the gap be- only under special provisions negotiated with the tween estimated grain requirements and do- international community. mestic production through imports.

56 Figure 4.2 Share in feed consumptionby livestockcategories in Kazakhstan and Russia,1990

Kazakhstan Russia

Sheep and goats 29% Ho se heep and goats Horses P 8% Pigs 2% ~~~~~12%

Poultry~~~~~~~~~~~~~~~Polr

55%

\ / / ~~~~~~~~Cows and \lY Cows and bulls\ bulls I- 36% I 20% ~-~Other cattle Othercattle 35% 33

Source: Derivedfrom Goskomstat USSR data.

Outlook for livestock production spite serious feed shortages and increasing eco- and adjustment nomic pressures. With a greater share of feed used for maintenance purposes, livestock pro- Livestock production prospects ductivity has declined. Milk yields and average rate of weight gain for cattle and hogs on state Increases in producer prices of livestock prod- and collective farms are down by 10 to 15 percent ucts will be constrained by falling consumer in 1992 (e.g., Tables 4.7 and 4.8). The combined demand and monopolies in processing, while impact of these productivity declines and the feed prices and interest rates will continue to slaughtering of younger animals has resulted in rise. Thus, the terms of trade in the livestock sec- reductions of meat and milk production of at tor can be expected to fall even further in the least 20 percent on state and collective farms. Al- year ahead. Currently, producer prices are not though production data are not available, it is be- high enough to cover even the average costs of lieved that livestock production in the private meat and milk production. Governments in the sector has increased slightly in 1992. Many live- region have responded with producer price stock operators appear to be counting on better guarantees, but in the Russian Federation even availability of feed in 1992/93 to allow them to these supported prices are not adequate to cover increase livestock production. However, initial the average variable costs of production. How- reports on this year's feed harvest (e.g., hay, si- ever, other budgetary allocations are being chan- lage) are not encouraging, particularly in Europe- neled to farms through various forms of income an areas of the former USSR. support payments, and these may be indirectly The stabilization program has a direct impact supporting unprofitable livestock producers. on profitability in the livestock sector. Except for Farms in the states of the former USSR are at- livestock producers who received subsidized tempting to maintain livestock inventories de- credit in 1992, higher interest rates will raise the

57 cost of the capital embodied in the herd. Price lib- and indirect subsidies and eliminating them eralization raises the relative price of meat and within a clearly defined time frame reduces real incomes in the short run, reducing * Substituting imports of protein meal and demand for meat. The bonuses formerly paid to soybeans for imports of coarse grains high-cost marginal farms, most of which concen- * Financing imports of veterinary phairma- trated on livestock production, have been elimi- ceuticals nated. In Russia, returns to production of meat * Facilitating the transfer of livestock to effi- and milk have fallen significantly. After an initial cient producers. period of rapidly rising retail prices in January, If the restructuring of the livestock sector con- accompanied by signs of excess suppl'y, prices for tinues to drag on into 1993, the governmenl: may livestock products have stabilized but by sum- need to consider a managed reduction in live- mer there were indications of excess clemand for stock numbers through a herd drawdown pro- meat and milk products. Barring efficiency im- gram designed to remove from production the provements, however, increases in retail prices least efficient operations. The feasibility of a herd will have to be substantial if livestock production drawdown program-and of livestock sector re- is to become profitable again. structuring in general-would be greatly en- Government livestock policy should concen- hanced by the development of a well functioning trate on forcing high-cost producers out of pro- internal market for livestock commodities. duction and taking steps to increase production Livestock numbers in the former USSR and in efficiency among remaining producers. In Russia Russia are coming down, but not fast enough to producer price subsidies introduced on Mav 1 maintain feed efficiency even at its former low 1992, for meat and milk fall well short of covering levels (Table 4.9). As a consequence scarce feed is average costs of production. Livestock producers being wasted. The decline in livestock numbers is also face further cost increases as a result of high- due to higher loss rates and lower replacement er energy prices and a unified exchange rate. rates. Shortages of veterinary medicines are re- While some budgetary support to tagriculture ported to be acute. Total Whilbugetry soe sppot toiagiculure 1991/92 in the former USSRfeed were supplies down 10during to 15 will be necessary during a transition period, it is percent in the prer yeaR The d 10uton imperative that income support policy for live- percent over the previous year. The feed situation stock producers be designed in a way that does became increasingly severe during the winter. In Russia stocks of feed available on state and col- not seriously impede necessary structural adjust- lective farms were one-third lower by April 1, 1992 than at the same time the year before. The tightening of financial discipline on live- By April 1, 1992, livestock inventories in the stock producers should be accomparied by in- states of the former USSR had declined, but by creased supply of imported inputs to increase less than the decline in feed supplies. In Russia productivity, including veterinary pharmaceuti- inventories of cattle had fallen 3 percent over the cals and protein meal for the mixed feed industry, previous 12 months and hogs 8 percent. Data for If necessary, budgetary subsidies to facilitate im- state and collective farms indicate that compara- ports of these critical inputs should be consid- ble declines in livestock inventories were occur- ered. ring in Ukraine and Belarus. Some of the decline on state and collective farms was a result of shifts Needed adjustments in the livestock sector in livestock from the state sector to the private sector; livestock numbers are increasing in the Adjustments under way in the livestock sector private sector. As of July 1, 1992, livestock inven- will require substantial changes in the number tories on state and collective farms in Russia ap- of animals, herd management, and production peared to be falling at an accelerating rate. patterns. Expectations of livestock producers As long-run expectations adjust to the new have been slow to change in the face of changing economic realities, farms that are unable to cut economic conditions. The policy agenda to fos- their costs sufficiently should begin to move out ter the reorientation of livestock production at of livestock production. Procedures need to be in the farm level should include these elements: place for allowing them to do so. Appropriate * Imposing stricter budget cons traints on bankruptcy legislation is necessary for farms that livestock producers by reducing existing direct are unwilling to sell off or halt unprofitable oper-

58 ations. The possibility of transferring animals to these new patterns emerge without artificial im- efficient producers through auction should also pediments and barriers to trade. be explored. Trade among the fifteen states of the former All states of the former USSR experienced a USSR accounted for up to 90 percent of their total decline in feed supplies in 1991/92, which great- international trade-from 60 percent for Russia ly affected livestock production, but most have to more than 80 percent for all the other states. not progressed as far as Russia in initiating nec- Preliminary estimates indicate that interstate essary economic reforms. Under pressure from trade has declined by more than 20 percent in the the Russian price liberalization retail prices for last year, and it is widely reported that interstate livestock commodities have increased through- trade has declined even more than trade with out the region, as have prices for feed and other third countries. The experience of the demise of inputs. But in most other countries of the former the CMEA is instructive. Several studies have es- USSR administrative control of prices still pre- timated that although the total external trade of vails, and in surplus livestock producing coun- the CMEA countries was not out of line, trade tries such as Belarus, budgetary support to pro- among CMEA members was excessive and ducers has been stronger. would decline by as much as 60 percent when placed on an equal footing with other interna- Food imports and international trade policytinlrae tional trade. The crisis of autumn 1991 demonstrated vividlv Traditionally, republics of the former USSR traded with each other before thev turned to trade within the that interruptions in interstate world markets. Before the breakup of the USSR former USSR can severely disrupt food supply 10 percent of domestically produced agricultural and that disruption is possible even with a rela- commodities was tradeddacross republic bound- tively minor shortfall in aggregate production. aries. That share was 5 percent for grain, meat, Thus maintaining interstate trade should be an and milk but as high as 50 to 70 ercent for cli- important concern. Doing so requires reform andsmit comghdas like forcli- andl institution building in several areas: mate-sensitive commodities like sugar, cotton, andibeaizing piceseand amareacs vegetable oil, tea, and citrus fruit. Some states the statesrof the former USSR were more dependent than others on outside * Removing barriers to trade at the local, pro- supplies to maintain consumption of agricultural vincial, and national levels commodities. The republics of Central Asia and v .stablishing arrangements for currency the Transcaucas region and the Non-Black Soil clearing and convertibility, as some of the new gion of Russia depended heavily on other re- states introduce their own currencies. publics for grain and livestock products. Within the Non-Black Soil Region, major urban centers Magnlitoideanid patternis of trade flows such as Moscow and St. Petersburg were particularly dependent on non-Russian supplies. The International attention to food imports from out- major exporting states for livestock were the Bal- side the former USSR has obscured the critical tic republics, Belarus, and Ukraine, while for role of interstate trade in agricultural commodi- grain these were Kazakhstan and Ukraine. ties and inputs. The relatively high levels of food The trade picture for agricultural inputs is consumption in the former USSR depend on more complex. Approximately half of chemical maintaining interstate trade. Trading patterns in fertilizers produced in the former USSR were the region have been changing with the creation traded across republic boundaries in 1990. Rus- of the Commonwealth of Independent States sia, Belarus, Kazakhstan, and Uzbekistan were (CIS), Georgia, and the Baltic states, and the the important net exporters of fertilizer. Ap- establishment of new trading relations among proximately 60 percent of tractors produced them. But neither food security for consumers domestically moved in interrepublic trade. The nor reasonable farm incomes for producers can largest net exporters of tractors were Belarus be sustained without interstate trade in food and and Ukraine. Russia was the sole producer of agricultural products. While interstate trade pat- grain combines within the former USSR, pro- terns will certainly change, protecting the wel- viding these machines to all other republics. fare of consumers and producers requires that Foreign imports played a modest role in sup-

59 plementing interrepublic trade of agricultural cattle production. Roughly two-thirds produced machinery. hogs. Established sales quotas forced individual farms to maintain a wide range of production Needed adjustments in trade policy activities. Production costs varied greatly by region. The states of the former USSR face the daunting Grain, meat, and milk production costs were two task of moving from a system in which most to three times higher in high-cost republics than trade was directed and regulated by Moscow in low-cost republics. For some crops regional (Box 4.1) and prices played relatively little role specialization was enforced purely by climate. in determining what products were produced, The extreme case was cotton. The combination of consumed and traded to a system in which climatic constraints and the political goal of sup- transactions are determined by the market. The plying both the USSR and Eastern Europe with socialist command system resulted in patterns of cotton forced a pattern of cotton monoculture on production and trade sharply different fron the republics of Central Asia. those that would have developed under a mar- Input manufacturing plants were constructed ket system. Agriculture trade policy of Russia on a very large scale, so a very few plants account- and the other states of the former USSR must be ed for the bulk of Soviet production. In addition guided by the overall recommendation to create the orientation of roads, railroads, air service, and a competitive agricultural market in which sup- telecommunications toward the center contribut- ply and demand determine prices. ed to trade patterns quite different from those that Regional autarky was pursued for grain and would have prevailed under a market economy livestock products: over 90 percent of all state with limited interventions in interrepublic trade. and collective farms in the former USSR were in- As a consequence the nature of the economic and volved in grain production and a similar share in trade interdependence among the states of the

Box 4.1 Types of state trade in the former USSR

Intergovernmental barter covers 100 to 150 of the most important products in interstate trade. Commitments made under this category carry with them the obligation of the state to fulfill the contract. All exports under this category are licensed by the state and generally must be sold to designated enterprises in the importing state. An effort is made in the negotiations to roughly balance this portion of the trade, by assigning prices and adjusting volume. In principle prices are set at world market prices, but in fact notional relative prices in rubles are closer to domestic prices than to relative prices in dollars. Many products under the obligatory lists specify maximum permitted prices.

Under indicative list trade, enterprises in the different states may engage in contract with each other that define all the terms of the sales, including price and credit conditions. There are 1,000 to 1,500 products on the indicative lists of the various states. Governments have no obligation for this part of the trade, but these products are subject to export licensing. Both states in the bilateral protocol agree to automatically provide export licenses up to the quota amounts specified in the protocols.

The third category of trade is direct enterprise-to-enterprise trade. All products that are on neither the obligatory nor the indicative lists may be freely traded at the enterprise-to-enterprise level. This leaves thousands of products to be freely traded between independent states without either import or export restraints, but most important products are in the first two categories.

60 former USSR is bound to change significantly presence of monopolies in many lines of over the coming years. production and distribution makes it even more To a large extent the trade policies adopted by important that export taxes, not quotas, be used the states of the former USSR will determine the to restrain exports. trade changes that occur and the extent to which Similarly, on the import side it might be desir- they contribute to production efficiency, food se- able in certain cases to introduce import duties to curity, and overall welfare. Nearly all of the states raise revenues. Tariffs ought to be uniform (or have introduced export controls, primarily in the nearly so) among products, and consideration form of quotas and licenses, in an effort to ensure should be given to extending preferential duty- adequate availability of local supplies. Imports free treatment to producers from other states of tend to be generally free of restrictions-the ma- the former USSR. jor constraint is the scarcity of foreign exchange. The use of state orders to meet bilateral trade Trade is conducted largely through bilateral protocols with neighboring states is common- agreements among the states on the basis of "in- place. When domestic prices are adjusted to dicative lists" of products to be exchanged (see world prices, there will be no reason to maintain Box 4.1). this practice. In the interim, bilateral agreements If trade regimes continue to drift toward au- are a pragmatic way to sustain trade. Even so, the tarky, the consequences for food production and agreements should eliminate compulsory state distribution will be severe. Interstate trade in orders in favor of indicative-list trade and should farm inputs would be disrupted, access to poten- cover only products that are still adjusting to tial markets for farm output would be lost, and world prices. To the extent possible enterprises consumers would lose access to food available in should negotiate their own prices and trade ar- other states. rangements, without the need for prior govern- To take only one example, consider the case of mental approval. Bilateral balancing of accounts Ukraine, a surplus producer of grain, that has to between states should be abandoned in favor of import a significant amount of its farm machin- more efficient multilateral payments arrange- ery. Ukraine's capacity to produce surplus grain ments. and provide needed food supplies to Russia is According to recently published reports the likely to depend on its ability to import farm ma- government of the Russian Federation intends to chinery in the years ahead. The enterprises in eliminate all export quotas in the near future and Russia that produce much of the farm machinery all limitations on the quantity of imports. These imported by Ukraine depend on parts and com- policies apparently will apply to trade relations ponents from Ukraine and other countries of the with countries outside the former USSR. Other former USSR. The Russian enterprises are now states should introduce similar policies in the in- threatened not only with loss of markets, but also terest of liberalizing trade in general and agricul- with the inability to maintain production. tural trade in particular. This strong interdependence among states It appears, however, that Russia's trading rela- means that any interventions that limit trade tionships with the other states of the former are likely to be especially harmful in the near USSR will continue to be governed by bilateral term. It is thus strongly recommended that arrangements that are heavily influenced by the trade among the states of the former USSR be terms and conditions for energy exports that Rus- unencumbered by restrictions on either exports sia is able to secure. This approach may represent or imports. In particular, quantitative restric- an unavoidable accommodation to the lack of tions (quotas, licenses, and similar trade barri- hard currency resources in the other new states ers) ought to be eliminated as soon as possible. with which to finance energy imports from Rus- Export restraints may have to remain on prod- sia. The approach has an inherently antitrade ucts whose domestic price is temporarily bias, however, and should be replaced as soon as controlled-a few agricultural and other prod- possible by arrangements similar to those being ucts. In such cases export taxes are preferable to adopted by the Russian Federation in its trading quantitative restraints, because product pricing relationships with the rest of the world. would still reflect production costs and the state Several states seem determined to introduce not the producer or trading organization their own currencies. Estonia and Latvia have al- would reap the excess profits. The continued ready done so, and preparations are well ad-

61 vanced in Georgia and Ukraine. If these curren- overall Soviet agriculture in the past. Adjust- cies are nonconvertible, this will complicate payments that attempt to duplicate past patterns are ments arrangements with the ruble zone and less likely to achieve longer-term objectives. Ad- could create an impediment to trade. Several pro- justments based on price and trade reform will posals have been put forth for dealing with such have costs during the transition that must be met an eventuality, covering the establishment of through the establishment of an appropriate so- multilateral clearing arrangements to facilitate cial safety net. private sector trade and settlements of international payments. These proposals are not dis- Changesin the structure of importsand exports cussed here, however, because this is a very broad issue that goes beyond the scope of this report. As internal prices gradually align with world Trade should gradually be transfe:rred to the market prices, there will be substantial changes private sector and to market institultions, and in the structure of imports and exports. Only the agreements between governments should be general direction of these changes can be fore- phased out. It is nonetheless recognized that seen. In the short run these changes will reflect there may be short-term advantages in retaining primarily the consumption declines due to the re- a state agency to engage in the large-scale impor- alignment of prices after price liberalizaticn. In tation of critical food products, such as grains, the medium to long run, however, as privatiza- meat, sugar, and oilseeds, especially where gov- tion and the enormous increase in alternatives ernmental guarantees are needed to secure credit that comes with a market economy influence pro- from exporters. Such interventions could be han- duction and costs, production effects will emerge dled by existing foreign trade corporiations dur- that are perhaps even more important than the ing the period of transition in the development of consumption effects. Positive production effects market institutions. would include optimal production patterns, re- Even in a liberalized trade environment the duced waste, lower seed use, increased feeding level and structure of internal food prices in the efficiency of livestock, and increased production Russian Federation will be determined largely by of higher quality forage crops. the interplay of domestic supply and demand for In the near future the management and regula- most food commodities, because internal mar- tion of trade among countries of the former UJSSR kets are so large. Over time, as interregional mar- is likely to follow different rules than those that kets develop and the private sector begins to govern trade beyond the region. The form that manage a larger share of Russia's foreign trade, these rules will take is difficult to determine. It price transmission will improve and the level and does seem plausible, however, that for the Russian structure of border prices will have more imme- Federation, reforms on the import side will lead to diate effects on domestic prices. In the other a major reduction in net grain imports (R-ussia states, however, border prices are likely to have a may even become a net exporter of wheat), and in- stronger effect on domestic prices after price and creases in imports of sugar, industrial raw materi- trade reforms get underway, because these coun- als of agricultural origin, and tropical food prod- tries are much smalle:r than the Russian Federa- ucts. Trade in meat is particularly difficult to fore- tion and comparatively more dependent on cast. In the short run demand factors will trade. predominate and lead to lower meat imports. In Whatever the nature of trade and payments re- the medium term, if the efficiency of livestock pro- lations among the countries of the former USSR, duction in Russia and other countries of the production and trade patterns must and will former USSR does not improve, meat imports are change. Adjustment will be needed whether the likely to increase again because of the countries' states adopt autarkic policies or encourage free comparative disadvantage in meat production. trade. The choice is not between adjustment and On the export side, in addition to potentially no adjustment. It is between adjustment that surplus wheat production, the Russian Federa- leads to longer-term improvements in efficiency, tion may find that it has a comparative advantage better supplies of agricultural products, and im- in several other products once the agricultural proved food security as opposed to adjustment sector has had time to adjust to new incentives that tries to reproduce at the national level the in- and the government's privatization policies. efficient production structures that characterized Competitive exports could include processed

62 fruits and vegetables, convenience foods, and ment agents for the government. Improvements marine and aquatic products. in government procurement operations are criti- The total area under cultivation in the coun- cal for efficient use of Western import assistance. tries of the former USSR is likely to decline mod- Competition, however, is essential for efficient erately, with marginal agricultural lands revert- procurement. The newly constituted foreign ing to meadows and pastures, particularly in the trade organizations should have to compete with northern areas of European Russia, and possibly private companies and may be encouraged to in northern Kazakhstan and neighboring por- privatize. These agencies should not be given tions of Russia. Cultivated area will also decline monopoly rights to allocate state procurement, as a result of major cuts in economically unjusti- since this would give them power to enforce col- fied state investment in land improvement lusive arrangements with their producer mem- projects. In general the share of agricultural pro- bers. More open and competitive markets would duction accounted for by southern areas of the make such restrictions to free trade difficult to former USSR is expected to increase. The live- sustain. State agencies may be needed, however, stock sector is expected to continue to shrink over to ensure adequate trade flows of bulk commod- the medium term and to shift from grain-inten- ities (grains, for example). But in all such cases sive, stall-fed operations to greater reliance on state trading should stop once private firms and pasture feeding. Diversification of agricultural distribution channels are functioning. Govern- production away from cotton should be antici- ments should encourage the growth of private pated for the countries of Central Asia. trading and should take necessary steps, such as The potential effects of these and other changes making trade credits available, to ensure that pri- need to be analyzed carefully. Any definitive con- vate traders are given equal opportunity to par- clusions that can be reached ought to be widely ticipate in trading activities. disseminated both within the former USSR and to the international community to avoid resource Food import requirements commitments that may run counter to long-run developments. The former USSR was a major im- To ensure adequate grain supplies in key areas, porter of agricultural products, primarily food grain imports for the former USSR for 1992/93 and feed, during the 1980s. Changes in that mar- should be about 33 million tons (they were 38 ket will have a strong impact on world agricul- million tons in 1991/92; Table 4.4). Grain im- tural trade that needs to be thoroughly analyzed. ports for Russia are expected to decline only Agricultural reform in the states of the former slightly (Table 4.5). If harvesting conditions dete- USSR may lead to a contraction in both the vol- riorate significantly, however, aggregate grain ume and composition of world trade in agricul- import needs could rise to 40 million to 45 mil- tural products. For example, world trade may de- lion tons, a level of imports that would prove cline for grain and rise for oilseeds and protein difficult to finance and handle. Under this sce- feeds. There will be many changes that will need nario the brunt of the additional shortfalls in to be monitored in the coming years as market 1992/93 would be borne by the livestock sector. economies emerge in these states. World grain prices, which were unusually high Access to international export and import for wheat during the fall and winter of 1991/92, markets was tightly controlled in the former are expected to be lower in 1992/93. Overall fi- USSR both by the establishment of monopolies nancing requirements for grain imports would for administering foreign trade and by restric- thus fall by 10 to 20 percent. Food imports during tions on the very limited supplies of hard 1992 are projected at $11 billion ($3.8 billion for currency. These foreign trade organizations grain imports) for the former USSR, of which $7 have been "semiprivatized" by reconstituting billion for Russia (Table 4.10 and Figure 4.3). them as corporations owned by enterprises and Approximately $5 billion in credits and hu- government. manitarian assistance was made available to the The entry of new firms in trade operations new states in the first half of 1992. Financing should be encouraged, and the foreign trade or- needs for the remainder of food imports in 1992 ganizations should be restructured into competi- are about $6 billion (the estimated total food im- tive multipurpose and multiproduct traders. port bill being $11 billion). Price liberalization They could diversify, for example, into procure- has appreciably changed the need for food assis-

63 Figure4.3 Estimatedannual fooclimports of Russiaand the former USSR, 1989-92

Billioncurrent U.S. dollars 20

16-

14-

FormerUSSR 12

8 - - Russia

6 1989 199C0 1991 1992 Source: Derived from U.S. Department of Agriculture data and World Bank staff estimates.

tance to Russia in 1992 and beyond. Even though 1992 in the fifteen new states are expected to be production is not expected to improve signifi- about 8 percent lower than estimated actual im- cantly, the adjustment in demand in response to ports in 1991 (Table 4.10). For the remainder of 1992 price liberalization has already begun. The fall- and into 1993 imports of food grains, vegetable oil, ing demand for meat will reduce mea t imports, and sugar will be of highest priority. Meat and an- from both the other new states and international imal feedstuffs (especially feedgrains) are of lewer suppliers. priority, with consumption trends away from meat Demand for imported feed grain will fall corre- being a natural consequence of consumer ad ust- spondingly and will fall by even more if imports ment to new price structures. of soybeans and protein meal are increased. More domestic grain should be marketed in Russia in Food procurement and distribution 1992 than in 1991 (even though marketi.ng is lagging behind last year at this time) even if produc- Food procurement and supply tion does not improve, so imports that compensated primarily for reduced internal trade can be Even if aggregate food supply (domestic procLuc- correspondingly reduced. Demand for bread will tion and imports) is equal to aggregate food re- increase, and imports of milling wheat will stiILbe quirements, there is no assurance that localized needed. Shortages of vegetable oil and sugar will food shortages will disappear. A major cause of remain. food problems in 1991/92 was the substantial The need for food imports will depend on how drop in marketed surplus (primarily grain pro- quickly internal trade in Russia responds to price curement by the state system) (Figure 4.4 and Ta- liberalization, on final production levels, and on ble 4.11; more detailed and historical information the impact of new fuel prices on flows offood from on state procurement of selected agricultural other states of the former USSR. Food imports for commodities is reported in Annex Table A4.1 for

64 Figure4.4 Share of procurementin grain productionin Kazakhstan,Russia, Ukraine,and the former USSR,selected years 1987-91

Percent 60 1987

50 19891 1991

40-

30 -

20-

0 Kazakhstan Russia Ukraine Former USSR

Source: Derived from Goskomstat USSR data.

Figure 4.5 Annual grain procurementand importsof the former USSR, 1986-91

Million tons 120 Procurement

100 - Imports

60-

40-

20-

1986 1987 1988 1989 1990 1991 Source: Derived from Goskomstat USSR and U.S. Department of Agriculture data.

65 the former USSR and in Annex Tables A4.2, A4.3 to food may also become an increasingly serious and A4.4 for the Russian Federation). During 1991 problem as food prices continue to rise anc aver- grain imports almost equaled domestic procure- age per capita real income falls. Those who are be- ment (Figure 4.5 and Table 4.12). low the poverty line-and their number is grow- In the aftermath of price liberalization, especial- ing-will face particular hardship. lv in Russia, producers are not expected to hoard grain and will market greater shares of other com- Food transfers to urban "hot spots" modities if appropriate channels are available. Disagreements between farms and the govern- About 35 cities in the Russian Federation are ment on purchase prices of grain have surfaced considered urban hot spots. These are cities with this year's harvest. In Russia, grain prices of- where heavy industry and the military-incLustri- fered by the state 10,000 rubles-are equal to $80 al complex often constitute the major sources of at an exchange rate of R125 = $1. Prices in Ukraine household income or those that are not located and Kazakhstan are slightly lower, while prices in in main agricultural producing regions. These the Baltic states are higher; as high as 15,000 to areas may be particularly vulnerable to disrup- 18,000 rubles per ton. The average farmgate price tions in the supply of specific food items. for wheat in the U.S. is about $130 per ton. Following the liberalization of food prices in How long farms will or can hold back grain Russia in early 1992, reported retail prices of food sales is unclear. Higher grain prices make sense varied widely across regions. The ratio of maxi- because the alternative to domestic procurement is mum to minimum prices throughout the RuLssian grain imports at even a greater cost to the state Federation ranged from 13 for butter to 3 for budget, both in terms Dfforeign excharnge cost and eggs. Such large dispersions in price have not subsidies to compensate for the higher exchange narrowed appreciably since then; they have even rate. Higher grain prices will increase production increased for sugar and bread. These differences incentives for the 1993 crop thereby reducing im- are a reflection of the very weak integration of port dependency next year as well. Higher grain regional markets. Until reliable interprovincial prices will further the goal of livestock restructur- markets emerge, administrative movement of ing by raising mixed feed prices and encouraging food to the urban hot spots will be needed to sup- farms to shift their feeding practices toward non- plement flows through embryonic free market grain feeds. At the same time higher prices will en- channels. The quantities distributed in this way courage production of wheat, for which Russia need not be large, and administered distribution and other countries of the former USSR likely have should be phased out as the volume in interre- a comparative advantage. Lastly, higher grain gional markets increases. prices improve agricultural terms of trade and Prices for a standard market basket of food would provide some relief to the current profit- commodities have been highest in St. Peters- ability squeeze in the sector. burg, Siberia, and the far north.' Where prices Alternatives to state marketing channels for are appreciably higher than average, the stan- grain remain limited in the immediate term while dard increases in income support payments marketing opportunities for other commodities may not be adequate. The international donor are increasing more quickly. In this context, priva- community has directed shipments of foocl un- tization of state trade and private sector develop- der humanitarian relief programs to cities in ment of parallel marketing are crucial for food dis- which prices are unusually high. Whether this tribution and need to be promoted at all levels. food is distributed in kind to needy people or With the exception of grain, state procurement sold on markets, such regional targeting makes quotas for 1992 have been reduced in Russia for all an important contribution to the liberalization food commodities. W/Vhether the government program. Relief assistance that is targeted to meets these targets depends on several factors: dif- hot spots does not depress producer incentives ferences between prevailing market prices and since the very existence of hot spots is evidence government procurement prices, the rate of infla- that these areas are poorly linked to internal tion (higher rates will trigger hoarding and specu- markets. lative purchases), and whether local authorities The ability to intervene administratively to in- block or reduce food movements out of surplus ar- crease supply in hot spots will be increasingly eas if the economic situation deteriorates. Access important through the winter of 1992/93. Stocks

66 are now drawn down at the household, local, Federation, the capacity to respond quickly to and national levels and are unlikely to be re- sudden shortages in the urban hot spots remains placed fully during the current crop year. There weak and uncoordinated. Full reliance on market is a need for continued pre-positioning of food in forces would be premature since the Russian urban hot spots as domestic supplies are released Federation's undeveloped marketing chain has from farm stocks and strategic reserves. Equally virtually no capacity to respond quickly to re- critical will be a steady supply of food imports to gional price differentials. top-up urban food supplies for the coming win- It is therefore recommended that a temporary ter and serve as a balancing mechanism to damp- agency be established and empowered to move en sudden price movements. sufficient quantities of food for release into local Although the administration of food assistance markets should the need arise.2 The agency within the Russian Federation and other repub- should be dissolved once interregional markets lics has been criticized, it is nonetheless clear that prove able to transfer sufficient food among re- the simple availability of imports during the past gions in response to regional price differentials. winter played a very important role in dampen- Until then, however, the agency's authority ing price expectations. Food imports will again be should extend to all sources of supply, including required in the July 1992/June 1993 agricultural food imports, drawdowns from the government's year, but a detailed assessment of import require- strategic reserves, and diversion of products in ments needs to be made following the harvesting domestic assembly and distribution channels. of winter and the spring crops. Such an assessment is essential to account for the impact of re- Notes forms-especially in the Russian Federation-on projected food supplies and on potential food 1. In some cases higher food prices reflect not only deficits in the other states of the former USSR. supply-side shortages, but also higher wage levels. Workers have traditionally been lured to more remote After a parolonged delay, coordination arrange- menthets forcritical food imports were im- parts of the country bv substantial wage supplements. mnents for the critical foocl imports were improved in early 1992-within Russia, through the 2. This intervention would be antimarket in the sense creation of a commission to monitor price devel- that administrative measures would be used to move oprnents in urban hot spots, and among the for- food to the hot spots. But it is pro-market in two pro- epientscommunity, through theestablishmentof found senses: it would relieve social pressure that thenFoodmunity, G roup g theaupiestablih tmightof otherwise reduce public support for the reform the Food Group under the auspices of the G-10 program, and it would allow commodities to be dis- countries. Although monitoring capabilities are tributed through wholesale and retail markets at the now reasonably well developed in the Russian local level.

Measures to improve agricultural production and efficiency

Agriculture in the former USSR developed Farm ownership, organization, without any mechanism for optimally allocat- and restructuring ing resources. Investment was administratively channeled to regions and sectors for reasons Land and farm ownership reform unrelated to their ability to maximize gains. Some parts of the agricultural and food econo- There were about 52,000 large farms in the former my experienced overinvestment (such as land USSR in 1990, 45 percent of them state farms improvement and agricultural machinery) (sovkhozes)and 55 percent collective farms (kolkhoz- while others experienced underinvestment es). (The historical evolution of state and collective (particularly farm services, food processing, farms is shown in Table 5.1 and Figure 5.1.) About and marketing). And once investment resourc- half of these farms (25,000 farms) are in the Russian es were allocated, there was little incentive for Federation (Box 5.1). While varying substantially enterprises to use them efficiently: farms were from one region to another, these farms are every- guaranteed financial viability by the state where grossly oversized: the average sovkhoz in through an elaborate state system of pricing, the former USSR has 15,300 hectares of agricultural debt relief, and other subsidies. land and the average kolkhoz has 5,900 hectares.1 This chapter examines ways to improve re- State farms accounted for 54 percent of the arable source allocation, use, and productivity at the land in Russia in 1990, and collective farms for 44 farm level. The strategy for developing the percent (Annex Table A5.1). Total employment in food and agricultural sector over the medium socialist agriculture in the former USSR was 24 mil- term must address policy measures affecting lion in 1989, or 480 workers per farm. The state and the performance and efficiency of primary ag- collective farms have a large stock of farm machin- ricultural production. Among the most impor- ery, although it is considered inadequate by many: tant are land ownership, organization, and re- 2.6 million tractors, 600,000 combines, and 1.3 mil- structuring of state and collective farms; land lion trucks in 1990. Together, state and collective use, soil fertility, irrigation, and the sustainabil- farms accounted for up to 75 percent of the gross ity of production; the availability and use of value of agricultural output. Most of the rest origi- critical agricultural inputs; and the role of agri- nated in household plots allocated to state and cultural research and technology transfer, in- collective farm workers. Irrespective of who was cluding agricultural education, extension, and farming the land, however, before the reform all ag- services. ricultural land was owned by the state.

69 Figure5.1 Numberand size of state and collectivefarms in the former USSR, 1960-90

Farm size (thousands) Numberof farms (thousands)

30 -50

2X1Average size of state farms

205__ EU Averagesize of collectivefarms 40

20 30 15 ~~~~~~Number of colB 30 15

, 0 __ Nmber of statefarms

10 5

0 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~0 1960 1965 1970 1975 1980 1985 1990

Source:Derived from USSRStatistical Yearbook.

Need for privatization. Higher productivity re- decision making and the lack of any relationship quires enterprise restructuring and investment between labor productivity and wages and a genuine owner who accepts responsibility * Near total dependence of farms on cen- for profit and loss. In agriculture the creation of trally allocated and supplied agricultural active agents requires the assignment of both land inputs ownership and assets of the state or collective * Off-farm administrative control of impor- farms. Only the assignment of ownership and fi- tant production and investment decisions nancial accountability gives an agent an incentive * No incentives to improve efficiency or re- to carry through restructuring; otherwise, losses duce cost, because of a system of cost-based can be passed on and incentive to seek ]higher pro- procurement prices and highly subsidized, un- ductivity is weak. Full private ownership of land, restricted credits with rights to mortgage and sell, is necessary for . Destruction of economic intermediation reinvestment in productive private agriculture. mechanisms and near total reliance on govern- Without land as collateral for loans, capital-inten- ment monopolies in procurement and sive modern agriculture cannot be fully priva- distribution tized. Thus assignment of land owners]hip, imple- * Subversion of the rural financial system mentation of land ownership laws, and reorgani- through centrally directed and subsidized zation of state and collective farms are all part of credit both for meeting investment needs and enterprise restructuring in agriculture. for covering the losses of a large percentage of The administrative command system and socialized farms. nearly uniform farm structure of the former The obvious shortcomings of collectivized USSR had several negative attributes: agriculture have provoked periodic reform ef- * Suppression of individual initiative and se- forts over several decades within the socialist rious free-rider problems because of top-down framework. Several failed reform attempts

70 Box 5.1 Traditional farm enterprises in Russia

There are approximately 12,000 state farms in the Russian Federation, and an equal number of collective farms. Prior to the mid-1960s the organization of state and collective farms differed significantly. In principle state farms are state enterprises, and collective farms are cooperatives in which all assets, except land, are owned by members. These differences ceased to be mean- ingful in the 1970s and 1980s, as procedures for paying workers and for gaining access to state credits became almost indistinguishable for the two types of farms. Collective farms in Russia have on average 6,600 hectares total land, about 4,000 of them cropped land. The average collective farm has 312 full-time equivalent workers, for an average of 21 hectares of agricultural land (including meadows and pasture, as well as arable land) per full-time equivalent worker. The average collective farm has approximately 1,900 cattle, one- third of them cows showing the importance of beef and milk production in the Russian livestock industry, particularly in the collective sector. The state farm, on the average, is about 9,000 hectares total area. Of this area, about half is planted. There are about 420 full-time equivalent workers per state farm, or about 21 hectares per worker. Although the total agricultural area is larger than on collective farms, much of the additional area is grazing land, pasture, forest, or waste land. For example, the grain area in the state sector exceeds that in the collective sector by only 14 percent. There are about 2,000 cattle per farm, one-third of them cows. State farms have a higher number of pigs than do collective farms, but beef and milk production is still more important than pork production. State and collective farms tend to be diversified enterprises, producing both crop and livestock products. However, diversification is more pronounced in the collective farm sector than in the state sector. This diversification has important implications for agricultural adjustment. If agricultural adjustment in the livestock sector is not carefully managed, it will bring down incomes on almost all farms. Prior to 1991 the private sector was limited primarily to household plots of farm employees and smaller gardens of urban residents. The most important of these in relative contribution to total output was the household plot of farm workers. These plots were approximately 0.5 hectares, although size varied considerably according to local conditions. This traditional private sector held about 3 percent of the arable land, most of which was planted to potatoes, vegetables, and fruits. Small household plots held 17 percent of cattle, 19 percent of pigs, 25 percent of sheep, and 83 percent of goats. Households produced little of their own feed and depended on the large farm to supply it, as well as tractor services, transportation to market, and in many cases, marketing as well. The household and collective/state sectors were part of an integrated system. Prior to 1991 there was no private sector of significant size independent of the collective/state sector, although the household sector-often referred to as the private sector-produced a substantial proportion of total gross output. Since 1991 a new private sector has been emerging, and the new independent private farms hold about 3 percent of Russian agricultural land.

71 later, however, it became evident by the late not quite private farms") in Russia in 1989 was 1980s that the scope for improverment within more than proportional to their share in arable the traditional socialist framework was slight. land, and larger for livestock than for crop Only a radical transformation to a new struc- production (Box 5.2). Most of the household ture based on a market economy, with private farmers benefit from special relationships with ownership and initiative, seems to offer a last- state or collective farms, relying on them ei- ing solution to long-standing agricultural ther directly or indirectly for a large propor- problems. tion of their inputs, especially animal feed and young livestock, which are often supplied Role of private farmiing. Before 1990 the pri- without charge as a side benefit to workers. vate sector in agriculture consisted only of personal household plots (referred to in the former USSR as "individual subsidiary Box 5.2 Contributionof personalhousehold farms") and gardens and vegetable plots allo- plotsto agriculturalproduction in Russia,1989 cated to urban workers. There were about 35 million household plots and 15 million garden Share of and vegetable plots in 1990, accounting for 9 Category householdpilots million hectares of land, 7 million of them Arableland 2.0 arable.Arbeln2. Grossvalue of agriculturalproduction 22.4 The private sector produced 25 to 30 percent Gross valueof crop production 16.9 of the value of gross agricultural product on Grossvalue of livestockproduction 25.8 about 3 percent of arable agricultural land (Ta- ble 5.2 and Figure 5.2). The contribution of pri- Source:World Bank 1992. vate household and garden plots (which are

Figure5.2 Contributionof householdplots to gross value of agricultural productionin the former USSR, 1989

Percent 50

45-

40-

0 Geor Azer Arm Kyrg Lith Kaz Ukr Uzb Bel Latv Tadi Rus Est Mold Turk Republics Source:Derived from GoskomstatUSSR data.

72 Beginning in 1990 individual peasant farms If all entitled recipients choose to remain in were also established. As of August 1992 there collective or corporate management, the shares' were 132,000 such farms on over 5 million hect- may never be individually identified and valued. ares of land in Russia alone; the number and Any recipient who chooses to leave the collec- land area have tripled since November 1991.2 tive, however, has the right to an individual Productivity and performance on private farms share of land and assets even if the majority of are generally higher than on state or collective shares remain collectively held. farms (Box 5.3), which is often attributed to clear The policy framework for farm restructuring ownership, higher than average quality of land, in the Russian Federation is contained in the De- intensive use of labor, and the planting of cember 1991 presidential decree on land reform higher-value crops. and recommendations issued by the Ministry of Agriculture in mid-January 1992 on reorganiza- Farm reorganization models. Reorganizing col- tion of collective and state farms. According to lective and state farms has already begun in Russia the decree all state and collective farms must re- and a few other states of the former USSR. In Rus- organize and register as new organizations by sia there are three main forms of reorganization, January 1, 1993. Farms that have been declared each of them involving the breaking up of farm bankrupt will be liquidated, and their assets land and assets into individual shares: sold. Since then state and collective farms have * Establishment of individual private farms, received permission to maintain their current small voluntary cooperative enterprises, or a operating and management structures. combination of the two The general assembly on each farm chooses * Creation of a joint-stock company with ei- the form of land ownership (individual, ther fully tradable shares or as a closed form with corporate, or collective) and the form of farm or- internally tradable shares ganization. That decision is implemented by a * Establishment of a producers cooperative, commission, chaired by the farm manager, and with greater emphasis on semiautonomous work including the farm administrators, local govern- groups within the collective farms. ment officials, members of the local land reform

Box 5.3 Privatefarming and efficiency Where the state owns most assets and does not allow genuine markets to develop, there are no proven means to motivate farm producers toward efficiency and sustained hard work, innovative behavior, and responsiveness to consumer demands. But where there is competition and provision of appropriate infrastructure, private enterprise will improve: * Technical efficiency, because clear ownership and competition hold costs down and motivate care for assets resulting in high productivity and benefits to consumers through lower prices. * Allocative efficiency, because the profit motive will stimulate producers to allocate resources and supply the kinds of products and services consumers want at times and places convenient to the buyer; and * Innovative efficiency, because the opportunity for financial gain and the pressure of competition provide the crucially important motivation for innovation and new product development. Individual peasant or family farms are an important vehicle for meeting the objectives of agrarian reform. However, the experience in the 1980s with the establishment of such farms was not always encouraging, and there are stronger reservations about private farming in the former USSR than originally expected. Conditions for establishment of fully independent family farms do not exist in most places. Without the establishment of markets for inputs and outputs the independent farms remain largely dependent on the collective and state farms.

73 committee, and representatives of major credi- representing partial ownership of one worker tors. As of February 15, 1992, land reform com- based on seniority and actual labor contribution. mittees had been established at regional and lo- The capital represented by the conditional cal levels throughout the Russian Federation. In shares or stock certificates is "faceless"-it is part addition eight regional conferences had been of a collective asset pool and cannot be physically held to train committee staff and agricultural ex- identified with an individual. In the absence of perts in the methodology for implenmenting land functioning capital markets such shares are not reform and farm restructuring. freely transferrable but can only be sold back to Farmers on state and collective farms that opt the farm. Under the joint-stock form of ownership to break up into private family farrns are being an individual is allowed to take possession of issued certificates of title and bank accounts are physical assets by announcing a desire to leave being opened in their names. For farms convert- the collective to take up private farming. The pro- ing to lease cooperatives, titles and bank ac- cedure for determining which physical assets the counts are being issued in the association's individual will receive is not well defined., how- name, though each cooperative member retains ever, and is open to abuse. Clear, transparent pro- the right to withdraw land and other assets. The cedures should be formulated without delay. more conservative restructuring option of established uslovnye pai or closed-type share-holding Accumulated debt and land reform. The out- societies is seen as a transitional step to one of standing debts of socialist sector farming units the other two forms of ownership. Even in this can be handled through three options: simple form, however, individual members reserve the write-offs, transformation of debt into equity right to withdraw. shares owned by the state, or repayment by the Russia's target for completing detailed sur- new owners. Because of the unique circumstanc- veys, land registration, distribution of nonland es under which socialist sector debt was accumu- and movable assets among members, and other lated, however, most of the debts should riot be formalities on these farms is Decermber 1992, passed on to new owners. However, the govern- which may be too optimistic. An encouraging as- ment must make clear that this is a one-time pect of the program has been the rapid diffusion write-off and that all loan contracts will be en- and adoption of the framework for decollectiv- forced in the new market economy. ization at the farm level. This suggests that resis- The real value of these debts has declinecl sub- tance by farm managers and the rural nomenkla- stantially, as high inflation has rapidly reduced tura was weaker than anticipated, and that the the burden of the remaining debt overhang. In- reported reluctance of the farm work force to as- terenterprise arrears, which are plaguing the in- sume some responsibility for farming decisions dustrial sector, do not appear to be as serious a within a market-oriented production environ- problem for state and collective farms. Nonethe- ment may have been overstated. 3 The initially less, accumulated debt and arrears require fur- rapid pace of farm restructuring has slowed ther analysis of their impact on the profitasility down considerably in the last few months, of the reformed farming units and of their con- however. sistency with the treatment of enterprise debt Joint-stock companies are a relatively recent under privatization guidelines. introduction to agriculture, made possible by the 1990 USSR Law of Land and subsequent legisla- Unirestrictedprivate ownership of land. The 1990 tion at the republic level on private ownership of Land Law established the principle of lifetime land and other assets. This approach. much fa- usufruct, with rights to bequeath but not to sell. vored by farm managers, is considered by many The corresponding Russian legislation provided to be a major form of agricultural restructuring. very restricted rights of sale. Russia's presidential The conversion of ownership is being imple- decree of December 27,1991, established a frame- mented in two stages: work for transferring ownership and land title. * Formal title to all state-owned. aissets is These measures constitute important steps in a transferred from the state to the state aind collec- progression toward full private ownership. tive farms Land markets are a fundamental complernent * The farms then divide all assets into condi- to private farm ownership. Authority to estab- tional shares by balance sheet value, each share lish such markets is the next logical step in

74 building a legal framework for private farming. farms could remain largely dependent on local However, Russia's Constitution proscribes the authorities. At present farm restructuring and sale of agricultural land (an attempt by the gov- the creation of private farms appears to be pro- ernment to amend the Constitution was rebuffed ceeding faster in Russia than privatization of the in the Congress of People's Deputies in April input supply system or output markets. The mo- 1992). An amendment to the Constitution should nopolistic state supply structure remains the be ratified as soon as possible. main source of agricultural inputs for private As envisaged by the presidential decree, the farms. The uncompetitive input supply system restructuring of the state and collective farm sys- could become one of the most serious constraints tem should start with clear titling of land and on privatization in primary agriculture unless other assets to individual owners. Once mem- development of a private input supply system bers have clear land titles, farm managers need and output marketing is accelerated. to address the interests of the new owners. Clear Supplementary measures that need to be im- assignment of ownership rights gives dissatis- plemented in parallel with land reform include fied members a viable alternative: they can leave proactive policies to move the state quickly out of the farm with their assets and land allotment. direct involvement in input and commodity mar- Until competitive input and output markets are kets, as privatization in these markets gathers a reality, members may need to reduce the scale of momentum. Policies are also needed to encour- existing state and collective farms, perhaps to vil- age the development of a competitive land mort- lage-level or even smaller units, to more effective- gage system for financing investments, including lv relate reward to productivity. Members with ti- purchase of equipment as well as land, and of a tle to land have a much stronger bargaining posi- competitive bank credit system for financing tion within the farms than is the case with either working capital. Increased public investment in the traditional structure or joint stock companies. rural infrastructure (such as farm-to-market Thus there is some urgency for completing the for- roads) and public services is also important. malities of land titling as soon as possible. Restructuring farms in the socialist sector Conditions for viable small farms. The maximum size of land holdings for the initial distribu- The restructuring of state and collective farms tion of land in Russia has not been clearly estab- needs to continue until they are replaced by indi- lished. There is enough agricultural land in Rus- vidual farms or can compete on equal footing sia to give each agricultural worker about 20 with private family farms. However, it will be hectares, but conditions vary across regions. Vari- many years before individual farms are estab- ability is very high, with private farms ranging lished in sufficient number to have a dominant from 150 to 200 hectares in areas that are marginal role in agricultural production. or extensively cultivated to as little as 2 to 5 hectares in intensive and highly productive regions; Need for decentralization. State and collective the average farm size is 41 hectares. farms in their present form are unfit for a market The minimum size of a viable farm in Russia economy As state plans, state orders, and subsi- seems to be 40 to 50 hectares in the north and 10 dies are lifted, the state and collective farms will to 15 hectares in the south. However, optimal feel pressure to restructure, sell, or rent out their farm size is a complex issue requiring further poorly used and redundant capital assets, mak- analysis. The right to enlarge or decrease farm ing land ownership reform easier to implement. size after the initial distribution-through pur- The legal restructuring will also involve the redis- chase, sale, and leasing-must be sanctioned so tribution of nonland productive assets among that the size of operational holdings can be ad- workers. Workers and pensioners should have le- justed in response to changing market condi- gal titles to their homes. tions and production possibilities. Once the land and nonland assets are distrib- Over the longer-term individual peasant or uted, the workers should be free to choose the family farms will become an important vehicle form of operation they prefer, whether as indi- for meeting the objectives of agrarian reform. vidual private farmers or in some form of associ- Without the establishment of markets for inputs ation with other private owners. The breakup of and outputs, however, the independent private large organizational units into village-based

75 cooperatives may be a viable, transitional adjust- total absence of market structures. Cooperative ment. Whether the smaller units should be orga- organizations could be developed as an interim nized as cooperatives or as private corporations step, to assist family farms in marketing products should be decided by the members or workers, and acquiring inputs at lower cost. Such coopera- but any new voluntary cooperatives must be tives could also help farmers decide on the kinds based on private transferable ownership. and amounts of inputs to use. As farms are reor- Policymakers have a special responsibility to ganized, it would be highly desirable to make of- ensure that members and workers have demo- fice, storage, and display space available for in- cratic control over the reorganization of farms. put supply and marketing cooperatives. Instruction on the benefits and liabilities of vari- Service cooperatives could be organized as ous forms of organization may be needed. Meet- well, if farm workers and members decided to ings for this purpose or other related educational pool their asset shares. A group of farmers could efforts should be conducted by someone other form a trucking cooperative, for example. The co- than the current management of the farms or operative would collect produce from the mem- other local officials, although they should be per- ber farms and deliver it to the nearest distribu- mitted to present their viewpoints. But mem- tion center or market. Where there are no distri- bers and workers must be offered the opportuni- bution centers or organized food markets, the ty to receive information that will help them cooperative may sell produce directly to consum- make informed decisions. ers in the cities. The same trucks could carry agri- Provisions are needed for the transfer of the cultural inputs from suppliers to the rural areas. quasi-governmental and social functions now undertaken by the socialized farms-schools, Initial impact of the Russian land reform hospitals, nursing homes, houses of culture, maintenance of roads-to newly constituted mu- Land reform is unlikely to have a significant pos- nicipal or other local governments. To assume itive impact on production this year. The transfer these functions, however, local governments will of assets to more efficient management is a grad- need a source of revenue to meet their new ex- ual process, and as it occurs the use of yield-en- penses. Land taxes or other alternative sources hancing inputs will fall because of limited of revenue will need to be considered to finance availability and higher prices. Land reform is not these social services. likely to have a significant negative impact ei- A few farms should remain in the state or public ther, however, since early reports indicate that sector, for a long time, perhaps even permanently: implementation is rather slow, with most of the - A small number of farms engaged in re- managerial structure of the state and collective search or as centers for extension and training; farms still intact. early decisions are needed about which farms The clearest development to date is an in- will be in this categorv. crease in the area of land managed under * State farms that produce seed for current household plots, particularly the garden and production, but only until private activity can orchard plots of urban dwellers. Although the take over. These farms should also carry out amount of land farmed by individual farmers adaptive crop research in collaboration with agri- is still very small, the number of individual cultural research centers. private farms has increased, and fewer reserva- * State farm land near major urban centers tions about private farming are expressed in that might appropriately be reclassified as a republic opinion polls. serve for future growth of urban areas. The failure of Parliament to legalize full private ownership of land in April 1992 signalled Role of cooperatives. Western style credit, mar- political reservations about the future of private keting, and input supply cooperatives should be farming and reflects the continued dominance given serious consideration. While privatization of state and collective farms. If the agricultural is economically feasible, not all of the agricultural sector is to support and strengthen the stabiliza- labor force in the Russian Federation feels ready tion program, greater financial accountability for independent farming. Such reluctance is un- must be required of all state and collective farm derstandable in view of the political uncertainty, enterprises. 4 For reregistered and moderately the inadequacy of infrastructure, and the near restructured state and collective farms most of

76 the old administrative apparatus remains in- Legislation on the establishment and opera- tact, and managers are more comfortable re- tion of all types of voluntary and commercial sponding to directives than whole-heartedly cooperatives (service, supply, marketing, and adopting new styles of management. production) should be ready for implementation as soon as possible, preferably by the end Recommended program of actioni of 1992. The formation of such cooperatives on the basis of available labor and capital resourc- That private farms have been much more effi- es, particularly of state and collective farms, cient and productive than socialist sector farms should be strongly encouraged. suggests that progress in land privatization ought to be accelerated. By the end of 1992 the Land use, soil fertility, and irrigation number of private farmers in Russia is expected to reach 300,000, accounting for approximately 5 Land use patterns percent of agricultural land. If the number of private farms doubles each year thereafter, about 40 About 25 percent of the area of the former USSR percent of agricultural land will be farmed pri- is agricultural land, about 40 percent of it arable, vately by the end of 1995. 59 percent permanent grassland, and 1 percent All state and collective farms should have de- under perennial plantations (Table 5.3). Because cided on their new organizational structure by of agroecological disadvantages, however, land December 1992. By that time the Russian gov- productivity is lower than in most European ernment should have transparent procedures in countries. Approximately 40 percent of agricul- place allowing state and collective farm workers tural land, 60 percent of arable land, and 30 per- to claim specific land and physical assets should cent of irrigable land in the former USSR is in the workers choose to become private farmers or Russia (Figure 5.3). to associate with other farmers on a cooperative Since 1950 arable land in the former USSR has basis. Farmers should also have the option of ex- been expanded by about 45 million hectares. The changing their share in land and other assets for largest increase (29 million hectares) came about easily marketable stocks or debt certificates. during the New Lands Program of 1954-58, By the end of 1993 all state and collective when the dry, marginal areas of the southern farms that are not financially viable should be Urals, southern Siberia (both in the Russian Fed- forced into bankruptcy. Appropriate bankrupt- eration), and northern Kazakhstan were cy legislation should be ready for implementa- brought under cultivation. Continual pressure tion by mid-1993, and bankruptcy proceedings for increased production also led to cultivation should be normalized during 1993. The state of large areas of permanent grasslands. land committees or similar bodies in the coun- In 1990 the cropped area in the former USSR tries of the former USSR should be preparing was 208 million hectares, with grains and puls- procedures on land and asset auctions prior to es accounting for about 110 million hectares. this time. The total area under crop cultivation, particu- The states of the former USSR should also in- larly grains, is declining (Figure 5.4). Marginal troduce legislation dealing with ownership of areas with low and variable yields are gradual- private property on all types of land (not just ly being taken out of cultivation. (See Table 5.4 agriculture land). All restrictions on the buying for the distribution of production of agricultur- and selling of land by those who farm their al commodities and population in the former land should be lifted by the end of 1992, as USSR and Table 5.5 and Figure 5.5 for the exist- well as any restrictions on farm size and the ing cropping pattern in Russia.) Land use and hiring of labor. The right to mortgage land is crop cultivation is expected to shift away from an essential aspect of private farming and the marginal and fragile land now that zonal pric- development of rural financial markets. Land ing has been dismantled. Efficient producers on mortgage legislation (for both long-term lease- good land will no longer be taxed through the holders and land owners) needs to be imple- pricing system to sustain less efficient produc- mented by the end of 1992. By the end of 1995, ers on marginal land. Programs will be needed all the prerequisites for efficiently functioning to ease the adjustment of workers formerly em- land markets ought to be in place. ployed on marginal land and in marginal

77 Figure 5.3 Distribution of arable land in the former USSR, 1990

Russia Kazakhstan

Ukraine __

Belarus Uzbekistan Lithuania

Moldova Latvia Azerbaijan

Kyrghyzstan Turkmenistan

Estonia Tadiikistan Georgia Armenia

0 20 40 60 80 100 120 140 Million hectares Source:Derived from USSRStatistical Yearbook.

Figure 5.4 Trend in area under grain crops in the former USSR, 1955-91 Million hectares 135

130"

125

120

115-

110-

105-

10 0 I I I I I I I I I I I I I - I I I I I I I I I I I I I I I I I i I I 1 1955 1960 1965 1970 1975 1980 1985 1990 Source:Derived from U.S. Departmentof Agricultureclata.

78 Figure5.5 Croppingpattern in Russia, 1988-90average

Sugar beets 1.2%0Grain crops 54.7%

Oilseedcrops 3.3% Flax 0.4% Potatoes 2.7% - Vegetables0.5%

Feedcrops 37.2%

Source: Derived fromGoskomstat Russia data.

livestock operations because of their substantial zone of the former USSR, stretching from number and regional concentration. Ukraine to beyond the Urals. Other less fertile Expansion of agricultural land would be dif- soils include brown forest soils in the North, ficult for several reasons. Most of the land that grey earth soils in Central Asia, mountain soils can support sustained agricultural production in the foothills of the Caucasus and Central is already being used. Past gains made through Asia, and red and yellow soils along the Black expansion into marginal areas are being lost to and Caspian Seas. wind and water erosion caused by poor agri- Soil fertility has declined severely, however, cultural practices, overgrazing, and saliniza- because of insufficient use of plant nutrients, tion. And investment funds for new irrigation poor cultivation techniques, and use of exces- and drainage projects will have to be curtailed. sively heavy machinery. Soil is also being lost Thus the primary strategy must be to maintain at an alarming rate as a result of severe wind and improve the fertility of existing agricultur- and water erosion, amplified by traditional al land and to ensure the sustainability of land farming and livestock grazing practices that ig- use from an environmental point of view. nore the need for soil conservation. The plow- ing of steep slopes, overgrazing, fertility-ex- Soil fertility and erosion hausting cropping patterns, and removal of vegetation have been particularly damaging in The most fertile black and chestnut soil areas the forest zone of the European part of the cover only 13 percent of the territory of the former USSR and the Transcaucasus. In semi- former USSR but account for 60 percent of its desert areas strong, dry winds are removing arable land. These soils, which are especially top layers of soil at an estimated rate of 0.5 suitable for wheat, corn, sugar beet, and pota- million to 1.5 million hectares of cropland each toes, make up the most important agricultural year.

79 Available estimates (which may be on the ough understanding of climate and soil charac- high side) for the former USSR indicate that teristics, and of the cultivation practices and problems with soil nutrients and erosion are crop and livestock mixes that are best suited to extensive. Eroded arable land area increased by the specific characteristics of each agroecologi- almost 26 million hectares between 1970 and cal zone. Knowledge is required about: opti- T985. About two-thirds (about 152 rnillion hect- mum land use patterns, tillage techniques, soil ares) of arable land and 54 percent: (about 175 conservation measures, plant varieties, crop ro- million hectares) of permanent grassland and tation, livestock species, and numbers and perennial plantation have been affected by ero- stocking rates. According to the Society of Soil sion. Over 50 percent of the soil profile has Science and the Academy of Agricultural Sci- been eroded in 64 million hectares of arable ences of the former USSR land productivity has land. About 3 billion tons of soil ccntaining 42 suffered mainly because of ignorance about million tons of nutrients are blown or washed these issues, especially about the diversity of away each year, reducing crop yields in affect- soils and changes over time in the different ed areas by an average of 20 percent of their agroecological zones, and because of stereotyp- yield potential. ical patterns of land use, crop rotation, fertili- The low humus content in many soils, zation, cultivation, irrigation, and soil caused mainly by intensive tillage and limited drainage. Soil compaction by excessively heavy replacement of organic materials, is also of con- farm machinery, overgrazing, lack of inputs, siderable concern. So is the nutrient content of and managerial shortcomings have also con- soils. About one-third of soils are highly defi- tributed. The result has been large-scale soil cient in phosphorus. According to some stud- destruction, including significant declines in ies improved phosphorus use could increase the humus content of soils, ever-increasing wa- average yields by as much as 20 to 30 percent. ter and wind erosion, acidification, and alkalin- About 10 to 30 percent of soils are deficient in ization of soils. potassium, and nitrogen deficiency is wide- Although optimum copping patterns have spread. Nitrogen losses are high in poorer soils been determined for the different agroecologi- of Russia; an estimated 10 to 15 kilograms per cal zones of the former USSR, crop rotation is hectare of nitrates are leached into the subsoil little practiced. Crop rotation works to sustain each year, depleting the soil and adding to wa- soil fertility and humus content, to reverse deter pollution. pletion of plant nutrients, and to protect the Over 50 million hectares of land in the north- soil structure. It is estimated, for example, that ern and western states of the former USSR proper crop rotation could increase yields on have serious problems with soil acidification, irrigated areas of the Central Asia states by 25 requiring large applications of lime. About 6 to 30 percent, but the pressure to produce more million hectares of mainly irrigated land, nota- grain and cotton works against adequate crop bly in the dry Central Asia region, suffer from rotation. Another consequence of limited di- excessive salinity caused by excessive irriga- versification is a reported increase in weeds tion and poor drainage. Salinated land area has and plant diseases, with weeds alone depress- increased by 65 percent since 1980, a,nd about 3 ing potential yields on many farms by 20 to 50 million hectares of irrigated land have been re- percent or more. moved from production in the last twenty five Future cropping patterns will undoubtedly years because of secondary salinization. In change considerably under private land own- 1990 deliveries of gypsum, crucial to desalin- ership or genuinely privatized former state and ization, were 72 percent below 1987 levels, and collective farms. New concerns for optimizing investments in drainage and tube well con- returns will require that more attention be giv- struction have lagged far behind the progres- en to soil and climatic conditions, price rela- sion of salinization in the former USSR. tionships, marketing possibilities, labor and machinery availability, and other production Sustainability and economic factors. Both researchers and farmers will need to focus on the development The tremendous diversity of agroecological and application of appropriate low input, sus- conditions in the former USSR requires a thor- tainable agricultural practices.

80 One practice with considerable promise for ble land (Table 5.6 and Figure 5.6). About 45 wider application in the former USSR is no-till- percent of the total irrigable area is in the Cen- age or minimum-tillage technology. Experts in tral Asia countries, 20 percent in Uzbekistan the former USSR are fully aware of the benefits alone. Russia accounts for about 30 percent of of this technology, although they admit that the irrigable area in the former USSR. results have often been unsatisfactory because Cropped area under irrigation is generally the equipment and herbicides used were not less (about 85 percent) than the total irrigable always optimal. The no-tillage or minimum- area, usually because the irrigation system is tillage technology has some drawbacks, but its not working properly or because of a shortage long-term soil conservation aspects and eco- of water. Of the total cropped area under irriga- nomic benefits may outweigh the drawbacks. tion in the former USSR in 1990, 25 percent was A prerequisite for large-scale dissemination of under grain crops, 21 percent under technical no-tillage and minimum-tillage practices in the crops, 7 percent under potatoes and vegetables, former USSR would be the availability of af- and 47 percent under feed crops (Annex Table fordable, good quality herbicides and planting, A5.2). The corresponding figures for Russia are spraying, and tillage equipment. 26 percent, 2 percent, 7 percent, and 64 percent (Annex Table A5.3). (Most of the area under Irrigationi and environment grain and food crops is, however, rain-fed and vulnerable to fluctuations in precipitation.) Another issue of land and water management Evidence suggests that irrigation schemes are that will require special attention, particularly inefficient and that water management at the in Central Asia, is irrigation. Total irrigable farm level is poor. Reassessment of the ecology area in the countries of the former USSR is and economics of large irrigation schemes to se- about 21 million hectares, or 10 percent of ara- cure better use of water resources is of high

Figure 5.6 Estimatedirrigable area in the former USSR, 1990

Turkmenistan Uzbekistan Azerbaijan Tadjikistan Kyrghyzstan Armenia Georgia Moldova Ukraine Kazakhstan Russia Belarus Lithuania Estonia Latvia 0 10 20 30 40 50 60 70 80 90 100 Percentshare of arableland Source:Derived from USSR Statistica( Yearbook.

8S priority, as is the development of a more com- monopoly suppliers to service a comparatively prehensive approach to the ecological and envi- small number of very large farms. Thus the ex- ronmental aspects of the decline of the Aral Sea. isting network is quite unsuited to meeting the A large share of the cropped area in Central needs of the large number of smaller farms Asia and the Caucasus is irrigated. Water that are emerging under the land reform de- charges have been very low, resulting in high crees in the Russian Federation and in other losses of irrigation water and wasteful water states of the former USSR. management practices. The diversion of river water for irrigation has been the primary rea- Agricultural machinery son for the decline in the water level of the Aral Sea. Heavy water use and poor drainage Problems with agricultural machinery are have led to serious problems of soil salinity. chronic, from the wrong mix of machinery, The heavy use of chemicals (fertilizers and particularly a shortage of trailer equipment pesticides) on irrigated crops (particularly cot- (Tables 5.10, 5.11, and 5.12) to a scarcity of ton) has also created serious environmental spare parts and rising fuel prices. Production problems. of agricultural machinery has declined rapidly Liberalization of prices and privatization of in recent years (Box 5.4), and fuel prices have land will encourage crop diversification risen since 1991. Localized shortages of gaso- (away from cottoni monoculture), but the line and diesel fuel afflict many areas despite transformation is expected to be slow because government efforts to allocate and distribute of the slow pace of reforms in the Central fuel for agriculture (Table 5.13). There are also Asian states. Any sudden shift away from irri- serious shortages of grain processing equip- gated agriculture would create serious pro- ment (drying and storage), milk refrigeration duction and farm income problems in an area equipment, harvesting equipment, and spray- with the lowest per capita incomes of the ing machines. There are almost none of the states of the former USSR. Thus, agriculture small and medium-size tractors and other must remain central to any strategy designed equipment needed on the emerging, much to solve the environmental crisis of the Aral smaller private farms. Even more serious than Sea. the recent decline in numbers, however, is the consistent poor quality of farm machinery, in- Supply of critical agricultural inputs adequacy of accessory equipment, and the lack of responsiveness of the agricultural ma- Efficient use of critical agricultural inputs (machinery industry to the agronomic and eco- chinery, animal feed, crop seed, agrochemicals, nomic needs of farms. and fertilizers) is essential for improving agricultural productivity. How efficiently inputs are used depends, among other things, on Box5.4 Declineinfarmmachineryfleetin the timely delivery of a;ppropriate inputs in ade- for USSR quate quantities. Input supply will be especially important in the medium- and long- Percentage term, as private sector farming takes over and changefrom production patterns change. In the last few Agriculturalmachinery 1986 to 1990 years both production and imports of agricul- Tractors -4 tural inputs have been gradually declining Trucks -26 (Table 5.7 shows production of critical agricul- Combines -17 tural inputs in Russia). Ploughs -7 Perhaps the most difficult task of the transi- Cultivators -12 tion will be to extend privatization and liberal- Cottonpickers -16 ized pricing to the input supply sectors. Agri- Pickupbalers -11 cultural input producers have had no incen- Milkingmachines -18 tive to satisfy the needs of farms, so they have Irrigationmachines - 4 often provided an inappropriate mix of low- quality inputs. The system was arranged for

82 Under the old Soviet system the farm ma- be established to cover a much broader area chinery supply system was supposed to work than a single state or collective farm, so that from the bottom up. Farms prepared lists of farmers have a choice. equipment required for the next year. These The movement toward world prices and the lists were combined at the district (rayon), establishment of true financial responsibility province (oblast) and republic levels and then for farms and other enterprises are expected to were handled at the union level by the State have major impact on the agricultural machin- Supply Agency (Gossnab). The Ministry of In- ery industry in the countries of the former dustry was expected to reconcile demand with USSR. Even allowing for quality differences, production and supply possibilities, while the the prices for agricultural machinery in the State Pricing Committee (Goskomtsen) estab- former USSR were well below world prices. lished wholesale prices for farm machinery. Since 1988, subsidies on farm machinery have This system of supply was inefficient, adminis- been eliminated, and prices have skyrocketed, tratively cumbersome, nonresponsive to farm- causing demand to plummet. This trend will be er needs, and supplied machinery of substan- reinforced by tightening farm finances and by dard quality. the need for farms to reduce investment expen- The existing production system is designed ditures in the short to medium term. The struc- to produce equipment for large socialist farms, ture of demand for machinery by state and col- so meeting the increasing demands of private lective farms is also expected to change, shift- farmers for small tractors and small-scale farm equipment will be very difficult. The Russian parts.To survive in the long run manufacturers government has initiated a project called Pri- will have to meet the specifications of end-us- vate Farmer (Fermer), which is attempting to ers for quality and applicability. address this problem through the design and The agricultural production response to bet- manufacture of agricultural equipment and machinery~~~~~~fo prvt famr.Tepojc~ .eisi ter quality machinery is expected to be large. chinery for private farmers. The project relies in Take grain, for example. Direct harvest losses part on the conversion of defense industries to due to inferior quality combine harvesters are the production of agricultural machinery, estimated at 10 to 20 percent, and postharvest In the meantime another solution to the farm handling and storage losses are estimated at up machinery supply problem for small private to 10 percent. Eliminating or reducing these farms is the establishment of farm service co- losses could result in incremental grain output operatives or independent enterprises that can losscudrutinnrenalginupt operform mechanizedopendentionsorpario tts can for the countries of the former USSR as a whole perform mechanized operations for farms on a o 0mlint 0mlintn nuly ta contract basis. Or the cooperative could own, of 30 million to 50 million tons annually. At an maintain, and repair the machines and rent average price of $120 a ton the value of lost them to individual farmers who were members grain is between $3.6 billion and $6.0 billion a of the cooperative. Another alternative, if so- year, which is equivalent to the annual grain cialist farm members or workers agreed, would import requirement for the former USSR. be to sell existing machinery to individuals, who could provide mechanized services to Animal feed family farms. The existing supply of farm machinery, except for spare parts and accessory Between 1988 and 1991 concentrate feed ac- equipment, is generally adequate to perform counted for about 42 percent of the animal feed the required operations for the next few consumed in the former USSR (Table 5.14 and seasons, until agricultural recovery gets under- Figure 5.7), and coarse feeds (hay, haylage, and way. If the machinery were privatized, it straw) supplied an additional 21 percent. The re- would probably be more than adequate. maining requirements were met by succulent To avoid the chronic inefficiency problems of feeds (24 percent for silage, green chop, potatoes, the past, it is essential that these service enter- feed roots, and food industry by-products) and prises be truly independent and voluntary. Bar- pastures (13 percent). What is striking about riers to entry or territorial delineations of area these figures is the very low reliance on grazing of operations are inconsistent with a competi- as a source of feed intake in a region with such tive farm service sector. Farm services should vast areas suitable for pasture.

83 Figure 5.7 Sourcesof livestocicfeed in the former USSR, 1988-91average

Pastures Succulent feeds 13% 241% _

Coarse feeds 21%

Concentrate feeds 42%

Source:Derived from U.S.Department of Agriculturedata.

Feedgrain. The amount of feed used to pro- straight, sometimes after being crushed by duce a unit of livestock output is sujbstantially small feed mills on the farm. Annual output of greater in the former USSR than in WVesternEu- the milling industry in the former USSR fluctu- rope or North America-as much as two times ated around 80 million tons. greater in many cases. There are many reasons Several measures are needed to improve the for the lower feeding efficiency, inc]uding lack cost-effectiveness of the feed milling industry. of incentives at the farm level, poor quality and The prices for feed ingredients need to be liber- nutritional content of feeds, and disruptions in alized, and cost-plus pricing of output needs to the supply of feeds to farms, especially to the be eliminated since it encourages feed miAls to large specialized producing units. use expensive but not necessarily better ingre- The estimated annual use of grain for feed dients. Strict quality control and testing mea- during 1989-91 for the former USSR was 136 sures need to be introduced, and the technolo- million tons, or more than 50 percent of the to- gy of feed milling and mixing plants needs to tal grain supply including imports. A large be upgraded in many areas. Privatization and fraction of the grain imports in recent years has enterprise reform policy for the feed industry been for livestock feed. The amounit of grain ought to be initiated in 1992. fed to livestock in the countries of the former USSR has declined since 1990/91 by 15 to 20 Forage crops and grasslands. Forage crops and percent. Demand for mixed feed is, declining pastures have been grossly underexploited as because of high prices, low quality, and gradu- sources of animal nutrients and dry matter in- al decline in the number of livestock, take. With the introduction of market forces a Only about half of all grain fed to livestock is shift in livestock production to less intensive hus- processed by the feed milling indUStry into bandry and feeding regimes can be anticipated manufactured feed. The other hailf is fed (especially for cattle), and feed supply will also

84 adjust in favor of cheaper feeds and greater reli- growing periods of less than 90 days would ance on forage and grazing. The reasons these permit forage maize to be grown much further sources have not been developed earlier are com- north than it now is. These hybrids would also plex but seem to be related to the central plan- enable harvesting to be completed before the ners' preference for intensified livestock produc- onset of bad weather, which has made harvest- tion. Thus large, integrated units received most of ing difficult or impossible because of muddy the livestock sector's investment allocations and fields and poor conditions of access roads. Ear- production support in the former USSR. Pastures lier harvesting would result in lower harvest and areas suitable for forage production were al- losses as well. lowed to degrade or were assigned to produce Early-maturing forage maize hybrids have grain. Forage crops have received slight attention not yet been developed in the states of the in the past compared with directly marketable former USSR, and imported varieties (such as field crops. Indeed, internal pricing practices those imported from the Austrian branch of Pi- made forages relatively expensive feedstuffs. oneer Hi-Bred or from Sucheava in Romania) Forage crops were produced on about 76.3 are in high demand in the northern parts of the million hectares in 1990, almost 34 percent of to- former USSR. Large-scale introduction of ear- tal arable land in the former USSR (Table 5.15). ly-maturing varieties would have very high Consisting mainly of alfalfa and other perennial economic returns. More attention also needs to forage legumes, annual forage clover-grass mix- be given to increasing the production of high tures, forage maize, fodder beets, and melons, protein-content forages such as alfalfa, clovers, forage crops produce succulent feedstuffs and clover-grass mixtures for ruminant con- (green chop, silage, feed roots, and the like) and sumption. Expanding production of top quali- roughage (hay, haylage, and high-protein-con- ty alfalfa and other forage legume hay and tent green meals). The crops are used primarily haylage deserves priority emphasis. to feed cattle and sheep. Substantial increases in Other annual forage crops, such as grain-le- forage legumes in crop rotations, together with gume and grass-legume mixtures, winter bar- the application of organic manure, are needed to ley, wheat, and rye, and spring barley, oats, improve soil fertility and to at least maintain al- and grasses, are grown mainly in the arid areas ready low soil humus balances. of the south and in areas with short growing The area planted to annual forage crops in the periods. Areas such as Siberia and the north- former USSR fluctuated around 20 million hect- eastern European plains require large amounts ares. Forage production from about 10 million of winter feed reserves because of the long hectares was fed green, and the remainder was pre- winters. served as silage and hay. At 16 million to 18 million Annual forage legume production should be hectares harvested each year, forage maize ac- substantially expanded to improve soil fertility, counted for the bulk of annual forage crop area in reduce application of nitrogen fertilizers, and the former USSR, which was the largest forage increase nutritive values. Mixed planting of le- maize producer in the world (Table 5.16). Agricul- gumes with spring oats, barley, and annual tural experts of the former USSR consider forage grasses would serve those purposes and maize to be the best suited and highest-yielding should be given high priority. Moreover, rain- forage crop to help bridge the long winter feeding fall permitting, cultivation could be intensified periods and, in the steppe areas, the hot and dry on large areas of the former USSR's vast fallow summer feeding periods when pastures are dor- land (estimated at about 20 million hectares) by mant. About two-thirds of total forage maize pro- planting annual and perennial forage legume duction is used as silage and the remaining third as crops or other relevant green manure crops. green chop. Average rainfed forage maize yields However, this would also increase demand for are relatively low at about 30 to 40 tons per hectare. seeds, which are in very short supply. Low rainfall is the most important factor lim- Perennial forage crops, including alfalfa, clo- iting higher yields of rainfed forage maize. The ver, and their mixtures with grasses, cover about short growing periods in Russia and most oth- 32 million hectares. Alfalfa is grown mainly in er parts of the former USSR also prevent the re- the forest steppe and steppe zones and in the ir- alization of maximum potential yields. The use rigated areas of the south. Clover-grass mixtures of early-maturing forage maize hybrids with or pure clovers are the main forage crops of the

85 north. During the past decade forage production Most permanent grassland is unsuitable for cul- increased by about 25 percent because of major tivation or has been damaged by exhaustive agri- yield increases from the use of improved variet- cultural practices. Poor management ancd over- ies and increased fertilizer. Perernial forage grazing have led in many places to a deterioration crops thus helped to reduce the protein deficit in species composition, and as pasture procluctivi- for livestock production. ty decreased, there has been a tendency to intro- A substantial expansion in area under peren- duce low-yielding field crops. According to the nial forage legumes is required to further in- Williams Fodder Institute of the Russian Academy crease protein availability in animal feed; it of Agricultural Sciences, overstocking and mana- will also be important as a means of sustaining gerial negligence have caused severe pasture deg- soil fertility. Shortage of seed is a serious obsta- radation on about 40 million hectares in the Cen- cle, however. The former USSR imported much tral Asia states and on about 15 million hectares in of its perennial forage crop seeds in the late the northern and northwestern parts of the former 1980s mainly because it lacked the equipment USSR. The speed of degradation has been unprec- for harvesting and processing domestic seed edented and may be a major reason behind the production. Hard currency shortages have vir- sharp drop in the numbers of small ruminants tually halted these seed imports, creating a se- since 1989. vere shortage of perennial forage crop seed. Both planners and farm managers have neglect- The supply situation is expected to worsen ed grassland in favor of marketable field crops, during 1992. Meanwhile, new forage legumes which is the main reason for low productivity and and grass species and varieties do not appear degradation of grasslands. Natural swards of to have moved off the research plots. Legumes good quality grassland do exist in higher rainfall tolerant of poor, acidic, and eroded soils and areas, however. These have the potential for swift low temperatures are not found in the former and significant improvement through fertilization USSR even though varieties of sanfoin are and good management. Even for poorer quality widely used in Western Turkey ando are adapt- swards, which cover at least 66 percent of the able to such cool climates as those of the high former USSR's grasslands, yields in the compara- altitudes of Peru and New Zealand. tively higher rainfall areas could be improved Permanent grslnsnslowly by changing sward composition through Permanent grasslands i the former USSR fertilization, controlled grazing, and cutting. More occupy about 320 mrillion hectaresl represent rapid improvement can be achieved by a combi- ing almost 60 percent of the total agricultural nation of fertilizing, reseeding with desirable grass land. About 290 million hectares are classified and legume species, and applying lime to reduce as pastures and 30 million hectares as meadow- acidity levels. land. The share of total animal feed intake de- Only about I percent of the total grassland area rived from this vast pasture area (13 percent) is is fenced, which renders rotational grazing impos- shockingly small (Figure 5.7). State farms and sible under prevailing pasture management prac- cooperative farms have been assigned about 85 tices. Insufficient watering and stock handling fa- percent of this land; the remaining 15 percent cilities exacerbate the problem. Communal grazing (approximately 50 million hectares) belongs to rights on much of the grassland in the State Land the State Land Reserve Fund. Reserve have also led to severe overgrazing and Pastures are used for livestock grazing only. soil erosion on this common-property resource. Meadows are used for grazing and for produc- The scientific know-how needed for grassland ing hay and limited amounts of silage. Herbage improvement and more rational management ex- production is limited by agroecological condi- ists in the former USSR. For example, the Williams tions and low levels of nitrogen, potash, and Fodder Institute has made specific recommenda- phosphorus in soils. Virtually all the grassland is tions for grassland improvement for southern unimproved and excluded from organized pro- pastures using drought-resistant grasses and a duction systems. Despite having much higher combination of native and exotic legumes (which feed value than permanent grasses, legumes can double yields) and for northern pastures us- generally represent only a small portion of total ing common, European-type grasses and clovers sward composition. Digestibility values are and other legumes (which can increase yields sev- therefore low. eral times over). The economics of grassland

86 intensification, however, does not seem to be well required per unit of output. The probable effect researched. For example, optimal economic levels will be to increase livestock output from a smaller of intensification and the relative profitability of herd size and total volume of feed. grassland development versus forage (particularly forage maize) and crop production would need Crop seed to be determined for the different agroecological zones of the former USSR.5 Except for small quantities of hybrid or special- Without special efforts, the uptake and spread of ized seed all crop seed is domestically produced. pasture management and improvement tech- Seeding rates per hectare are high because of niques long practiced in the West will be very slow. poor germination rates and poor planting meth- Given limited interest and limited practical experi- ods. For example, approximately 25 million tons ence in grassland improvement and management, of grain seed are used to produce 190 million tons the uncertain production cost and marketing sce- (clean weight) of grain. For a similar mix of crops nario for livestock products, and the relatively high in Canada seed requirements may be only half cost and scarcity of inputs, fencing materials, stock that amount. The pattern in other crops is not handling facilities, and meliorative works, it is much different. Shortages of high quality seed for doubtful whether many farms will invest in grass- vegetables, fruits (propagating stock), hybrid land development in the near future. corn, sunflower, sugar beets, and forage crops Although the regeneration of grassland will re- have also been reported. quire new investment and is likely to be a slow Privatization and land reform are likely to re- process, grassland development should be carried duce the amount of seeds used for most farm out with vigor wherever economically feasible. crops, especially grain and potatoes. The reduc- Market forces will undoubtedly encourage the tion in seed use for grain could be as large as 10 conversion of arable land on erosion-prone slopes million tons, as incentives to improve seed quali- to permanent grassland. For example, in Ukraine ty, cultivation practices, germination rates, and arable land on slopes above 7 degrees gradient is yield potential diffuse through the seed industry already being converted to pastures. A follow-up and agricultural sector. Improvements in the campaign has been designed to convert to grass- yields and quality of forage crop seeds also offer land those portions of arable land even on slopes great potential for increasing agricultural output. of 3 to 4 degrees that are vulnerable to erosion. The seed industry in the former USSR is domi- Such expansion is a proven way to substantially nated by large-scale public sector seed enterprises increase the supply of feedstuffs with good pro- and farms. These enterprises have generally oper- tein content at relatively low costs, while simulta- ated well below capacity, producing substandard neously reducing soil degradation and erosion quality seeds at highly subsidized prices. Until problems. recently, little attention has been paid to the po- With the change in incentives that privatization tential role of private seed companies, with the will bring and the increased opportunities for op- exception of Pioneer Hi-Bred International, a joint timal decisions provided by a market economy, it venture in Ukraine for hybrid maize production. is reasonable to expect that feeding efficiency in Until the private sector is sufficiently developed, many of the countries of the former USSR will ap- present seed farms must not be dissolved. proach that in Western Europe and North Ameri- The seed production and supply infrastructure ca. The use of high-protein feeds, vitamins, min- appears to be disintegrating. If this occurs there erals, antibiotics, and other pharmaceuticals will may be serious disruptions in interstate supply increase significantly, reflecting the interaction of and distribution of high-quality seed and corre- demand and supply: use of these inputs will responding disruptions in crop production. Ukraine flect their profitability to those who actually and Russia, prime suppliers of a wide range of make the decisions and who will realize the ben- seeds to other republics, may be unable to contin- efits. Thus, the combination of alternatives pro- ue to supply other states of the former USSR. vided by markets and decisions based upon po- Neither the former USSR nor its constituent tential profitability will result in significant im- republics had an overall seed policy or seed provements in feeding efficiency. Higher feeding law. In the absence of a proper seed policy efficiency will lower livestock production costs framework to protect breeders rights, foreign by significantly reducing the amount of feed plant breeding and seed companies will be

87 unwilling to bring their best germ plasm or to In recent years pesticide use has declined sig- invest in the domestic seed industry. Thus it is nificantly (Table 5.17 and Figure 5.8), as has imperative that an appropriate overall seed the use of all types of agrochemicals (Box 5.5). policy be established and implemented to The decline in herbicide use is of particular guide the development of the seed industry in concern since weeds are estimated to remove both its public and private components. 10 million to 11 million tons of plant nutrients from the soil annually and to lower crop yields Agrochemicals by 11 to 12 percent.

As much as one-quarter of overall crop production in the countries of the former USSR is estimated to be lost to pests. Such large losses underline the need for judicious and selective Box 5.5 Agro-chemical(active ingredients) applications of high-quality pesticides within use in the tormer USSR an integrated pest management (IPM) approach. In the recent past the most widely Percentagechange fgro used chemicals were herbicides, followed by Agrochemical 1986to 1991 insecticides and fungicides. Defoliant use was Pesticides -47 also high because of the large area under cot- Herbicides -55 ton and the need for mechanical picking. Insecticides -74 Trends in the production, import, and use of Fungicides -36 pesticides were rising in the former USSR until Defoliants 47 the mid-1980s, but even then the level of pesticide use was low by international standards.

Figure 5.8 Delivery of agrochemicals to the agricultural sector in Russia, 1986 and 1991

Thousand tons 180

160 - 1986

140 - 1991

120

100

40 -Av

20 -Ž

0 Herbicides Irnsecticides Fungicides Defoliants

Source:Derived from Goskomistat Russia data.

88 Several factors have contributed to the re- The state monopoly on distribution needs to cent decline in pesticide use, among them eco- be replaced with an efficient and competitive logical considerations, increasing cost, the use system. However, manufacturing and distribu- of more effective pesticides, and wider use of tion systems need to be closely regulated to integrated pest management, including bio- ensure that necessary safety and health stan- logical control methods. More recently, the dards are maintained. major reason for the precipitous drop in the use of agrochemicals is the lack of foreign ex- Fertilizer change for imports of ready-made products. Since domestic production consists primarily Many soils in the states of the former USSR of rather primitive mixtures, declining pro- are deficient in nutrients. Phosphorous defi- duction and use of these chemicals is consis- ciency is particularly widespread. Yet, crop re- tent with the need to shift to more effective, sponse to applied fertilizer is quite low, environmentally safe modern mixtures. primarily because of poor management and The medium to long-term outlook for do- application methods. Fertilizer production in mestic production and availability of pesti- the former USSR, which was a net exporter of cides in the states of the former USSR is un- nitrogen and potash and a net importer of certain. There is a need for improving efficien- phosphate fertilizers, reached its peak in 1988 cy and product quality in the agrochemical and has been declining since (Table 5.18 and industry. Joint inspection with foreign experts Figure 5.9). The decline is due to shortages of of pesticide production plants and the distri- raw materials and spare parts and aging of bution network could help to improve current fertilizer plants. Fertilizer deliveries to the ag- practices and to identify inefficient or unsafe ricultural sector also declined rapidly between plants and distribution facilities for closing. 1988 and 1991 (Box 5.6).

Figure5.9 Productionand deliveriesof fertilizerin the formerUSSR (in terms of nutrients),1986-91

Milliontons 40

25 Deliveries

15 1986 1987 1988 1989 1990 1991 Soujrce:Derived from GoskomstatUSSR data.

89 commercial distributors of fertilizer and other Box 5.6 Declinein fertilizerdeliveries agricultural inputs. At the wholesale level fertil- in the formerUSSR izers are beginning to be sold on commodity Percentagechange exchanges. Nutrient from1988 to 1991 Fertilizer distribution should be gradually Nitrogen -34 privatized, starting at the retail level. For a pri- Phosphorus -13 vate sector fertilizer market to develop properly, Potash -31 however, certain basic elements need to be in Total -26 place. A dense network of dealers should be established around key consumption areas to meet peak periods of demand. These dealers should know all about the proper use of fertilizers and The drop in fertilizer use reflects reduced de- complementary inputs so that they can advise mand after fertilizer subsidies were eliminated farmers appropriately. Incentives should be de- in 1988/89. Consumption is lower than deliv- veloped to attract people into the distribution eries because of losses in transit reported to be network who are already skilled in business as high as 20 percent of deliveries. Despite ap- management practices or are willing to learn parently high levels of aggregate fertilizer con- them. A management information system is also sumption, applied nutrients per hectare are needed to monitor changes in the market. rather low compared with other European Achieving these longer-term objectives wA-illre- countries, and fertilizer losses (both before and quire the privatization of existing enterprises after use) are high. Fertilizer use levels follow and the lowering of barriers to entry by private agroclimatic conditions and generally decline entrepreneurs. Investment will also be needed to from west to east in the former USSR. expand and broaden the existing distribution The former USSR was the world's leading pro- network at four points: at the level of retailers, ducer and exporter of nitrogen and potash fertil- who would sell mainly to farmers; at the level of izers. It ranked among the top five producers of distributors, who would sell mainly to retailers; phosphate fertilizer, but agricultural dcemand ex- at transit distribution points, where enterprises ceeded domestic supply and excess requirements would function essentially as primary wholesal- (about 5 percent of total production) were met ers; and at prime supply points, to handle sales through imports. The Russian Federation comes from ports and factories. closest to self-sufficiency in the production of all In January 1992 the Russian government elim- fertilizers. Other net exporters include Ukraine, inated all statutory barriers to direct trade be- Belarus, and Uzbekistan, though each is serious- tween dealers and manufacturers and formally ly deficient in at least one of the three major fer- abolished the monopoly of state intermediaries. tilizer nutrients. In 1990 about half of all fertilizer Preparations for privatization of farm chemical produced in the former USSR was traded across and machinery dealerships at the rayon level republic boundaries (Table 5.19). Each country of have also begun. Retailers such as private deal- the region is dependent upon the free movement ers, service cooperatives and units attached to of fertilizers across borders. state and collective farms administration will Until recently, fertilizer was shipped (usually initially constitute the end-point of the fertilizer by rail) directly from the factory or port to the distribution system. railhead at the rayon level and then dispatched As in other sectors, the aim of privatization is to to the state and collective farms for application create a more efficient, price-responsive market and storage. A predetermined amount was allo- for fertilizers and other agricultural inputs. Mass cated to each farming unit to achieve specific privatization at the retail level is key and can be crop production goals. Retail fertilizer prices realized more quickly than at other levels of the were fixed and generally covered only half the distribution chain. Existing units at the retail level cost of production. should be privatized as quickly as possible. Spe- On December 13, 1991, the Russian Federa- cial temporary incentives should be provided to tion, under a decree of the Ministry of Agricul- encourage new private distributors to enter the ture, began to transform state-owned input dis- market-perhaps through provision of special tribution enterprises into retail sellers and small business credits to facilitate the acquisition

90 of space, equipment, and inventories. Over time Agricultural research and technology transfer local dealerships should be encouraged to consol- idate in ways that would not hurt competition. In the medium- and long-term, as production Meanwhile, restrictions on the types of inputs in- patterns shift, strategies will be needed for di- dustrial dealerships can offer or on their market recting agricultural research and technology area should be abolished. transfer more toward solving agricultural pro- Although retail prices in the fertilizer sector duction problems. Improvements in agricultural were liberalized on January 2, 1992, administra- technology ought to focus on production effi- tive pricing may have to be retained at higher ciency and optimal use of resources. There is a levels of the distribution chain, at least until need to develop efficient and responsive agricul- privatization is well under way there. Eliminat- tural extension systems for the emerging private ing distribution subsidies would allow the iden- farming sector and to strengthen linkages among tification of the real costs of distributing fertiliz- agricultural research, extension, education, and ers across regions. Products delivered from fac- service sectors. tories and ports should reflect international price parities for finished fertilizers. Transfers further Agriculturalresearch down in the distribution system should reflect In the former USSR agricultural research was regional transport cost differentials and new pat- conducted through the All-Union Academy of terns of demand. Agricultural Sciences (Vaskhnil)-with special- This approach to administered pricing will re- ized institutes in every republic-four republic- quire continuous monitoring as cost relations level agricultural academies, and agricultural change, energy prices rise, and reform spreads universities. There are over 100 agricultural re- to other sectors, including transport. Fertilizer search institutions, representing a substantial in- prices at the retail level in the Russian Federa- vestment in staff and research facilities-farms, tion have increased more rapidly since the Janu- buildings, and equipment. Every agroclimatic ary 2, 1992, than those of any other major agri- zone has one or more agricultural experiment cultural input or output and are approaching station and experimental farm. These institutions world price levels. One reason for the rapid conduct area-specific on-farm adaptive research price changes is that fertilizer is exported (nitro- at some of the state and collective farms and pro- gen and potash) and exports have increased vide training for technicians. Vaskhnil livestock rapidly to earn foreign exchange. Higher export research is carried out at fifty-four institutes. prices tend to be reflected in higher prices which In the past agricultural research was financed the domestic manufacturers charge from local through budgetary allocations from the former buyers. Domestic demand for fertilizer is down, USSR and individual republics, small contribu- and if the experience of Eastern Europe is any tions from state and collective farms, and the indication, it will continue to fall in the medium sale of products (such as seeds and livestock) term. Rising energy prices will also boost the from large commercial farms attached to most price of nitrogen fertilizer. research institutes. Contributions from govern- price of nitrogen fertilizer.U The energy efficiency of existing nitrogen fer- ment and state and collective farms are now dry- tilizer mnneting up, forcing the institutes to cut programs and tilizer plants needs to be evaluated with an eye to generate their own resources. There is little to revamping the industry and maintaining its justification for maintaining the current large competitiveness on world markets. To assist the number of different agricultural research organi- industry in staying abreast of developments and zations. Cost effectiveness is low and duplica- to counteract possible monopolistic practices, a tion of efforts seem common. price information and consumption monitoring The quality of research and staff appears system should be established, either within the mixed. In some areas the technology is very good Ministry of Agriculture or as part of the general while in others it is substandard compared with monitoring of performance in the food system. Western technology. The focus of research, which Technical assistance may be required to assist has been on the large socialist sector farms, with the development of monitoring procedures should switch to the needs of smaller, private and performance indicators. sector farms. Adaptive research is reportedly

91 weak at present, with priority attention given to in various agricultural disciplines. There are also basic research. In addition, transfer of science over 700 technical colleges with two and half year and technology from other countries has been diploma-level courses for technicians. Technical limited, due largely to the shortage of foreign ex- colleges also run specialized courses for farm change. The exposure of scientists to activities in workers. Western countries is rare, and funds for subscrip- A review of the agricultural educational sys- tions to foreign scientific literature are scarce. tem needs to be conducted, especially of the number and quality of institutions, their orienta- Agricultural extensioni tion, and funding. Teaching needs to be reoriented to meet the challenges of commercial agricul- A very large number of research and teaching in- ture, with an emphasis on efficient, cost-reduc- stitutions throughout the former USSR were ing technologies, natural resource management, supporting a relatively small number (50,000) of farm management, and agricultural marketing. large state and collective farms in the former Linkages between teaching, research, and tech- USSR. These institutions were expected to trans- nology transfer are weak and need to be in- fer new technologies directly to farmns. As a re- creased and strengthened. Various options sult a developed extension service never should be considered, including the feasibility of evolved. In the new market-oriented agriculture adapting a system based on U.S.-type land grant with small individual farms, however, extension universities which combine teaching, research, services will play an important role in the suc- and extension activities. cess of agriculture. Farm workers need to be Agricultural research, technology transfer, and transformed into real farmers. The new states of human resource development will have a critical the former USSR have no experience in meeting role to play in the privatization of the agricultur- the information requirements of private sector al sector. The countries of the former USSR farms. Thus the need is urgent to develop and should review their research, teaching, and tech- provide such a service through extension agents, nology transfer activities and revise them to input distributors, and private agencies involved meet changing needs and technical services rein research on specific crops or livestock. quirements. In the meantime existing facilities Organizations called scientific production as- should not be allowed to disintegrate, and re- sociations exist in most of the major oblasts and search farms should not be privatized. There will are responsible for adapting scientific research to always be a need for public sector research, even local conditions. They were not designed to once the private sector participates actively in serve small private farmers, and the record on applied research and extension services. Agricul- their contributions to state and collective farms tural research institutes frequently operated in a is mixed. They could, however, be reconstituted vacuum, without adequate access to information on a cooperative basis, with their operations fi- and developments from other parts of the nanced by member farms. Farm input suppliers former USSR or abroad. This isolation needs to which currently offer no extension service to be ended immediately, by opening up access to farmers, should probably begin to do so as farms data and information throughout the system. and input suppliers are gradually privatized. Joint ventures in the farm inputs industry Veterinary services should also be allowed, to introduce and expand technology transfer activities. Veterinary services departments within the ministries of agriculture of the new states are well Agricultural education staffed and reasonably well equipped. They are organized in regional veterinary centers, with a Higher-level agricultural education is provided multitude of small veterinary offices at the rayon by fifteen agricultural universities and five agri- level. In each country there are also diagnostic cultural academies. Agricultural universities laboratories and specialized research and disease tend to be oriented excessively to scientific re- control institutes. The Russian Federation, for search and graduate studies in agricultural example, has a veterinary research and control science. Some 120 agricultural education institu- institute in Moscow for quality control of phar- tions provide four and a half year degree courses maceuticals and vaccines and an institute for

92 vaccine preparation in Kazan, Tartarstan. There with private veterinary services. Some countries are about 140,000 veterinarians in the former have established a network of private veterinary USSR, plus technicians and support staff. By services by financing office space, transport facil- comparison the total veterinary staff in France is ities, veterinary equipment, and working capital, about 8,000. with support from the international community. Veterinary departments carry out national dis- That approach might usefully be applied in the ease control programs, veterinary and diagnostic states of the former USSR to improve the respon- services, sanitary control of meat and milk pro- siveness and efficiency of veterinary service. cessing plants, quarantine control, and distribu- Ideally, private veterinarians and veterinary tion of drugs, vaccines, and other veterinary technicians, supported by private veterinary supplies. About 75 percent of veterinary budgets pharmacies, should carry out all clinical veteri- are financed from fees and charges paid by live- nary treatments, vaccinations, and drug distribu- stock producers under contractual arrange- tion. Public veterinary services would continue ments with the large state and collective farms to be responsible for diagnostic support, re- and from profits from the sale of pharmaceuti- search, quarantine measures, meat and hygienic cals and other inputs. Regional and local author- inspection, and policy and monitoring tasks re- ities contribute the remaining 25 percent. Pro- lated to animal health. This concept of dual ser- phylactic vaccines are free, but the producer vices is not yet well understood by veterinarians pays for the vaccination itself. Private farmers of the former USSR. Budgetary constraints, how- pay the full cost of veterinary services, including ever, and the financial difficulties of socialist sec- related transport costs. tor farms mean that many veterinarians will lose In the past all major infectious diseases have their public sector jobs and be forced to take up been well controlled, with the exception of hoof private consultation in any case. and mouth disease along the southern borders of the former USSR. Gastrointestinal diseases are Breed improvement services. widespread, however, often caused by low-quality feedstuffs. Respiratory tract infections are Livestock breeding and artificial insemination common, and internal and external parasites were the responsibility of All-Union organiza- affect young stock in many parts of the region, se- tions in or near Moscow. For example, the All- verely reducing the profitability of livestock pro- Union organization for cattle breeding coordi- duction. Clinical and subclinical forms of mastitis nated breeding programs on over 200 breeding are widespread because of defective milking farms throughout the former USSR. Responsibil- equipment, lack of appropriate detergents and ity for breeding has now been assumed by the drugs, and lack of incentives for milkers. new states. Artificial insemination technology is Because of increasingly severe shortages of of high standard; Soviet scientists developed ar- veterinary supplies since 1990, livestock diseases tificial insemination in the 1930s and pioneered are reportedly on the rise in the former USSR. the use of frozen semen in the early 1960s. Outbreaks of tuberculosis and brucellosis have Close cooperation with foreign specialists in been reported in the more remote areas in recent artificial insemination and livestock fertility has months. If appropriate preventive actions are not been maintained over the years, especially with taken soon, a serious health crisis may erupt. specialists from German breeding associations Soaring price of drugs and medicines are appar- and research institutes. Embryo transfer skills ently contributing as well, by making many live- are also at high levels. The Russian Federation stock producers hesitant to seek veterinary alone has about 50,000 small artificial insemina- assistance. tion points, which inseminated over 80 percent There is no competition in the provision of of all cows and heifers, 38 percent of sows and veterinary services. There are no private veteri- gilts, and about 50 percent of sheep in 1990. narians, and livestock owners are not permitted Since 1990, however, the number of insemina- to administer drugs and injections. Privatization tions has shrunk significantly. of veterinary services would be highly desirable. While the former USSR made credible efforts Experience in other countries has demonstrated to implement bull selection programs (including that veterinary coverage is better and veterinary performance testing for meat and progeny test- services are more cost effective and affordable ing for milk), genetic progress has not kept pace

93 with that in the West, mainly because of less hectares of agricultural land, and 2,000 farms in Be- stringent sire-mother selection criteria and rela- larus accounting for 34,000hectares. tively limited importation of breeding stock, fro- 3. On the other hand, although many social sector zen semen, and embryos. In the not too distant farms have already begun to reorganize into subcoop- future, as the gap between productivity and ge- eratives, groups of private farms and joint-stock associ- netic potential begins to close, using imported ations, these units will continue to rely on the old frozen semen for cattle, swine, and ovines and kolkhoz or sovkhoz structures for purchases of inputs imported grandparent stock for poultry would and sales of outputs until alternative, preferably pri- be the most cost-effective way to achieve rapid vately owned, distribution channels can organize. genetic progress. For example, if a long-term 4. During reorganization the implementing commis- agreement with foreign suppliers of frozen se- sions can choose, with the agreement of local govern- men and embryos for cattle breeding could be ment authorities, to transfer schools, clinics, and other reached and guaranteed, the tremendous cost social services to local authorities, along with outstand- reached~~~and guaanted ~ the tremendousicost savings would meriit the closing of most of the ing debt on the facilities. breeding farms in the former USSR. Artificial in- 5. There are many agroecological conditions in the semination services should also be privatized, former USSR under which improved grasslandls can for the same reasons as for veterinary services. compete with forage crops and feed grains, in terms yield and production cost per oat unit. In the arableof zones of the western and central parts of the former Notes USSR, for example, the economics of crop production on large portions of arable land are marginal due to soil 1. State and collective farms tend to increase in size damage and related low yields. In these areas, expan- from west to east in the former USSR.There are relative- sion of modern grassland-based livestock prodaction ly more collective farms in the western (European) por- would be highly desirable. tion of the former USSRand relatively more state farms in the eastern (Asian) portion of the former USSR. 2. At the beginning of July 1992 there were 10,000pri- vate farms in Ukraine accounting for nearly 200,000

94 6

Policies on food distribution and marketing

Any strategy for reforming the food and agri- Evolution of the food distribution system cultural sector must include the transport, processing, storage, and marketing of food Legacy of central planniing products and agricultural inputs. This chapter deals with transforming the food and agricul- The command system of the former USSR was tural distribution system that developed under reasonably successful as a food logistics agency, the centralized economy into a system based on delivering large volumes of food under state pro- market principles. It highlights three vital curement orders and achieving reasonably high concerns: levels of consumption (Table 6.1). But its opera- * The need for rapid privatization of the mar- tion was accompanied by unresponsive and slug- keting and input supply chains gish product delivery, huge physical losses (Table - The need to introduce complementary poli- 6.2), low levels of investment, difficulty in intro- cies to promote competition and efficiency. Unless ducing new technologies, rigidity of production efficiency is improved quickly, there is serious and consumption patterns, and mounting finan- risk that excessively high transport, processing, cial losses stemming from internal inefficiencies and marketing margins will develop and under- and the pattern of transfer pricing imposed on mine new production possibilities in primary the system. agriculture The beginning of the end of the tightly struc- * The need to promote rapid expansion of tured command distribution system came as market-based transactions in the food sector by dissatisfaction with the inflexibility of the eco- eliminating the system of state orders and other nomic system mounted in the second half of the forms of excessive government interference 1980s. In the Russian Federation the process By number of employees, enterprises in the culminated in formal disintegration of central- food industry are smaller than enterprises in any ized command and control in August 1991. The other major industrial sector, suggesting that re- system is now a hybrid, operating in a partially structuring, privatization, and closure may be liberalized environment but still encumbered easier to manage than in other sectors. The chap- by state orders and sustained by considerable ter reviews the main components of the food dis- inertia and ambivalence toward liberalized pric- tribution system, addressing generic issues in ing. Thus the official system remains largely in- wholesale and retail marketing and product as- tact and continues to dominate food assembly, sembly first, followed by sector reviews of key is- transportation, storage, processing, distribu- sues in food processing, grain storage and han- tion, and foreign trade. The extent to which the dling, and food transport. higher liberalized prices are being transmitted

95 to the farm level is unclear, and there are indica- through a third channel, collective farm mar- tions of monopolistic behavior both upstream kets, located primarily in urban areas and re- and downstream of agriculture. ceiving very little support or encouragement Food sector reform is relatively more ad- from the state. vanced in the Russian Federation than in other At the farm assembly end of the distribution states of the former USSR. Most of the prob- system state procurement agencies collected lems are institutional. In the first eight months and stored the produce (including output to following the January 1992 price liberalization, be recycled as seed or animal feed) and paid initial fears about the distribution and avail- state and collective farms according to state- ability of staples have largely been addressed. regulated prices. Enforcement of supply com- Now the state should be looking to reduce its mitments relied mainly on district Communist involvement in food distribution and market- Party structures and associated local governing by reforming the state-owned system. De- ment agencies.] The state procurement agency monopolization, privatization, and the encour- would then pass on the produce (through agement of private sector entry will ibe key. state processing enterprises if required) to the Investment will also be required, ais will con- consumer cooperative wholesale systerr. and siderable technical assistance and training: to metropolitan wholesale centers in accordance reduce losses and replace obsolescent equip- with administered prices and planned ment and to outfit new private sector entrants allocations. with the facilities and equipment needed to op- Organizationally, the central element was a erate a business. Initially, the range and kind of division of administrative responsibilitv for investments will be severely constrained by fis- procurement, transfer, and sale among net- cal austerity during the period of economic sta- works of wholesale distributors. These net- bilization and by the willingness of private for- works were comparatively few in number and eign investors to move into the food sector. were specialized both geographically and by For some issues concerted action by the commodity. State orders were issued through states of the former USSR will be required. the wholesale departments of the USSR and re- States must establish policies to minimize dis- public ministries of trade and executed by pur- ruptions in the flow of agricultural commodi- chase and trade boards of the local Soviets. En- ties and production inputs across state borders. terprises in the transport sector received ship- And firm coordination and payments arrangement orders to move products between various ments must be set-up among the states on the levels in the supply network. Competition and basis of bilateral or multilateral agreements. unauthorized transactions in food "wholesaling" were proscribed, and price discipline was Recent developments enforced through strictures against price gouging, black market activity, and speculation. The The command system was designed so that enterprises served merely as logistical agencies, most of the food reached households through responding to directives and targets. two main channels: state-managed chains (the There has been little progress in privatiza- retail end consisted of a scant 107,000 urban tion, and state channels are still the main food stores for the entire country) and consum- source of purchased foods, especially for er cooperatives, mainly in nonmetropolitan ar- bread and milk, but also for other basic items. eas, with their own retail outlets and Until recently the private sector's role in the distribution centers. food system consisted solely of the collective At the retail level about two-thirds of food farm markets, which offered individuals the was distributed through state channels, and opportunity to market food products at large- most of the remainder flowed through consum- ly unregulated prices, and limited subsistence- er cooperatives. Both were official channels that oriented production and handling of leakage fed off a highly integrated structure for market- from the state system. At present the food dis- ing the products of both state and collective tribution system combines a number of differ- farms. Differences were mainly in the areas ent elements: recently developed free-market served, not in their autonomy from state direc- mechanisms, bridging mechanisms between tives. About 5 percent of food was marketed the public and private sectors that had always

96 been tolerated but had thrived only since and may represent the formative stage of a 1985, and substantial remnants of the com- broader set of cash-forward exchanges at the mand-based distribution system (Figure 6.1). wholesale level for the acquisition and interre- In 1991 state procurement agencies found gional sale of foods and other products. their capture of farm output had dropped by A Congress of Commodity Exchanges has as much as one third from the previous years' been established and is already providing a level. A primary reason for the decline was basis for consolidating exchanges and integrat- the failure of adjustments in official procure- ing them in networks. Initially, the most suc- ment prices to keep up with increasingly high cessful of the exchanges were specialized ones, rates of inflation, inducing producers to with- such as for construction materials and petro- hold output from the state procurement agen- leum products. Much of the recent growth in cies. Equally important was the dissolution of commodity exchange transactions appears to the Gosagroprom complex of ministries respon- have taken place in multipurpose exchanges. sible for coordinating agribusiness policy, The Russian Commodities and Raw Materials which had tied delivery of farm input sup- Exchange is the largest, with daily turnover of plies to fulfillment of state procurement several billion rubles. quotas. The private sector's response to the disinte- Food wholesaling and retailing gration of the official trading system has been to create a variety of commodity exchange Developments in retailing organizations (birzhi) to facilitate barter and other trading contracts. These exchanges al- Under the system in place for many years con- ready number in the hundreds (at last count, sumers obtained foods from an array of retail more than 600 in the Russian Federation alone) establishments, markets, institutional sources,

Figure 6.1 Overviewof the food distributionsystem in the formerUSSR

FARM ~~~~~WHOLESALE RETAIL PRODUCTION TRADE

Stateand collective 1 State(regulatdchannels Stt shops farms StateJ v L Stateshops l State channels C c-p (negotiated) Consumerco-ops 0 ao Axlayfarms C3 E> Af Iduxiliar Local govemrment Institutions oi _ ~~~ofindustrial chanel enterprises o m

(/ ______>z X) o | Long-termbarter Restaurants a 0 :3 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~CD *0 ______2 0 EL ~~~~~~~~~~~~~~~~~~~~~0 Part-time farmers Spot barter Farmersmarkets

Privatefarmers Commodityexchange Privateshops

Source:World Bankstaff.

97 and informal market and nonmarket channels. food processing and transportation systems, the By Western standards the effort required to pur- most promising model for urban retail food out- chase food was very high.2 A vastly inadequate lets appears to be the small to medium-size number of retail units is one of the negative con- neighborhood shop. State retail shops could sequences of state domination in this sphere. In transform themselves into such neighborhood the late 1980s only 1,970 square meters of floor shops, but to do so they would have to become space (about 26 stores or small shops) devoted to service-oriented concerns. The failure to priva- foodstuffs and other consumer goods was avail- tize retail food outlets before liberalizing prices able per 10,000 inhabitants. To give some indica- meant that a potential source of responsiveness tion of how inadequate that was, consider that in to price changes was lost. If retail outlets had the Federal Republic of Germany (Wlest Germa- been privatized, consumer response to the liber- ny) more than 10,000 square meters of floor space alized prices could have been more quickly was available per 10,000 inhabitants in 1985. transmitted to the processing and distribution Until recently all retail shops were state- network. Mass privatization of retail shops is owned or part of the consumer cooperative sys- now gathering momentum. tem (the Central Union of Consumer Coopera- The shortage of investment funds for upgrad- tives, or Centrosoyuz, and the republican and re- ing facilities could be a constraint. And if tradi- gional levels of this organization). The coopera- tional management practices remain unchanged tive system operates mostly in rural areas, rarely once widespread privatization programs are in- extending into the cities. The state food shops troduced, the survival of state shops could be are generally poorly stocked and show virtually threatened. If anyone who can organize space no concern for consumers' time nor preferences. and resources to open a shop is allowed to do so The time consumers spend waiting in line, for and if there is equal access to food items and instance, could be cut substantially simply by needed equipment for all who enter the retail putting more people to work behind counters to food business, then competition can be relied on serve customers. Should this trend of iinadequate to eliminate poorly managed enterprises and to supply of goods continue for the state stores, raise the quality standards of shops that survive. consumers will move quickly to new shops as Another short-run measure to improve the re- other sources of food open up. tail food system would be to facilitate expansion Much of the output from state and collective of the system of farmers markets. While these farms (for meat 90 percent) was required, by markets account for only about 5 percent of food law, to go into the state procurement system at retailing, they are an important source of food in very low fixed prices. The rest could be sold at large cities. Increasing the number and size of negotiated prices. For the state outlets, there these markets will not necessarily require nmajor was a rising trend (which began even prior to new investment. More important is space alloca- price liberalization) in purchases at negotiated tion and state regulations that minimize barriers prices, particularly for meat, sausage, poultrv to entry and protect against the establishment of and milk products, suggesting that these shops mafia-type control of these outlets. had, of necessity, moved toward becoming suppliers of nonsubsidized (or partially suibsidized) Developments in wholesaling goods as well as of highly subsidized goods. State procurement has not disappeared since Bulk shipments of food commodities are still be- prices were liberalizecd. Until markets are more ing programmed to arrive in the large urban cen- fully developed, some mechanism will be re- ters by rail, barge, or truck transport. The quired to ensure that food is delivered to areas shipments are received at large bulk handling, experiencing extreme food shortage and/or processing, and storage facilities designed for soaring prices during the early stages of price various classes of commodities. Processed prod- liberalization. ucts are then dispatched by trucks to retail out- Consumers throughout the Russian Federa- lets in accordance with prearranged allocation tion, particularly in urban areas, need additional and delivery schedules. Each major commodity retail food shops. Given the type of food prod- has its own specialized market channels, adapt- ucts now being produced and likely to be pro- ed to its physical characteristics and processing duced in the next few years and the state of the and distribution practices.

98 In essence wholesale distribution remains an variety and better quality of products. In the near administered system. Consequently, there are term some broadening can be anticipated at the no institutions through which the forces of sup- wholesale level: farmers markets and direct pur- ply and demand influence prices at the assembly chases from small farmers, independent traders, market and wholesale levels. This also explains and existing specialized urban commodity bases the reported stickiness in price transmission (depots). These commodity bases will be price from the retail end to the farm level. The system leaders on the volume items they handle, but will is gradually breaking down, however, as prices soon have to compete with many other wholesale are liberalized and new enterprises are allowed suppliers, especially in the summer months. to diversify. * Over time enterprises operating the com- Price liberalization is thus taking place in the modity bases will either diversify or be replaced various state enterprises in the food distribution by new entrants who can offer a more diverse ar- chain without changes in ownership or relation- ray of commodities. Large volume transactions at ships. Negotiated channels are likely to become the wholesale level will gradually shift from di- predominant over regulated ones. The outcome rect procurement to purchase on commodity ex- in the first half of 1992 was the emergence of changes, as exchanges begin to specialize and wide disparities in prices for products moving evolve into cash-forward and futures markets. In through state channels. The ability to move com- the process some of the large facilities operated modities to areas where profits are higher has by the commodity bases may become redundant, not developed, however, and prices are far from as storages may be located closer to producing ar- the sole determinant of transactions since most eas that have dependable rail and highway con- storage, processing, and transport facilities still nections to the cities. operate under the nominal control of government at different levels. Commodity assembly markets As part of the liberalization of most commodity prices it is intended that urban-based food Although land reform will alter the structural processors and wholesale buyers negotiate with and operational characteristics of farm level sources of supply, including state farms, cooper- production, over time, it is anticipated that atives, and a new class of private traders (some commodity assembly, processing, and whole- of whom have already entered into the market saling functions will evolve through the two ex- process through commodity exchanges and oth- isting market channels. The larger-scale system er arrangements). For commodities that are not will handle regional and inter-regional trade, procured under state orders, the assembly mar- and smaller-scale local channels will handle a ket prices will be reflected in the offering prices wide variety of livestock, vegetable, and fruit by food processors and wholesale traders. products. Retail buyers will search for the best deals on More fundamental changes in the assembly price, reliability of supply, and conditions of market functions will occur in the large-scale transaction. The lack of organized commodity trade as it shifts to transaction systems that gen- markets centered around the rural assembly, pro- erate market-clearing prices and expose all par- cessing, and wholesale trading functions contin- ticipants to a new and more risky economic en- ues to hamper the price discovery process, how- vironment. This environment will create pres- ever. There has been a high level of risk associat- sures for the establishment of new institutional ed with unreliable market information, and some arrangements to facilitate trading in a depend- monopoly-monopsony problems have appeared able, efficient manner adapted to the special lo- as large enterprises exercise their influence on gistical requirements of different commodities. prices and terms of trade. Experience with food systems in market-based In a free market setting the configuration of a economies suggests that the following institu- price-responsive and logistically more efficient tional mechanisms for coordinating the ex- wholesale-retail network is likely to evolve as change process are likely to emerge over time: follows: * Open markets at the wholesale level that en- * Retail outlets might become larger and able buyers and sellers to communicate directly more consumer oriented in their procurement to arrange transactions on specific lots of prod- and merchandising methods, offering a wider ucts for immediate delivery. Personal inspection

99 of the product (or analysis of a representative and Nizhny Novgorod; the International Finance sample) is common for goods whose quality and Corporation (IFC) and other international agen- condition are not easily and reliably determined, cies are supporting the privatization activities in as for certain perishable commodities. More Nizhny Novgorod. IFC has already prepared standardized commodities are traded on the guidelines for small-scale privatization in Rus- basis of description. sia, with a particular focus on the Nizhny * Forward contracts that specify the quantity, Novgorod model (IFC, 1992). delivery schedule, minimum standard of quality, Most retail food outlets are small by interna- price or a basis for determining the final price for tional standards, in number of employees, and products when delivered, and arrangements for floor space. Most outlets are in buildings that payment and transport. primarily serve other functions, usually apart- When open markets and contracting arrangement houses. As a market economy develops the ments fail to provide acceptable levels of de- area required for a profitable food store is likely pendability and costs, enterprises will move to to be considerably larger, making leasing the vertically integrate into adjacent stages of the physical facilities more appropriate than selling. production-distribution process. Fariner cooper- Indeed, in the absence of functioning capital and atives are a form of partial integration in the as- financial markets, the leasing of small state assembly and processing of agricultural commodi- sets may be the essential complementary mea- ties and in the procurement of farm inputs. Back- sure to privatization initiatives for other small- ward integration of processing enterprises into scale enterprises in the food sector as well as re- farm production could also occur when depend- tail food outlets. able supplies of high-quality products cannot be Preceding links in the distribution chain also acquired through other means. need to be privatized and transformed if the retail sector's capacity to serve as an engine of Food distribution issues change and increased efficiency is to be fully realized. If wholesale and processing enterpris- The most fundamental food distribution issues es remain state enterprises they will be rela- are institutional, in the broadest sense. For three tively unresponsive to price signals. Equally generations a concerted effort was made in the important, the wholesale and processing enter- former USSR to eradicate the fundamental insti- prises have monopoly power that enables them tutions that are common to most market-based to ignore the requirements of retail outlets, economies-private trading, private property, which are likely to be very small and highly and voluntary exchange of labor for goods. The competitive. legal and ideological bases for a market-based The privatization process needs not only to food economy are just beginning to be rebuilt. transfer ownership to private hands but to pro- The more flexible, small-scale system of food mote competition as well. This means that the distribution can probably adapt rather quickly to large conglomerates (kombinats) and enterprise the new market environment as long as there are associations that control many aspects of pro- no legal barriers to entry and transport and cessing and distribution must be divested into a wholesale supply systems can provide ready ac- sufficient number of separate private operating cess to food commodities. These conditions are units to ensure competition. Competition among especially likely to apply at the retail level, operating units can initially be encouraged by where initial capital requirements are not too abolishing geographic restrictions on their oper- high. Obtaining floor space in the absence of ations, which serve to reinforce market segmen- well-functioning real estate markets may present tation. New entry should be promoted as rapidly an obstacle to rapid entry of new firms. Thus in as possible to create competitive enterprises that the initial stages of the privatization program the are responsive to changing consumer demands. state will need to sell, donate, or lease some Several new or expanded institutional ar- state-owned retail shops and other srmall enter- rangements are also needed to facilitate efficient prises in the food chain to willing entrepreneurs. and low-cost buying and selling of farm and food The Russian government plans to move quick- products within a competitive marketing and ly to privatize small enterprises, and the process distribution system. Examples are commodity has already begun in Moscow, St. Petersburg, exchanges, wholesale markets for fruits and

100 vegetables, livestock auctions, special milk-pric- The Russian Federation has already taken the ing institutions, and an effective market informa- first steps, with announcement of its privatization network. tion guidelines as part of the Privatization Pro- As the public sector pulls out of direct in- gram. For the food sector the following privati- volvement in production, it will assume new, fa- zation targets have been established: cilitative roles. An important task is providing a * Track 1. By December 31, 1992, all small- legal framework for permitting private com- scale enterprises in wholesale and retail trade, ag- modity trading and establishing regulatory mea- ricultural and food processing, and food trans- sures to punish fraudulent actions and abusive portation are to be privatized through vouchers use of market power. The public sector can also and competitive auctions promote private sector development by provid- * Track 2. By December 31, 1993, all medium- ing needed infrastructure, market information, sized and some large enterprises are to be reorga- and research and extension education for food nized as joint-stock companies, with ownership system participants. Carrying out these func- shares auctioned to the highest bidders. A first tions properly requires that the responsibilities round of auctions of agrofood enterprises is to of various levels of administration (local, district, follow provincial, and national) in food marketing and * Track 3. Originally, privatization of the large distribution be carefully specified. state enterprises in input manufacturing and food processing was to begin with the presenta- Needed policy actions tion of privatization plans for approval by Sep- tember 1992. Targets have been established to Three kinds of action should constitute the nu- privatize approximately half these larger enter- cleus of efforts to reform and develop the retail- prises by January 1, 1995, and the remainder by wholesale network in the next few years in a December 31, 1995 way that promises reasonable predictability and The revised targets recognize the special prob- avoids the undesirable consequences of unregu- lems of privatizing the large food processing, lated markets: storage, procurement, and distribution enterpris- * Implementing a privatization strategy that es, which deliver over 70 percent of food com- encompasses immediate privatization of retail modities to the cities. This system cannot be dis- food outlets, steps to authorize and encourage mantled at once without resulting in chaos, and private firms to enter the wholesale market, and privatization needs to occur in stages. 3 January the design of programs and timetables to priva- 1, 1993 was set as the target date for the approval tize or restructure and divest larger enterprises at of legislation to govern Russia's burgeoning the wholesale and product assembly levels. marketing and services cooperatives, which 9 The establishment of a compatible legal and should soon constitute a viable alternative to the regulatory framework that encompasses antimo- established channels. nopoly regulations, procompetition policies, and These privatization targets are ambitious. legal personality, property law, and contract en- Some actions to advance the program in food re- forcement. tailing, wholesaling, and product assembly can * The provision of essential support services, be taken without waiting for detailed regula- notably price and market information, technical tions and decrees. To promote privatization and assistance and training services, financial services entry into food retailing: to assist new businesses and to meet priority in- * Leasing and auctioning should be autho- vestment requirements, and food inspection and rized and encouraged in ways that support the phytosanitary standards. emerging policy framework for privatization and competition in the food sector. No restrictions Privatization. For privatization, the task is to should be placed on the resale or subleasing of fa- design a simple initial reform package that can cilities and equipment to interested third parties. quickly encourage private sector entry in the * Whether transferred by auction or lease, the food distribution chain while also developing a newly privatized food stores should operate ac- longer-term strategy for more complete privati- cording to commercial principles. zation of government-owned enterprises and en- * Small business credits should be made couragement of private sector development. available to private food retailers to finance initial

101 working capital and some funds for improve- * Legalization of private commodity trading ment of facilities. should be announced immediately. Meanwhile, * Small retailers should be trained in the fun- private trading is moving ahead of the existing le- damentals of food retailing and good business gal statutes. --ractices. A pilot small-enterprise extension pro- * Firm rules and criteria for enforcing con- gram should be set up in Moscow and other major tracts are needed to reduce uncertainty in busi- cities. Initially, the service should be cirganized by ness transactions, so that a rational basis exists for the government and offered free of charge. Later, commercialized retailing and wholesaling and the service should be offered for a fee and its ad- commodity trading. ministration turned over to retailers associations, * Regulations and monitoring systems are lending institutions, or independent contractors. needed to curb abuse of market power by the * The state should act to increase the number large food system enterprises. Initially, the anti- of farmers' markets, particularly in large cities. monopoly policy should seek to enjoin price At the wholesale and assembly level restructur- gouging and abuse of market power by large ing and divestiture should begin as soon as priva- state-owned enterprises. As these entities restruc- tization guidelines for various sectors have been ture or privatize, and new entrants gain sizable promulgated. In the meantime, to encourage com- market shares, the regulatory framework and petition among existing and new enterprises: monitoring system may have to be broadened * Geographic restrictions on the marketing and perhaps integrated with the commercial areas served by large kombinats and ernterprise as- codes. Foreign legal and technical assistance will sociations should be lifted. Enterprise associa- likely be needed. tions, particularly at the province level, should * Bankruptcy regulations were issued in the assume a service and consulting role. Russian Federation by presidential decree in June * Licensing and other requirements for estab- 1992 for large insolvent state-enterprises in which lishing new wholesale enterprises in various ad- the government owns 50 percent or more of the ministrative jurisdictions should be reviewed and equity. The decree will remain in effect until a for- clearly enumerated. To simplify the approval pro- mal bankruptcy law is adopted by the Supreme cess, "one stop shopping" arrangements should Soviet. The legislative framework, including be set up to accelerate approvals for would-be en- rules and procedures, ought to be broadened to trants. Laws and regulations should be redrafted cover all forms of ownership, including private to simplify requirements and formalities. sector firms and newly privatized state enterprises. A formal bankruptcy law should be adopted Legal and regulatory framework. Several areas of as soon as possible. commercial, property, and company law (includ- * Any needed modifications ought to be ing rules governing entry and bankruptcy) need made in the foreign investment regulations to en- to be elaborated as states of the former USSR courage foreign participation in food wholesaling move to address the legal and regulatory re- and retailing. quirements of the market economy. Restrictive * Regulatory measures and administrative statutes and regulations that remaiin on the procedures should be developed to protect con- books must be rescinded, especially those en- sumers from health-threatening chemicals in joining genuine risk-taking and profit seeking. their food and improper handling practices. The framework for legal and regulatory re- * The rights of provincial and local govern- form and the conversion of existing tribunals ments to intervene in food markets should be into dispassionate judicial bodies for enforcing clearly spelled out and minimized to the extent commercial and property codes and adjudicat- possible. ing civil and commercial disputes are well beyond the purview of this study. However, some Support services. The government can perform areas in the legal framework can be identified as an important supporting role in organizing sev- needing reform if they are to support the com- eral key services and technical assistance that mercialization of wholesaling and retailing, will be required during the transition to a mar- transformation of ownership, and development ket-based food distribution system. These in- of supporting institutions: clude policy actions to:

102 * Create a price and market information sys- added in food marketing. These industries have tem in the public sector to support the develop- suffered for decades from a chronic lack of in- ment of a well-informed commodity trading vestment and attention from central authorities system and management decisionmaking that has contributed to a high degree of obsoles- throughout the food system. In addition to provid- cence in facilities and technology. Value added in ing current price and market information, the ser- the food industries of the states of the former vice should disseminate information on USSR is quite low by Wlestern standards. There is commodity stocks, production estimates for major virtually no frozen food production capability, commodities, and production forecasts. Such a little processing of basic products such as pota- market information program would greatly re- toes, and an extremely underdeveloped grading duce risks and contribute to a more efficient food system for meats. The skewed prices and incen- system and is particularly important since useful tives of the old command system resulted in information has long been withheld from the pub- misallocation of the limited resources and lic by government officials and state enterprises. spawned a management and production system * Provide direct technical assistance to manag- with no sense of accountability or consumer ers of large food companies as they are forced to responsibility adapt their procurement and product distribution Production of most processed foods increased operations to a system of negotiated prices. steadily during the 1980s until 1988 or 1989, then * Organize pilot demonstration projects for started to fall off as primary agricultural produc- each major food commodity group to experiment tion declined and the system of state orders and with new institutional arrangements and physical plan targets began to disintegrate (Table 6.3). The facilities for wholesale commodity trading. Atten- decline in the outturn of most food industry tion should be directed to wholesale-retail interac- products continued during the first nine months tions in the cities and to wholesale assembly and of 1991 (Table 6.4), a fall that apparently acceler- processing relationships at the farm level. Assis- ated as the crisis intensified during the last three tance from foreign food corporations and com- months of 1991. Processed food exports contrib- modity exchanges could provide valuable uted very little to the former USSR's agricultural guidance at this stage and is highly recommended. trade balance in the 1980s. Imports of animal * Prepare feasibility studies with the assis- products, semiprocessed oils, and other food in- tance of foreign experts to advance the develop- dustry products, however, accounted for about ment of wholesale market infrastructure by 20 percent of total agricultural imports ($15.9 bil- establishing new, privately run wholesale termi- lion) in 1987 (a peak year for processed agricul- nal markets for fresh fruits and vegetables, other tural imports) equal in value to total agricultural perishable products, and live animals. In the Rus- and food exports ($2.9 billion) that year. sian Federation the initial goal should be to de- An OECD report found that investment in velop at least one prototype market in each of the the food industry in the 1980s lagged behind five major cities. that in production despite plans for accelerating * Organize short-term training programs, in- construction and rehabilitation of food indus- cluding foreign study tours, for policymakers, try plant and equipment (OECD, 1991). Half the managers, and senior technical staff of private processing operations in the food industry are and state-sector enterprises. If carefully planned, carried out manually, and integrated processing visits to observe commodity markets and food lines like those in Western countries are rare. At marketing businesses in Europe, the United least 70 percent of processing enterprises are States, and Canada could be very useful to man- said to be in need of reconstruction. Imported agers of newly privatized enterprises. machinery and components have accounted in recent years for over half of annual deliveries of Food processing industries machinery to the sector. Most of the imported equipment came from former CMEA countries Recent performance (74 percent in 1986), whose standards are well below those of Western countries. The challenge The food processing industries are among the is to implement change in the food processing weakest links in the food distribution system industry without seriously affecting a supply and a major constraint to the expansion of value system already under stress.

103 Two characteristics of industrial enterprises and unassembled. An estimated 40 percent of in the food sector have a special bearing on the sausage plants are in such poor condition that scope and prospects for privatization. The food they are ready for demolition, and many sugar sector has the largest number of industrial en- processing plants were built prior to the 1917 terprises of any industrial sector in the former Revolution. Production levels are thus substan- USSR-9,554 of a total of 46,840 enterprises in dard, and low processing efficiencies require 1987 (Annex Table A6.1)-and the smallest large volumes of raw material per unit of output. number of employees per enterprise-314 per Energy consumption per unit of output appears enterprise compared with an industrywide av- to be high as well. Many food processing facili- erage of 813 (Annex Table A6.2). Industries ties are in cities, far from their sources of raw such as metals, machine building, and chemi- materials, resulting in tremendous additional cals all have well over a thousand workers per cost for transport and storage and deterioration enterprise. The implication is that many food in the quality of raw materials shipped over industry enterprises probably employ a rela- great distances. tively small number of workers and can be The lack of modern packaging lines and pack- privatized relatively quickly. aging materials also accounts for significant losses of product. A large amount of the paper Main operational problems products used in packaging has been imported and hence is in critically short supply. B3ottle Raw materials acquisition. Supplies oi raw mate- supply is totally inadequate for production rials for the food processing industries are be- needs. With the exception of milk only 20 to 40 coming increasingly unreliable because of the percent of products supplied to the retail level breakdown in the system of state orders. In addi- have been properly packaged or bottled. It is tion the raw materials are generally of low quali- doubtful that many of the products distributed ty as poor handling, long transit time, and lack or the processing facilities themselves would of refrigeration and adequate storage at produc- meet Western sanitation and hygiene standards. tion and assembly sites take their to]l. As a re- Substantial investment is needed to rehabilitate sult, losses are high (Table 6.2). The problem of existing enterprises and construct new capacity, raw material supply may only get worse in the but the fledgling financial sector is unready to next few years as more farms are privatized and shoulder the burden (such investment came more state and collective farms set up small- largely through budgetary transfers in the past). scale processing facilities of their own. Continuing control of market channels by au- Marketing and distribution. Many processing thorities at the provincial and local levels is hav- plants experience transportation problems during a significant impact on the ability of food ing peak production seasons. The lack of tnrcks, processors to respond to emerging market de- especially refrigerated trucks, and tractor-trailers mands. With the increasing difficulty of obtain- for long distance hauls creates problems in picking raw materials and other inputs, processors up and delivery, while the lack of information on will need to rely more heavily on other, evolving transportation services exacerbates the problem. supply channels. The absence of intermediaries Handling equipment is also in short-supply, as is and middlemen will hinder their ability for storage capacity, including refrigerated storage some time to come to obtain raw materials and facilities and deep freezers. Efficiency problems other essential supplies. The fact that middle- continue to persist in the wholesale and retailing men have been accused in the past of "speculat- links, as well. ing" and "profiteering" and imprisoned for their activities has retarded the widespread develop- Management capabilities. Most managers in ment of intermediation activities. the food processing industry have a technical background. Reacting to directives from above, Technology and equipment. Most of the equip- managers emphasize quantity over quality and ment in the food processing industries is old, lack the basic business and management skills outdated, or poorly maintained. Yet new equip- of their Western counterparts. Little attention is ment (worth billions of rubles) purchlased by given to product management, production central authorities has often ended up unused scheduling, forecasting, inventory control,

104 order filling, or shipping efficiencies. Energy dation of the agroprocessing sector to a more consumption is high and wasteful. Plants ap- commercialized environment by supporting pear to be poorly organized and are engineered preparation of feasibility studies-on a pilot ba- with considerable overstaffing to compensate sis-for relocating processing operations. If such for the low quality of equipment. The lack of projects are to apply to existing processors, the training in the management of business risks- projects need to be part of a privatization pro- price, quality, foreign exchange-will be felt gram; otherwise, they ought to be limited to new more and more as the processing operations private firms. Assistance from foreign partners struggle to adjust to market-driven operations. could be helpful for these activities. Under the military conversion program plants Recommended Actions once devoted to military production are being converted to the manufacture of food processing Despite the enormous need for modern technol- equipment. Governments could stimulate the ogy in the food processing industry, it would be conversion process by channeling information to unwise to promote broad-based investment in the plants on market demand and pricing for new capacity and equipment at this time. Other various lines of equipment, by facilitating new reforms essential to a major overhaul of the in- joint ventures, and by contributing to the local dustry must be in place first-price reform, costs of exhibitions of foreign food processing privatization and enterprise reform, financial equipment. During the transition government sector reform-before a realistic assessment of assistance in financing critical imports of spare technology needs and priorities can be made. parts and equipment for the food processing in- Plant location relative to sources of raw materials dustry should be considered to enable plants to and the impact of shifts in demand and prospec- fully utilize the existing capacity. tive markets resulting from price reform also Less than 10 percent of joint ventures are in need to be considered in investment decisions. the food processing industry. Although this re- Brief preliminary assessments may be war- port cautions against massive investment in the ranted to determine strategic options for restruc- food processing industries for the time being, turing or closing enterprises in some industries. foreign investment and technology could jump- The assessments should consider requirements start the process of introducing modern technol- for overall quality control in the dairy and meat ogy where the need is demonstrably obvious- industries. A program of audits by joint teams packaging, food additives and ingredients, alter- (civil, military and foreign) of procurement, natives to certain raw materials, pilot wholesale technology, and product marketing options and retail chains, and commodity trading (in- could establish organizational and investment cluding links with international commodity priorities for some other commodities, especially markets such as the Chicago Board of Trade). sugar and other sweeteners, cereals (dry milling, Technical assistance, including private assis- wet milling, and other processing for food), fish tance, would also be helpful. Consideration and aquatic products, oilseed crushing and re- should be given to the use of bilateral and multi- fining, fruit and vegetable storage and process- lateral credits and grants as a source of financing ing, and potato processing. for food processing and marketing technology, Organizing these assessnments and training lo- in addition to food products. cal staff to conduct them will take time, so preparations ought to begin immediately, with Food storage and handling facilities the assistance of foreign experts. "Pre-assessment training" in the concepts and methodolo- Storage capacity gies used for such assessments in industrialized market economies will be required, both locally While the operation of demand and supply forc- and through foreign study tours. Following this es and new political constraints will gradually initial training, detailed designs could be change the patterns of grain production, con- worked out for each industry, and several of the sumption, transport, and trade, current patterns assessments could begin. are likely to persist for some time. Under the As these assessments are being conducted, centrally controlled system most raw grain was governments could ease the eventual accommo- moved to state elevators during the harvest

105 period. The state grain elevators were the point elevators. The system in the former USSR has of purchase, and farms were responsible for de- been affected by neither. livery of grain to the elevators. The balance of At the farm level substandard storage facilities, the grain was used as feed or seed by the farms, inadequate drying and cleaning equipment, and and very small amounts were sold through pri- poor stock management practices lead to serious vate channels. This system, with its overriding grain losses. Storage is primitive and temporary emphasis on sales to the state, provided neither in nature and inadequate in capacity, consisting incentives nor resources for the construction of mainly of flat, run-down storage units in which adequate on-farm and local grain storage. grain is stored in bulk form.6 Cracked floors and Precise information has not been available on walls permit infestation by insects and rats, and storage capacity and location, which have been proper fumigation is not feasible because doors considered national security issues by the former cannot be closed. In addition, there are no venti- USSR government. 4 According to some broad lation or aeration facilities and no drainage sys- estimates that have been provided, storage ca- tem. Most of the storage areas lack drying and pacity in the Russian Federation has remained cleaning facilities, resulting in further damage, unchanged since 1985. Only 60 percent of stor- especially to oilseeds, maize, rye, and pulses, age requirements are being met, and drying which frequently arrive with a high moisture equipment meets only 32 percent of demand. content (26 percent to 33 percent). Most investment over the last decade has been channeled to production rather than to market- Storage losses ing infrastructure. Most of the "modern" storage facilities are Experts estimate total grain losses in the former owned and operated by state procurement and USSR, (including field losses) at 25 to 30 percent, storage committees. The facilities consist mainly up to half of it in storage and handling (Table of concrete and steel silos, together with some 6.2). Heavy losses were observed during field flat storage units equipped with rudimentary visits. In one storage unit containing 750 tons of handling and drying machinery. The silos are three month old barley, heat and moisture had very large (averaging 50,000 to 60,000 ton capaci- destroyed the entire contents: the lower levels ty) and are located in consumption, railhead, had become rock-hard, while the upper ones and port locations, frequently at considerable were sprouting. In other collective farm storage distance from production areas. The facilities ap- facilities rats and mice were running openly pear to be based on standards and technology around the floor, a problem that could have been not used since the 1960s in Western countries. remedied with solid doors, floors, and outside Slip-form construction of silos is poor, equip- drainage. In short, storage at the farm level re- ment for temperature control and drying is inef- quires immediate attention. ficient, and stock management practices are in Much of the 38 million tons of grain imports of urgent need of upgrading. More important, ca- the states of the former USSR in 1991/92 would pacity utilization and turnover are very low, ren- have been unnecessary had grain losses been dering the whole operation unresponsive and prevented through adequate storages. For both uneconomic. 5 Losses average a very high 5 to 6 social and economic reasons priority should be percent-in most industrial countries losses are placed on saving the existing grain stocks and no more than one percent. improving the quality of grain generally, rather This state-run off-farm grain storage is divided than focusing on increasing future production among procurement collection elevators, termi- since much of the increase would also be lost nal elevators, and mill and process storage. In until storage conditions improved. 1974 the USSR Ministry of Procurement operated more than 3,600 such enterprises, including Grain Movement 1,100 grain elevators. The grain collection system is more widely dispersed and less efficient than Interregional trade in grain and grain products those of the United States, Australia, Canada, in the former USSR was substantial (Table 6.5 and Europe. In free market systems both the pref- and Figure 6.2). Road transport accounted for erences of farmers and competitive conditions af- the largest share of grain movement by volume fect the location and efficiency of procurement in the former USSR, though rail shipments

106 Figure6.2 Net graintrade in the formerUSSR, 1987/88

Russia -

Central Asia*

Trans-Caucasus

BalticStates

Belarus ;7.7

Moldova

Ukraine

Kazakhstan

-25 -20 -15 -10 -5 0 5 10 Milliontons ExcludingKazakhstan. Source:Derived from U.S. Departmentof Agriculturedata.

(mostly in bulk) accounted for 93 percent of total especially at the farm level, are common. Con- freight carriage (Table 6.6 and Figure 6.3). siderable improvement in business skills among Imports and exports of grain and milled prod- managers and procurement and marketing ucts in the former USSR were handled at 26 sea- agents is required to enable the system to adjust ports in 1988. Twenty-two of these ports han- to new profitability criteria and to respond to the dled imports and ten handled exports. Four shifts in supply and demand that are already ev- Russian ports together handled about 12 million ident in the transition from plan to market. tons of grain in 1988, while the Odessa port Privatization may ease the adjustment, at least in alone handled nearly 14 million tons (Table 6.7 some parts of the system. Reforms in the trans- and Figure 6.4). The major ports in the Baltic port sector, especially changes in costs once real- states handled about 8 million tons. Since nearly istic freight tariffs are adopted by the railways, 20 million tons of grain a year go to the Non- and the pace of privatization and development Black Soils Region of the Russian Federation, it in long-distance trucking will also affect the food is apparent that the northwestern area of Russia handling and storage system. received nearly half its imported grain supply The most immediate gains can be realized by through ports no longer under the direct control reducing distribution losses, which are most se- of the Russian government. rious at the farm-level and rural assembly points. Improved facilities for drying and storing Priorities for action grain at the farm level will reduce losses and allow farms to take advantage of seasonal price Existing handling and storage infrastructure fluctuations as the free market system develops. cannot readily be adapted to operation under An investment proposal in the Russian Federa- free market conditions. Shortcomings in the location for the construction of prefabricated storage tion and capabilities of existing storage facilities, units, the rehabilitation of other units, and the

107 Figure 6.3 Transport of grain ancdgrain products in the former USSR, period averages

Total movement Volume hauled (tons) (ton-kilometers) 1987-89 average 1986-88 average Rail 93.6%

Road 39.9%

Sea \ 7.1% Inland water Road Inland water 2.2% 2.5% 3.9%

Source:Ministry of Railways,Rosrechflot, and Minmorflct.

Figure 6.4 Imports of grain and milled products by seaport in the former USSR, 1988

Odessa 38%

Baltic ports OtherUkrainian 3%

Ukrainian ports terBaltic 4% Russian ports

UNGeorgianports Klaipada44%

~~~~ Rigs 5% Georgianports 1M%7

108Novotalinn 90

St. Petersburg15% Nakhodka3%

OtherRussian 4%/

Novorossiysk1 00/ Vladivostok40/ Source:Minmorflot.

108 provision of dryers, cleaners, and other equip- Food transport systems and policies ment was analyzed. The proposal covers the need for quick expansion of low-cost storage ca- Tranisportoverview pacity at appropriate locations 7 to meet immediate needs for grain storage, suggestions for the As the states of the former USSR move to a mar- design of a comprehensive training program, ket economy, the food transport system (pick-up, and measures for transferring ownership to co- shipment, and delivery of food commodities) operatives, private enterprises, and private must be able to respond flexibly to user demands, farmers. provide increasingly diverse services for a larger Preliminary analysis suggest that an estimated number of smaller production units, and meet $200 million to $250 million is needed for imme- more sophisticated and complex delivery diate investment needs in new storage capacity requirements of urban wholesalers and retailers. in Russia. If financing is not available or other Actions that will contribute most to higher conditions are not fulfilled, the program could quality and lower cost food transport apply to be reduced in size and concentrate on only a few the entire transportation sector. Among them are districts in the southern part of Russia's major the adoption of policies to increase flexibility grain-producing areas. It could then serve as a and efficiency in the operation of transport pilot project to test such implementation issues modes that will likely remain under state owner- as organization, ownership, interest rates, and ship such as railways, open entry in other procurement. In any event, the technical assis- modes, private ownership, market-determined tance and training in grain storage should not be transportation tariffs, and little government in- delayed. terference in decentralized segments of the Discussions with government officials and transport system. 8 Implementing these measures farmers indicate that the best arrangement for stor- in the trucking industry could immediately im- . . . p~~~~~~~~~rovethe efficiency of food transport. age facilities may be to operate them on a lease ba- y sis. Facilities would be constructed using interna- In large part because the economic downturn tional designs, equipment, and siting criteria and has reduced transport demand, there is no gen- sold to farmers on a lease-purchase arrangement. eral shortage of physical transport capacity in - ~~~~~~thecountries of the former Soviet Union. How- The system has been used successfully in a number of other countries, including Turkey. Details of ever, major elements of the transport system are project organization and the lease and financial undergoing such a serious erospon of capacity terms and conditions would need to be finalized. that there is a danger of a transportation crisis during the next economic upturn. Even a harvest The investment program should lay the founda- larger than that of 1991 could overload the sys- tion for a commercially oriented, privately owned tem. The fall harvest season is traditionally a pe- and operated grain marketing system. The assis- riod of peak demand that has typically stressed tance of an international consulting firm may be the transport system severely in the past. required. There is also a need to develop a compre- In addition the quality of transport and associ- hensive plan for revitalizing grain marketing and ated logistics support functions, such as food to determine the optimum grain storage capacity, preparation and packaging for shipment and location, design, and additional training require- storage, is far below modern standards. The rail- ments to meet demands in grain marketing in the ways are still the primary carrier for long-dis- medium-term. tance haulage, even for food commodities for Training is crucial for both managers and work- which it is ill-suited-and for which it will be ers to upgrade technical knowledge in stock-man- even more ill-suited in a decentralized market agement practices. Training must be in fundamen- economy. tals: grain reception, moisture control, dust control, rotation, aeration, pest control, and maintenance. Transport under the command economy Foreign experts would train local trainers, who would then train local workers. This type of train- Designed to respond to state orders, the transport ing-if carried out quickly and efficiently-would system in the former Soviet Union consisted until noticeably reduce grain losses even without any recently of a small number of very large organiza- upgrading of existing storage facilities. tions. Transport modes were organized vertically

109 under mega-enterprises that reported to their increasingly turning to road transport. Virtually headquarters or ministries in Moscovv. The move- all food sold outside the state system, including ment of goods on thirty-two separate railways barter transactions with manufacturing or im- was thus planned centrally at an All-Union level porting enterprises, relies on trucking for both according to budgeted estimates of transport re- short and long distances. quirements of industries, state farms, and other large organizations. Road transport was provided Vehicle maintenance. Maintenance of truck by large centrally managed trucking organizations fleets in the food and agricultural sector is a ma- that operated unde:r annual contracts financed jor problem in all of the states of the former through government budgets. USSR. At least 10 percent of the fleet is Arrangements for food imports and shipment programmed to be under maintenance at any were undertaken by a monopoly purchasing and one time but the lack of spares stretches out even freight forwarding company in conjunction with this routine work. It is estimated that as many as the centrally run Minmorflot, which controlled 300,000 trucks are out of operation each year. both ports, the merchant marine fleet, and ship- Maintenance of the vehicles is costly given the building. Internal shipments went primarily by poor standard of equipment. At the average rail for long distance haulage and by truck for trucking mega-enterprise the number of sup- shorter distances. The railways system of the port staff per vehicle averages as high as 3 to 4 former USSR thus became the most intensively -more than half of them workshop mechanics. operated in the world, carrying about 90 percent Service intervals are short. of total surface transport on a ton-kilometer basis; the average haul of road transport is surpris- Transport tariffs. In the centrally planned sys- ingly low, at less than 30 kilometers. In most tem tariffs for all modes of transport were fixed economies with smaller, more consumer-driven by state committees and published in official industrial bases the share of rail transport is documents. This homogeneous tariff structure about 30 percent to 35 percent, and the average has now broken down, and tariffs for different length of haul in road transport is far greater. modes of transport are being set by the gcvern- ments of each of the new states. In the Russian Transport modes. Most food transport, particu- Federation maximum rates for freight carriage larly from farm to storage and from wholesale to have been established. These ceilings are expect- retail outlets within cities, involves short dis- ed to be abolished by the end of 1992 for truck- tances not suitable for rail. Thus on a tonnage ing, with tariffs to be established by negotiation, basis, most food in the state supply system was possibly between truck owners and their clients. moved by road transport-522 million tons in 1989, compared with 178 million tons for rail, Adequacy of the transport system. Although and 5 million by inland waterways (Table 6.8). cumbersome, heavily bureaucratic, and ineffi- Trucks associated with state and collective cient, the transport system in the former USSR farms (owned and operated by the Agroprom or- has generally achieved the objective of moving ganizations) hauled about two-thirds of truck- food from farm to market. It did so, however, at ing's share and common carrier trucks the rest.9 enormous cost in terms of food spoilage, waste, The average length of haul by road transport of theft, and high vehicle operating costs. It is esti- food commodities was only 21 kilometers. mated that as much as 30 percent of food is lost Over longer distances rail remains the main through waste, theft, and poor preparation and transporter of food, particularly in the state sup- packaging. During harvest periods, however, the ply system where, until recently, movements system occasionally experiences capacity over- were planned well in advance. Grains are moved load. There are never enough working trucks on largely by rail: 62 percent of farm production the farms to meet needs during the harvest peri- and 117 percent (more than one move) of state od, so it has become an annual ritual for the gov- purchases and imports were moved by rail in ernment to issue a decree ordering trucks from 1989. Railroads have generally played a less im- other organizations to report to the rural com- portant role in moving perishables and time-sen- munities to assist in hauling harvested crops. sitive commodities. Because of the railways' rig- The lack of storage facilities at the farm or in id scheduling requirements, food producers are nearby rural areas intensifies the problem.

110 During the peak agricultural season all rail transport capacity arises basically from two grain hopper cars are also sent inland to the har- sources: the disruption of spare parts supply, vest areas, leaving a dearth of rolling stock to particularly for vehicles and equipment manu- serve bulk cargo carriers arriving with grain at factured in the former CMEA countries, which various ports. The lack of silos at the ports also now insist on payment in hard currency,1 1 and adds to the peak transport problem. Imports are curtailment in the supply of new vehicles from scheduled for unloading during nonharvest both domestic and foreign sources, so that old times of the year, forcing ports to program oper- vehicles are not being replaced. The problem is ations at levels of efficiency rarely achieved. This somewhat less serious for the railways. Older causes blockage in the ports and leaves loaded equipment has simply been sidelined because of ships at anchor, vastly increasing costs and the general decline in traffic. Once the economy congesting harbors. begins to recover, similar stresses can be expected, particularly as the railway is facing increas- Problems of the transition ing financial difficulties which will only increase with the liberalization of energy prices. In addition to the significant economic shifts put in motion by the Russian reforms, the break up Port and maritime bottlenecks. The newly inde- of the former USSR into independent states has pendent states of the former USSR have claimed disrupted trade and shipping patterns. Signifi- the ports and fleets within their boundaries as cant changes are likely to continue for some time sovereign property. This means that Ukraine and before equilibrium is reached. The effect of these the Baltic states have large fleets with ports and developments on the transport sector will be shipping tonnages that far exceed domestic re- immense. quirements, while the Russian Federation has inadequate ports and vessels. Russian sea ports, Privatization and corporatization of road trans- with the possible exception of St. Petersburg, are port. There are more than 4 million trucks in op- incapable of increasing their volumes of cargo eration throughout the former USSR, about 3 and traffic in the short run. Firm agreements million of them in the Russian Federation. About among the newly independent states of the 800,000 of the Russian trucks are engaged in former USSR governing cross-border trade and food transport. Under the centrally planned use of ports are urgently needed. economy responsibility for truck transport was assigned to a few giant organizations operating Integration of railways. Railways too have been on the republic level. These, in turn, controlled divided along national boundaries, reducing the thousands of subsidiaries scattered throughout fungibility of assets and raising the specter of the republics. costly border crossing formalities and redundant In the Russian Federation trucking organiza- investment. The new states are attempting to tions are being broken up, corporatized, and preserve as much of the All-Union train opera- privatized. Full privatization is intended by the tions as possible. Locomotives have been divid- end of 1993. The most common practice is to cor- ed up, but freight wagons are still being pooled. poratize the existing company by forming a As traffic declines and the financial difficulties of joint-stock company owned by management and railways increase, however, there may be less employees. The problem is that this process re- willingness to share rolling stock. Acquiring tains the very large enterprises, and preserves spare parts and new rolling stock is also becom- existing patterns of commodity and geographi- ing difficult because of the problems of interstate cal operation. The danger is that the process may trade. There are reports that 600 switching loco- lead to the substitution of powerful private mo- motives lie idle for want of batteries made in nopolies for powerful state monopolies. 1 0 Ukraine using inputs from Kazakhstan.

Erosion of transport capacity. Transport capacity, Need for more road transport. In most Western although not a problem now because of the eco- markets long-haul road transport is the most ef- nomic downturn, is eroding as vehicle fleets fective way to move perishable foodstuffs over shrink and handling capacities in ports and ter- long distance from multiple suppliers to multi- minal areas break down further. This erosion of ple markets, distributors, and users. In the newly

I ill independent states as the nature of the economy hauls between farm and market, and in distribu- changes, and large manufacturing enterprises tion within the main consumption cente:rs. The are broken up and small market-c[riven enter- use of trucks for long-distance transportation is prises and service firms develop, there are likely growing and is expected to replace rail as the to be enormous shifts in traffic from rail to road. dominant long-distant mode for food transport Experience in Eastern Europe has shown this to in the years ahead. The recommendations in this be the case. section thus emphasize measures to privatize the Agricultural and consumer goods will shift to intraurban and long-distance trucking indus- trucks, as will most international traffic to and tries, encourage new entrants, and expand truck- from Europe. Many farms have indicated a pref- ing capacity. erence for road transport, and virtually all food moving outside the official state supply system Free and open entry. The most important way to uses road transport. In the Russian Federation promote low-cost road transportation is through the road transport industry will need to make free and open entry. Economies of scale and major changes in structure and orientation as the scope are illusive in road-freight transportation. structure of its economy changes further. Sub- To develop properly, the trucking industry will stantial numbers of large, longer haul trucks and require a large number of firms, each with a rela- of small, versatile trucks for in-city deliveries tively small number of vehicles. Average firm will be needed as these most underdeveloped ar- size will be small in an open environment. But eas of the transport system experience rapid the total costs of transport and logistics will also growth in the future. be lowest in such an environment. Facilitating new entry and more appropriately sized trucking Logistics management. In all Western countries ncern an be acedyvral measures: andumbr -roing ofdeveopig naionslo- concerns can be achieved by several measures: and a growing number of developing nations lo- * Promoting competition among users of gistics C,management has become a critical ele- oPooigcmeiinaogueso gsti has becm an crial ere- transport services, which will result in their seek- ment of industrial progress and trade p7erfor- mance. The transportation system, selection of ing the most efficient and cost-effective transport modes, and the growing use of intermodal provider. The break-up and privatization of other freight systems have become increasingly inte- parts of the food supply chain will encourage grated into manufacturing and trading processes new entry by removing the barriers posed by so that market-responsive logistics management command-driven trading relations. has become a key determinant of competitive- a Removing restrictions on truck tariffs and ness. Electronic data interchange and communi- administrative restrictions on the type of freight cation systems are important complementary that can be carrid other than for health and safety technologies. reasons. Unfortunately, many of the prerequisites for * Facilitating access to trucks for new market effective logistics management are simply not entrants. Opening the market for trucks by abol- available in the states of the former USSR. Devel- ishing centrally controlled allocation of new vehi- oping them will take considerable time. These cles is one way. Another is to ensure that new prerequisites include streamlined documentary entrants are able to gain access to used trucks. procedures, effective electronic communication There are two potential sources for used vehicles systems, container manufacturing, leasing mech- in the former USSR: redundant military trucks, anisms, repair facilities, and specialized rolling which could (and should) be auctioned off to pri- stock. Freight consolidation and clistribution vate operators, and fleets of existing road trans- centers are another critical need. An effective port enterprises, which should be auctioned off network of freight forwarders, brokers, insurers, as these entities are privatized or sold to their and the like is also needed, much of which is still present drivers, who may wish to become inde- in an infant stage. pendent operators under arrangements for preferential sale. Action program for the trucking industry * Facilitating the development of truck leasing enterprises within the Russian Federation, The trucking industry currently is involved in which would assist new and current operators to food assembly at points of productioni, for short acquire new and used trucks.

112 * Ensuring that privatization of mega-enter- Once barriers to entry in the road transport in- prises in trucking is not unduly anticompetitive dustry are lowered as a matter of policy, liquida- in its effects. This could arise either through high tion and break-up would likely occur as a natural costs of entry for new operators or through gift- process, though perhaps not as rapidly as might deeding assets to existing operators, freeing be desired. them of the need to take the cost of capital fully . By encouraging the break-up and restruc- into account in the short to medium term.1 2 turing of the mega-enterprises in trucking. This * Fundamentally changing the role of prov- would most easily be accomplished at the level ince-level trucking associations. These organiza- of the operating subdivisions of the trucking tions should focus on providing consulting and mega-enterprise in the case of road transport, al- repair services to truck operators, and not on though it should be recognized that these are not controlling trucking activity within their tradi- separate accounting units. For the largest truck- tional geographic purview. ing enterprises detailed restructuring options may need to be prepared, complete in their man- Privatization. Without a move to private own- agerial, organizational, financial, and accounting ership it is highly unlikely that an efficient, re- aspects, before decisions to restructure or priva- sponsive market in trucking services will devel- tize can be made with confidence. Treatment of op. In the absence of genuine economies of scale these sorts of units should therefore be sub- nonbudgetary incentives for improving the qual- sumed within the general framework for the ity of trucking services can be brought to bear on privatization of large enterprises, perhaps along the trucking industry. Once serious privatiza- lines presently being formulated by the govern- tion begins, it can be anticipated that separate ment of the Russian Federation. channels of distribution for state and private In addition about two-thirds of the agricultur- ownership will evolve as an intermediate step. al commodities hauled by trucks are transported Right now, however, privatization of road trans- at some stage in the delivery chain in trucks port services is moving slowly and quite possi- owned by Agroprom organizations. Efforts to bly not in the right direction. Because higher privatize the trucking industry have thus far quality services, with lower loss and damage, been aimed at common carriers, and not at units are likely to arise first in the private sector, state- operated within the Agroprom system. At owned firms will be driven out of business un- present there is the likelihood that the Agroprom less they respond quickly and effectively. fleet will be transferred to state and collective There are three basic options for privatizing farms rather than to specialized small carriers road transport services: and that the fleet could therefore fall into disre- 9 By auctioning the movable and fixed assets pair and be poorly utilized. The same privatiza- and real property of existing small and medium- tion rules ought to be applied to divestiture of size trucking enterprises, beginning with their in- the Agroprom fleet as those proposed above for ventory of trucks and spares. Preference should divestiture of the Ministry of Transportation's be given to presently employed drivers and common carriers. workers, through an appropriate discount on To support the creation and expansion of a pri- sales. This would force the break-up of the enter- vate trucking industry, the market for commer- prises, and although the new owners might sub- cial vehicles and other food transport-related sequently regroup into truckers associations or equipment must be opened, commercialized, larger unitary firms, the decision would be a vol- and made responsive to the changing needs of untary one, based on individual owners' assess- private operators. For these reasons the abolition ments of profitability. An open auction would of centrally controlled allocations of trucks, also provide opportunities for new entrants to equipment, and food shipments should take gain access to the trucks and other operational place as soon as possible. New investments and assets. technical assistance will be required to make * By offering the medium-size trucking enter- substantial additions to equipment inventories prises for sale as unitary entities, with reliance on and introduce major improvements in technolo- market entry to drive out the more inefficient en- gy-features, durability, and suitability to the terprises or force them to split into more econom- road transportation of foods-of the sorts avail- ically sized units once ownership is transferred. able in the industrialized market economies.

113 These are areas where direct foreign investment shelf. Western assistance may be required before and financial and technical assistance from the domestic production can meet the level of de- international community could measurably as- mand that already exists. sist. Military conversion projects might be partic- Trailer technology is advancing rapidly in ularly suitable here as well. Western Europe. Such advances, together with the effects of recession, have left the European Private sector financing. It will be extremely im- transport industry with excess trailer capacity in portant for the government to facilitate the avail- good operating condition. Many suitable trailers ability of investment and working capital financ- are being surplused because of demand for the ing for private trucking firms. The entry of new newest equipment, not because of their condi- privately owned distributors should be encour- tion. The following recommendations are there- aged through the provision of special incentives fore made: for a limited period of time, again ;through the * Priority consideration should be given to a provision of special small business credits for the program of assistance to trucking firms for the purchase of vehicles, equipment, and s pace. Oth- procurement of surplus Western trailers. er needed short-term actions include appropri- * The Russian Rosavtotrans and its ecluiva- ate legislation and regulations covering methods lents in the other countries and the Agropron sys- of collateralizing debt in the trucking industry, a tems in these countries could be partners in the lien-recording system to protect lenders' inter- rapid development of this sector. Both these or- ests in the equity of the borrowing enterprise, ganizations are developing freight-forwarding and courts and other bodies empowered to and freight-booking networks, and a trailer enforce transportation and delivery contracts rental-leasing program could be developed using and to arbitrate bankruptcy, liquidation, and re- the assets of these networks as an initial base. possession actions. * Consideration should be given to assisting Small carriers would benefit from the creation long-haul road transport firms to acquire suitably of cooperative transport clearing associations to powerful road tractor units. Because of con- assist with the acquisition of investment and straints on local production of these units, and for working capital and the collection of receivables. reasons of technology and environmental impact, Such organizations could also serve as a clearing this equipment might need to be imported from house and collection agent for financial transac- foreign suppliers at first. This suggestion reqluires tions between shippers and small carriers, help- further analysis. ing shippers settle their accounts expeditiously * Priority consideration should also be given with the many small carriers that will likely to assisting local manufacturers design ancd pro- emerge once privatization in the truc:king indus- duce more appropriate tractor and trailer untits. try is underway. These associations can also assist financial institutions in monitoring the Action program for railways creditworthiness of small trucker clientele. It is particularly important to stimulate good ser- Priority investments. The long-distance road vice from the railways because of their monopo- haulage sector needs to be expanded to meet the ly power and the inability of domestic needs of the underserved small producer and manufacturers to produce effective highway perishable food supplier. To speed the develop- transport equipment. It is, however, hard to con- ment of this sector in the absence of sufficient ceive of an appropriate economic inducement. domestic production and relevant technology, Establishing systems of service measurement assistance will probably be required in the short and cargo loss and damage estimation, with in- term for imports of refrigerated and tilt trailers dependent examination of the results, may help. for food transport. Insufficient reefer capacity is This option should be considered in evaluating a key limiting factor in the development of these the performance of the top management of the services. Assistance to this sector couLld have a railways. dramatic impact on the efficiency of the food The railway tariff system is neither cost-orient- supply chain and would also contribute to pro- ed nor sufficiently refined. Cost-oriented rates viding consumers with a better quality product avoid rate structure cross-subsidies that distort in fresher condition when it reaches the market the selection of transport mode and ultimately

114 sap the economic strength of both the railroad * Provision for proper cleaning and immedi- and potentially competing modes. The cost-ac- ate post production packaging facilities counting challenge is difficult even for the most * Initial packaging and palletization of prod- experienced of Western cost-accounting practi- ucts before transport or storage tioners. But considerable improvement is possi- * Transportation under suitable conditions, in- ble through appropriate training progress. cluding precooling where necessary and attention As the railroad moves into the era of service to to proper airflow around products during transit small customers, the pressure on its embryonic * Palletization or unitization wherever possi- equipment control system will intensify. The ble to reduce handling and minimize damage, in- railways will need a single, comprehensive, cluding the provision of trays, crates, shrink equipment control and car management system. wraps, and board cartons While it need not be real-time, it should be near * More refrigerated transport equipment, real-time-no more than perhaps twenty-four properly maintained. hours behind in its information. Data transmis- Pilot project funding and technical assistance sion and remote data-entry problems seem the should be offered on a large scale for perishable hardest to resolve. and nonbulk shipments. For bulk shipments the The railroads must realign their operations to need is for: provide for short-notice pick-up of freight on a * More bulk loading and unloading facilities nondiscriminatory basis. They must also improve along railways and highways and at several of their cost accounting to support a reasonably re- the main transfer points fined, cost-based system of tariffs and contract * More effective handling equipment to re- rates tailored to shippers and freight movements. duce the need to break bulk in transit. If railroads were to concentrate primarily on pro- Over time, as bulk shipment modes and routings viding reliable, low-cost service, independent change, there may be a need to build transit stor- freight brokers and other intermediaries could age depots in new locations or to expand capaci- move in and assume the sales functions. ties of others. Again, technical assistance will The rail system is unlikely to adapt easily to likely be required, though specific requirements the time-critical nature of perishable cargos. So need to be identified first. although single reefers may be needed for today's configuration of operations, major invest- Mechanical handling equipment. There is little ments in new cars to provide this service are not use of mechanical handling equipment (MHE) in recommended without considerably more mar- the states of the former USSR and the technology ket research to verify the long-term viability of is limited. Improvements are critical for intro- such a service. 13 ducing unitization and palletization along the food chain. To avoid the expense of electric-bat- Action program for efficient operations tery-equipment, additional hand-pallet trucks could be used for floor and vehicle movements, Preshipment and handling. Action is required at together with diesel- or propane-powered fork- all stages of the food distribution chain to im- lifts in areas where their use is more appropriate. prove the preparation of products for shipment Over the longer term, however, increased local and the conditions under which they are production of mechanical handling equipment shipped. A government food inspection and should be a priority and is a suitable candidate grading service needs to be set up and properly for Western technology transfer and support. Ex- supervised. Market participants must have con- pansion of domestic manufacturing of such fidence in the integrity of this system so that equipment, perhaps under an international joint trade can occur far from where the products venture, could provide yet another market niche originate and so that responsibility can be appro- for military conversion projects. priately assigned for loss and damage adjudica- Increasing the supply of pallets and containers is tion. Storage, handling, packaging, and trans- fundamental to improving the efficiency of the portation conditions must be brought up to stan- food distribution chain and permitting greater use dards that can ensure that products are delivered of mechanical handling equipment. The manufac- in good condition. For perishables and nonbulk turing of wooden pallets and plastic trays is a low- shipments the prime areas for attention are: raw-material cost but high-labor-content operation

115 that can be established in each region with the the organizational and operational management injection of modest funding and limited technolo- of transport and distribution operations. The use gy. This is an area of self-help that will assist both of personnel, the deployment of vehicles, and the distribution industry and the local economy It the organization of warehouse and dispatch ar- deserves higher priority than it has received. eas all show a lack of awareness of the cost-base and management skills needed for a new market Information and telecommunications. The billing, economy. If new equipment and technology are accounts receivable, and collection functions of to have the intended effect, an extension pro- freight carriers will have to be upgraded to sup- gram of management and organizational skills port the requirements of private operators and us- training must be implemented. ers and to accommodate the introduction of cred- Gaps are particularly apparent in finance and it. These functions will need to be decentralized to accounting fundamentals, transportation man- be able to serve many small companies collecting agement, inventory management and control, from many small customers, often strapped for demand forecasting, distribution requirements cash. Freight bills will have to be prepared with- planning, warehousing management, strategic out error and rendered expeditiously. It is reason- planning, customer service, and information able to assume that freight structure and arrange- technology. Ideally this training should come ments will be more, not less, complicated as ship- through joint-venture partners that have training per-carrier negotiations proliferate. Western programs already in place. Where that is not the trucking associations and international account- case the international donor community, founda- ing firms could provide valuable assistance with tions, and private business groups should be laying out a framework and demonstrating-per- asked to prepare comprehensive training needs haps on a pilot basis-how to introduce the assessments and to identify suitable foreign and framework to the firms and apply it in regular local providers. business transactions. Information technology applications to support Management of fleet operations. Privatization and the efficient management of trucking logistics also divestiture of the trucking mega-enterprises is needs to be introduced. Priorities in terms of ap- likely to give rise to independent fleet operators as plication should go to: well as to individual truck owners. Most such a Transaction-based order processing, invento- firms are likely to be owned and managed by ry control, freight payment and audit, and fleet as- groups associated with the predecessor enterpris- set management es. Old patterns of organization and operation will - Decision-support inventory management, need to be replaced with more flexible and re- distribution network strategic planning, and fleet sponsive patterns. Management skills will need to routing and scheduling be upgraded, and several transitional problems * Performance measurement, custcmer service can be anticipated as these groups attempt to performance, budget cost tracking. adapt as newly privatized entities in a commercial Given the poor quality and unrelialbility of the environment. Several pilot projects could be estab- telecommunications network, solutions based on lished with help from foreign technical assistance sophisticated computer systems may prove un- or under joint ventures and management con- workable. Simple personal computer-based soft- tracts to identify positive models for replication. ware packages for vehicle maintenance, stock location, inventory control, and delivery note and in- Training attuned to small operators. There will be a voice preparation could provide immediate large influx of new entrepreneur-entrants to the benefits. It may be premature to introduce software highway freight transportation industry, as entry for vehicle routing and utilization, however, and is opened and equipment and credit become avail- that may need to wait until detailed data base maps able. These new entrants will have the advantage are available and management skills have been de- of a closer alignment between incentives and effi- veloped for interpreting the results of such analysis. cient operation-the driver owns the truck--and of not having to unlearn old patterns of inefficient Management and training needs. In iaddition to organization and operation. The disadvantage will shortcomings in equipment and information be a lack of time to attend formal training seminars technology, there are general inadequacies in despite a need to know more about the business.

116 Trial and error may be the primary trainer, but the Grain production in Russia was estimated to be 92 mil- economy will benefit if errors can be anticipated lion tons of usable grain. Since farm-level storages are and avoided. One education medium could be a multipurpose facilities(also used to store fertilizers and trucking handbook which should contain appro- other agricultural inputs as well as nonagricultural priate information for new small motor carrier op- goods), this information would indicate that the report- erators. Such handbooks are common in many ed capacity of on-farm grain storage is generally inade- Western industrial countries. quate. 7. Preliminary estimates indicate an immediate need for Notes 7 million to 10 million tons of additional storage capacity in the Russian Federation at a construction cost of 1. The Party had both political and economic levers at about $25 to $30 per storage ton. its disposal to keep the system integrated. It controlled 8. Several studies have recently been commissioned by the input supply and credit systems that farm produc- the European Bank for Reconstruction and Develop- tion in the former USSRdepended on. ment, including an intermodal study, to examine key 2. One Soviet study of labor expended in the food and constraints and investment needs in the transportation agricultural distribution sector in 1990 came up with the sector and to recommend corrective programs and re- startling conclusion that total time spent shopping and forms. standing in lines by Soviet consumers was approximate- 9. The State Agro-Industrial Committee, or Gosagro- ly equivalent to the total time spent by workers in agri- prom, was created in 1985 as a joint committee of the cultural production and food distribution activities. ministries of agriculture, food industry, and procure- 3. The State procurement network is often the only opment, and some other ministries. It was subsequently 3. Th Staeneworkis prouremnt ofen te onl op-abolished at the All-Union level in late 1989. Trucking tion in many of Russia's agricultural districts that is capable of handling large volumes. It also is the main organizations associated with respective republic-level source of supply in several of Russia's urban and periur- Gosagroproms continue to operate large numbers of ban areas. Again, a phased privatization program trucks. In the Russian Federation, 25 percent of all trucks would seem appropriate to allow time for alternative are operated by state and collective farms and Agro- private sector marketing chains to develop (although prom organizations. the system of compulsory state orders should be phased 10. Even with antimonopoly legislation, the present out as soon as possible). Meanwhile, the liberalization of process results in large companies with high over- prices will force the large food enterprises to operate in heads, not the most suitable outcome for an industry a price negotiated system of procurement and resale. that should have a large number of competitors, capa- 4. No inventory of state-owned grain handling and ble of responding quickly and flexibly to the customer storage facilities for the former USSR is available, and transport demands that will evolve in a market-based there are few detailed accounts of actual technical eval- economy. uations. A technical paper presented by George S. Zelin- 11. The lack of spare parts for all types of vehicles used sky in 1974and a report of a visit by a U.S. study team in in food transport is a major issue. The situation is espe- 1976 provide some insight into technical characteristics cially critical for road vehicles built in the former CMEA of the system. The U.S. study team reported that the So- countries. These vehiclesare traditionally the smallest in viet grain system consists of 250 million tons of storage the fleet, operating in the 400 to 1,500 kilogram load capacity, of which 140 million tons was off-farm. They range. In some regions as many as 50 percent of such also reported Soviet plans to construct an additional 40 small vehicles are not serviceable because of a lack of million tons of off-farm storage by 1980.Based on these spare parts. figures it is likely that the total off-farmgrain storage capacity is more than 200 million tons in the states of the 12. High costs of entry could also arise in a situation former USSR. where one mega-enterprise with special high-cost vehicles is privatized in its entirety, its monopoly or quasi- 5. In Bank-financed projects in Turkey and Hungary, monopoly powers intact, as happened in the case of turnovers of stock in facilitiesof this size average 7 or 8 milk transport from farm to processor in Moscow. Such times a year. In Russia turnovers average only 1 to 2 a a monopoly would have no effectivecompetition in the year. near term. 6. A 1988 inventory of farm buildings shows on-farm 13. It is not just a question of rail cars. Tomake effective grain storage in Russia to be nearly 90 million metric use of an increased rail car fleet it will be necessary to tons. The inventory does not provide details on the age, build terminal facilities to enable consolidation of part condition, or type of storage other than to identify 8 mil- loads. Without terminal facilities for part-load assembly, lion metric tons of the total capacity as "mechanized." access for the smaller producer will be difficult.

117

Agricultural price policy and terms of trade

This chapter analyzes agricultural price policy Food products in the former USSR were sold before and after the Russian price liberalization through three channels: state retail stores, the of January 2, 1992, looking at the changing price state-dominated network of consumer coopera- structure, price distortions, and the impact of tives (Centrosoyuz), and collective farm mar- price policy on the food and agricultural sector. kets.' Retail prices were fixed in the state stores, More specifically, the chapter addresses four as- negotiated and administratively controlled in pects of agricultural price policy: the evolution the cooperative markets, and relatively free in and structure of agricultural prices (retail food the collective farm markets (Table 7.2). About 70 prices, farmgate input and output prices, and percent of food purchases were normally made marketing costs); price liberalization and its im- at state retail outlets, although this share proba- pacts; the impact of energy price reform on agri- bly declined in 1991 because of food shortages. cultural production and food processing; and For most commodities, collective farm markets prices, profitability, terms of trade, and income were very thin markets, though meat and some problems in the agricultural sector. The main fo- other foods (particularly vegetables) were avail- cus of the price policy analysis after price liberal- able at these markets even when state stores ization in 1992 is the Russian Federation. were empty (Annex Table A7.2). Food prices in state retail stores were set by Price policy prior to liberalization the central government but differentiated for three broad geographic zones in the former Retail food prices USSR. These prices varied little over time, although there have been substantial increases for Official prices of food at the retail level remained certain items, such as alcohol, fruits, and coffee, relatively stable throughout the 1970s and 1980s and new food products were generally intro- (Table 7.1), rising less than 1 percent a year in the duced at higher prices. State prices also varied 1970s and only 1.3 percent a year in the 1980s little seasonally and did not reflect quality differ- (Annex Table A7.1). These official prices, howev- ences, such as different cuts of beef. er, do not reflect the hidden costs to consumers The structure of domestic retail prices also dif- of rationed supplies, long lines, and substandard fered greatly from those in most market econo- quality. Nor do they capture the growing pro- mies. Direct and indirect payments by consum- portion of retail food sales by nonstate enterpris- ers and favors to clerks and store managers es at significantly higher prices or the growing raised the real cost of subsidized food, as did diversion of food from official to nonofficial mar- tied sales and quality degradation. For most keting channels. commodities the effective prices that consumers

119 paid in state outlets were somewhere between Until price liberalization state orders covered a official and parallel market prices. large portion of most commodities except pota- In 1989 the former USSR government relin- toes and vegetables. quished control of retail and producer prices of Negotiated prices were used primarily in sales potatoes and vegetables and stopped paying to the state of quantities over the amount cov- subsidies on them. When procurement price in- ered by state orders and indirect interenterprise creases already granted to farms and hence an trade. The official consumer cooperative, Cen- increase in consumer subsidies threatened to trosoyuz, was traditionally the only major buyer double the state budget deficit, retail prices for at negotiated prices. For most commodities the other foods were increased on April 2, 1991 (An- quantities sold at negotiated prices were small. nex Table A7.3).2 An important aspect of the Free market prices covered few food commod- April 1991 retail price increases was the degree ities and only a small share of total agricultural and scope of measures to compensate consumers output. Products sold directly to consumers in for the price increases. The general wage increas- the collective farm markets were generally ex- es that accompanied the price reformn and special changed at market-clearing prices. Sellers were support provided for low-income groups, in- required to market their output directly-no cluding families with children, kept inflationary paid intermediation was allowed. Sales were pressures strong. Household savings deposits usually in small amounts, and the costs of retail- also were indexed upward. ing were high. In the following months it became apparent Between September 1990 and January 1991 that the higher retail prices were not curtailing prices paid to farms for agricultural comnmodi- excess demand. Imbalances in the food markets ties were increased an average of 32 percent. The continued and worsened until it becatme obvious increases were meant to cover higher production that nothing short of a major reform in food pric- costs resulting from increased prices for machin- ing and marketing could turn the situation ery and agricultural inputs, higher interest rates around. Thus the stage was set for liberalization on credit, and larger farm contributions to cover of prices, removal of restraints on buying and pensions and other social expenditure. Special selling in food markets, and contraction of the bonus payments to financially weak farms were system of state orders in the Russian. Federation discontinued, and a special government-fi- on January 2, 1992. nanced investment fund (about 17 billion rubles) was established to assist weak state and collec- Agricultural output prices tive farms.3 As part of the procurement price increases the In contrast to retail food prices agricultural pro- number of differential price zones was reduced ducer prices were increased steadily during the significantly-from forty-nine zones to five for 1980s. Agricultural procurement prices rose almost meats and from ninety-eight to four or five most 6 percent a year during 1986-89, while re- for milk (depending on the quality). Uniform na- tail food prices rose only by about 1.5 percent. tional prices were established for most grains Corresponding to the array of permissible retail and oilseeds. Individual republics could still es- food prices, agricultural producers sold their tablish their own internal price zones but incre- output at three kinds of prices unde:r the previ- mental outlays had to be funded from their own ous system: state procurement prices, negotiated budgets. Farms were increasingly reluctant, prices, and free market prices. however, to deliver products in fulfillment of Procurement prices were established by the state orders, and the share of state procurement government for specific products and were dif- in total sales declined precipitously in 1991. ferentiated by geographic region. The procure- State orders and procurement prices dominat- ment price consisted of a base price plus bonuses ed farm-level prices until the system began to based on quantity, quality, and financial need of break down in late 1991. Average procurement farms. Weak state and collective farmns received prices for major agricultural commodities for price bonuses in an effort to improve their finan- 1981-91 are shown in Table 7.3 and in Figure cial position. However, private producers, who 7.1. As shown in Box 7.1 these average procure- marketed through state channels usually re- ment prices concealed a wide variation around ceived base procurement prices without bonuses. the mean (also see Annex Table A7.4 for

120 Figure7.1 Procurementprices for selectedagricultural commodities in the former USSR, 1981-91

Rubles per ton 5000

4500 /

4000 -/

3500 -

3000 - _ Cattle 2500 2500~~~~~~~~~~~~10- . . _ . * ~ * *-. . _ . . _ . . _ . . _

2000 _ -

1500

1000 Cotton ...... -.- ~~~~~...... -- Milk 500 Grain _

1981 1983 1985 1987 1989 1991 Source:Derived from GoskomstatUSSR data.

Box 7.1 Interrepublicdispersion of averageprocurement prices in the former USSR,1990

Price in the former USSR Lowestprice Highest price Agricultural commodity Rubles/ton Rubles/ton Republic Rubles/ton Republic Grain 313 250 Georgia 527 Moldova Potatoes 286 240 Ukraine 554 Turkmenistan Sunflower seeds 453 330 Georgia 594 Moldova Sugar beets 56 52 Moldova 74 Lithuania Cotton 1,088 845 Kazakhstan 1,330 Turkmenistan Cattle 3,422 2,858 Estonia 4,247 Georgia Poultry 2,531 1,920 Kyrghyzstan 3,225 Armenia Hogs 2,971 2,440 Tadjikistan 3,609 Georgia Eggs 103 85 Turkmenistan 125 Georgia Milk 555 326 Latvia 654 Russia

Source: Goskomstat USSR

121 procurement prices for selected crops and An- about these figures is how small the margins are nex Table A7.5 for procurement prices for live- at each stage. stock products). More efficient proclucers in ar- The estimates, however, are an imperfect indi- eas with comparative advantage received gener- cator of profitability owing to several flaws in ally less than the national average price for a Soviet enterprise accounting techniques and in particular commodiity. the method of computing margins. Actual profitability, as a share of transfers and sales, was Agricultural input prices probably even lower. Indeed, by any reasonable accounting standard the food industry would The important agricultural inputs-farm ma- have registered substantial losses under the old chinery and equipment, seed, fertilizer, pesti- system. With few exceptions the marketing costs cides, livestock feed, and veterinary medicines for food commodities before the 1992 price liber- -were both domestically produced and import- alization were about 10 percent, exceedingly low ed. Input production, imports, and distribution compared with costs in market economies. were centrally controlled. Like output prices, agricultural input prices were controlled by the Exchange rates government. The relationships arnong input prices and between input prices and output The government of the former USSR insulated its prices differed greatly from those in developed domestic prices from world market influences by market economies. Both input and output prices strictly controlling foreign trade. While foreign were kept below international prices, but input trade was conducted either in hard currency or prices were generally depressed more than out- on a bilateral clearing basis, exchange rates were put prices, so that the relationship between required for pricing imported commodities in ru- them was quite different in the former USSR bles. Until 1991 the exchange rates used for that than in the United States or other Western purpose were generally less than 2 rubles per countries, dollar, a price that had little economic basis. The resulting ruble prices were well below prices that Generally, the prices of inputs at the farm lev- end-useruld have bee willinglo pay. thow el were uniform across the country. ]Ex-factory en-srwolhaebnwiigtopyH - ever, domestic producers and consumers had lit- prices were based on cost-plus pricing and so tle direct influence over the structure and varied according to each factory's cost structure. allocation of imports, which were controlled The resulting price lifferences as well as a large administratively. share of input distribution costs were covered by the government through implicit or explicit sub- Price liberalization and its impact sidies. As input production costs increased during the 1980s, input prices at the farm level Rationale for price liberalization were also increased, with the largest increases coming in the late 1980s (Table 7.4). Price subsi- The rationale for the Russian price liberalization dies for fertilizer and machinery were phased was simple and compelling. In one stroke a poli- out in 1988/89 to improve incentives for more cy framework was introduced on January 2,1992, efficient resource use. which began to reduce the crushing burden of price subsidization, reverse the pervasive distor- Marketing costs and margins tions caused by previous consumption and incomes policies, and reduce the government's Under central planning the size of per unit mar- direct involvement in food and agricultural en- keting costs and margins was one of the main terprises. Moreover, the groundwork was laid for criteria for assessing enterprise tax obligations in the supporting and regulatory roles normally the food sector and for deciding whether to ad- performed by governments in market economies. just official transfer and sales prices. Sample An important side-effect-one crucial to the costs and margins in procurement and transport, political sustainability of reform-is a new set of processing, and wholesale and retail trade (at incentives for all sectors of society. Key among transfer prices, before subsidies were applied) in them are incentives for the work force in food 1990 are shown in Table 7.5. What is striking and agricultural enterprises, which should

122 stimulate labor productivity, and for the manag- achieves an acceptable price level and provides ers and administrators (especially at the local partial compensation to protect vulnerable peo- levels), whose interests might otherwise coa- ple. This task will be particularly important dur- lesce and inhibit an effective response to the re- ing the first few years of the liberalization, when forms. In sum, price liberalization is an essential the twin temptations to reimpose controls and to initial step in a series of measures which, if sus- provide overly generous compensation will be tained, will lead to a competitive and commer- strong. cial environment for the food and agricultural sector (Box 7.2). Impacton retailprices and theavailability of food Price liberalization by itself provided some relief from tension in food markets by discourag- In January 1992 the retail prices of major food ing hoarding and reducing speculative demand items in urban areas increased to 5 to 7 times for food. Of greater significance, however, is the their December 1991 levels. The increase had a linkage of price liberalization with liberalization marked effect on consumer behavior. Though of internal and external trade, enterprise reform, the price liberalization was not complete since land reform, private entry, savings mobilization, caps were imposed on increases for some basic investment, and incentives to higher productivi- foods, most consumer spending decisions were ty. The full benefits of price liberalization will be b realized over time as private and commercial based on liberalized prices. Demand for food fell transactions gain a stronger base. How large the as consumers turned to household stocks. Pur- benefits and how soon they are felt will depend chas both fod and nonfood consue on how resolutely market liberalization is pur- goods dropped, and availability increased signif- sued, particularly through measures to free in- icantly in many cities. ternal trade and prevent the erection of interstate Immediately after price liberalization producers trade barriers. and processors reported excess supplies of meat. By releasing mechanisms that depressed prices Consumers did not purchase available quantities below market-clearing levels, price liberalization at offered prices, and prices did not adjust down- results in changes in relative prices and a shift to ward to clear markets. Not unexpectedly, price a higher general level of prices. By itself price lib- ceilings for bread and milk, which were still under eralization does not cause an inflationary price state control and subsidized, were exceeded in spiral, but if accompanied by lax fiscal, monetary, many cities. Shortages of commodities still under and incomes policies such a spiral could easily price control appeared, in part because processors result. The challenge of price liberalization is to and distributors had adjusted their product mix find a judicious formula that simultaneously away from those items. For example, more butter

Box 7.2 Price liberalization and price determination in the longer-term

Because internal markets in the Russian Federation are so large, the level and structure of food prices will be determined largely by the interplay of domestic supply and demand for most food commodities, even in a liberalized trade environment. Over time, as interregional markets develop and the private sector begins to manage a sizable share of Russia's foreign trade, price transmission will improve, and the level and structure of border prices will have more immediate effects on domestic prices. In the other states, however, the influence of border prices on domestic prices will likely be much stronger once their price and trade reforms get underway, because of their smaller size and greater dependence on international and interstate trade.

123 and higher-quality breads were being offered in dear tendency to narrow since January. Because of place of milk and lower-quality bakexy items. the geographic separation of markets, excess de- Production of processed foods declined because mand in one oblast has not necessarily attracted of the sharp fall in orders and inadequate supplies the excess supply of its neighbor. The constraints of raw materials. Output in January 1]992was be- include transport, with most of the industry still in low that in January 1991 for sausage (61 percent the public sector, and access to food supplies for decline), meat (31 percent decline), milk products private agents engaging in commercial trade. (46 percent decline), and cheese (31 percent de- Local authorities in many areas intervene in cline). Production of butter increasecd by 18 per- food markets through price controls and other cent because butter is storable and because its trade restrictions. Those price controls explain price was liberalized, while the price of fluid milk some of the relative stability in prices for meat and was still controlled at low levels. Sugar production many other agricultural commodities since Janu- fell sharply Production of flour, bakery products, ary. They also explain the increasing incidence of mixed feed, and beverages also fell. Cinly for sug- shortages for particular commodities, although ar, and perhaps for mixed feed, did the decline in the situation is not nearly as severe as it was in De- production reflect the inadequate supply of raw cember 1991. For example, according to a weekly materials rather than lower demand. Output in survey of food markets conducted by the State the food processing industry recovered somewhat Statistical Committee, beef was unavailable in after January, however, in response to the decline state retail outlets in 25 percent of sampled cities in in household stocks and the increase in demand. early May, but it was available in most colective By the end of January food prices had leveled off farm markets. The gap between prices in collective (Table 7.6 and Figure 7.2). Another smaller increase farm markets, which are virtually uncontrolled, in February and March reflected wage increases for and state prices has widened, reflecting increasing employees paid directy from the state budget and excess demand for food in state retail food stores. increments in old-age 1pension 1. 1l.payrments. 1, Both1 ContnuedContinued l~~mprovementin the availability of wage and pension increases had been deferred to February because of a shortage of cash. The i- food in retail markets will require restraints on creaeicoms i cahcntriute toa mderte rowth in nominal income and accelerated reform increase in prices registered in early February. By at the enterprise level in transport, processing, dis- late February the assortment of foods available in tribution, and trade. Monopolies in processing stores sampled by Goskomstat1 7 in . 120 cities. . through-1 ~~~~anda distribution and the dominance of state enter- out the Russian Federation had increased. prises impeded downward adjustment of prices in As of March 1992 retail food prices had in- January 1992, when excess supply was evident. creased 6 to 13 times over average 1991.prices (Ta- Locally imposed price ceilngs and restrictions on ble 7.7 and Figure 7.3). The higher prices reduced trade are not the answer, since they impede the the real incomes of all consumers and created creation of an integrated marketing system and re- hardships for poor consumers on fixed incomes. duce the welfare of producers and consumers. However, with the leveling off in retail prices in Recent price and income trends suggest that late January, the position of Russian consumers there is some scope for further increases in consum- began to improve. Between late January and late er food prices without a need for additional wage April the price of a basket of seventy basic food adjustments or higher consumer subsidies. How- commodities increased by about 35 percent while ever, given growing discrepancies in income, par- nominal per capita incomes increased by about ticularly the lagged adjustments in pension pay- 190 percent. As a result of the lagged aadjustment ments and minimum wage, the need for an effec- in nominal incomes the share of monthly nominal tive food safety net program remains very strong. income needed to purchase a basic foocdbasket fell Despite substantial increases current retail pric- from 88 percent in January to 38 perce:nt in April. es in Russia are still low compared, say, to retail In December, 1991 the food basket share had been prices in the United States (Box 7.3). Although the an even lower 22 percent but consumers still con- prices are not quite comparable, since no acdjust- fronted shortages, long lines, and other costs. ments have been made for better quality, conve- A national market for food commodities does nience, packaging, and higher value added in the not yet exist in the Russian Federation. Regional United States, they do show that Russian prices price discrepancies are large and have shown no still lag far behind world prices.

124 Figure7.2 Changesin retail pricesfor selectedfood commoditiesin Russia after price liberalization,1992

A. Nonsubsidized commodities

Rubles per kilogram 180

160 - Butter

140 -

120 -

100 _ Beef, grade 1 80 ------,,- -- -- ,,-- - -_-, - - -

40 Sugar

20------

0 Jan 21 Feb 21 Mar 21 Apr 21 May 21

B. Subsidized commodities Rubles per kilogram 6

Milk,fluid ------5~~~~~~~~

4 - 0 Bread, wheat

0 Jan 21 Feb 21 Mar 21 Apr 21 May 21

Source: Derived from Goskomstat Russia data.

125 Figure7.3 Increasein retailfood prices in Russiafrom March1991 to March 1992

Pork

Butter--e;j

Margarine |

Beef

Sugar '- ,': '*'*

Vegetable oil

Poultry _ 5_

Rice e

Milk* _'N _* ,

Wheat flour 3

Bread *

0 2 4 6 8 10 12 14 Times increase Subsidizedcommodities as of March1992. Source:Derived from Goskomstat Russia data.

Box 7.3 Increases in and international parity of retail food prices in Russia

March 1992 Increase April 1992 Russian retail pricea (number of times) U.S. retail prices Russian retail Commodity ($/kl) over 1991 ($/kg) price parity Beef 0.57 10 5.70 0.10 Pork 0.61 13 4.36 0.14 Poultry 0. 40 9 1.87 0.21 Milk (per liter)b 0.03 7 0.73 0.04 Butter 0.86 12 4.22 0.20 Wheat flour 0.07 6 0.53 0.13 Breadb 0.03 6 0.75 0.04

a. Convertedinto U.S.dollars at $t=R125. b. Subsidizedprices. Source:World Bank 1992.

126 Impact on farmgate prices and marketing costs For agricultural inputs, however, farmgate prices increased rapidly, rising to 12 to 39 times Adjustment to price liberalization can be particular- the levels of the year before. As a result econom- ly slow when the state owns and operates most of ic incentives for agricultural producers deterio- the land and agroindustrial enterprises. As part of rated. Efforts to improve farm incentives by rais- the ongoing process of instantaneous privatization, ing producer prices will result in higher retail state monopolies are being converted into private, food prices, with particularly high increases in quasi-private or pseudo-private monopolies. Even prices for milk and bread if subsidies are elimi- two plants located next to each other had different nated. The alternatives are to cushion the impact assigned territories and these territorial divisions re- at the retail level through consumer subsidies main in effect even at present. There have been sev- (which will have immediate impact, but will eral reports of monopolistic price gouging following have higher budgetary costs) or to lower market- price liberalization in the Russian Federation. These ing margins. Monopoly rents and higher market- assigned market territories must be removed and ing costs because of inefficiencies must be re- competion among enterprises must be promoted. duced, but that may be difficult to achieve in the After price liberalization state-owned producers short-term. and distributors of farm inputs raised input prices immediately to reflect higher costs, operational inef- economy, marketing margins for food commodi- ficienciesand, possibly,monopolyrents.ItisstiHtoo ties were below 10 percent, an incredibly low soonfciencan cposiby m polyren It is stillato level by any standard. Following price liberaliza- soon for a comprehensive picture of how farmgate tion, marketing margins rose to an estimated 50 prices have responded or how much competition to 70 percent, (Table 7.9). Some of this increase is state and local procurement agencies now face. In due to lower subsidies and higher marketing the case of grain the state procurement quota ac- and processing costs. There is some evidence, counts for so much of output that little effective however, that state monopolies and monopso- competition is likely to develop. State-owned buy- nies are capturing rent at the cost of producers ers (at the local level) of farm produce appear not to and consumers. be passing the full benefits of liberalized retail prices Marketing margins are much higher in the on to farmers. United States than in Russia. However, U.S mar- A synthesized picture of the relative increases in gins reflect greater amounts of value added livestock product prices at the farmgate and retail down-stream from the farmgate, from greater levels (Box 7.4) shows that from April 1991 to March processing and quality control, and better pack- 1992 retail prices increased more than twice as fast aging and convenience to consumers. The last- as farmgate prices (also see Table 7.8 and Figure ing solution is not to control marketing margins 7.4). This is not surprising considering the massive (as is done now for some items) but to foster cutback in retail price subsidies that occurred as competition through demonopolization, privati- part of the January price liberalization. zation, and enterprise reform. This is a slow process, however, and will constrain rapid adjust- Box 7.4 Relativeincreases in livestockpro- ment to existing price reform. duct pricesat the farmgateand retail levels in Russiafrom March 1991to March1992 Measures to promote competition Increasein Increasein farmgateprices retailprices Although monopolies are a serious problem in Foodcorn,modity(numberoftimes) (numberoftimes) food retailing and processing, poorly developed Cattle/beef 4.4 10.2 market information, lack of flexible links among Hogs/pork 6.1 12.7 markets, and poorly defined ownership of prod- Poultry 5.0 8.9 ucts also impede improved performance in the Milk 5.6 7.1a food distribution system. It is important to Eggs 5.5 - monitor farmgate prices to keep abreast of the Butter - 12.3 arrangements farms are making to dispose of --Not available. their output, of how prices are being deter- a.Subsidized retail price. mined, and to what extent farms are being affected by agroindustrial and marketing monopolies.

127 Figure 7.4 Increasein agriculturalfarmgate prices in Russiafrom March 1991 to March 1992 Outputs Wheat

Corn Hogs

Milk Eggs Poultry

Cattle

Inputs ___ Mixed feed A,. Graincombine ~

Tractor vR

0 4 8 12 16 20 24 28 32 36 40 Timesincrease Source:Derived from GoskomstatRussia and RussianMinistry of Agriculturedata and WorldBank staff estimates.

In the past political patronage resulted in a necessary agricultural inputs. As the transition system of price discrimination in which private period progresses, however, farmers' access to farms received the lowest prices and state and resources must be increasingly tied to evolving collective farms the highest prices for the same market conditions. quality of produce. Over time the privatization State procurement quotas for agricultural of farms and enterprises, if accompanied by a commodities must be reduced and eventually rigorous application of antimonopoly and com- eliminated. Along with a change in procure- petition policies, will curb monopolistic rent ment policy, there is also a need to privatize the seeking and discourage price discrimination state procurement network, gradually transfer- among different kinds of farms. But in the next ring most of the marketing infrastructure and two to three years a more proactive stance may other facilities for storage and initial processing be required to prevent farmers from becoming to the private sector in order to create a competi- discouraged with the new system of rnarket pric- tive marketing system. Because of the monopo- ing before it has had a chance to take hold. listic nature of the existing network, it is impor- Privatization of agricultural input dealerships tant to encourage new private enterprises to en- is now under way and should continue to accel- ter the industry. It may also prove reasonable to erate. Local input dealerships could be encour- establish farmer-owned cooperatives and to aged to join into larger companies or farmer- transfer many of the existing facilities to the co- owned service cooperatives. However, such a operatives. Legislation permitting the establish- strategy should be consistent with the realization ment and operation of marketing and service of economies of scale and the creation of a com- cooperatives should be enacted as soon as petitive environment. During the transitional possible. period special efforts must also be made to guar- A private system of cargo transport is vitally antee to private farmers an adequate supply of needed for the creation of an effective agricultur-

128 al input and output distribution system. The scope, its method of functioning simple to com- process needs to begin by privatizing the majori- prehend, and its operation readily visible. ty of the existing truck transport companies. De- Should some form of price stabilization be nec- regulation and liberalization of transport tariffs essary for sociopolitical reasons, the policy are also recommended to encourage private sec- should be confined to the most basic staples, like tor involvement in cargo transport. wheat and bread, and carefully targeted. In general farm prices should not be managed through Measures to stabilize prices large buffer stocks held by the government. Some capacity to stabilize prices will un- Pressure on prices could intensify in the coming doubtedly be required during the transition, if months as producers demand greater compensa- only to avoid disarray in wheat consumption tion. This is evident in the recent confrontation and production centers as seasonal and region- between farms and the government over grain al price disparities occur. The Russian govern- procurement prices. Producers are demanding ment should seek to accelerate privatization of roughly a 25-fold increase in procurement prices the food distribution industry, so that it can over prices last fall (about 500 rubles per ton). pull out of direct administrative interventions Passing these prices through to consumers as soon as possible. would raise bread prices to 5 times their level on Doing so could, of course, introduce other July 1, 1991. The alternative of maintaining the problems. Rapid start-up of a large invest- low retail prices while allowing producer prices ment program might be needed to develop to rise would push consumer price subsidies marketing infrastructure, perhaps even requir- through the roof. Some sort of more limited con- ing investments at a level that exceed the fiscal sumer subsidy will probably be necessary, and financial targets established for other sec- however. sr.a m t tors during the stabilization program. This fur- Administrative measures to position food inm urban hot-spots as imports arrive and domestic ther underscores the need to replace state supplies are released from farm stocks and stra- management in the distribution of food and tegic reserves will need to be retained through agricultural inputs with new, decentralized, the remainder of 1992 and probably extended and price-responsive firms and marketing in- well into 1993 until interregional markets have stitutions, self-financed and operating in a time to develop. Equally critical will be a steady competitive environment. supply of food imports to top-up urban supplies and serve as a balancing mechanism to smooth Energy prce policy and its impact out sudden price movements. Over time the Russian government should Energy price reform rely increasingly on market mechanisms to achieve price stability. The agency established to Energy prices were increased in Russia on May coordinate the delivery of imported food to ur- 18, 1992. Diesel prices, which were 0.15 rubles ban hot-spots could, after the present emergency a liter in 1990, 0.20 rubles a liter in 1991, and has passed, be transformed into an agency for 0.85 rubles a liter in early 1992, rose to 6.0 ru- stabilizing basic food prices. Under the new eco- bles a liter in May 1992. While certainly a sub- nomic program the government of the Russian stantial increase the May 1992 prices were still Federation intends to reduce the need for food less than one-sixth of world prices (at an ex- subsidies while also providing incentives to change rate of 125 rubles to the dollar). Further farms to supply the market. There will thus be a increases in domestic energy prices are expect- need for government intervention to cushion the ed in 1992 for diesel and most other forms of least well-off consumers and producers from the energy, possibly to about two-thirds of interna- full impact of seasonal price fluctuations arising tional prices by the end of the year. Higher en- from liberalized prices. ergy prices for farms and rural households will The most important principle in designing a increase the costs of production, and cause fur- successful food price policy is to attempt only ther deterioration in agriculture's terms of what can realistically be implemented. This trade. It could also have major effects on the means that the policy should be restricted in profitability of farming and food processing.

129 Impact on agricultural production How these price increases might play out over the longer term is difficult to foresee. In the The former USSR ranked as one of the two or short-term they would be likely to cause imme- three most energy-intensive econornies in the diate contraction in most sectors of the econo- world (Table 7.10). In terms of energy consump- my. In agriculture the increase in costs of energy tion per dollar of GNP the former USSR and manufactured inputs would probably be matched Poland at a level of consumption felt immediately. Farms would have little ability much higher than that of other middle-income in the short run to respond to the higher prices developing countries such as Korea. and more by adjusting input combinations, introducing than 10 times that of West Germany and Japan. energy-saving improvements, or raising output The agricultural sector is affected by energy prices. It seems inevitable that production will price increases through three main mechanisms: decline in 1992 as a natural consequence of the * Direct consumption of petroleum prod- economywide adjustments that must be rnade. ucts-diesel, gasoline, lubricants, and kero- The task in the coming year or so will be to min- sene-by vehicles and farm machinery and for imize the impact and the period of adjustment heating in agriculture and to head off a too-severe de- * The use of fertilizers and other petroleum- cline that could be induced by panic and confu- based agricultural chemicals and of agricultural sion at the farm level. machinery, whose costs of production will rise as energy prices rise Impact on food processing and distribution * The costs of transport for inputs and outputs. The food processing industry, like the rest of the Overall the effect of higher energyi prices on manufacturing sector in the former USSR, is the average cost of agricultural proc[uction de- quite energy intensive. The same simulation of pends on the level of new energy prices, but the the effects of increased energy costs was con- effect may not be very large. Some activities ducted for unit food processing costs and pro- will be affected more than others. Crude esti- cessing margins as for agricultural production. mates of the impact of increased energy costs (The composition of the costs of the food pro- on the costs of agricultural production were cessing industry in 1987 is shown in Table 7.11.) made using the 1987 input/output table for the Were the full impact of energy price increases on former USSR. In the estimated scenario, petro- farm production passed on to food processors leum prices rise 1,000 percent (to 4,000 rubles according to the scenario described above, the per ton), gas and coal prices 800 percent, and overall unit cost increase, including higher costs electricity 500 percent. These assumed increases of raw materials and transportation, would be in energy prices imply a near doubling of oil very high (Box 7.5). prices over the level of May 1992 while other energy prices realign themselves into a more rational energy price structure. Box7.5 Impactof higherenergy prices on food The estimates show that increases of this processingcosts magnitude could result in a 35 to 40 percent rise (percent) in the average cost of agricultural production. Totalincrease increasedue Of this rise, higher petroleum prices would ac- in food to increased count for about 20 percent and increases in pric- production processing es of other fuels for the rest.4 A 1992 World Foodcommodity costs costs Bank study suggests that higher energy prices Meatand dairy products 41 51 would have a particularly large direct impact Fruitand vegetable on grain maize production (because of the high products 50 66 energy requirements of the maize drying equip- Oilsand fats 35 74 ment since maize is harvested in Russia at Cerealproducts 29 62 moisture levels much higher than world stan- Sugarand confectionery 33 61 dards) and on energy-intensive components of Otherfoods 44 73 livestock production, such as large-scale poultry production.

130 The increase in total unit costs of food process- Fertilizer prices are relatively closer to inter- ing would be highest in fruit and vegetable pro- national prices. Russia is a net exporter of ni- cessing (50 percent) and lowest in cereal prod- trogen fertilizers (urea) and a net importer of ucts (29 percent). But the rise in unit processing phosphate fertilizers (triple superphosphate costs would contribute the most to the total in- and diammonium phosphate). The farmgate crease in processing costs in oils and fats pro- prices for pesticides and veterinary medicines cessing (74 percent) and least in the meat and have also been reported to be very high. While dairy products industry (51 percent). domestic prices for farm machinery, diesel fuel, If these estimates are at all indicative of the and seed have skyrocketed, the prices are still kinds of adjustments that will have to be made in quite low by international comparison. This the food processing industry, profitability could level and range of prices indicate the large be reduced considerably in all subsectors. Thus price adjustments required for Russia's inte- production will probably fall in 1992 and 1993 as gration into the world economy at an exchange the new energy prices work their way through rate of 125 rubles to the dollar. However, in- the industry. Governments of the newly indepen- comes policies must necessarily be an impor- dent states need to take strong, appropriate tant factor in determining the sustainable pace measures to foster the transition to a more effi- of future price increases. cient industrial organization since a return to the direct and implicit subsidization of the past Declining profitability (which was unsustainable even then) is not a viable option in the long run. Enterprise reform and The preliminary results of a 1992 World Bank privatization must be pursued vigorously to im- study based on current prices for winter wheat, prove energy and production efficiency. maize, and poultry indicate that financial profitability in agriculture has declined rapidly from 1990 to 1992. While wheat and maize remain profitable, poultry production has become un- Price distortions and the exchange rate profitable. Poultry producers are not even able to recover their variable costs, and profitability may decline even more as new economic re- In Russia, domestic producer prices are still low, ms aecintded. and relative prices are highly distorted by inter- Production costs and financial profitability 1ationalstandards (see Table 7.12 for crops, Table for selected livestock products are reported in 7.13 and Figure 7.5 for livestock, and Table 7.14 Table 7.15. The level of profitability is influ- for fertilizer). Fertilizer may be the lone excep- enced by Thea ed e a rate, energy tion. Domestic prices of crops, livestock products, prices, and the magnitude of fixed costs. Fur- other agricultural inputs (seed, feed, farm ma- ther energy price increases will reduce farm chinery, fuel), and most imported agricultural profitability. At a unified exchange rate of 125 outputs are still far below international levels. rubles or higher, profitability levels will decline The recent shift to a unified exchange rate will even more because of the strong reliance on boost the implied domestic prices for imported imported agricultural inputs, including live- agricultural inputs and outputs and lower export stock feed. Before July most agricultural im- prices (in terms of dollars) for domestically pro- ports were being priced in the domestic econo- duced agricultural inputs and output (Box 7.6). my at an exchange rate of 5 to 30 rubles per At an exchange rate of 125 rubles to the dollar dollar, so at a unified exchange rate of 125 ru- the farmgate price is only 50 to 70 percent of the bles the prices of imported agricultural inputs international price for wheat and slightly higher will be 4 to 25 times higher. The impact of a for maize. Livestock product prices are one-fifth higher unified foreign exchange rate will be to one-third of international (U.S. farmgate) particularly large on production activities with prices. Adoption of world prices for wheat a high import content, such as the poultry would intensify the bread price dilemma facing sector. the government. If subsidies were eliminated en- Financial profitability in the agricultural sec- tirely, bread prices would be nearly ten times tor is central to successful reforms. Otherwise, higher than they were on July 1, 1992. there will be little incentive for more efficient

131 Figure 7.5 Farmgateprices for selectedlivestock products in the UnitedStates and Russia,Marchi 1992

U.S. dollars per ton 1400

1200 - United States 3 Russia 1000 _

800

600

400-

200 -

0 Cattle Hogs Poultry Milk Eggs

Note:Prices in Russiaare convertedinto dollars at an exchangerate of US$1= 125rubles. Source:Derived from RussianMinistry of Agricultureand U.S. Departmentof Agriculturedata.

Box 7.6 Domestic prices, exchange rate unification, and trade liberalization Although domestic relative prices have moved closer to world relative prices through changes in the terms of trade, the domestic price levels of both inputs and outputs declined considerably with unification of ruble exchange rates, and prices are now far from world levels. This gap between domestic and world prices has several implications. The first relates to anticipated changes in terms of trade. Although prices of fertilizer and chemicals relative to output prices in the first part of 1992 appear to be roughly consistent with ratios in North America, both can be expected to move up significantly in. the months ahead. Prices of exportable agricultural inputs, particularly chemicals, will probab]ly rise faster than prices of tradable outputs, such as grain. Prices of tradable agricultural products will increase eventually to world levels. The domestic price level that corresponds to world levels depends on the strength of the ruble, and greater openness will strengthen the ruble. In the past agricultural producers could not participate directly in export markets and were shielded from the real cost of imported inputs, such as feed grain. Liberalization of agricultural trade will eventually improve the profitability of agricultural production, but it will place immediate upward pressure on retail food prices. The pressure will be substantial even if macroeconomic policy is not inflationary. Prices will not immediately jump to world levels, but policies to ensure that the poorest and most vulnerable people are adequately nourished will be even more important in the future, when depleted household stocks will be unable to cushion price increases.

132 producers to engage in agriculture. In the ab- price scissors and falling farm profitability. The sence of reasonable profits (but not so large as to barter terms of trade for selected agricultural discourage restructuring and efficiency im- commodities clearly indicate that farmers are provements) there will be little incentive to pro- facing a severe economic squeeze (Box 7.7 and duce for the market in the short term or to in- Box 7.8). Part of the movement is due to perva- vest in capital, technology, and land improve- sive monopolies in input and product markets. ments for the longer term. Furthermore, low In response to the worsening terms of trade profitability will lead to low farm income and producer price subsidies for livestock products low purchasing power for agricultural inputs were reintroduced on May 1, 1992. Farms have and consumer goods, no capacity to repay loans also demanded higher prices for grain from this or to receive new ones, no savings (retained year's harvest, and thus far the Russian govern- profits) to self-finance at least a portion of need- ment has offered prices (10,000 rubles per ton for ed investments. As a result, planned reforms wheat) which are about three times the March will have only a limited chance of success. 1992 prices. This will likely improve the barter terms of trade for wheat (assuming input prices). Deteriorating terms of trade Following the recent grain price increases, diesel fuel once again is cheaper in terms of wheat in In the 1980s the policy of the former USSR was Russia than in the United States. Agricultural to shield the inefficient agricultural sector as barter terms of trade in Russia compared with much as possible from potentially adverse those of U.S. agriculture vary a great deal for dif- movements in the agricultural terms of trade. ferent agricultural inputs and outputs. While the Official procurement prices were adjusted up- wheat-based price of agricultural machinery in ward several times (Figure 7.1) in response to Russia remains much lower than in the United higher input prices. Agricultural input manu- States, there are substantial qualitative differenc- facturers were adept at persuading the State es between Russian and U.S. farm machinery. Price Committee that new specifications and More recent data are not available for fertilizer quality improvements to their products justi- prices. However, with the increase in energy fied higher prices. Better quality products also prices in May it is likely that wheat-based prices seemed to find their way into the informal par- for fertilizer in Russia remain above those in the allel markets (at higher prices), leaving lower- United States. This reflects the fact that fertilizer quality goods to supply the official outlets. 5 is the most easily exportable of the major agri- In 1991 the prices of farm inputs rose faster cultural inputs and its price is most rapidly ap- than procurement prices for agricultural prod- proaching world prices. In the livestock sector ucts (Figure 7.4). Although procurement prices the terms of trade for cattle production, an ex- were increased in 1991, input prices increased tremely important component of the agricultural even more, as control over input prices deterio- sector in Russia, seem to have deteriorated. rated. In Russia, for example, prices received by Farms had to sell many more tons of cattle or farms for their products increased 60 percent milk in March to purchase a ton of mixed feed, from 1990 to 1991, while the prices by farms paid but slightly less hogs and poultry than in the for inputs increased 93 percent (Table 7.16). United States. Since March the position of Rus- One objective of price liberalization in Russia sian farms seems to have worsened. was to strengthen incentives for producers to The ongoing adjustment in terms of trade has market their accumulated stocks. Another objec- several potentially positive impacts: farm inputs tive was to boost agricultural terms of trade will most likely be used more efficiently, on-farm above the level that would have prevailed in harvest and postharvest losses will likely de- 1992 with price controls. Both objectives were cline, and inefficient production activities will partially achieved. Incentives to market and to contract, especially in the livestock sector. The produce were better than they would have been efficiency and profitability of farm enterprises in without liberalization, although even with this the long term will undoubtedly increase as a re- improvement, terms of trade for agriculture are sult of these changes. However, it may take sev- worse now than they were at the end of 1991. eral years to fully realize these benefits. Movements in prices of inputs and output have Whether the changes in terms of trade and raised concern about a widening agricultural the decline in profitability arise from correction

133 Box 7.7 Barterterms of trade for the crop sectorin Russiaand the UnitedStates

Tonsof wheatneeded to purchaseone Country/year Graincombine Tractor Tonof urea Tonof dieselfuel Russia 1990 157 26 0.39 0.44 1991 233 55 0.62 0.52 1992 (March) 294 71 2.33 1.76 a

UnitedStates 1992 (March) 741 b 127b 1.24 1.80

a. May 1992prices after priceincreases. b. Not comparablesince it doesnot reflectsizable quality and servicedifference between U.S. and Russianmachinery. Source:World Bank1992.

Box 7.8 Barterterms of trade for the livestocksector in Russiaand the UnitedStates

Tonsof livestockproducts needed to purchaseone ton of mixedfeed Country/year Cattle Hogs Poultry Milk Russia 1990 0.05 0.06 0.07 0.27 1991 0.08 0.09 0.10 0.46 1992 (March) 0.22 0.18 0.23 0.98

United States 1992 (March) 0.13 0.20 0.27 0.64

Source:World Bank1992.

of past privilege or imposition of new penalties, on January 2, 1992, and any procurement of farm producers will need assistance in adjusting. The output by government agencies is now to take old favorable terms of trade are built: into pro- place at so-called market prices. duction technologies, and farms cannot re- The system of state orders for agricultural spond instantaneously to new relative prices. procurement has also been modified in other They can and will respond over time, however. states (Armenia, for one). Responsibility for de- The magnitude and nature of the response determining production needs and ensuring depends on whether new relative prices are per- liveries has been devolved to lower-level au- ceived to be transitory or permanent and on thorities, who set targets in consultation with how the chosen intervention (direct payment, state and collective farm managers. However, output price subsidy, input price subsidy) alters the old legislation remains on the statute farm-level perceptions of profitability. books. Annually revised agreements drawn up by the local authorities specify the time sched- Market adustment and price prospects ule for deliveries, quantities, grades and quali- ties, and the enterprise in the processing-distri- A continuation of the traditional cost-plus basis bution system to which the produce is to be de- of price formation is not consistent with livered. Price-zoning systems maintain a increased economic efficiency The system of state segmented market, and the logic behind price orders was modified in the Russian federation differentiation still serves to blunt incentives

134 for productivity improvement. The formal re- and sell and their access to quality services not voking of these arrangements by the other now available. However, the implementation of states and removal of associated legislation the privatization program and its impact on would provide a very clear signal to farm man- promoting competition in agricultural input agers that they are now free to make their own and output markets and provision of services production and marketing decisions, as is the needs to be carefully monitored. intention of the Russian legislation. While price policy changes are transmitted Notes quickly through the economy, appropriate structural adjustments take some time. In the 1. Before price liberalization consumers faced essen- case of Russia, structural adjustment is further tially three sets of food prices, depending on where complicated by the lack of necessary legal, ac- they made their purchases. The lowest prices were counting, financial, and regulatory infrastruc- the government-set prices (fully controlled official ture. Any adjustment in the real sectors to an prices) in the state-owned shops (beef at 8 rubles per instantaneous price liberalization policy is kilogram in 1991, for example). "Negotiated" prices bound to be slow. The accelerating structural (semicontrolled prices set at the discretion of the re- adjustment process will require the implemen- tailer but on the basis of government guidelines) in tationof several preconditions, including an state-owned shops managed on commercial lines tation of several preconditions, including an and in consumer cooperative outlets were at a mid- appropriate legal framework, private owner- dle level (beef at around 25 rubles per kilogram). The ship, financial discipline, and institutional ca- highest prices were the relatively free (uncontrolled) pacity that is responsive to the emerging needs prices in the collective farm markets (beef at around of a market-oriented private sector. 100 rubles per kilogram, but of superior quality). It is not clear how the key input-output price Price differentiation did not always correspond ex- ratios faced by farm managers will change in actly to this typology of retail outlets: some state the remainder of 1992 or what effect this will shops operating under "commercial" rules of busi- have on agricultural production. However, the ness might also charge "free market" prices for some waveorris posiblity remain. tHateireasin items (for example, butter). The proportion of the to- of state -oned inp distribtrs and tal amount sold at different prices varied by com- numbers ofstate-ownedinputdistributorsmodity. Virtually all bread, for example, was sold at marketing enterprises will learn how to use state prices while the bulk of fruits and vegetables their dominance at the farm level to garner mo- was sold at market prices, even in state or coopera- nopoly rents. Likely confusion in the farm sec- tive shops. tor owing to disruption of the state and collective farm structure also threatens improve- 2 Meat prices were roughly tripled, with even larger ments in the position of farms. increases for beef. Milk product prices in state outlets mentsposition in theof farms. were increased by 130 percent, with larger increases Government should remain resolute about for butter and smaller increases for fluid milk. Large the main objective, which should be adjustment increases were also enacted for bread, sugar, vegeta- to new relative prices. Interventions should not ble oil, and eggs. Prices for certain commodities, impede progress toward that goal. Privatization such as coffee and vodka, which had previously been regulations, procompetition policies, and anti- increased, remained unchanged, while the prices of monopoly regulations, which have been under perishable goods were made negotiable. debate for some time' ought to be the focus of 3. As reported in OECD (1991), the investment fund government attention. It is recommended that represented one-third of all farm investment that was the core of the initial enforcement effort be the programmedpresented onethiby the formerfarm USSRinvestment government tw in monitoring of the pace of privatization and 1991. Taken together the procurement price increases compliance with antimonopoly decrees by the and the new investment fund were intended to com- state-owned food processors and distributors, pensate state and collective farms for anticipated input distribution enterprises, and trucking production cost increases in 1991, without requiring firms. any fundamental change in farm structure or farm Implementation of privatization and demon- management. opolization policies is expected to promote 4. It is worth noting that these estimates rest on the competition at all levels of upstream and down- assumption that wages are not indexed in response stream agricultural activities. Increased compe- to the resultant escalation in the general cost of living tition there will spread farmers' options to buy (which would increase by 90 to 95 percent). Even a

135 partial indexation of wages would have a significant 5. Since the state input supply organizations were sep- impact on agricultural production costs, though the arate entities from the procurement agencies, the abili- impact is difficult to estimate since a significant frac- ty of farm managers to negotiate barter deals with tion of agricultural labor income is derived from self- suppliers was limited. employment, implicit rents, and the like.

136 8

Income support policies and the role of subsidies

This chapter examines policy options for encour- * Demonopolization and increased competi- aging restructuring in the food and agricultural tion in product and factor markets sector and providing financial assistance to agri- * Pricing at levels that correspond to interna- cultural producers and consumers during the tional prices and price parities transition. The chapter is organized around ele- * Liberalized domestic and foreign trade ments of subsidy and income policy and the po- * Tolerable levels of farm incomes and food tential effects of price reform. More specifically, consumption the chapter reviews the budgetary costs of food * A phase-out of consumer and producer sub- and agriculture subsidy programs, the Russian sidies, accompanied by improved targeting of in- government's 1992 subsidy programs, and con- come and consumption support programs. siders subsidy options during the transition that The structural adjustment will involve a tran- would also foster the reforms. The chapter also sition from the low-wage, low food price regime outlines options and recommendations for pro- that underpinned the command agricultural tecting the poor from the harshest effects of re- economy-both in the minds of influential deci- structuring and reform. The main focus of the sion makers and in practice-to a higher wage, analysis is the Russian Federation. higher price economy equipped with affordable safety nets and income supports (see Annex Ta- Incomes during the transition ble A8.1 for monthly nominal wages in the Rus- sian Federation). The dilemma for the short-term will be to design a set of policy interventions that can be understood and accepted by the many nomenklatura who remain in positions of In its desire for a rapid economic transition the influence without losing sight of the longer- Russian government faces several difficult policy term objectives of the reforms. It will require a choices. Now that state administrative and eco- delicate balancing act. nomic controls have been disassembled, the government must ensure that the temporary Strategy for the transition measures it takes to ameliorate price and incomes shocks do not impair its ability to move The most appropriate short-term solution to the the food and agricultural sector toward longer- serious economic problems faced by the food term objectives. These objectives include: and agricultural sector probably is not the * Privatization and widespread reliance on "pure" market solution. The market, as known market mechanisms in the West, does not yet exist and it will take

137 several years before all the pieces for a well- The length of the transitional period is diffi- functioning market system are in place. The cult to predict. In any case the structural adjust- legacy of seventy years of a centralized system ment of the real sector will not be instantaneous that pervaded all aspects of the agricultural sec- and may take several years. Since the first few tor cannot realistically be wiped out overnight years of the transition are critical, a strategy for Jr even within a year or two. Current socioeco- the transition should focus on at least the com- nomic realities do not allow a pure market solu- ing three agricultural years (1992/93-1994,/95).' tion. Trying to rely on one would threaten uncontrolled disintegration of agriculture. Subsidy policy before liberalization Some form of government financial assistance for the food and agricultural sector is a necessi- Costs and incidence of subsidies ty during the transition to market economy. The sector strategy should ensure financial Differential price bonuses were the most signifi- profitability for average producers while also en- cant category of agricultural subsidies in the couraging appropriate structural reforms. That 1980s. Until the late-1980s farm inputs were is, it needs to consider options for the transition also subsidized, and the budget covered the dif- that also move the agricultural sector along a ference between prices paid by farms and pric- more efficient and sustainable growth path. es received by input suppliers. Explicit input Measures are needed to facilitate contraction of price subsidies were removed in 1988/89, and the agricultural sector through a blending of farm procurement prices were raised to cover market forces and administrative measures and higher prices for inputs. The price subsidies to instill financial discipline and responsibility were particularly inappropriate because they among the array of farms and food sector enter- had no natural capping mechanism. prises that emerge from the transition. And the The state succeeded in raising food consump- government needs to accomplish this while pro- tion but at a cost of monetary instability and in- gressively retreating to a position of less active creasing budgetary costs. The increasing gap and direct involvement in agriculture. between rising procurement prices and nearly By the end of the transitional period the agri- constant official retail prices during the 1980s cultural sector (particularly the livestock sector) was being met by substantial and growing di- may need to be as much as 15 to 20 percent rect subsidies from the central government: (Ta- smaller, a major structural change by any defi- ble 8.1 and Figure 8.1). Trying to shield con- nition, and no small feat to accomplish. And sumers from the costs of an inefficient food and also by the end of the transition the govern- agricultural system by passing the costs on to ment will need to have transformed its own the budget was unsustainable, and the system role so that its primary focus is on such issues collapsed in autumn of 1991. as antimonopoly policies, safety regulations, in- At their peak between 1988-91 subsidies to vestment in infrastructure, agricultural re- agriculture and the food industry constituted search, technology transfer, and othe:r concerns between 10 percent and 12 percent of GDP (Ta- that are properly the domain of government. ble 8.2). Their share in 1989 in the total costs of Subsidies should be used sparingly to pro- several foods at the retail level was large (Table vide income support for the truly poor and to 8.3). Producer and consumer subsidies account- encourage the adjustment of production and ed for the bulk of state price intervention. consumption activities to a sustainable bal- Indirect subsidies were also large during this ance. Within the limitations of the govern- period, though cost estimates are not available. ment's budgetary capabilities some financial Domestic prices for fuel and energy were far be- cushioning will be required to mitigate the low world prices. Interest rates to borrowers were worst hardships of the transition. The guiding well below market- clearing levels. Different ex- principle of subsidies should be to focus on change rates were applied to specific impcrted production activities that will have a future in agricultural inputs and outputs and represented the new market-driven agricultural sector. The large implicit subsidies to both producers and encouragement of efficiency and growth must consumers. By 1991 these indirect subsidies may be the ultimate objective. have been well over 5 percent of GDP.

138 Figure8.1 Retailfood subsidiesin the former USSR,selected commodities and years, 1970-90

Billion rubles 110

100- Sugar Potatoes 90 Eliil Grain

80 - Milk

70 -Fish Meat 60 -

50 -

40 -

30 -

20 -

10 0~~ __iiiiii _

1970 1975 1980 1985 1990 Source:Derived from USSRMinistry of Financedata.

Consequencesof subsidy policy All the costs of delivering a better product to market had to be borne by the budget as long as In an economy in which the government con- retail prices were fixed. This proved to be an ef- trolled virtually all prices and had a dominating fective brake on investment in food processing. influence on resource flows, subsidies are an arbi- The changes in food marketing that normally trary indication of the extent of economic distor- would have been expected to accompany income tions. The subsidies unquestionably had major growth and urbanization over the past two de- deleterious effects on agriculture and the econo- cades never took place. The backwardness of my as a whole. Agriculture, through subsidies food processing and retailing is a direct conse- and the monetization of the budget deficit, both quence of retail price policy. contributed to and was victimized by the conse- Low retail prices and uncertain supply at those quent growth in the monetary overhang and de- prices encouraged consumers to hold large in- terioration of the ruble. ventories, with resulting waste. The way the sub- Agricultural producers, lacking confidence in sidy was paid also stimulated waste: processors the ruble, refused to sell their output, instead us- paid for raw materials at subsidized low prices ing it in costly barter trade or increasing their in- that already reflected the subsidy and so could ventories. The growing wedge between official write off waste and loss at a low cost.2 Food sub- prices and market prices generated large econom- sidies were so high they exceeded government ic rents, and activities sprang up to capture those expenditures for health and education. Unless ag- rents, such as the movement of organized crime riculture's drain on the budget is reduced, the into wholesale food trade, as has been widely re- government will find it difficult to finance the ported. Excess demand in food markets contin- safety net of social welfare programs-including ued to worsen, depleting shelves in state food unemployment insurance and welfare services- stores and pushing up prices on the free market. that will be needed during the transition.

139 Before food prices were liberalized, the Russian sources were introduced in conjunction with the Federation absorbed about 55 percent of total con- energy price increases of May. sumer and producer price subsidies in the former Estimated producer subsidies for calendar USSR (Table 8.4). Meat alone accounted for about year 1992 and projected subsidies for crop year half the total subsidy and milk and other dairy 1992/93, based on Russian government projec- products for about a quarter (Table 8.1). Con- tions for agriculture and the food industry, are sumption patterns for these two commodities summarized in Box 8.1. For the low-case variant demonstrates the subsidies' regressive nature. estimates for the first two quarters of 1993 as- Throughout the former USSR per capita consumed no further increases in domestic fuel and sumption of highly subsidized commodities was energy prices; the high case assumed further greater in urban than in rural areas and in richer movement toward world prices for fuel and en- than in poorer areas. This is not surprising, since ergy. The projections show that agriculture pro- meat has a high income elasticity of demand. ducer subsidies could total between 776.4 billion and 868.4 billion rubles for 1992/93. Rapid infla- Current income support and subsidy situation tion is expected to alter the nominal values of these subsidies, but their share of GDP-5.7 to Agricultural producer subsidies 6.4 percent-is expected to hold. Budgetary allocations for farm investment are As part of the January 2, 1992, price liberalization being directed to state and collective farms to fi- producer and consumer subsidies in the food and nance livestock housing, storage, and other pro- agricultural sector were reduced dramatically, duction-oriented investment. Funding for the de- dropping from about 12 percent in 1988-90 to less velopment of private farms through the Association than 2 percent of GDP in the first quarter of 1992. of Peasant Farms and Cooperative of the Russian While price liberalization resulted in higher pric- Federation (AKKOR) could easily rise even fast- es at the farmgate, these increases were not suffi- er than inflation, as the number of private farms cient to compensate for higher input prices or to continues to expand. Most of this allocation is keep agricultural production profitable. used to provide seed money, to subsidize inter- With the harvest season still months away est rates, or to provide guarantees for commer- farms were almost totally dependent on live- cial lending to new private farmers. stock products for income. But it was particular- Allocations for farm operating expenditures rep- ly meat and milk production that was most un- resents funding for soil improvements and mea- profitable. By March farmgate prices covered sures to control the spread of livestock and plant only 60 percent of the average costs of beef pro- diseases. Many of these services are provided by duction, 75 percent for poultry production, and the private sector in market economies. Interest 80 percent for pork production. Lagged adjust- rate subsidies for agricultural credit were intro- ments in wages of state and collective farm duced by the February 29, 1992 Presidential De- workers threatened to drive these figures even cree "On Measures to Organize the Spring Sow- lower. While there is a strong economic rationale ing and Harvest in 1992." The Central Bank is for downsizing of the livestock sector, extreme covering over 50 percent of interest on agricul- unprofitability threatened the financial viability tural loans, which will be reimbursed from bud- of most Russian farms and the prospects for the getary sources. 1992 crop harvest. Partly in recognition that a phased transition Producer price subsidies were reintroduced on from plan to market was needed in Russia's food May 1, 1992. Livestock producer price subsidies and agricultural sector and partly in response to are at 61.3 billion rubles. However, even with the political pressures, the Russian government rein- subsidies farmgate prices cover only 73 percent troduced producer price and other subsidies in of the state-estimated average cost of production May 1992. Part of the jump in producer subsidies for cattle, 81 percent for poultry, and 92 percent in spring of 1992 reflected the government's de- for hogs (Table 7.15). Many farms are not receiv- cision to bring implicit subsidies out in the open ing these subsidies, however, because payment by making them explicit. Credit subsidies were mechanisms have not been fully worked out. expanded as interest rates were increased, and About 80 percent of livestock price subsidies are subsidies for fuel, lubricants, and other energy expected to go for milk and cattle. These state-set

140 Box 8.1 Estimatedagricultural producer subsidies in Russia,1992

Governmentaloutlays in billionsof rubles 1992/93 Typeof subsidya 1992 Low case Highcase Farm investment 177.7 298.0 358.0 Privatefarms (AKKOR) 34.1 58.2 58.2 Operationalexpenditure 43.1 59.3 59.3 Interestrate 66.0 98.5 98.5 Producerprice, livestock 61.3 100.5 100.5 Producerprice, northern areas 10.0 15.0 15.0 Socialinfrastructure 34.8 62.4 67.4 Fuel andlubricants 70.5 84.5 111.5 TotalSubsidy 497.5 776.4 868.4

GDP' 13,651.0 13,651.0 13,651.0 Subsidyas percentof GDP 3.6 5.7 6.4

a. The GDPand subsidyestimates refer to June 1992.The GDP andsubsidy estimates have since beenrevised upward but the precisein- formationwas unavailable. b. All othersubsidy estimates except this tableassume GDP of 15,726billion rubles for 1992. Sou,rce:World Bank 1992.

producer prices apply only to procurement-quota were generally priced at between 5 and 30 rubles sales, whose level for 1992 is about 55 percent of to the dollar; and the average exchange rate was actual 1991 sales. Since non-quota product sales about 15 rubles to the dollar. If that level of sup- are not eligible for the subsidy, it is impractical to port were to be retained, new subsidies would pass these higher producer prices through to con- amount to about 265 billion rubles at the unified sumers. Furthermore, it appears that livestock exchange rate of 125 rubles to the dollar and producers are being compensated for the shortfall would have to be financed from the budget. Add- in producer price subsidies through other bud- ing another 1.7 percent of projected GDP to the getary channels. subsidy burden for agricultural production, this A new subsidy for social infrastructure was in- would bring the total subsidy cost to about 7.5 to troduced simultaneously with the new producer 8 percent of GDP, a level which would be difficult price subsidies to compensate farms directly for to finance within the parameters of the stabiliza- higher production costs. The subsidy, introduced tion program. The exchange rate subsidy on im- by the April 4, 1992 presidential decree 'On ported agricultural inputs, particularly Measures to Stabilize the Economy of the Agro- feedgrains, can certainly be reduced. Industrial Complex," has been indexed directly The array of subsidy instruments in the 1992 to the costs of energy. While farms are paying for program is complex, incomplete, and inconsis- most energy price increases, they are supposed to tent with the directions' of longer-term sectoral pay only half of the new higher prices for fuel adjustment. The source of the misdirection in the and lubricants used in field operations. Howev- 1992 program is the subsectoral composition of er, farms are having serious problems getting the subsidies. While it is difficult to determine these subsidy payments. These subsidies are ex- precisely the breakdown by subsector, livestock pected to increase along with energy prices. producers appear to benefit the most. This is not Now that the exchange rates have been unified, a desirable allocation, in view of the limited the once implicit subsidies on imported farm in- long-term prospects for livestock production puts will have to be transferred on-budget if lev- and its need for restructuring. 4 els of production support are to be maintained. 3 The government's subsidy program is intended Before exchange rate unification imported inputs to arrest the deteriorating financial situation in

141 agriculture while also reducing the subsidy bur- al 0.6 percent of GDP (assuming that 10 million den on the state budget. However, there are worri- tons of imported wheat is sold domestically at some signs of the possibility of backsliding toward 10,000 rubles per ton). traditional levels of support, a potentially destabi- If domestic wheat prices rise to world levels lizing development. The tendency to expand the (nearly 20,000 rubles per ton) and bread prices use of secondary budgetary channels to compen- are 17.5 rubles a kilogram, the total subsidy bur- sate farms represents a regression to the practice den would be 3.3 percent of GDP. Passing world under the command-administrative system, when wheat prices completely through to consumers price signals to producers were overridden by de- would necessitate further increases in pension pendency on ad hoc budgetary allocations. payments and the minimum wage. Food imports other than wheat also pose a Consumer subsidies and income support threat to the state budget. Before July varying exchange rates were applied to food imports, with Consumer price subsidies in the first quarter of the average about 15 rubles per dollar. At an ex- 1992 amounted to only 10 billion rubles (only change rate of 125 rubles to the dollar, maintain- about 0.5 percent of first-quarter GDP) and ap- ing pre-July prices for imported food commodi- plied primarily to bread, fluid milk, and yo- ties other than wheat would require an addition- ghurt. As the price of raw materials rose in al 2.5 percent of GDP. Major price increases in spring 1992, however, the potential budgetary these goods are therefore essential, and a reduc- burden of these retail price subsidies increased. tion in import levels appears pending. Local governments by and large chcse to pass In a situation of rapidly rising inflation and higher wholesale costs for milk on to consumers, fluctuating exchange rates, the potential size of and the budgetary outlays for milk appear to consumer price subsidies is constantly changing. have been controlled. Exact information on cur- Assuming domestic wheat prices of 10,000 rent level of milk subsidies is not available, but rubles a ton, retail bread prices of 17.5 rubles a the milk subsidy cost is expected to be less than kilogram, no increase in the domestic prices of 0.5 percent of GDP for 1992/93. imported food commodities after July 1, and an The increase in farmgate prices has had a exchange rate of 125 rubles to the dollar, the cost much greater impact on the wholesale costs of to the budget of retail price and exchange rate bread than milk. Either retail bread prices will subsidies associated with food commodities skyrocket or consumer subsidies will. At the be- (milk, bread, imported wheat, and other import- ginning of July 1992 bread prices were 7 rubles a ed food commodities) would be roughly 4 to 4.5 kilogram (the price for high-quality bread, percent of GDP (2 percent for milk, bread, and which is not subsidized, was much higher). Do- imported wheat and 2.5 percent for other mestic wheat prices by July had reached 10,000 imported food commodities). rubles per ton. In the area of social protection the present cash If retail bread prices are not raised bread sub- benefit system (mainly pensions, unemployment sidies would soar to about 1.8 percent of GDP. benefits, sick pay, and family allowances) was The government has announced its intention of providing benefits well in excess of minimum raising bread prices by 150 percent, bringing subsistence levels earlier in the year. The rapid bread prices to roughly 17.5 rubles a kilogram. inflation of recent months has eroded the real With wheat prices of 10,000 rubles per ton this value of those benefits so much that by June 1992 step alone will lower bread subsidies from 1.8 the level of minimum pensions (900 rubles per percent to about 0.8 percent of GDP. person per month) stood well below the pro- Imported wheat accounts for roughly half of posed, and austerely defined, poverty line all wheat used in bread production in Russia. (1,300 rubles per person per month). Thus the higher unified exchange rate will increase costs for bread. Imported wheat prices Subsidy options for the transition (c.i.f.) are nearly 20,000 rubles per ton at the unified exchange rate of 125 rubles to the dollar. Program priorities With the domestic price of wheat at 10,000 rubles per ton there is an implied exchange rate subsi- The transition in agriculture must address three dy on imported wheat representing an addition- key issues: dramatic shifts in relative prices and

142 their realignment with international price parities, erosion in food purchasing power in the wake of reduced profitability of agricultural enterprises, price reform was not as great as it may be per- and an inappropriate institutional structure to ceived. The impact of the exchange rate unifica- cope with the new market-based economy. The tion will need to be cushioned, however, but that key to successful adjustment, however, is to avoid must be done within the constraints of the stabi- accommodating either the deteriorating terms of lization program. This cushioning would be best trade or the reduced agricultural profitability accomplished by letting domestic prices rise through resort to subsidization without restruc- gradually, rather than all at once, to international turing. Financial support during the transition price levels.5 must be tied to enterprise restructuring, particu- Far more important will be to provide transi- larly away from intensive livestock production, tion subsidies for agricultural producers, albeit on a and improvements in efficiency This will allow lesser scale than presently programmed in 1992. for a reduction of feed imports as well as subsi- Increasing efficiency is the only sustainable basis dies-which in turn will contribute to macroeco- for a profitable agricultural sector in Russia and nomic stability. in other states of the former USSR. Adequate ef- The priorities embodied in the volume and pat- ficiency gains will not be achieved without the tern of projected subsidies for 1992/93 will not establishment of a workable market infrastruc- contribute to macroeconomic stabilization. The ture serving the main production and consump- program agreed with the IMF for 1992 foresees a tion centers. Also required is the conversion of reduction of producer subsidies economywide to farming and the food industries into essentially about 5 percent of GDP. Yet the producer subsidy self-financed economic activities, responsive to projections for agriculture alone could amount to the discipline of the market. at least 6 percent in 1992/93. Adding projected In analyzing agricultural producer subsidies, consumer subsidies and monetization of implicit it is useful to distinguish production support exchange rate subsidies on imported inputs and from rural income support policies. These objec- food commodities would push the subsidy cost tives have been mixed together in the instru- to between 11.5 and 12.5 percent of GDP. This lev- ments chosen by the Russian government for de- el of subsidization greatly exceeds stabilization livering subsidies in 1992. Furthermore, there is targets and in all likelihood would aggravate in- no evidence of forward thinking about how a flationary tendencies in the Russian economy. more permanent safety net for disadvantaged The actions taken thus far in the Russian Fed- rural households might be organized once the eration represent a major improvement over the need for transitional production and profitability situation before the reforms. Before 1992 explicit subsidies fades away. producer and consumer subsidies were 10 to 12 In the short run government support for agri- percent of GDP and implicit subsidies were cultural production and incomes will be re- probably well over 5 percent of GDP in 1991. The quired to address the deteriorating terms of food and agricultural sector meanwhile, is ab- trade and declining profitability problems. An sorbing the effects of major policy changes this immediate elimination of subsidies could create year, such as increases in energy prices, higher an environment in which even the more efficient credit costs, the elimination of other implicit in- producers would be forced to shut down before put subsidies, and a higher unified exchange having a chance to adjust. rate. At 7 to 8 percent of GDP in 1992/93, explicit While large strides have already been made in producer and consumer subsidies, excluding price reform, progress in other areas will be subsidies to compensate for the higher exchange slower. To allow this process more time to take rate (4.8 percent of GDP), would be much lower place, some budgetary support to the agricultur- than they were in 1991. That level is still too al sector will be required during the transition. high, however, and threatens stabilization objec- These transitional subsidies should be phased tives. The subsidies must be scaled back this out as quickly as possible, however. Thus the year. That means that priorities will have to be overall approach in agriculture should be to pro- established and affordable options identified. vide a level of support high enough to boost The case for general consumer food subsidies is profitability so that efficient producers are en- quite weak except perhaps for bread. The analy- couraged to produce but not so high that ineffi- sis presented above suggests that the general cient producers can also continue to operate.

143 Interventions should be limited to the first meant to compensate farms for the recent in- three years of the transition period (beginning crease in energy prices. The criteria for allocating July 1, 1992 and running through June 30, 1995), and distributing these funds now are unclear and gradually phased out during that period so and need to be clarified. Furthermore, reductions that they are close to zero by 1995/96. Targeted in funding through both these channels should payments to consumers would be among the be encouraged. few remaining subsidies after that. At the same time attention needs to be given to Producer price subsidies. The producer price in- the design of future incomes policies for rural resi- terventions are not large enough to discourage dents. The need for such policies could escalate downsizing and adjustment in the livestoc:k sec- rapidly as the structural transformation takes tor. However, a number of problems are associat- hold in the agricultural sector. During the transi- ed with the use of producer price supports. First, tion rural incomes policies must address basic they force uniformity over a price region and re- subsistence needs of rural residents to head off duce price sensitivity to changing market sig- any sudden mass migrations out of rural areas. nals. Second, for such a program to work, the Currently, pressures arising from the general government must act as a buyer. Thus the rein- increase in energy prices and unification of ex- troduction of price supports may slow the devel- change rates are likely to push up subsidy levels. opment of a private procurement and marketing This process needs to be brought uncler control, system.6 Third, linking payments to production and the structure of existing subsidies needs to levels may eventually lead to an accumulation of be clearly tied in with the necessary structural government-held stocks. For Russia this is not changes in the economy. While the government expected to be a problem in the near future be- may hope to reduce the size of its inte:rvention in cause it is a large net importer of grain and live- the agrifood sector in the future, it is not clear stock products. But for the surplus livestock pro- how and when this will be achieved. ducing countries, such as Belarus, Ukraine, and As a practical matter the mechanisms for de- the Baltics, this could be a problem. The price livering subsidies in the remainder of 1992 will support program is relatively easy to administer, entail some combination of price and credit sub- which accounts for some of its appeal. sidies and direct income support payments to producers and consumers. Any set of these poli- Energy subsidies. On the basis of farm budget cy interventions will have secondary effects that analysis a recent World Bank (1992) study con- are likely to retard the process of structural cluded that the May increase in fuel prices will change. A guiding principle for subsidy pro- not radically alter the profitability of wheat programs during the transition, however, must be to duction but that the profitability of grain nmaize minimize these retarding effects. production could be seriously affected because of high energy use in drying. Since the current Evaluation of producer subsidies inventory of machinery and equipment is wasteful of energy, more energy-efficient machinery Direct income support. Government allocations may have to be introduced before substantial en- for direct income support could be reduced with- ergy conservation becomes feasible at the farm out harming agriculture's prospects during the re- level in response to higher energy costs. The de- structuring process. The potential danger of these sign, manufacturing, and use of more energy ef- payments is that they may go to shore up the fi- ficient farm machinery will take many years. The nances of inefficient farms rather than fostering impact of energy price increases on livestock farm restructuring. The two budget channels for production is expected to be more serious. The these payments are the "farm investment" catego- issue of energy prices needs to be examined in ry and the new "maintenance of social infrastruc- detail for both crops and livestock in light of the ture" category, which together are expected to evolving overall economic situation. Meanwhile, cost roughly 3 percent of GDP in 1992/93. to the extent possible, volume-based energy sub- In the past, the farm investment payments sidies should be converted to fixed sums. were a means of channeling resources to unprofitable farms. The Russian government has stat- Input subsidies. The subsidies to compensate ed that most of the farm investment allocation is for higher exchange rates for imported inputs

144 should be made transparent and included in the Considerations for fiture programs budget. The subsidies should be set in a way that moves relative domestic input prices into line For the economic reform effort to succeed will re- with relative world input prices and into line quire achieving macroeconomic balance through with agricultural input-output price relatives. In- a balanced budget and making any remaining ternational price parities for agricultural output, subsidies transparent and incorporating them in at an exchange rate of 125 rubles to the dollar, the budget. Thus lower subsidies should be an are now in the range of 0.2 to 0.4 for livestock important component of strategies designed to products and 0.6 to 0.8 for grain. reduce the budget deficit. The issue of who is eli- At this exchange rate subsidizing c.i.f. prices gible for such payments and at what level be- for imported agricultural inputs, excluding feed comes increasingly pertinent for the imple- grains, at 50 to 60 percent for 1992/93 would be mentation of the 1992 food and agricultural subsi- consistent with these goals and would cost an es- dy programs, if a return to the situation before the timated 100 billion rubles (World Bank 1992). reforms is to be avoided. This is about 0.6 percent of estimated GDP. To In the Russian Federation three main options help reduce losses and encourage a shift to more exist for managing subsidization during the rational livestock feeding programs, it is impor- transition. Each has appealing features, but each tant that the provision of critical inputs for agri- also has several undesirable characteristics. culture (pesticides, veterinary medicines, seeds, These options include: fertilizers, and protein feed) that are not pro- - Complete liberalization of domestic prices, duced domestically (or only in small quantities) with a reliance on import and export subsidies be assured. Adequate access to these inputs will and tariffs ("tariffication" ) to generate insulating allow the Russian Federation to reduce import wedges between domestic and border price pari- requirements of food and feed in the short run, ties and thus avoid too rapid price increases to in- and result in foreign exchange savings as well. ternational levels that would require massive income supplementation Other Other.subsidiesincludasubsidies. Reliance on consumer price ceilings and price guarantees at the farm-level to provide gen- the government program are interest rate subsi- eral, untargeted income support dies, allocations for the establishment of private * Expanded use of targeted income supple- family farms, and allocations for operational ex- ments for consumers and of producer income penditures. Interest rate subsidies are dis- supplements consistent with the goal of farm cussed in the next chapter. The motivation be- restructuring. hind special subsidies for the establishment of private farms is understandable. The danger in Import and export price wedges. Tariffication in- the government's current approach, however, volves manipulating the foreign trade regime to is that the newly developed private farming gradually raise the level of domestic prices to in- sector may fail to become self-supporting. The ternational levels, while letting internal markets desire to rapidly expand the number of the pri- operate more or less unfettered in the price dis- vate family farms should not outweigh consid- covery and price determination process (except erations of long-run viability and financial for intervention in the domestic pricing of im- discipline. ports and exports). Thus domestic pricing could Allocations to operational expenditures are be decontrolled, with remaining controls affect- used primarily for soil improvement and con- ing the much smaller share of agricultural value trol of livestock and crop diseases. These mea- added emanating from foreign trade. Tariffica- sures, if carried out effectively, will boost agri- tion also has the advantage of convenience and cultural production. Many of these measures administrative simplicity: no new institutions were not carried out effectively in the past, need be established to implement the policy and however. The twin questions now are, to what the tariffs and export subsidies could readily be extent do such operations really make economic modified to accommodate exchange rate adjust- sense, and would they be better implemented ments and changes in foreign exchange alloca- through emerging private and cooperative ser- tion policies. Further, the subsidy would be vice organizations or by the farms themselves? transparent and therefore easy to monitor.

145 The usefulness of tariffication decreases as the decontrolled pricing and impede adjustment in real effective exchange rate approaches its inter- consumption and production patterns. national equilibrium, which seems to be happen- Second, imposition of price controls w.ill pre- ing in Russia. However, its usefulness by no vent the use of price monitoring to identify hot- means disappears in an inflationary environment spots under the stabilization program, to track where "real" equilibrium is maintained by con- market development and performance, and to stant adjustments in the nominal exchange rate- monitor progress in regional market integration. as also appears to be happening in Russia. Indeed, Prices could no longer serve as an indicator of by dampening the constant upward adjustment in the incidence of monopolistic behavior or of the nominal prices and wages required in a situation continuation of policy-induced market fragmen- of high inflation to stay abreast of international tation brought about by the actions of municipal parities, tariffication can inhibit growth in money, and local governments. credit and wage fund, and therefore serve as an Third, the volume of actual subsidies will re- important counterinflationary instrument. main opaque under price controls, making the The main disadvantage of tariffication is its real incidence of subsidization difficult to deter- underlying requirement for fully functioning in- mine. Price controls are also likely to prove an external markets for agricultural commodities and cessively expensive means for achieving tolera- labor. Since agricultural and labor markets are at ble levels of social safety during the transition be- best only embryonic in the Russian Federation cause of their general, nondiscriminating nature. and the other states of the former l;SSR, adop- Finally, it is worth noting that the only feasible tion of a tariffication policy would require that means of implementing price controls within the confidence in the ruble as an acceptable medium Russian Federation's current economic administra- of exchange be rapidly reestablished. tion is through continued reliance on the already Further, a tariffication policy would also have pervasive state monopolies for commodities and to be underpinned by rapid progress in privatiza- inputs that would remain subject to control. Some tion, enterprise reform, and demonopolization features of this option are definitely antireform. eolicies(some of which are still being formulat- A variant on price controls is a per unit subsidy poiis(oeo hc r tl en omlt above production costs, calculated as either a ed); rapid implementation of agricultural land re- . p , form decrees and a politically difficult reformula- fixed stipend per unit produced (or sold) or an ad tion of the state and collective farm restructuring valorem payment to eligible enterprises. This ap- decrees; effective regulation and monetization of proach suffers from all of the shortcomings of the spontaneous and tunregulated foreign trade in price controls, plus the added administrative cost thersponturaneproducsand unregulate foathreigntly of having to accurately assess unit production agriu Rucsia inputs th tha brecently costs. In the cost-plus environment within which evolved in Russa im response to the breakdown marketing margins and prices are established by in the economic order; and the creation of a Russian enterprises, the application of per unit strong, much more responsive financial sector. margins above costs would tend to reinforce reli- Tariffication is thus not a viable option for the im- ance on cost-plus pricing, thus weakening incen- mediate future-certainly not before Russia's sta- tives for controlling production costs-which bilization program is well advanced, commercialization, privatization, and greater ex-

Price ceilings and guarantees. Price controls have posure to market forces are intended to stimulate. the appeal of being readily understood in Rus- Income supplements. A third administratively sia. Their use and administration would not rep- more complex option would be increased reli- resent a major departure from the kinds of in- ance on income supplements to ease the transi- struments used under central planning to bal- tion: in urban areas through wage, pension, and ance physical and financial targets against cash supplements and in the rural areas through annual and medium-term development plans. income supplements and budgetary transfers to There are several disadvantages, however. encourage farm restructuring. The advantages First, price controls will result in further distor- are several. The volume of subsidies and their tions of an already highly distorted price structure incidence would be fully transparent since the for food and agricultural inputs. Their i.mposition magnitude of subsidies would not be tied to pro- could block the all important signaling function of duction or consumption levels. Further, price

146 distortion would be minimal, and the transpar- were not included in the budget. In 1992, how- ency of this approach would permit adjustments ever, these three types of subsidies have been to be made as needed to maintain the volume of made explicit and account for over two thirds of subsidization within the resource constraint the total subsidies associated with the sector in faced by the government. 7 1992/93-8.6 percent of GDP. Remaining subsi- While income supplementation in various dies now are only about 3 to 4 percent of GDP as forms could be relied on to deliver program ben- compared with comparable explicit subsidies of efits in urban areas, the rural and farm compo- about 10 percent of GDP in 1992. nent will require special arrangements. Criteria Further analysis of the economic impact of for identifying eligible recipients must be de- various subsidy policy instruments on agricul- vised, and a simple delivery system must be set tural production, consumption, and reform is up. Further study will be needed to develop eligi- essential. For the remainder of 1992 steps bility criteria, although rigorous precision is not should be taken to restrain and reduce the over- important since most of the subsidies (except for all level of subsidies. For example, subsidies on the pure safety net elements) would be phased farm investment and on imported foods (other out in a fairly short time. than wheat) and feed grain should be substan- The focus of rural poverty has been fairly well tially reduced or eliminated. Particular care identified on a regional basis and the main direc- must be given to controlling the level of con- tions of adjustment in the agricultural sector can sumer price subsidies. Increasing the prices of be specified with some confidence. The construc- bread, milk and milk products, and imported tion and use of prototype financial statements foods could easily keep consumer price subsi- and farm budgets would probably guarantee dies below 2 percent of GDP in 1992/93. The to- that the bulk of rural income supplements tal volume of agricultural producer subsidies would go to those parts of the state and collec- should also be reduced to no more than 5 per- tive farm labor force and private farm house- cent of GDP in 1992/93. holds most affected by the adjustment program. The guiding principle for the design of the Because the program needs to be put in place 1993 program should be to favor policies that quickly and phased out soon no new administra- further the reforms and agricultural adjustment tive structures ought to be constructed in rural program and to avoid those that dilute the in- areas to implement the program. Rather, existing centives to adjust. Thus to the extent possible structures, such as the extensive branch net- production subsidies should be earmarked to works of the state-owned agricultural and sav- promote private farming and to help finance ings banks, could be used to transfer resources start-up capital and initial operating expenses and administer the program at the local level on and to restructure state and collective farms a commission basis. and the enterprises owned by these units in That approach has worked quite well in China ways that contribute to their genuine commer- and Turkey and could probably be readily adapt- cialization and, ultimately, their full privatiza- ed in Russia. These activities would have to be ful- tion.8 In particular the use of subsidies to com- ly segregated from the banks' ordinary banking pensate for declining profitability in the live- functions, and the fiscal transfers would have to stock sector must be scaled back to allow this remain separated from the bank's own resources. overextended sector to contract and adjust to more sustainable input combinations. Whether Suggested policy approach to subsidize feed grain imports in the wake of exchange rate unification needs careful study. The combination of producer and consumer Subsidies as a share of GDP will have to be subsidies in the food and agricultural sector in further reduced in 1993 to achieve macroeco- 1992/93 could be as high as 12 percent (Box 8.2). nomic stabilization goals. An important objec- This figure assumes no increase in domestic tive is to gain a firmer understanding of how prices for imported agricultural inputs and food quickly domestic price relatives can be allowed commodities after July 1 except for wheat and to move into line with international price rela- bread. Prior to 1992, subsidies for energy and tives under unified exchange rates without credit and those associated with the system of imperiling Russia's economic adjustment and differential exchange rates were implicit and stabilization efforts. If the need for subsidies

147 Box 8.2 Projectedtotal subsidycost in the food and agriculturalsector in Russia,1992/93 (percent of GDP)

Type of subsidy Producer subsidies Consumer subsidies Total subsidies Energy 2.7 2.7 Interest rate 1.1 - 1.1 Exchange ratea 1.7b 31C 4.8 Price 0.8 1.0-1.3d 1.8-2.1 Other 1.3-1.5 1.3-1.5 Total cost 7.5-8.0 4.0-4.5 11.5-12.5 Proposed subsidy cap 5.0 2.0 7.0

a. Assumes exchange rate of 125 rubles per dollir. b. Agricultural inputs. Average exchange rate for input imports was assumed to be 15 rubles to a dollar c. Wheat (0.6) and other food (2.5). Assumes an exchange rate of 15 rubles to a dollar for other foods and 62.5 for wheat. d. Bread (0.8) and milk (<0.5). Assumes bread prices raised to 17.5 rubles per kilogram. Source: World Bank staff estimates.

continues after the 1994/95 agricultural year, in dynamic developing economies as markets the government should rely on tariffication as deepen and new firms enter the market-unless much as possible to provide production and government intervenes to protect the monopoly. consumption support and on direct income Another important task is to determine early supplementation to provide a rural safety net. in the transition what changes are likely to occur Apart from political consideration.s the main over the medium term in the structure of com- rationale for subsidizing food and agricultural modity production, in regional production and production over the longer term is market failure. consumption patterns, and in farm input use Market failure can be induced by restrictive ac- and employment. These changes could be sub- tions of government or by economic, technologi- stantial. Knowing about them in advance would cal, and financial factors that result in natural allow for early identification of the likely "survi- economies of scale and an excessive concentra- vors" among subsectors and locales. Such infor- tion of market power. Government-induced mar- mation could help guide forward budgetary ket failures normally take the form of licensing planning and could serve as a standard against and other restrictions that create and sustain mar- which to assess progress in implementing other ket fragmentation (often to benefit favored aspects of the agricultural adjustment program. groups or to preserve revenue centers to safe- These investigations should also be directed at guard tax yields). designing the main elements of a rural social In the classical sense natural economies of safety net, including associated income policies scale emerge when the minimum efl-icient firm and the means for delivering income supple- size for organizing production is (quite large ments and social services to rural households compared to the total size of markets being under the new arrangements for local govern- served. Large, continuous production processes, ment that are evolving in rural Russia. such as refining and heavy industrial processes Organizing this broad analytical agenda would are examples. There are few instances of natural be greatly facilitated by the formation of a Food monopoly in the food and agricultural sector, and Agriculture Policy Joint Working Group to however, except where marketing infrastructure guide and oversee the work. The Joint Working is completely underdeveloped or when radical- Group should be headed by a member of the ly new technology is introduced. Natural mo- Russian Presidency's economic reform team, in nopolies that do exist are often associated with order to link this work directly to work on the dynamic disequilibrium in expanding and macroeconomic reforms, privatization, and over- developing markets, and so are temporary phe- all fiscal and financial sector policies. The mem- nomena that have tended to disappear quickly bers of the Joint Working Group should include

148 representatives of the food and agriculture, fi- parsimonious minimum level should receive no nance, and economics ministries; GKI, the Central compensation, just that it is not the first priority. Bank; other agencies dealing with food policy The social protection principles for the rural and agricultural reforms; and a few carefully se- population will be similar to those for the urban lected foreign experts. This Joint Working Group population, though details will necessarily dif- could also provide a link between policymakers fer. The peculiarities of rural demographics and in Russia and the international finance communi- employment patterns will need to be consid- ty for policy advice and development assistance. ered, and the absence of a functioning apparatus for administering poverty programs apart Protecting the poor during reform from the existing state and collective farm structure, will pose special problems. Some Measures are needed to protect the most vulner- farms and villages in marginal areas may even able groups from serious hardship, especially to need to be abandoned as the structure of Rus- insure minimum consumption levels for the sian agriculture adjusts to the reforms. There poorest as reforms unfold and prices adjust over are many other impediments to implementa- the coming year. Over a slightly longer time tion of the broad principles of social protection frame, measures are also needed to protect and in rural areas. redeploy those whose jobs are eliminated as the economy is restructured. Social welfare institu- Measurementofpoverty tions need to be established or adapted to protect minimum living standards (through One impediment relates to the definition of pensions, child allowances, and other transfer poverty. The concept of "social minimum," as payments) and to ensure delivery of essential used in most countries of the former USSR, is services in health and education as the economy inappropriate. It is based on a high-protein food becomes more flexible and as Russians become basket that is too high in saturated fat, too low more socially and geographically mobile, in carbohydrates and fiber, and far above sub- This section discusses only the short-term sistence requirements. Estimates of poverty based on this minimum are therefore unduly needs for a social safety net in response to price pessimistic. A revised poverty-level food basket and income shocks, although the response de- has been proposed by the World Bank, based on pends to some extent on the systems required for recent surveys of consumption patterns of low- protecting social welfare in the longer term. In income people and recommendations by the addition to protecting the poor these measures World Health Organization, adjusted for chang- must also be consistent with fiscal constraints, ing relative prices. avoid creating new disincentives (for example, The recommended revision of the poverty line through excessive taxation), and be capable of (1,300 rubles per person per month, which is cost-efficient and effective administration, equivalent to 125 percent of the market value of the revised minimum food basket) is still being Principles of social protection reviewed by the Russian Government. In any case, however, the principles that should govern Because fiscal constraints are so tight, politically the minimum subsistence level of food con- difficult trade-offs and compromises are inevita- sumption now seem reasonably well agreed. ble. Should the poorest and most vulnerable seg- Goskomstat and the Center of Preventive Medi- ments of the population receive full protection or cine, with World Bank assistance, are preparing should they receive only partial compensation so an annual family survey to monitor the effects of that some who are not quite so badly off can be economic reform on the well-being of individu- helped as well? For example, indexing of social als and families. Among other uses the survey benefits to minimum wages (the system fol- will be used to adjust the minimum food basket lowed until March 1992) meets the second objec- and poverty line as the transition proceeds. tive but not the first. This report urges that the A related impediment concerns the lack of a government ensure full protection of the poorest simple mechanism for precisely determining as its first priority for available financial resourc- which groups fall below the poverty line at a par- es. This does not imply that those above this ticular time. Identifying these groups is especially

149 difficult when prices are rising rapidly. The exist- can be traded, there is a danger that ccupons ence of regional and rural-urban differences in may come to be preferred to cash, therebv com- poverty line calculations creates especially knotty plicating monetary and fiscal management. Fur- problems. For this reason it may be preferable in thermore, a quantity-denominated food coupon the short term not to base the poverty line explic- carries on open-ended fiscal cost. There are also itly on a basket of goods, but rather on a judgment potentially heavy administrative demands asso- of what is enough to live on, parsimoniously de- ciated with the prevention of fraud. fined. Under the present system this judgment is The third option, direct feeding programs being made by local authorities. through hospitals, orphanages, schools, child care centers, and other institutions, is already Mechanisms for social protection being used and should continue. But it is only a partial solution since it does not reach many The third impediment concerns selecting an ap- groups in poverty or vulnerable to price shocks, propriate method for supplementi.ng the in- such as pensioners, children in large families, or comes of those whose subsistence is threatened the unemployed. The government's decision to by price adjustments. There are four broad op- sell humanitarian food aid on the market and tions; the effectiveness of each depends on en- use the counterpart funds for poverty relief pro- suring an adequate supply of basic foodstuffs grams rests at least implicitly on an understand- and other basic necessities: ing of this fact. * Continuing to subsidize the prices of a few The fourth option, cash compensation, has very basic commodities the advantage that it generates no distortions * Distributing quantity-denominated food in food markets and permits consumers to se- coupons to selected poor households that would lect their own food within the limits of their in- allow them to purchase a small quantity of basic comes. Cash compensation is also more man- foodstuffs at below-market prices ageable from a fiscal viewpoint. The Russian * Providing direct, in-kind assistance to the Federation already has in place an extensive poorest households system of cash benefits, through which relief * Providing cash compensation to the poor- can be channeled. However, cash compensa- est households. tion is less effective than quantity-denominat- The first option, selected subsidies, has been ed coupons in providing social protection rejected by the Russian government, though ex- when prices are rising rapidly, since the index- change rate unification is temporarily prolong- ation of benefits becomes increasingly difficult. ing the use of this approach. This option has Provided inflation does not accelerate, howev- two shortcomings. First, it is hard to identify er, cash compensation through the existing products that are a significant part of the con- benefits system is preferable to a coupon sys- sumption of poor groups, but not of the others. tem. A coupon system could be kept in reserve Second, maintaining price controls would create in case of hyperinflation. a disincentive to production of the price-controlled products, so that availability on the mar- Better targeting of cash benefits ket could not be ensured-and diversion to the black market would be likely. Beyond the short term there is an urgent need The second option, quantity-denominated for a comprehensive system of social assis- coupons, has the advantage of being implicitly tance-a means-tested benefit program of last indexed (they automatically compensate for resort. The lack of such a program is a major price rises). In addition several cities and other gap in the present system of cash benefits. In- local authorities in Russia have experience with troducing such a program will take several such schemes. There are several disadvantages, years, but work should begin now on its de- however. Making the system compatible with sign. Several other improvements in cash bene- market liberalization, requires a two-tiered pric- fits policy and administration are also needed ing system so that consumers can use the cou- over the medium term-for example, a retire- pons in private markets, and that creates an in- ment test for pension benefits, perhaps a hiigh- centive for diverting commodities from the lower retirement age. Particular attention is also er to the higher-price channel. If the coupons needed on the delivery of services that are

150 especially critical to the more vulnerable about what is enough to live on, parsimoniously groups: employment, health, housing, and defined, rather than on a basket of goods. transportation. Providing financial assistance * Establish the principle that full protection for these services is especially important in the of the poorest groups is the first priority for short term, until reform programs can be intro- available financial resources. duced in those sectors. * Ensure an adequate supply of basic food- Recently, the Russian government requested stuffs and other essential services such as med- World Bank assistance to strengthen the employ- icine, transportation, energy. ment services through an Employment Services * Use the existing cash benefit system to and Social Protection Project. The project is being provide cash compensation to vulnerable designed to enable the employment services to groups. Coupon systems may be a workable respond to the high levels of unemployment ex- supplement in some localities and might be pected in the future, especially to ensure the needed as a backup in case of hyperinflation. prompt payment of unemployment benefits; to . Avoid further increases in payroll taxes as improve the operation of related programs for a method of financing the cash benefit system. social protection; and to complete the design of - Ensure that the minimum level of cash proactive employment activities. benefits is fully indexed to anticipated price changes; benefits above the minimum should Financing compensatory measures be indexed only to the extent that budgetary resources are available. Pensions have been moved off budget for the . Beyond the short term establish a compre- most part and are expected to be self-financing hensive system of social assistance and move in 1992 at the current rate of payroll taxation (37 on to reform of the cash benefit system and to percent of wages). Contributions to the pension reform of related services, notably employ- fund are estimated at 1,400 billion rubles for ment, health, housing, energy, and 1992. Old-age pensions at the new minimum lev- transportation. el of 900 rubles per month would cost approximately 440 billion rubles during 1992. Notes Further increases in cash benefits financed out of payroll taxes, particularly for benefits not di- 1. The option of completely eliminating subsidies in rected to the poor, should be avoided since they the agriculture and the food industry in 1992 (and in are likely to induce another round of price in- 1993 as well) is not politically feasible, following tradi- creases by the affected enterprises and could re- tional levels of explicit subsidy support of more than 10 duce the incentive for expanding enterprises to to 12 percent of GDP. hire labor. There is concern that current methods 2. A decision was made several years ago to require of financing the employment fund could be in- processors to pay the higher price for raw materials adequate for paying unemployment benefits in and receive a subsidy only for the actual volume that the event of large- scale unemployment, let alone was processed, but it was never implemented. for conducting proactive labor market policies. 3. In November 1991 the government issued a Decree For the immediate future the main concern is on the Liberalization of Foreign Economic Activity es- to ensure that the minimum benefit level tablishing the basic principles of the exchange and (whether in the form of pensions, unemploy- trade system for the Russian Federation. In January ment compensation, family allowance, or other 1992 a special exchange rate of 5.4rubles per dollar was benefit for those below the poverty line) is fully established to govern central import operations and indexed to anticipated price changes (not to wag- other imports using centrally allocated hard currency es), so that it does not fall below the poverty line. reserves. Before July 1, 1992, the government had a multiple exchange rate policy. Exchange rates for cen- An approach for protecting the poor tralized imports varied between 5 and 86 rubles per dollar, but at the same time the market-determined exchange rate had risen to over 120 rubles per dollar. On * Adopt a more realistic subsistence mini- July 1, 1992,the Russian government adopted a unified mum, below the present "social minimum," as the exchange rate pegged to a controlled float. The rate basis for compensating the poor. In the short term was initially set at 125 rubles per dollar, but it has since base the subsistence minimum on a judgment risen to roughly 160 rubles per dollar.

151 4. Bailouts of loss-making farms and enterprises in any 6. The current producer price program applies only to subsector should be avoided since this type of assis- sales made under the state sales quota (which repre- tance is antireform. It impedes efforts to create a finan- sents a little over half of meat and milk, but virtually all cially responsible and disciplined structure of of grain). Beyond this amount, emerging procurement production units, inhibits commercialization of input enterprises outside the public sector can compete with supply and marketing enterprises, and postpones the the state at nonsubsidized prices. However, the state is adjustment of the commodity composition of produc- expected to maintain a dominating presence. tion and food consumption patterns toward a balance 7. This assumes that supplementation would be fi- more consistent with Russia's regional arnd internation- nanced by noninflationary means, that is, from budget- al comparative advantage. Support for crop production ary sources (revenues and borrowing) at levels (especially food grains) should be emphasized in lieu of consistent with the parameters of the stabilizat; on pro- intensive animal husbandry, and strong consideration gram, and not by recourse to the financial sector's lim- should be given to supporting the still embryonic pri- ited resources. vate farming sector and to promoting restructuring and privatization of state and collective farms. 8. Ideally, subsidies should be offered only on the basis of restructuring plans; however, suitable criteria and 5. The case of bread is exceptionally difficult, given guidelines for such plans would first have to be formu- that domestic prices would have to rise nearly 10 times lated and disseminated. over their level on July 1 to be consistent with world wheat prices and to eliminate bread price subsidies.

152 9

Credit policy and financing agriculture

This chapter reviews the role of banks in financ- recently-made few loans, formal financial insti- ing agriculture and explores the credit reforms tutions did a weak job of intermediating or real- needed for a market economy. More specifically, locating resources between deficit and surplus the chapter provides an overview of the struc- entities in rural areas. The flow of funds in these ture of agricultural banking in Russia and the two institutions was part of a fiscal process rather former USSR, outlines policies for improving the than part of commercial financial intermediation. efficiency of the agricultural credit system in the Most of the deposit funds collected by the Sav- short term, and discusses restructuring of the ru- ings Bank were absorbed by the government. ral credit system in the longer term. The low and inflexible interest rates paid on deposits effectively transferred purchasing power Structure of agricultural banking from savers to the government. Rural loans were used to reinforce official production targets is- Financial intermediaries sued by the central planning authority (Gos- plan). In addition, concessional interest rates and Under the formal system of rural financial inter- periodic loan forgiveness effectively transferred mediation in the former USSR deposit mobiliza- income to selected groups and enterprises as tion and lending functions were separated and part of centralized attempts to equalize farm in- interest rates were tightly controlled at low lev- comes. Market mechanisms played no part in els. The state-owned Savings Bank (Sberbank), this process. with its extensive network of 75,000 branches and agencies, had primary responsibility for de- Outstanding agricultural credit posit mobilization. Credit was allocated to state- owned enterprises by the government banking The agricultural sector has accounted for a large system through the USSR Central Bank (Gos- share of the financial reserves channeled into the bank). As part of a 1987-88 banking reform three economy through the banking sector. State-allo- specialized banks were hived off from the Cen- cated credit has been widely used to bail out in- tral Bank. The USSR Agroprombank (Agro-In- efficient and high-cost agricultural producers. dustrial Bank) took over all the Central Bank's State and collective farms rapidly accumulated commercial banking activities in agriculture, in- debt in the 1970s and 1980s, and postponing cluding both deposit-taking and lending; it also debt service was a common practice (Annex acted as fiscal agent for the government. Table A9.1). Since the Agroprombank accepted few depos- This lack of financial discipline in Soviet agri- its from individuals, and the Savings Bank-until culture was made possible by low interest rates

153 and lax credit policies. Interest rates were set at ed to commercial banks. The intention is to sever 0.75 percent on long-term loans and 1 to 2 per- traditional direct links with the state budget. The cent on short-term loans, decidedly below the ultimate goal is to create a two-tier banking sys- rate of inflation. Arbitrary allocations and reallo- tem-similar to the U.S. system of commercial cations of financial resources were common. The banks and the Federal Reserve System--with state banking system often reclassified short- control of credit and monetary policy indepen- term credits as long-term credits or wrote off a dent of the state budget. large part of the outstanding debt. Subsidies to The USSR Agroprombank was dismembered high-cost agricultural producers were also fre- in mid-I991. In the Russian Republic it was ab- quently raised to cover increasing losses. sorbed by the Agricultural Bank of Russia (ABR, Outstanding agricultural credit during the last or Rosselkhozbank). The ABR, which has about decade accounted for about 25 percent of all 1,300 branches nationwide, supplies about 60 short-term debt and 60 percent of all long-term percent of the total bank credit for agriculture in debt in the former USSR. After a substantial in- Russia. A network of commercial banks, with crease in debt during the early 1980s-from 100 about 2,000 branches, supplies the rest. Another billion rubles in 1980 to 140 billion rubles in bank, the Rosinterbank (RIB), was established by 1985, a period of low profitability in, agriculture the Russian Ministry of Agriculture in 1990 to -outstanding agricultural debt remained fairly specialize in agribusinesses, including foreign constant in nominal terms until 1989, at about 80 joint-venture operations. Also, in the past sever- billion rubles of short-term and about 60 billion al years the Savings Bank has begun to make rubles of long-term debt, due partly to large in- loans to individuals and to firms, some of whom creases in producer prices in 1983. are engaged in the food industry or in agricul- Between 1989 and 1990, however, agricultural ture. Alternative sources of agricultural credit re- debt declined dramatically; short-term debt for main relatively scarce. The shortage of credit is a 1990 dropped to one-third of the 1989 level, and manifestation of the need to simultaneously pur- long-term debt fell by half. Despite the reported- sue expensive restructuring policies and tight ly high profitability of agriculture in 1989-90, this monetary policy. change did not represent repayment of outstanding debt, but rather a major write-off of 71 billion Agricultural credit policy in the short term rubles of debt owed by state and collective farms. Flow-of-funds statistics report net bor- The flow of credit to agriculture is constrained rowing, not net repayment of loans, in 1990. by general economic uncertainty and by banks' continued heavy reliance on the Central Bank for Agricultural banking in Russia funds and on budgetary subsidies to keep interest rates to final borrowers low, as required by In the Russian Federation outstanding credit for the government. In the spring the Central Bank agriculture at the end of December 1991 was increased its refinancing rate to retail banks from much lower than at the end of 1990: about 8 per- 20 to 50 percent and then to 80 percent and cent of total bank credit (39 billion rubles out of dropped preferential interest rates to specific 481 billion rubles) compared to 18.6 percent (37 sectors, including agriculture. Commercial inter- billion rubles out of 200 billion). The decline in ag- est rates currently range between 70 and 100 per- riculture's share was due to additional debt write- cent. Interest rates subsidized through the state offs, economic and political uncertainty, and a budget to final borrowers in agriculture were substantial decline in agriculture production dur- also raised, from 8 percent to 20 percent and then ing 1991. Outstanding debt of state and collective to 28 percent, boosting government interest rate farms declined in nominal terms from 81 billion subsidies from 12 percent to 30 percent and then rubles in 1989 to about 31 billion rubles in 1991. to 52 percent of loan amounts. No data are available on informal credit or farm- The government budgeted 140 billion rubles ers' own savings and investments in agriculture. in short-term credit early in 1992 under this pro- The Russian government is encouraging the gram, with an estimated interest subsidy of 66 development of commercial and cooperative billion rubles. The actual delivery of short-term banks. The large sectorial banks formerly associ- credit in 1992 may be greater, however. New pri- ated with the USSR Gosbank have been convert- vate farmers receive even higher subsidies on

154 interest rates-with rates as low as 8 percent- redefined to reflect ongoing financial sector de- through state budgetary funds made available to velopment and enterprise reforms and to ad- AKKOR. Any major expansion in agricultural dress prevailing constraints to resource mobili- credit will be limited by the government's ability zation and credit supply to agriculture. Credit to subsidize interest rates. Removal of these sub- policy needs to deal with issues of directed cred- sidies is linked to the ongoing economic stabili- it, rationalization of interest rates, financial man- zation and liberalization program and to efforts agement, and debt restructuring and to integrate to strengthen the financial and economic viabili- the rural banking system with the overall finan- ty of the agricultural sector. cial system. Many of the recently established specialized and commercial banks are undercapitalized, Directed credit have concentrated loan portfolios, and are unpre- pared to manage loan portfolios in an increasing- Directed credits as an interim, emergency mea- ly market-oriented environment. The supply of sure to ensure the availability of credit to agri- agricultural credit will remain tight at least dur- culture, must remain within the confines of ing the period of economic transition. In the present fiscal and monetary constraints. By all short term the government is using the banking indications, there has been a contraction in the system to direct credit to agriculture and plans to real value of formal agricultural loans in Russia reduce subsidies on interest rates through gradu- in 1992. Inflation has eroded the purchasing al interest rate reforms. The government is pro- power of the current agricultural credit portfolio. moting the development of financial intermedia- In the near future declining loan recovery tion services, reducing the banking system's reli- rates will likely further shrink the nominal ance on the government budget, and improving amount of funds available for agricultural lend- the financial viability of banks. 1 ing.2 While self-financing, barter, and informal In agriculture emphasis has been placed on re- finance can overcome some of the inefficiencies structuring state and collective farms and begin- in resource allocation that will result from a con- ning the privatization of retail trade, transport, traction in formal rural credit, formal credit will food processing, and input dealerships. Progress remain essential for input and product transac- in farm restructuring has been slow, and relative- tions that cover substantial distances and time. ly few state and collective farms have substan- Current circumstances suggest that the rural fi- tially changed their property relations and opera- nance system (in particular ABR) may have few tions. The number of private farms continues to of its own funds to lend in the near future. increase rapidly, however, as does their share of It is recommended as a temporary policy agricultural land, although it is still below 3 per- measure that banks that financed agriculture in cent. Privatization of retail food outlets and input the past (and that retain rural branches) should dealerships is underway, though not progressing continue to direct their lending toward farming as rapidly as was hoped. and food processing activities through the re- The main agricultural financing issue con- mainder of 1992. The decision about how much fronting policymakers in the short term is how credit to extend in the 1992/93 agricultural year much credit is required to maintain the food needs to be made within the broader context of supply in the year ahead. While emergency in- government budgetary stringencies and credit tervention may be necessary in the short run to constraints. While it is probable that the level of ensure an immediate flow of credit to agricul- credit will have to be lower than in 1991/92, the ture, these short-term interventions must be se- actual level will depend on the amount of funds lected carefully to avoid undermining the devel- that can be shifted to agricultural lending from opment of a durable and efficient rural financial alternative budget or credit sources. system. Policies should not sanction loan de- It may also be necessary to concentrate scarce faults, and credit subsidies should be phased out loan funds on vital agricultural activities that quickly and replaced with more transparent would be seriously handicapped without formal forms of income supplements. credit. Doing this would require identifying the Credit policy is an essential component of ag- key agricultural inputs that must be available to ricultural sector strategy. Government policies assist fall 1992 and spring 1993 planting and that for agricultural finance generally will need to be require credit to facilitate transactions between

155 manufactures and users. Seeds, fertilizer, other real terms as soon as possible. If inflation contin- farm chemicals, and veterinary supplies are like- ues to accelerate, some form of indexing nmaybe- ly to be high on the list. However, with the dete- come necessary. riorating terms of trade faced by farms, demand for inputs is declining and, with it, the credit re- Financial management quirements of agriculture. The government's policy goal should be to es- Loan collection policies of the past led to a seri- tablish a market-oriented, competitive, financial ous deterioration of credit discipline that under- sector in which intermediaries have the autono- mines the basic viability of the financial system. my to decide who will receive loans, in what The following approach is recommended: amounts and on what terms. Recent banking * The government and Central Bank should laws establishing a two-tier banking system clearly articulate through public announcements have prepared the framework for a banking sys- their determination to enforce credit discipline tem independent of the government. and their expectation that banks will enforce loan In the medium term, therefore, it is expected contracts. that the government would phase out any di- * The government should explicitly state that rected credit schemes (for all sectors) currently it will not guarantee farm loans. supported by interest rate subsidies. For agricul- * The government should enact legislation ture the objective should be to develop a market- unambiguously giving banks the right to take oriented credit policy that defines a limited, tran- legal security for their loans in the form of sitional role for directed credit, as wrell as mea- pledges, guarantees, or other contingent liabili- sures to improve portfolio management and loan ties acceptable to the banking system. Siinulta- collection and to introduce risk assessment and neously, legislation is needed clearly defining provisioning for bad debts. land ownership and farmers' rights to use land as security for credit. Rationalizing interest rates * The government should quickly initiate training in asset and liability management, mod- The Russian authorities should reconsider their ern accounting systems, computerization, man- policy of subsidizing interest rates on agricultur- agement information systems, credit risk al loans and quickly phase out the subsidies over management for diverse loan and investment a clearly defined time frame. There are several portfolios, and human resource development. reasons for this recommendation: The role of financial intermediaries, particular- * Credit subsidies are expensive for the gov- ly their relationship with the Central Bank and ernment and will foster excessive clemand for government, needs to be redefined. Their auton- credit, which is inconsistent with stabilization ob- omy and accountability under the new financial jectives.3 There is strong political pressure from system must be clearly spelled out. An action various groups affected by tight credit and ad- plan needs to be developed for institutional and justment problems, making the danger of overex- management strengthening, initially for the spe- tending credit especially acute. cialized state-owned banks, but later encompass- * Developing a durable, resilient agricultural ing the less viable among the newly chartered system depends on mobilizing savings deposits commercial banks. through positive real rates and then allocating these resources at lending rates that provide a Debt restructuring reasonable return to financial institutions. * Interest rate subsidies exacerbate resource As state and collective farms reorganize and are allocation problems and retard adjustment to the privatized, their existing debts to the govern- new economic realities created by a liberalized ment, the banking system, and other creditors pricing system. The livestock sector, which is fac- will need to be restructured. Any part of those ing declining demand due to reducecd consumer debts that is not backed by tangible assets or the purchasing power, is a case in point. potential profitability of the new units and is, As a first step agricultural lending rates therefore, not collectible, will need to be written should be brought in line with other commercial off. Reorganized state and collective farms rates, and all rates should be made positive in should assume new debts based on the value of

156 assets they acquire and backed by contracts with fifteen independent states. A program of reform the government and banks. Principles of valua- for the financial sector will need to: tion of assets and determination of liabilities will * Clarify the financial situation and owner- have to be defined at the outset as a critical part ship of the state-controlled banks resulting from of this exercise. the dismantling of the former Union institutions Outstanding debt of state and collective * Strengthen the role of the Central Bank and farms in Russia at the end of December 1991 strengthen supervision of commercial banks was estimated at 39 billion rubles. The real val- * Develop a program for restructuring and ue of this debt has since been greatly dimin- privatizing the banking system ished by inflation. Data are unavailable on new * Rationalize the structure of interest rates debt incurred since January, including interen- * Undertake extensive programs of institu- terprise arrears. An important consideration in tional development and training restructuring outstanding debts is to provide * Develop new rural banking institutions. reasonable terms to emerging new entities As part of the larger settlement there must be based on their potential profitability. a division of assets and liabilities among the branches of the former USSR banks on a state ba- A competitive rural financial system sis, in particular the division of assets of the Sav- ings Bank. This issue remains unresolved. The Steps need to be taken immediately to reduce the division could have inflationary consequences, specialized character of the present rural banking and these need to be taken into account. system and to integrate it with a more competitive banking system. Rural banks need to offer a full Banking regulations range of banking services, with emphasis on deposit mobilization, trust and investment business, In the Russian Federation, the laws pertaining to and capital market operations. The government finance and Central Bank regulations need to be also needs to provide legal status for informal fi- redrafted and, more important and more diffi- nancial contracts and their enforcement. cult, they need to be enforced. Right now the Central Bank cannot enforce its regulations on Financial sector reform over the medium term the banks and the courts cannot enforce the laws. A new system of accounting needs to be An agenda for reform developed and put in place as well. The banking system is dominated by a few Over the longer term meeting the needs of agri- specialized state banks that, for historical rea- cultural credit will depend on reform of the fi- sons, have remained financially weak. In Russia nancial system. As Russia's economy stabilizes, there has also been an explosive growth of new- policymakers should turn their attention to de- ly chartered banks, which are often branches of veloping a strong financial system to efficiently former state banks or closely affiliated with par- support a decentralized market-based economy. ticular industrial enterprises. The portfolios of Policies ought to promote both lending and de- these banks are usually very concentrated by posit taking, to support interest rates that reward economic sector, a pattern that is not usually savers and allow lenders to cover their costs of suited to promoting competition, efficiency, sta- operation, and to force lenders to make loans bility, or quality of service in finance. based on creditworthiness. A system of mandatory periodic reports to the Radical and extensive reform of the financial commercial bank supervisory authorities at the sector needs to begin as soon as possible in the Central Bank should be instituted. Supervisory states of the former USSR to support economic authorities should have effective instruments for stabilization and private sector growth. The enforcing compliance with regulations. Until ad- states of the former USSR will encounter not only equate prudential supervision and regulatory the problems experienced by reforming socialist procedures are in place and regularly applied, economies generally, such as weak central banks deposit insurance for depositors at commercial and inadequate supervisory and regulatory banking institutions should not be introduced. capabilities, but additional challenges as well A program needs to be developed for the because of the break up of the former USSR into privatization or at least the incorporation of

157 banks. More stringent solvency and perfor- Rural finance policy group mance standards need to be applied through more effective regulation by the Central Bank. In the Russian Federation authority and responsi- Not all banks need be privatized at once. Some bility for formulating and assessing rural financial banks or financial entities could remain in the policies is so scattered that it impedes the ability of public sector, financing state enterprises, while both lenders and borrowers to form stable and reli- private banks operating on commercial princi- able expectations about near-term and longer-term ples could finance profit-making eniterprises. government policies. The government should establish a high-level rural finance policy group that Modern banking skills would be responsible for assessing and formulating proposals for rural financial policies consistent Banks lack skilled managers and appropriate re- with the establishment and expansion of a strong, view and control systems. Programs for institu- competitive financial system and broader macro- tion building and staff training will be needed. economic framework. This specialized policy Central banks in the new states are ill-prepared group on rural finance should work closely with to carry out their central banking functions. Re- and under the direction of the proposed Food and training of central and commercial bank staff in Agricultural Policy Joint Working Group. modern banking skills is thus of very high pri- Membership might include representatives ority. Training programs should include semi- from the Central Bank; ministries of finance, agri- nars that introduce policymakers and senior culture, economics, the Agricultural and Savings managers to priority issues in rural finance. Banks; and private commercial, cooperative, and Training programs should also retrain in- peasant banks operating in rural areas. The group structors directly at foreign banks or bank train- should concern itself with financial interrnedia- ing institutions and provide financial education tion and competition in the rural banking sector for potential bankers as well as on-the-job train- and the expansion of the nonbank financial ser- ing. Mid-level policymakers and bank manag- vice institutions, both formal and informal, state- ers might also be temporarily assigned to for- owned and private, among other activities. The eign institutions for training. Technical assis- group's activities would be distinct from the pru- tance will likely be needed to restructure dential and bank supervision functions of the university curricula and training programs. monetary authorities. Foreign technical assis- Massive and coordinated support f rom the in- tance could usefully assist the group during its ternational community in this area would be start-up phase and is highly recommended. highly desirable. Notes New financial institutions 1. Despite substantial increases, interest rates, particularly for short-term credit, continue to fall short of in- There will be ample room in a reformed state flation. As long as a situation exists where there are banking system in rural areas for new financial negative real interest rates that cannot respond to institutions that compete with and complement changes in demand for credit and expectations of a fur- existing institutions. Besides the miany private ther acceleration in inflation, the administrative alloca- commercial banks that are being formed across tion of credit will remain a necessity. Russia, it also may be appropriate to promote 2. Accelerating inflation in 1991 made interest rates new grass-roots financial institutions. In the highly negative in real terms, so that the purchasing near future the government should. formulate power of both the agricultural loan portfolio and rural the legal, regulatory, and supervisory under- deposits at the end of 1991 was rapidly evaporating. pinnings that will allow grass-roots institutions 3. There is evidence that farms have not yet shifted to emerge in rural areas, such as post office their focus from nominal rates to real rates in making banks, credit unions, and possibly credit coop- borrowing decisions. In a survey commissioned by the eratives. But even under the best of circum- World Bank and carried out in March, a majority of stances these new institutions will not provide farms cited high interest rates as a factor leading them substantial amounts of financial services in ru- to forego borrowing-at a time when real interest rates ral areas for many years. were negative.

158 10

Role of governments and the international community

This chapter outlines the strategic roles of the na- * A high priority should be placed on estab- tional governments and the international commu- lishing the legal and institutional framework to nity in the short and medium term in trans- support domestic and foreign private investment, forming the food and agricultural sector. Particu- including legal codes and laws governing proper- lar attention is paid to immediate food and finan- ty ownership and tax treatment of investors. cial assistance, short-term technical assistance, * A program of public investment in infra- and medium-term public and private investment. structure to support the development of the food The broad principles and recommendations apply and agricultural sector should be drawn up by to all the states of the former USSR. each state government. New procedures and criteria for evaluating the economic, technical, and Strategic roles to promote reforms environmental merits of these individual investment proposals should also be put in place. The governments of the states of the former USSR, * For the next year or so at least the interna- foreign governments, international institutions, tional donor community should be prepared to and foreign investors all have important roles to assist with financing imports of critical food and play in supporting the reform of the food and ag- agricultural inputs, spare parts, and equipment to ricultural sector. Broadly, the strategic roles for support food production and economic adjust- various national and international agencies that ment in the agricultural sector. Donors should emerge from the analysis in this report are the also be prepared to assist in financing public in- following: vestment in infrastructure and to provide strate- * The governments of the states of the former gic technical assistance and training to transform USSR will need to withdraw from many activities the food and agricultural sector. in the food and agricultural sector, particularly The programs for adjustment and reform that from areas of direct production, procurement, and are being introduced in the Russian Federation distribution. They will, however, need to maintain are the most comprehensive within the fifteen and adjust certain activities during the transition newly independent states of the former USSR. to a market economy and initiate new activities to support and facilitate expansion in private sector Role of national governments activities. * One of the most important roles of govern- National governments should pull back rapidly ment is the design and implementation of sound from public ownership and operation of land macroeconomic policies that promote economic and other assets in direct production. State in- stabilization and encourage private investment. volvement in procurement and distribution

159 should diminish rapidly as well. Many recent ac- areas the governments of the states of the former tions by the Russian government support this USSR will need to expand their activities. strategy: initiation of the land reform program, * Farm restructuring will require that the auctioning of small retail shops and enterprises, public functions now performed by socialized the recent decision to initiate a mass voucher- farms-education, health, cultural activities, road based privatization scheme, and the removal of maintenance-be transferred to municipal or oth- barriers to entry in industry, marketing, and er local governments. transport. * The government will need to invest in appropriate infrastructure and take an active role in Policy directions to support reforms encouraging the restructuring of industry to meet the vastly different needs of smaller-scale, private While the government needs to pull back in agriculture. many areas, there are other areas in which the * Agricultural education, research, and exten- government needs to continue to play a role dur- sion activities need to be improved and strength- ing the transition. ened to serve the needs of market-based * The government needs to manage food agriculture. The government will need to study grain imports in a way that ensures adequate this question carefully and design the systems availability and reasonable stability of prices. needed to deliver essential technical and market * Some subsidies will be required to accom- information to farmers. * Soe sbsidesill e rquird t accm- * Government must also design and enforce modate the lagged adjustment of wages, pen- ratiovns ect mth enirnmenproet sions, and farm incomes to higher prices during regulations protecting the environment, protect- the transition, to ease the disruption caused by ing the health and safety of consumers and pro- rapid contraction in the livestock sector, and to moting competition through antimonopoly guide the agricultural sector into a m.ore efficient measures. configuration. These transitional subsidies In some cases these activities may require cre- should be designed to minimize distortions in ating or strengthening public sector institutions. producer (and consumer) incentives, and the lev- Some functions, such as veterinary and animal el of subsidization should be progressively re- breeding services, agricultural extension, and duced andiphasedhout by 995/96.e applied research, may eventually be performed dcdndephaseout bye1995/96. better by the private sector, cooperatives, or joint * Since transportation, market inf-rastructure, .ventures. and markets are relatively underdeveloped, some In addition governments need to construct re- state intervention will be needed fo;r a while in liable and adequate social safety nets for vulner- the procurement, transportation and distribution able urban residents-pensioners, others on low of grains and other basic foodstuffs to prevent se- or fixed incomes, families with large numbers of vere food shortages from developing in certain dependents, the temporarily unemployed -- and areas. Such shortages could undermine the re- for people in rural areas. In rural areas there may form process. be a special need to ensure the availability of * The current turbulence in the economy and consumer goods until commercial channels to remaining distortions in financial markets sug- supply these items have developed. Over the gest that some intervention will be needed to en- longer term these social protection programs sure a smooth flow of appropriate credit to should rely primarily on cash supplements and agriculture in order to avoid a major disruption be supported by retraining and re-employment in production. Existing fiscal and credit con- services for displaced workers. straints will have to guide this process. There may also be a need for small business credits to Reform components and institutional changes encourage the development of small-scale private retailing and trucking companies. Enterprise reform. About 50 to 60 percent of ag- All of these interventions should be tempo- riculture-related industries are slated to be priva- rary, lasting only during the transition period. tized in 1992 under the rapid privatization There are a number of other areas, however, that program of the Russian Federation. Considering constitute the normal support functions of the modest progress made thus far this year, this governments in a market economy aind in these goal may not be achieved. Nonetheless, the

160 government remains committed to rapid privati- the existing truck transport companies and zation and expects that by the end of 1995 all breaking up the mega-enterprises, which were small and medium-size enterprises and most recently converted to joint-stock transport com- large ones would be privatized. panies. Deregulation of cargo transport will also To achieve these rather ambitious targets, the be needed to encourage private sector activity. government needs technical assistance resources for these industries. Demonopolization poli- Land reform. All state and collective farms in cies are needed as well, since merely replacing a the Russian Federation should complete the state monopoly with a private, semi-private, or process of choosing their new organizational pseudo-private monopoly does not promote structure by December 1992. By that time, competition, which is the ultimate objective of transparent procedures should be in place for structural reforms. Existing barriers to entry allowing farm workers who choose to become need to be reduced and eventually eliminated. private farmers or to join with other farmers on Liberalizing foreign trade, including trade a cooperative basis to claim specific land and among the countries of the former USSR, will physical assets. Farmers should also have the also introduce new competitive pressures and option of exchanging their share of land and market discipline that will reduce the power of other assets for easily marketable stocks or debt existing domestic monopolies, certificates. State and collective farms that are not financially viable by the end of 1993 should Marketing reform. Privatization of agricultur- be forced into liquidation. al input dealerships is now underway and Te prces o land shoud beacceeraed.ocalinpt delersips The process of land privatization must be ac- should be accelerated. Localminput dealerships celerated, and all the prerequisites for efficiently could be encouraged to merge into larger com- fucinn ladmressoldb'npaeb panies~~~or famrondsric.oprtvs ~ functioning land markets should be in place by paIe or famr-we sevc copeaivs the end of 1995. By the end of 1992, the govern- to the extent this strategy is consistent with the ementshould have eliminated all restrictions on realization of economies of scale and creation of a competitive environment. During the transi- the buying and selling of land by those who tional period special efforts must continue to farm their land. Land mortgage legislation (for guarantee private farmers an adequate supply both long-term leaseholders and land owners) of critical inputs through AKKOR and other needs to be implemented by the end of 1992, as such private organizations or associations. well, since the right to mortgage land is essential Through time, however, access to resources to private farming and the development of rural must be increasingly tied to evolving market financial markets. conditions and mechanisms. As the system of state procurement quotas is Input sector reform. The structure of agricul- phased out and then eliminated by the end of tural production and growth of the sector have 1994/95, most of the state marketing infrastruc- direct and important implications for the de- ture and other facilities, such as storage and ini- rived demand for inputs. Any reforms in the tial processing facilities, will need to be gradu- agricultural input sector must reflect emerging ally transferred to the private sector, to create a changes in farm organization and production competitive marketing system. Because of the technology. Shifts in terms of trade are reducing monopolistic nature of the existing network, it demand for agricultural inputs, and this sector is especially important to encourage the entry will need to adjust accordingly. Government of new private enterprises. Many of the existing must avoid supporting inefficient manufactur- facilities may be transferred to farmer-owned ers, while supporting efficiency-enhancing in- cooperatives. Legislation for the establishment vestments in enterprises with the strongest and operations of supply, marketing, and ser- prospects for long-term viability. Successful re- vice cooperatives should be ready as soon as structuring of agricultural input industries possible, preferably by the end of 1992. (seeds, fertilizers, pesticides, farm machinery, A private system of cargo transport is vitally and livestock inputs) will likely depend on at- needed for an effective agricultural input and tracting direct foreign investment in the form of output distribution system. There is a need to ac- either joint ventures or fully foreign-owned celerate its development by privatizing most of enterprises.

161 Policy analysis and coordination sector, assessments of movements in price levels and other economic developments, and appro- Formal institutional arrangements will need to priate policies for establishing a food safety net be established soon to coordinate Russia's reform (both rural and urban). This work must be based program for the food and agricultural sector. on sound economic analysis consistent with the While ad hoc arrangements have sufficed so far long-run goals of improved efficiency and inte- to handle emergencies in the wake of price liber- gration of the economies of the region into the alization, they are not adequate for addressing world economy. longer-term, second-generation issues, which are now beginning to appear. These unstructured ar- Role of the international community rangements have also precluded a systematic assessment of how much intervention and Priority areasfor assistance budgetary support will be consistent with the hard discipline required by the stabilization pro- The international community has a crucial role to gram in the next three or four years. play in the reform process in all the states of the Several current programs will need close at- former USSR. The Russian Federation has em- tention and complex modification: the design of barked on a historic and courageous effort to price, subsidy, and trade policies; the devising of transform its economy, and strong support from "real-time" monitoring indicators; analyses of the international community will be essential to the kinds of adjustment (and labor displace- its success. While the foreign assistance needs of ment) that can be expected in agriculture; formu- the various countries in the region will differ, the lation of sound policies to guide reform in the foreign community could most usefully assist rural financial markets; and the crafting of sus- over the next twelve to eighteen months bv: tainable income support policies for the transi- a Continuing to provide food assistance and tion and beyond. To this end it is proposed that a to finance critical imports for agricultural pro- Food and Agricultural Policy Joint Working duction Group be established with leadership from the * Initiating technical assistance to help for- highest level of government to link the group's mulate and implement key economic reforms work with broader fiscal and monetary policies * Providing capital or facilitating the inflow and economic restructuring and privatization. of foreign investment for quickly gestating in- For the Russian Federation, the joint working vestments in assembly, storage, and trucking group should be headed by a member of the and for the renovation or rehabilitation of key president's economic reform team. Membership food processing industries and urban market- should include high-level representatives from ing facilities. the agriculture, finance, and economics minis- As these countries achieve economic stability, the tries; the Federal Center for Land and Agro-In- emphasis in international assistance should dustrial Reform; GKI, the Central Bank; and a se- gradually shift from emergency assistance to lect number of foreign experts. The joint work- technical assistance and' investments necessary ing group must have access to all re.levant data for transforming the food and agricultural sector. from the State Statistical Committee, line minis- This study focused primarily on the detailed tries, other government agencies, arid research assistance needs of the food and agricultural institutes. Foreign representatives should be se- sector in the Russian Federation. Similar priori- lected on the basis of their expertise in econom- ties are likely to emerge for other states of the ics and broad international experience with food former USSR, though their priorities will, of and agricultural policy. course, reflect the geographical diversity and The Joint Working Group should be empow- agrotechnical variation of these newly indepen- ered to commission sub-groups to analyze specif- dent nations. ic aspects of the reform, including long-term adjustments in crop and livestock production pat- Critical food imports and assistance terns, restructuring of state and collective farms, enterprise viability in input manufacturing and Food import requirements for 1992 are estimat- food processing, rural finance policies, options ed at $11 billion for the fifteen new states, about for trade policy in the food and agricultural $7 billion of it for the Russian Federation. About

162 $5 billion in food assistance has been already Group has been urged to support the quick es- committed by the international donor commu- tablishment of this temporary food agency by of- nity in 1992. Although total food import re- fering financial support for its activities and by quirements are expected to be slightly lower in posting logistics specialists to work with the 1992, revitalization of primary production and agency. To meet the policy objectives of this pro- marketing in response to privatization and gram, most of the food assistance should be in better incentives will require more time. For the form of commodities consumed by lower-in- now, substantial food imports are still needed. come groups, including food grains, vegetable Since the international creditworthiness of the oil, sugar, and baby foods. Russian Federation and the other new states is likely to remain somewhat delicate, additional Critical imports of agricultural inputs financing will be needed for critical food imports under external credit guarantees and simi- The supply of farm inputs available to produc- lar arrangements for the remainder of 1992 and tion enterprises and farms is likely to shrink into 1993. again in 1992 because of the lack of foreign ex- Imports are needed to ensure adequate sup- change, disruptions in the domestic supply net- plies of key commodities, such as wheat, and to work, and the absence of a well-developed support the state food distribution system for distribution system for serving smaller and more low-income people who are not in a position to numerous farms. Shortages of some inputs are bear the full brunt of price reform unassisted. already critical: pesticides, herbicides, fertilizers, Food import requirements will likely decline fur- veterinary medicines, concentrate feed, feed ad- ther in 1993 for the region as a whole because of ditives, and spare parts for agricultural and a slightly better grain crop in 1992 and much transport equipment. Emergency measures may higher prices for imported food commodities be needed to top up supplies in some regions. It following the unification of exchange rates. For is probably too late for the international commu- the Baltic states and Belarus, drought in 1992 has nity to finance the placement of additional sup- increased grain import requirements. For coun- plies at the farm level before fall planting begins. tries that are especially dependent on the flow of These shortages are likely to persist for several agricultural commodities within the former planting seasons, however, and it would be high- USSR, such as the states of Central Asia and the ly desirable to have imported supplies posi- Transcaucasus, import needs would rise if agri- tioned in time for the spring 1993 planting cultural trade among the former republics season. contracts further. It is thus recommended that the donor agen- Coordination arrangements for critical food cies begin to provide quick-disbursing financial imports were improved in January 1992. The assistance to the new states of the former USSR Russian Federation established a commission to for imports of critical agricultural inputs. Assis- monitor price developments in urban "hot tance would also be valuable to support prepara- spots," and the foreign community established tion of revised assessments of input needs that the Food Group under the auspices of the G-10 reflect changing circumstances in the agricultur- countries, to coordinate food flows. al sectors of the economies of the former USSR This report also recommended that a tempo- and to establish arrangements to ensure timely rary agency be established and empowered by delivery of inputs, whether through reliance on the government of the Russian Federation to market mechanisms or, more likely, through a move sufficient quantities of food for release into mix of market mechanisms and administrative local markets as needs arise. Once food has been means. transferred- to locations in short supply, most of it should be sold through market auctions so that Technical assistance and training prices and distribution are based on market principles. The European Community and other Many difficult policy, technical, and market is- donors are experimenting with this approach. sues are emerging during the transition from a The proceeds of these sales could be used to command to a market economy, and new skills support carefully targeted programs to protect are needed to deal with them effectively. Techni- vulnerable groups. The international Food cal assistance and training covering broad areas

163 of food and agricultural sector policy are need- training in all aspects of farm operations and ed to facilitate this transition. The topics dis- management, and that will require some expo- cussed in this section should be regarded as sure to farming in foreign countries. To most ef- indicative only, and not as a comprehensive list fectively meet the needs of large numbers of of all the possible needs for technical assistance farmers and potential farmers, individuals who for the states of the former USSR. In many of can later train other farmers should be selected these areas a number of multilateral institutions, for on-farm training in foreign countries. foreign governments, and private organizations are already involved, but their involvement so Enterprise reform and privatization far meets only a small fraction of the need in each of the states of the former USSR. Also im- The World Bank, the European Bank for Recon- portant is coordination of technical assistance struction and Development, and the European activities, to ensure their relevance, usefulness, Community are already providing extensive and cost-effectiveness. technical assistance to the state property organizations in several states of the former USSR in Food and agricultural policy formulation the design and implementation of corporatization and privatization programs. Nonetheless, For the transition period and beyond, assess- there is still considerable unmet need for techni- ments are needed for future incomes, invest- cal assistance in system design and institutional ment, and trade policies and the extent of development and in the development of restruc- producer and consumer subsidization consistent turing programs at the subsector and enterprise with the fiscal control needed to stabilize the levels. economy and the goal of economic restructuring. Food and agricultural processing enterprises Technical assistance and training are critical in . X p these areas. ~~~~~~~arein particularly urgent need of plans for re- theseareasro structuring, demonopolization, and privatiza- Foreign experts should play an important rl Foreinthexprosd shoud plyandArimrtrant roly tion. Technical assistance for these enterprises in the proposed Food and Agricultujral Policy should be guided by the broader macroeconomic Joint Working Group described earlier. Interna- tional and bilateral organizations should also be objectives and by analyses conducted by the prepared to continue offering advice and exper- Foo au tise on economic policy issues generally, as re- Group. quested. The upgrading of programs in economics and agricultural economics in these countries Retailing, wholesaling, and product assembly. is essential. Training efforts should focus on ex- Managers of large food enterprises and retail panding the number of top-quality economic outlets need training in marketing, accounting, policy advisers and policymakers. and finance. Foreign specialists should assist in the establishment of new, privately operated Land reform and farm restructuring wholesale terminals in selected urban areas. Pi- lot projects could be initiated to teach business While Russia has a detailed mapping base in skills and, for each major commodity group, to some respects, it has not taken any but the most develop and demonstrate commercially orient- basic steps toward establishing the kind of com- ed interaction at the retail-wholesale interface prehensive land information system needed for and at the farm product assembly level. land registration and titling of individual land holdings. The next step is cadastral surveys to de- Agroprocessing industries. Assessments should termine land-use patterns. Technical assistance in be carried out under the direction of the joint developing a comprehensive land information working group to identify options for restructur- system would facilitate not only land reform, but ing or closing inefficient food industry plants also the development of rural taxation and credit with outdated technology. Assessments should systems based on land as collateral. examine total quality management in the dairy Technical assistance is needed in establishing and meat subsectors and procurement, technolo- agricultural cooperatives of all types. Private gy, and product marketing options in other farmers and those aspiring to be farmers, need subsectors.

164 Transport system. In the transport sector assis- development; defining the rights of foreign firms tance and training are needed in truck fleet man- engaged in seed research, production, and mar- agement and in general business practices. keting; and upgrading national seed quality Learning to use information technology in these standards. Plant breeders, seed dealers, and gov- areas is essential. A manual on basic operating ernment officials associated with the seed indus- guidelines would be extremely useful for the try will need training in modern practices. many new entrepreneur-operators expected to enter the trucking business. Pilot projects should Machinery. Converting defense plants to pro- be initiated to demonstrate effective storage, duce agricultural machinery will require assis- handling, and movement practices for perish- tance in product development, market identifica- ables and nonbulk shipments. tion, and cost control. Assistance in improving production designs and operational uses of agri- Input production and supply cultural machinery is essential, particularly to meet the needs of small-scale private farms. Input production facilities need to be assessed with an eye to their long-term viability under Veterinary services. As part of farm restructur- market conditions. Associated investment strate- ing the large number of veterinarians now em- gies need to be developed as well. Technical assis- ployed by state and collective farms are likely to tance is needed for manufacturing enterprises at move into private practice. Guidance based on the production and distribution levels and for in- foreign experience in privatizing veterinary ser- put dealerships, to establish product standards, vices would be helpful. quality control, and a network for providing service and support to end-users. Input dealers also need training in business management and technology transfer. The development of farm service centers on a pilot basis, building on existing input Agricultural research and education systems dealerships or emerging service cooperatives, need to be integrated into a comprehensive sys- would greatly assist in this effort. tem of research, education, and extension that is oriented to commercial agriculture and more at- Fertilizer. Plants producing nitrogen fertilizer tuned to the optimal use of natural resources. should be assessed for energy efficiency, and the The growing importance of private farms cre- least efficient plants should be identified, retro- ates special needs for developing new informa- fitted, rehabilitated or, if they cannot be convert- tion systems (technical, market, policy), ed into viable operating units, shut down. Tech- information channels, and research and exten- nical assistance is also needed in the production sion programs for appropriate production tech- of phosphate and potassium fertilizers. The nologies. Retraining of technical specialists at transformation of the centralized distribution the local level will be necessary. The agricultural system to a private multi-input distribution and research systems in the countries of the former service centers would also benefit from techni- USSR are in disarray and could benefit greatly cal assistance and training. from assistance in financing equipment and supplies and subscriptions to foreign scientific Pesticides. Pesticide production, storage, and publications. distribution facilities need to be inspected (with foreign participation) to assess the health, safety, Optimum agricultural production and environmental implications of current practices. Private farmers will need instruction in The viability of various types of livestock and pesticide handling and application. crop production and production technologies needs to be evaluated on a regional basis accord- Seeds. Assistance is needed in defining the ing to free market principles. The work should be proper roles of government and the private sec- carried out under the auspices of the Food and tor in the development, distribution, and mar- Agricultural Policy Joint Working Group. Priori- keting of seed. Areas requiring attention include ty areas for technical assistance are farm man- protecting property rights in seed research and agement, quality assurance, and appropriate

165 technology for smaller, more competitive pro- savings and lessons from the experience of ru- duction systems. ral banking reform in Eastern Europe.

Rural infrastructure Social safety net

Both public and private groups will need tech- The logistics of getting food to deficit rural or nical support in improving the rural infrastruc- urban areas and to low-income groups are ture base. This includes assistance in evaluating complex, and technical assistance is needed to the economic, technical, and environmental set up the necessary systems for this work. As- merits of individual investment proposals. Ba- sistance may also be needed to help design so- sic road, marketing infrastructure, and irriga- cial safety nets for rural residents as state and tion systems will need to be redesigned. collective farms are restructured. Such emer- Expansion of the rural road infrastructure is a gency services need to be stressed as labor is particularly pressing priority. Additional roads released during the restructuring of state enter- are needed to improve market access for the prises and unemployment increases. many new production units being created as state and collective farms are broken up. Rail- Investment in the food and agricultural sector road operations need to become more commercially oriented and responsive to shippers' Inadequate storage and marketing infrastruc- needs, particularly if the railroads are to pro- ture, obsolescent processing industries, and vide adequate service for the shipment of time- worn-out transport equipment characterize the sensitive perishables. food distribution systems in the states of the Shortcomings in the location and capabilities former USSR. Particularly critical is the need for of storage facilities have led to very high losses on-farm storage and for improved facilities in the of food and other agricultural output and need assembly areas to handle bulk shipments from to be addressed. The introduction of efficient, farm to market and to protect chemical inputs low-cost storage, particularly at the farm level, is stored on the farm. Many agroprocessing facili- critical. Technical knowledge in stock-manage- ties are far from sources of raw material and need ment practices needs immediate upg:rading. As- to be more efficiently located. Food transport sistance is also needed in introducing energy-ef- patterns are already changing in response to ficient grain-drying facilities. price-liberalization. The use of road transport to move products from the assembly areas to urban Rural financial system markets is increasing, but the road transport fleet is woefully inadequate for meeting transport de- Substantial retraining in modern banking prac- mand. Wholesale and retail space is seriously de- tices is one of the highest priority needs, partic- ficient in the main consumption centers, often ularly in the rural banking system. Programs badly located and generally run-down. should encompass seminars for policymakers and senior managers on priority issues in rural Private investment finance, retraining of instructors in bank training institutions, on-the-job training, revision of While the current financial crisis persists, priori- university curricula, and temporary assignment ty in investments should go to projects that can to foreign institutions as appropriate. be made operational quickly say, in six months or Training is needed in virtually all aspects of less. Appropriate projects would include build- financial sector reform: central bank supervi- ing on-farm storage facilities, importing used sion, bank restructuring, legal aspects of bank- trucks, constructing small and medium-size ing, accounting, and central and commercial wholesale markets, and equipping new retail bank management. Technical assistance in the outlets. Rehabilitating some agroprocessing fa- design of an efficient rural credit system is es- cilities might also meet the quick-operation crite- sential. Assistance in fostering diversification rion, though complete modernization or of the rural financial system would be particu- construction of new factories would require fea- larly helpful, including the introduction of sibility studies and long construction periods, credit unions, credit cooperatives, and postal and thus should be postponed.

166 The guiding principle for all new investments valuable contribution in the food production and should be whether they are consistent with priva- distribution industries by introducing improve- tization and restructuring within a market-based ments in packaging, processing, and product system. Ideally, then, investments would be di- diversification. Such improvements are needed to rected toward projects that facilitate private sec- transform existing enterprises in the food and distor participation, entry of new private enterpris- tribution sectors into productive firms operating es, or the implementation of privatization to international standards. schemes for publicly owned enterprises. Realistic Especially promising areas for foreign invest- financing plans need to be established for all in- ment are food processing, grain storage, and vestments to ensure that local counterpart fund- transport. Much of the food processing equip- ing will be available under current money and ment is old, outdated, or poorly maintained. Bare- credit ceilings and to avoid reliance on such dubi- ly one-fifth would meet Western standards. For ous means as rolling over short-term loans. example, as many as 40 percent of sausage-mak- The international community has used several ing plants are considered ready for demolition means to stimulate investment and technology and three-quarters of the sugar-processing plants transfer in the food and agricultural sector in in the Ukraine were built at the beginning of the transforming socialist economies. Most direct fi- century. nancial assistance comes through loans from mul- Lack of modern packaging materials contrib- tilateral and bilateral assistance programs for in- utes to significant losses in processed food prod- vestment project development-secured by sov- ucts. Except for milk, only 20 to 40 percent of re- ereign guarantees; equity and loan participation tail products are bottled or packaged. Poor loca- at the enterprise level in the private sector (by the tion of grain storage units accounts for losses as International Finance Corporation of the World high as 20 percent of annual harvests. A fruit- Bank Group, for example); and technical assis- processing plant in Lipetsk oblast purchases ap- tance grants and credits, which are time-tested ples from as far as 1,000 kilometers away. Refrig- methods for introducing advanced technologies. erated trucks, tractor-trailers, and fork-lift Several innovative techniques are also being trucks for food handling are in critically short used to encourage direct private investment, and supply. some of these could be extended quickly to pro- Opportunities also exist for foreign investment mote privatization, rehabilitation, and develop- in the manufacture of fertilizers and modern ment in the Russian Federation's food and agri- agrochemicals, although shrinking demand for cultural sector. These include financing private those products should be kept in mind when as- enterprise development funds that enable local sessing investment prospects. Opportunities in- and joint-venture investors to acquire foreign clude the manufacture of nitrogen fertilizers equipment and material; underwriting credit and rehabilitation of urea factories, and manu- guarantee funds and venture capital funds, facture of phosphate and potash fertilizers. In- which have proved fairly successful in the trans- vestments are needed in equipment for recover- portation sector; and extending investment guar- ing the 130 million tons of sulfuric acid released antees-through insurance and other means- to annually into the atmosphere in stack gases, individual foreign investors and their financiers. which could be used in the manufacture of phos- As the reforms take hold and the investment phates. Some 20 percent of fertilizer produced climate stabilizes in Russia's food and agricultur- and shipped is lost or ruined before it reaches al sector, these kinds of financial services, offered the fields. There is an estimated $500 million in mainly by multilateral (and some bilateral) assis- potential investment projects for improved stor- tance agencies, could be particularly attractive age and handling facilities for fertilizers at port, to both foreign and domestic private investors. regional, and provincial levels. There are already a number of joint ventures Direct foreign investment with foreign investors in the food and agricultural sector, and more projects are under consid- Direct foreign investment provides not only capi- eration. A large number of foreign companies, tal, but also technology, management and market- particularly from North America and Europe, ing expertise, and sometimes even export market are actively exploring the possibilities of joint access. That combination can make a particularly ventures in different states of the former USSR.

167 There is wide-ranging interest in all aspects of should have no bearing on regulations or incen- the food and agricultural sector, including the tives. For example, foreign investors should not seed industry, agroprocessing, dairy products, be given tax holidays that are unavailable to meat processing, integrated poultry operations, domestic investors. Also, foreign investors and others. should not be required to have local partners to Despite the numerous opportunities the diffi- participate in existing productive facilities or in culties and risks of cloing business in the former new ones. USSR should not be underestimated. Political un- A healthy and flourishing food and agricultur- certainties are perhaps the basic problem. The al sector is a top priority. Thus fiscal and other uncertainty is intensified by the inadequacy of incentives for foreign and domestic investors in the regulatory framework for foreign investment, food production, processing, and distribution economic risks, uncertainties about domestic cur- should be fully explored. Incentives provided in rency conversion, absence of functioning inter- other countries should be examined. Finally, the nal markets, and lack of basic infrastructure in government should as a matter of urgency take finance, telecommunications, and other areas. advantage of technical assistance in these areas. Without improvements in these areas rapid increase in foreign investment is unlikely. Lending to the private sector The Russian government has already initiated reforms in foreign investment regulations. A International financial institutions and foreign Foreign Investment Committee has been created private banks have lent money to domestic banks under the chairmanship of a government minis- in many countries for onlending in support of ter. Draft amendments to the July 1991 Foreign productive investment by the private sector. The Investment Law are being prepared. These re- potential uses seem evident for such two-step forms should be accelerated. The law should be lending to the private sector in the new states for modified to bring it in line with foreign invest- long-term loans and foreign exchange and assis- ment codes in other countries serious about at- tance in project evaluation, technology selection, tracting foreign investment. The law should state and market studies. Macroeconomic instability explicitly that businesses have the right to con- and underdeveloped financial systems hold back vert rubles to foreign exchange regardless of progress on this type of lending. But as the eco- whether they export. nomic climate improves and donor assistance to Screening and approval of foreign investment financial institutions bears fruit, two-step lending proposals is another troublesome area. If the may be introduced in the region. government insists on discretionary power to authorize each foreign investment, the cost will Public investment outweigh the benefits. The obvious shortcoming is that government employees cannot be expect- Large public investments are needed in basic in- ed to have better judgment about investment de- frastructure and services, which the international cisions than private investors whose money is at community could help finance. A program of stake. It is also unlikely that any single agency public investment in infrastructure that supports would have the processing capacity to effective- the development of the food and agricultural sec- ly screen the large volume of investment appli- tor needs to be drawn up by each state govern- cations likely to flo-w in. Universa] screening ment. New procedures and criteria for evaluating should be replaced by provision for a list of only the economic, technical, and environ-menta] mer- those activities that would require case-by-case its of investment proposals need to be put in approval by the government. The list itself place. Whenever possible arrangements to ensure should not be included in the law but should ap- reasonable cost recovery should be included. pear in regulations that can be more easily For the development of long-haul transport changed as circumstances warrant. services in the Russian Federation the sticking The emphasis should be on flexibility and on point is not an adequate road network but seri- facilitating foreign investment rather than on ous road deterioration. Substantial investment in trying to control it. Improved access to foreign road maintenance and better administration will exchange is key. Neutrality of treatment is also be needed to preserve the quality of the road net- important: the nationality of private investors work. Additional investment in farm-to-market

168 roads is also likely to become necessary as the role of urban warehouses will change substan- farm structure changes from a relatively few tially as the distribution of food in urban areas large farms to many smaller holdings. becomes integrated through to the retail level. Similarly as railroads begin to provide service There is a need for investments to rehabili- to smaller firms, the pressures on the equipment tate irrigation systems and to improve their control system and operational management operation and maintenance, particularly in Cen- will increase. There may also be a need for addi- tral Asia. These states are also aware of the com- tional refrigerator cars and other facilities, but plex issues relating to land and water use in the these investments should be made only after region and have formed a Commission to Save careful study of emerging market conditions, the Aral Sea. Discussion is underway on the cre- investment options, and ways to improve rail- ation of an Aral Sea Action Plan, which would way operations. provide the basis for mobilizing and coordinat- Consumphon-end warehouse capacity (in- ing international support. cluding cold stores) in urban areas is very large, The agricultural education, research, and ex- amounting to more than 1.5million tons for vege- tension system needs intensive review. Such a re- tamounting tosmore thaone1.millio tons foracyve view could provide the basis for substantial fu- tables in Moscow alone. While this capacity is tueivsmnsiXeeinn n oenz technologically outdated and inefficient, new ture investments m redesigning and moderniz- public investment should be undertaken only af- ing the system to more adequately serve the ter careful study. The major storage problem is at large numberuof emap te farmers. the production end of the food chain, and the

169

Text tables

Table 1.1 Distributionof employmentin the former USSR,by sector,selected years, 1975-89 (percentages)

Sector 1975 1980 1985 1989

Industry 29.1 29.4 29.3 28.6 Agricultureand forestry 22.2 20.3 19.5 18.5 Construction 9.1 8.9 8.8 10.8 Transportand communication 8.8 9.1 9.2 7.5 Domestictrade 7.8 7.9 8.0 7.5 Other materialspherea 1.2 1.4 1.5 1.8 Nonmaterialsphereb 21.8 23.1 23.8 25.3 Total 100.0 100.0 100.0 100.0

Note:Figures may not addto 100because of rounding. a. Thesefigures may differ from other official figures because of theinclusion here, for simplicity, of all employmentintransport and communications as employmentin the materialsphere. b. Government,science, education, health care, and othernonmaterial services. Source:Derived from Goskomstat USSR data.

Table1.2 Capitalinvestment in agriculturein the formerUSSR, 1971-90

1971-75 1976-80 1981-85 Investment category Average Average Average 1986 1987 1988 1989 1990 Investment (billion current rubles) Total 112.6 143.5 168.6 194.4 205.4 218.2 228.5 229.8 In agriculturalproduction 22.2 28.6 31.2 33.5 34.4 36.5 38.4 41.0 In rural infrastructure 8.3 11.3 14.2 16.6 16.2 16.5 17.8 18.0 Shares (percentages) Agricultureas a shareof total investment 19.8 20.0 18.5 17.2 16.7 16.7 16.8 17.8 Rural infrastructureas a shareof total investment 7.4 7.9 8.4 8.5 7.9 7.6 7.8 7.8 Agricultureand rural infrastructureas a share of total investment 27.1 27.8 26.9 25.8 24.6 24.3 24.6 25.7

Source:Derived from USSRStatistical Yearbook, various years.

Table 1.3 Distributionof net materialproduct in the formerUSSR, by sector,selected years, 1970-90 (percentages,based on currentprices)

Sector 1970 1975 1980 1985 1990 Industry 51.2 52.6 51.5 45.5 40.4 Agriculturea 21.8 16.9 14.9 19.5 24.9 Construction 10.3 11.4 10.3 10.8 12.0 Transportand communication 5.6 6.3 5.8 6.1 6.6 Trade,procurement, and supply 6.2 6.5 7.0 6.3 Other 1.2 1.0 0.9 0.8 Foreign trade 3.7 5.3 9.6 11.0 Total 100.0 100.0 100.0 100.0 100.0

-Not available. a. Part of net materialproduct created in agriculturewas realizedin the form of turnovertaxes and profitsin food industryand otherbranch industries of materialproduction. Source:Derived from GoskomstatUSSR data.

173 Table1.4 Distributionof net materialproduct in Russia,by sector, 1985-90 (percentages, based on current prices)

Sector 1985 1986 1987 1988 1989 1990

Agriculture 14.1 15.5 15.4 18.7 18.8 18.3 Industry 48.6 46.7 47.2 44.5 44.5 43.1 Construction 10.5 12.0 12.8 13.1 13.0 12.3 Transportation and communication 6.5 6.7 6.7 6.6 5.8 7.6 Othera 20.3 19.1 17.9 17.1 17.9 18.7 Total 100.0 100.0 100.0 100.0 100.0 100.0

a. Trade, material-technical supply, procurement, and others. Source: Derived from Goskomstat Russia data.

Table 1.5 Distribution of employment in Russia, by sector, 1985-90 (percentages)

Sector 1985 1986 1987 1988 1989 1990

Material 74.2 73.8 73.2 72.6 72.2 72.0 Industry and construction 41.8 41.8 41.8 42.6 43.0 42.8 Agriculture and forestry 4.3 14.0 13.8 13.5 13.4 13.4 Transport and communication 9.8 9.7 9.3 8.4 7.9 7.9 Trade and other material services 8.3 8.3 8.3 8.1 7.9 7.9 Nonmaterial 25.8 26.2 26.8 27.4 27.8 28.0 Science, education, health care, and 17.9 18.3 18.5 19.0 19.3 19.5 culture Government 2.4 2.4 2.4 2.4 2.3 2.3 Municipal and other nonmaterial services 5.5 5.5 5.9 6.0 6.2 6.2 Total 100.0 100.0 100.0 100.0 100.0 100.0

Note: Figures may not add to 100 because of rounding. Source: Derived from Russia Statistical Yearbook, 1990.

Table 2.1 Grain productionin the former USSR,1976-91

Area Yielcf Productiona Percentage change from previous year Year (mill ha) (tons/ha) (mill tons) Area Yield Production

1976-80 average 127.9 1.60 206.9 n.a. n.a. n.a. 1981-85 average 121.4 1.49 180.3 n.a. n.a. n.a. 1986-89 average 114.7 1.80 206.9 n.a. n.a. n.a. 1990-91 average 108.8 1.89 205.0 n.a. n.a. n.a. 1986 116.5 1.80 210.1 n.a. n.a. n.a. 1987 115.2 1.83 211.4 -1.1 1.7 0.6 1988 114.9 1.70 195.1 -0.3 -7.1 -7.7 1989 112.3 1.88 210.9 -2.3 10.6 8.1 1990 109.5 2.15 235.0 -2.5 14.4 11.4 1991 108.0 1.62 175.0 -1.4 -24.7 -25.5

n.a. Not applicable. Note: Yield and production figures are based on July-November harvest of winter and spring grain crops. a. Bunker weight. Source: Derived from Goskomstat USSR data.

174 Table2.2 Grainutilization in the formerUSSR, 1989-91 (millionsof tons) 1989-91 Utilization 1989 1990 1991 Average Percentageshare Seed 25 25 25 25 10 Industrial use 5 5 5 5 2 Food 48 148 47 48 20 Feed 139 143 125 136 56 Dockage/wastea 29 36 20 28 12 Totalb 246 257 222 242 100 a. Dockageis thedifference between bunker weight and cleanweight in domesticproduction. It is about7-8% and accountsfor excessmoisture and extraneousmaterial. The discountfor dockagecan rangefrom 4% to 20%depending on climateand harvestingtechnology. Waste refers to losses in storage,transport, and handling.Actual losses are muchhigher because of highharvesting losses (about 8-10 %). b. Includesdomestic production (bunker weight), imports (clean weight). and estimatedchanges in stocks(clean weight). Source:Derived from U.S.Department of Agriculturedata.

Table2.3 Compositionof grain usedas food and feed in the former USSR,1986-91 (millionsof tons)

Food Feed Otherusesa Percentageof Coarse Coarse Coarse wheatused as Year Wheat grains Total Wheat grains Total Wheat Grains Total Food Feed 1986 36 7 47 45 80 130 12 17 29 39 48 1987 36 7 47 40 84 132 12 17 29 41 45 1988 37 7 48 41 86 135 12 17 29 41 46 1989 37 7 48 41 90 139 12 17 29 41 46 1990 37 7 48 53 82 143 12 17 29 36 52 1991 36 7 47 50 71 125 12 17 29 37 51

Note:Coarse grains include barley, rye, oats,millet, and corn.Total includeswheat, coarse grains as well as othergrains. a. Seed,industrial use, and lossesin storage,transportation, and processing. Source:Derived from U.S. Departmentof Agriculturedata.

175 Table 2.4 Area under grain crops in the former USSR, 1955-91 (thousandsof hectares)

Year Wheat Barley Rye Oats Millet Othera Total 1955 60,457 9,855 19.208 14,811 7,683 11,447 123,461 1956 62,010 11,872 18,489 15,063 6,369 11.803 1:25,606 1957 69,058 9,164 19,163 14,029 3,570 8,021 123,005 1958 66,642 9,679 17,977 14,832 3,729 8,558 121,417 1959 62,997 9,631 17,138 14,238 2,698 7,730 114,432 1960 60,393 12,126 16,250 12,842 3,783 10,143 1 15,537 1961 63,000 13,375 16,800 11,533 3,800 13,663 122,171 1962 67,411 16,250 16,938 6,950 4,299 16,828 128,676 1963 64,609 20,470 15,025 5,719 3,965 20,165 129,953 1964 67,887 21,674 16,807 5,734 3,549 17,655 133,306 1965 70,205 19,737 16,030 6,628 3,253 12,174 128,027

1966 69,958 19,396 13,583 7,162 3,253 11,456 124,808 1967 67,026 19,125 12,418 8,688 3,802 11,113 122,172 1968 67,231 19,353 12,269 8,998 3,050 10,571 121,472 1969 66,426 22,484 9,237 9,300 3,376 11,880 122,703 1970 65,230 21,297 10,020 9,250 2,691 10,773 1I 9,261

1971 64,035 21,566 9,507 9,632 2,397 10,800 1-17,937 1972 58,492 27,269 8,160 11,358 2,724 12,155 120,158 1973 63,155 29,387 7,012 11,887 2,850 12,447 126,738 1974 59,676 31,079 9,810 11,567 2,970 12,085 127,187 1975 61,985 32,548 8,010 12,107 2,774 10,496 127,920

1976 59,467 34,261 9,035 11,269 2,998 10,730 127,760 1977 62,030 34,464 6,697 13,026 3,048 11,029 130,294 1978 62,898 32,690 7,719 12,097 2,924 10,137 12'8,465 1979 57,682 37,005 6,476 12,239 2,784 10,165 126,351 1980 61,475 31,574 8,645 11,770 2,907 10,228 126,599

1981 59,232 31,781 7,551 12,470 2,692 11,833 1 25,559 1982 57,278 29,706 9,829 11,489 2,821 11,889 123,012 1983 50,823 31,679 10,334 12,389 2,885 12,699 120,809 1984 51,061 30,426 9,420 12,806 2,640 13,259 119,612 1985 50,265 29,058 9,520 12,604 2,808 13,684 117,939

1986 48,728 29,964 8,741 13,173 2,485 13,386 116,477 1987 46,684 30,654 9,725 11,790 2,763 13,596 115,212 1988 48,058 29,732 10,115 10,946 2,615 13,446 114,912 1989 47,635 27,611 10,598 10,880 2,736 13,443 112,903 1990 48,197 26,192 10,570 10,555 2,923 11,170 109,607 1991 45,956 28,724 8,529 10,749 3,043 11,240 108,241 a. Includes corn, buckwheat, rice, pulses, and miscellaneous grains. Source: Derived from U.S. Department of Agriculture data.

176 Table2.5 Cropyields in the former USSRand in selectedcountries, 1988-90 average (tonsper hectare) Roots and Sunflower Sugar Seed Country Cereals Wheat tubers Potatoes seeds beets cotton

Former USSR 1.9 2.0 11.0 11.0 1.5 26.7 2.6 Argentina 2.3 1.9 31.4 23.6 1.4 - - Canada 2.2 1.8 25.0 24.8 1.4 37.8 - France 6.0 6.3 31.4 32.2 2.3 64.5 - Germany Eastern part 4.4 4.9 30.3 36.1 - 27.1 - Western part 5.7 6.6 28.0 26.1 - 53.9 - Poland 3.1 3.8 19.0 18.9 - 35.4 - Romania 3.1 3.4 11.0 10.7 1.5 17.6 0.9 United States 4.3 2.4 31.1 32.2 1.2 43.7 1.8

-Not available. Note: Three-year average for 1988-90. Source:Derived from FAOAgricultural Yearbook, various years, and GoskomstatUSSR data.

Table 2.6 Annualpotato production in the formerUSSR, 1970-91

Area Yield Production Percentage change from previous year Year (mill ha) (tons/ha) (mill ha) Area Yield Production

1970 8.1 12.0 96.8 n.a. n.a. n.a. 1971-75 average 8.0 11.3 89.8 n.a. n.a. n.a. 1976-80 average 7.0 11.7 82.6 n.a. n.a. n.a. 1981-85 average 6.8 11.5 78.3 n.a. n.a. n.a. 1986 6.4 13.7 87.2 n.a. n.a. n.a. 1987 6.2 12.1 75.9 -3.1 -11.7 -13.0 1988 6.1 10.3 62.7 -1.6 -14.9 -17.4 1989 6.0 12.0 72.2 -1.6 16.5 15.2 1990 5.8 11.0 63.7 -3.3 -8.3 -11.8 1991 5.8 11.1 64.5 0.0 0.9 1.3

n.a. Not applicable. Source:Derived from GoskomstatUSSR data.

Table2.7 Annualoilseed production in the formerUSSR, 1971-91

Area Yield Production Percentage change from previous year Year (mill ha) (tons/ha) (mill tons) Area Yield Production

1971-75average 10.1 1.1 11.4 n.a. n.a. n.a. 1980 10.1 1.0 10.5 n.a. n.a. n.a. 1985 9.8 1.1 11.0 n.a. n.a. n.a. 1986 8.7 1.3 11.6 -11.2 19.4 5.5 1987 9.4 1.3 12.5 8.0 0.0 7.8 1988 9.6 1.4 13.3 12.1 3.0 6.4 1989 9.6 1.5 14.3 0.0 8.0 7.5 1990 9.6 1.4 13.6 0.0 -4.0 -4.9 1991 9.1 1.3 12.2 -5.2 -6.3 -10.3

n.a.Not applicable. Note:Oilseeds consist of sunflowerseed, cottonseed,soybean, rape seed, and others,with sunflower seed andcottonseed accounting for mostof oilseeds in the former USSR (87% of all oilseed production in 1990). Source:Derived from GoskomstatUSSR data.

177 Table 2.8 Annual sugar beet production, sugar production, and sugar imports of the former USSR, 1971-91 Sugarbeet Sugar(million tons) Percentagechange in proauction Area Yield Produc,tionra Total Production Net fromprevious year Year (millha) (tons/ha) (mill tons) Production from sugar beets importsb Sugarbeet Sugar

1971-75 average 3.53 21.7 76.0 - n.a. n.a. 1976-80 average 3.75 23.7 88.7 - - - n.a. n.a. 1981 85 average 3.50 21.8 76.4 - 7.2 - n.a. n.a. 1986 3.40 23.3 79.3 12.7 8.0 4.9 n.a. n.a. 1987 3.53 26.6 90.7 13.7 8.8 4.9 14.4 7.9 1988 3.37 26.1 87.9 12.1 8.2 4.0 -3.1 -11.7 1989 3.32 29.1 97.5 13.3 8.8 5.2 10.9 9.9 1990 3.27 24.9 81.2 12.2 8.4 3.8 -16.7 -8.3 1991 3.13 21.2 663 9.7 6.9 3.4 -18.3 -20.5 n.a.Not applicable. - Notavailable. a. About90% of sugarbeetproduction is purchasedby the governmentfor sugarproduction. The averagesugar extraction rate is 11%. b. Mostsugar is importedin raw form.About half of the sugaris importedfrom Cubaalthough the share varies from year to year.a smallquantity of refinedsugar has beenexported in the past.On average,refined sugar is about92% of raw sugar. Source:Derived from GoskomstatUSSR data.

Table 2.9 Annual cotton production in the former USSR, 1971-91 Percentagechange from Cotton previousyear Area Yield Production Year (mill ha) (tons/ha) (mill tons) Area Yield Production 1971-75 average 2.8 2.73 7.7 n.a. n.a. n.a. 1976-80 average 3.0 2.93 9.0 n.a. n.a. n.a. 1981-85 average 3.2 2.81 9.1 n.a. n.a. n.a. 1986 3.5 2.34 8.2 n.a. n.a. n.a. 1987 3.5 2.31 8.1 0 -1 -1 1988 3.4 2.56 8.7 -3 11 7 1989 3.3 2.61 8.6 -3 2 -1 1990 3.2 2.59 8.3 -3 -1 -3 1991 3.0 2.60 7.8 -6 0 -6 n.a. Not applicable. Note:All cotton in theformer USSR is producedin CerntralAsia republicsand Azerbaijan. Estimated percentage shares in 1990were as follows: Area Production Republic (O%) (%/-) Uzbekistan 58 61 Turkmenistan 20 18 Tadjikistan 10 10 Azerbaijan 8 7 Kazakhstan 4 4 Kyrghyzstan 1 1

Cottonaccounted for 50%of the totalvalue of agricultLiralexports in 1989. Source:Derived from GoskomstatUSSR data.

178 Table2.10 Annuallivestock population in the formerUSSR, 1986-92 (millionhead as of January1) Cattle Total animal Year Total Cows Hogs Sheep Goats Horses Poultry unitsa

1986 120.9 42.9 77.8 140.9 6.5 5.8 1,165.5 156.9 1987 122.1 42.4 79.5 142.2 6.5 5.9 1,174.0 158.3 1988 120.6 42.4 77.4 140.8 6.5 5.9 1,175.0 156.7 1989 119.6 41.8 78.1 140.8 6.6 5.9 1,199.5 156.5 1990 118.4 41.7 79.0 138.4 7.0 5.9 1,213.9 156.1 1991 115.7 41.5 75.6 133.3 7.0 5.9 1,206.1 152.8 1992 112.4 41.0 71.2 128.0 6.8 5.9 1,170.0 148.0 a. Interms of cowsat the following conversion ratios: Cow 1.00 Cattle (other than cows) 0.60 Hogs 0.30 Sheep and goats 0.10 Horses 1.00 Poultry 0.02 Source:Derived from Goskomstat USSR data; 1992 figures are World Bank staff estimates.

Table2.11 Privatelivestock as a shareof total livestockpopulation and production, selectedyears, 1970-91 (percentages) 1970 1980 1990 1991 Category/product Population Production Population Production Population Production Population Production

Cattle / beef and veal 25.1 35.4 20.0 31.1 20.4 25.5 21.6 -

Cows / milk 38.9 35.9 30.4 31.1 31.7 29.9 33.0 -

Pigs / pork - - 19.0 - 19.2 35.5 21.7 - Sheep and goats / mutton and goat meat - - 20.5 - 25.0 - 26.1 - Sheep /wool - 19.7 n.a. 21.7 - - - - Poultry / meat - - n.a. - - - 5.0 -

Poultry /eggs - 53.3 n.a. 32.1 - - 33.0 - Fur animals 85.4 - 87.1 - 82.1 - 83.0 -

Beehives / honey 45.5 20.5 47.8 23.4 50.4 21.1 47.6 -

Rabbits 77.5 - 87.9 - 89.2 - 88.6 - Horses - - 10.7 - 15.3 - 18.6 -

- Notavailable. Source: Derived from Goskomstat USSR data.

179 Table 2.12 Average livestock productivity and feeding efficiency in the former USSR, Germany, and the United Kingdom, 1990 FormerUSSR Former United as percentageof Indicator USSR Kingdom Germany UK or Germany Productivitycriterion (per year) Milk per cow (kg) 2800 4700 n.a 60 Calvesweaned per 100cows 75 90 n.a 83 Lambsweaned per 100ewes 85 115 n.a 74 Pigletsweaned per sow 12 20 n.a 60 Eggsper layera 231 268 n.a 86

Feedingefficiency (in oat units)b Cattlefattening 12.4 n.a 5.2 238 Pigfattening 8.0 n.a 4.2 190 Poultryfattening 4.2 n.a 2.5 168 Dairycow production 1.4 n.a 0.8 175 n.a. Not applicable. a. Statesector only. b. Oat units of feed requiredper kilogramof weightgain or milkproduction; one oat unit = 600 gramsof starch. Source:Agroprom and USSRStatistical Yearbook.

180 Table2.13 Averageper capitaavailability of majorfood itemsin the former USSRand a group of other industrialcountries, selected years, 197688

Annualavailability (kilograms per year) Daily availability(calories per day) Industrial Percentagechange Industrial Percentagechange FormerUSSR countries in the formerUSSR FormerUSSR countries in the formerUSSR Commodity 1976-78 1980-82 1986-88 1986-88 1976-78to 1986-88 1976-78 1980-82 1986-88 1986-88 1976-78to 1986-88

Cereals 174.6 172.3 166.4 117.2 -4.7 1312 1297 1255 892 -4.3 Potatoes 118.6 108.0 103.6 63.9 -12.6 218 198 190 114 -12.8 Sweetners 46.8 49.0 50.0 61.5 6.8 445 477 487 108 9.4 Pulses 3.7 2.9 1.8 17.6 -51.4 34 27 17 411 -50.0 Vegetable oils 7.7 9.1 10.1 105.6 31.2 177 210 230 72 29.9 Vegetable 88.7 96.6 97.6 102.0 10.0 53 57 60 109 13.2 Fruitsa 42.9 43.4 49.8 108.1 16.1 56 57 66 187 17.9 Alcoholic beverage 51.8 52.9 35.7 84.1 -31.1 171 171 127 474 -25.7 Meat 57.7 59.0 66.6 - - 300 300 340 - - Animal fats 13.9 13.7 15.1 9.5 8.6 193 193 209 165 8.3 Milk and milk productsb 184.0 165.6 171.2 208.4 -7.0 265 233 235 293 -11.3 Eggs 12.2 13.6 15.2 14.0 24.6 47 53 59 53 25.5 Fish/Seafood 27.6 25.8 28.2 26.4 2.2 63 62 66 51 4.8

- Not available. Note:Industrial countries are thosecountries considered "developed market economies" by the FAO. a. Excludinggrapes for wine. b. Excludingbutter. Source:Derived from OECD1 991 data. Table 2.14 Annualaverage per capita food consumptionin the former USSRand selectedOECD and Centraland East Europeancountries, 1984-86 and 1985 1984-86 1985(kilograms per year) Calories Proteingram Vegetable Grainand Country per day per day Meat Milka oitb Sugar' bread FormerUSSR 3,394.0 105.6 62.0 295.0 10.0 42.0 1:33.0

OECD Austria 3,416.0 96.6 90.0 142.0 15.0 37.0 68.0 Finland 3,080.0 95.6 68.0 182.0 6.0 37.0 73.0 France 3,273.0 111.3 106.0 84.0 12.0 34.0 80.0 GermanFederal Republic 3,476.0 101.0 100.0 112.0 5.0 37.0 74.0 Japan 2,858.0 88.0 38.0 36.0 12.0 21.0 108.0 Spain 3,365.0 96.5 75.0 102.0 25.0 33.0 77.0 UnitedKingdom 3,218.0 88.0 74.0 141.0 12.0 37.0 83.0 UnitedStates 3,642.C 106.5 118.0 129.0 11.0 30.0 65.0

Centraland EasternEurope Bulgaria 3,634.0 106.3 77.0 250.0 16.0 35.0 144.0 Czech andSlovak Federal Republic 3,473.0 103.3 86.0 239.0 8.0 35.0 111.0 GermanDemocratic Republic 3,800.0 112.7 96.0 - 2.0 40.0 J9.0 Hungary 3,541.0 101.7 77.0 175.0 5.0 35.0 110.0 Poland 3,298.0 101.8 67.0 403.0 3.0 41.0 118.0 Romania 3,358.0 104.3 60.0 - - 26.0 143.0 Yugoslavia 3,542.0 101.5 55.0 - - 35.0 175.0

Not available. a. For OECDcountries, excludes processed dairy products. For Centraland East European countries, includes milk equivalent of all dairyproducts. b. For OECDcountries excludes magarine. For Centraland East Europeancountries, includes all vegetableoil andderivative products. c. Excludesother sweeteners and syrups. Source:"The Global Food Regime in the 1990s: Efficiency, Stability and Equity", The Unversity of IowaCollege of Law Transnational Law & Contem- poraryProblems, Volume 1, Number2, Fall 1991.

182 Table 2.15Annual per capitafood consumptionby republicin the former USSR,selected years, 1970-90 (kilograms) Former Commodity RussiaArmenia Belarus GeorgiaMoldova Ukraine Azerbaijan KazakhstanKyrghyzstan Tadjikistan Turkmenistan Uzbekistan Estonia Latvia LithuaniaUSSR 1970 50 34 49 31 35 49 26 50 38 30 38 29 73 70 72 48 1980 62 47 61 43 49 61 32 56 38 32 44 31 82 76 81 58 1985 67 49 70 47 54 66 35 58 40 31 41 31 89 85 87 62 1g9oa 75 56 73 46 57 69 34 70 51 29 44 31 84 85 84 67

Milk anddairy" 1970 331 328 371 235 172 311 227 265 172 126 135 150 420 453 464 307 1980 328 432 369 309 265 331 281 275 177 164 174 185 453 403 415 314 1985 344 433 399 309 294 350 293 260 182 152 168 180 489 455 409 325 1990 386 446 425 289 303 373 292 307 266 161 212 210 487 454 480 358

Eggs (units) 1970 182 94 170 85 128 156 90 122 81 44 58 73 241 194 208 159 1980 279 146 294 135 183 239 134 206 108 79 87 90 305 259 253 239 1985 299 148 315 148 209 276 155 217 124 104 92 107 296 295 285 260 1990 297 163 323 140 203 272 143 221 154 111 101 120 289 259 305 258

Fish 1970 19 4 14 6 12 16 3 9 6 3 4 3 29 21 15 15 1980 22 4 16 8 14 17 3 10 6 3 5 4 25 2 17 18 1985 22 5 20 9 13 18 5 11 6 3 5 5 25 24 18 18 1990a 20 8 20 9 13 18 5 10 6 4 5 5 24 24 19 17

Sugar 1970 42 26 35 35 33 41 33 34 30 23 25 21 44 46 37 39 1980 47 31 43 45 47 52 40 38 33 24 26 22 46 46 41 44 1985 45 29 44 43 45 46 37 37 32 25 27 22 45 47 43 42 1990 47 39 49 39 49 53 36 39 37 28 32 25 45 48 40 45

Vegetableoil 1970 7 2 5 3 11 7 2 5 5 8 5 8 7 7 4 7 1980 9 3 7 5 10 10 2 8 7 10 8 10 9 9 6 9 1985 10 2 8 6 12 10 3 10 9 11 8 11 9 9 8 10 1990 10 3 9 6 14 11 3 11 11 12 8 13 7 8 7 10 Table2.15 Annualper capitafood consumptionby republicin the formerUSSR, selected years, 1970-90 (continued) a (kilograms)

Former Commodity Russia Armenia Belarus Georgia Moldova Ukraine Azerbaijan Kazakhstan Kyrghyzstan Tadjikistan Turkmenistan Uzbekistan Estonia Latvia Lithuania USSR Potatoes 1970 139 55 245 38 75 156 25 94 59 33 23 28 151 146 212 130 1980 118 55 200 46 75 133 25 86 56 35 23 29 122 128 150 109 1985 109 65 185 49 79 139 28 89 65 35 31 26 113 122 134 104 1990 106 58 170 41 69 131 27 85 69 35 26 29 103 125 157 100

Vegetables 1970 82 101 70 51 84 103 47 66 60 65 84 66 80 82 86 82 1980 94 118 77 79 115 115 72 84 74 95 105 116 83 72 78 97 1985 98 135 81 87 129 124 62 90 98 91 111 107 79 80 84 102 1990 89 132 78 82 112 102 67 75 78 95 123 107 64 69 81 92

Bread 1970 144 154 144 195 187 155 155 150 144 173 159 160 112 110 113 149 1980 126 140 140 190 177 146 160 147 149 177 165 177 96 107 111 138 1985 119 134 131 190 173 138 158 146 144 178 168 177 92 104 107 133 1990 119 129 126 183 171 141 151 146 139 167 165 170 77 107 111 133

a. Republic-level (except Russia) per capita meat and fish consumption estimates refer to 1989. b. In milk equivalent. Source:Derived from DomesticTrade of theUSSR, 1989; the USSRStatistical Yearbook, 1990; and VestnikStatistiki (of ficial monthlystatistical journal),l 991. Table 2.16 Volume of annual agricultural imports of the former USSR, 1985-91

1991 Import 1985 1986 1987 1988 1989 1990 (est.) All grains(million tons) 45.6 26.8 30.4 35.1 38.1 32.3 35.7 Wheat 21.4 15.7 18.1 21.2 14.2 15.0 17.7 Barley 3.7 3.6 3.0 2.4 3.6 3.4 4.7 Corn 18.6 7.2 9.2 11.4 19.0 13.2 12.8 Other (thousandtons) Soybeans 839 2,012 1,534 1,350 872 492 900 Raw sugar 4,305 5,158 5,035 4,094 5,046 3,919 4,455 Refinedsugar 195 23 20 127 371 32 624 Vegetableoil 813 451 825 342 1,065 567 323 Freshvegetables 190 271 254 203 149 144 100 Freshfruits and berries 1,123 1,270 926 969 778 874 400 Meatand meatproducts 858 937 858 719 696 1,129 1,208

Note:Data are on a calendaryear basis. Source:Derived from Goskomstat USSR data.

185 Table 2.17 Value of annual agriculturall imports of the former USSR, 1987-90 (millionsof currentU.S. dollars)

Commodity 1987 1988 1989 1990 Wheat 1,547.4 2,401.6 2,243.8 :2,486.3 Barley 166.2 224.2 430.6 441.2 Corn 741.5 1,266.1 2,245.5 1,687.8 Othergrain 3.8 7.5 28.0 68.4 Sorghum 3.8 5.7 10.3 27.4 Wheatflour 35.2 31.3 42.0 213.8 Rice,milled 188.5 172.2 220.2 118.0 Subtotalgrain products 2,686.5 4,108.6 5,220.4 5,042.9 Animalsforslaughter 112.1 125.8 95.1 85.5 Breedinganimals 24.8 23.4 22.9 25.7 Meatand meatproducts 1,387.6 1,208.0 1,150.0 2,040.0 Milk and milk products 103.7 107.7 170.4 138.9 Eggand egg products 12.6 13.1 5.8 6.8 Animalfats, includingbutter 212.8 333.7 413.1 456.6 Wool 641.9 823.3 940.2 419.0 Furs 3.6 2.7 8.5 4.4 Raw hides 4.7 4.6 3.5 3.4 Otheranimal products 48.9 50.2 47.4 66.2 Subtotallivestock and livestockproducts 2,552.6 2,692.5 2,856.9 3,246.5 Vegetablesand potatoes 607.8 735.8 703.8 593.4 Fruit and berries 903.8 936.3 793.9 937.7 Nuts 175.4 186.5 119.7 200.9 Sugar,raw 4,833.7 4,539.4 5,046.0 5,077.0 Sugar,refined 7.7 33.4 158.9 11.3 Coffee,cocoa, and tea 846.9 700.2 1,093.3 1,091.0 Spices 89.8 83.3 93.2 77.0 Beverages 392.8 369.6 430.6 464.3 Tobacco,raw 236.1 224.8 157.0 163.4 Tobaccoproducts 695.5 690.7 681.3 839.6 Naturalfibers 166.3 201.2 145.9 155.6 Cottonlint 136.9 169.7 133.9 155.6 Tapioca - 45.5 37.2 34.2 Oilseeds 384.3 312.6 260.0 129.8 Oilseedmeal (a) 573.5 816.8 974.7 576.3 Vegetableoil, edible 303.4 210.2 526.4 283.5 Technicalfats andoils 145.5 182.5 197.7 136.8 Seedsand planting materials 196.9 213.0 143.9 144.4 Confectionary 53.7 59.4 80.0 56.4 Other 5.2 4.5 38.6 41.1 Total 15,994.3 17,516.5 19,893.3 1 ,458.7

-Not available. Note:Converted from rublesto US dollarsat the followingaverage official exchange rates (US$/R): 1.58 1.65 1.58 1.71 a. Estimate. Source:U.S. Departmentof Agriculture,derived from USSRForeign Trade Yearbook,various years.

186 Table4.1 Annualcomposition of grain productionin the former USSR,1989-91 (millionsof tonsbunker weight) Percentage change in 1991 over 1989-91 Percentage 1989-91 Grain 1989 1990 1991 Average share 1990 Average Wheat 92.3 108.0 78.0 92.8 45 -28 -16 Rye 20.1 21.0 13.5 18.2 9 -36 -26 Barley 48.5 61.0 43.0 50.8 25 -30 -15 Oats 16.8 18.0 14.5 16.4 8 -19 -12 Corn 15.3 9.8 11.0 12.0 6 12 -8 Othera 17.9 17.2 15.0 16.7 8 -13 -10

Total 210.9 235.0 175.0 207.0 100 -26 -15

a. Includes millet, buckwheat, rice, pulses, and miscellaneous grains. Source: Denved from Goskomstat USSR and U.S. Department of Agriculture data.

Table4.2 Regionalgrain area, yield, production,and procurementin Russia,1989-91 average

Production Procurement Regional Regional Share of Area Yield Amount share Amount share production Region (thousha) (tons/ha) (thoustons) (%/) (thoustons) (T0) (%/) North 389 1.15 448 0.4 9 Northwest 454 1.07 484 0.5 47 0.2 9.6 Central 6,202 1.60 9,920 9.6 2,393 8.2 24.1 Volga-Vyatsk 3,612 1.45 5,245 5.1 824 2.8 15.7 CentralBlack Soils 5,252 2.31 12,126 11.7 3,853 13.2 31.8 Volga 12,536 1.47 18,464 17.8 5,646 19.3 30.6 North Caucasus 7,620 3.25 24,779 23.9 9,947 34.0 40.1 Urals 11,877 1.13 13,441 13.0 2,947 10.1 21.9 West Siberia 10,011 1.12 11,171 10.8 2,045 7.0 18.3 East Siberia 4,170 1.36 5,664 5.5 1,076 3.7 19.0 Far East 962 1.36 1,305 1.3 418 1.4 32.1

Russiaa 63,279 1.64 103,533 100.0 29,248 100.0 28.3

Negligible or none. Note: Grain is reported as clean weight. Regional shares may not add to 100 because of rounding. a. Includes Kaliningrad Oblast. Source: Derived from Goskomstat Russia data.

Table 4.3 Projectedgrain productionscenarios for the former USSRfor 1992 1986-91 1991 1992 Production scenarios Variable Average Actual Low' HighD Area(million hectares) 112.7 108.0 106.0 107.0 Yield(tons per hectare)c 1.83 1.62 1.65 1.82 Production (million tons) c 206.3 175.0 175.0 195.0

a. Assumes normal weather, 2% decline in grain area over 1991, and below normal (9% lower) grain yield because of farm input supply problems. b. Assumes normal weather, 1% decline in grain area over 1991, and normal (1986-91 average) grain yield. c. Bunker weight. Source: World Bank staff estimates.

187 Table4.4 Estimatedgrain supply and utilizationin the former USSR,1987/88 - 1992/93 (millionsof tons) Production Bunker Clean Total Utilization Stock Year weight weight Imports Exports availability' Food Feed Other" Total changec 1987/88 211.4 193.8 32.0 0.5 225.3 47.5 132.0 41.8 221.3 4 1988/89 195.0 180.2 39.0 0.5 218.7 47.8 135.2 37.7 220.7 -2 1989/90 210.9 196.7 39.5 0.5 235.7 48.2 138.9 44.6 231.7 4 1990/91 235.0 218.0 26.4 0.4 244.0 48.4 143.0 50.6 242.0 2 1991/92 172.5 161.7 38.3 0.1 199.9 49.0 123.0 38.6 210.6 -10

1992S93 d Scenario 1 185.0 172.0 33.0 0 205.0 50.0 113.5 41.5 205.0 0 Scenario 2 175.0 163.0 38.0 0 201.0 50.0 111.0 40.0 201.0 0 Scenario 3 195.0 181.0 27.0 0 208.0 50.0 115.0 43.0 208.0 0 a. Availability= Clean WeightProduction + Imports- Exports. b. Seed use,industrial use, losses in storage,transportation, and processing. c. Stockchange is the differencebetween Total availablityand Total utilization. d Scenario1 is the mid-pointof scenarios2 and3. Scenario2 is the low-productionscenario. Scenario 3 is the high-productionscenario. Source:U.S. Department of Agricultureand World Bankstaff estimates.

Table4.5 Estimatedgrain supplyand utilizationin Russia,1987/88 - 1992/93 (millionsof tons) Production Bunker Clean Total Utilization Stock Year weight weight Importsa Exportsa availability" Food Feed Otherc Total changed 1987/88 109.0 98.6 19.2 1.1 116.7 21.9 69.9 24.9 116.7 0 1988/89 102.8 93.7 2:3.0 0.5 116.2 22.1 71.0 24.1 117.2 -1 1989/90 113.2 104.8 210.0 1.0 123.8 22.3 72.5 27.0 121.8 2 1990/91 127.0 116.7 15.0 1.0 130.7 22.4 75.3 31.0 128.7 2 1991/92 95.0 89.1 22.0 0 111.1 22.9 68.2 24.0 115.1 -4 1992/93e Scenario 1 102.0 94.0 20.0 0 114.0 23.5 65.0 25.5 114.0 0 Scenario 2 97.0 90.0 22.0 0 112.0 23.5 64.0 24.5 112.0 0 Scenario 3 106.0 98.0 1 8.0 0 116.0 23.5 66.0 26.5 116.0 0

a. Includesinterrepublic trade. b.Availability = CleanWeight Production + Imports- Exports. c. Seeduse, industrialuse, losses in storage,transportation, and processing. d.Stock change is thedifference between Total availablity and Total utilization. e. Scenario1 is the mid-pointof scenarios2 and3. Scenario2 is thelow-production scenario. Scenario 3 is the high-productionscenario. Source:U.S. Departmentof Agricultureand World Bankstaff estimates.

188 Table4.6 Share of totalfeed consumptionby livestockon stateand collectivefarms in the formerUSSR, by republic,1990 (percentages) Cowsand Other Sheepand Republic bulls cattle Pigs goats Horses Poultry Totala Russia 36.3 33.0 12.1 8.0 2.2 8.1 100 Armenia 30.2 30.1 7.3 13.0 0.4 18.9 100 Belarus 36.8 43.3 12.4 0.5 2.1 4.8 100 Georgia 29.7 28.4 14.5 7.7 0.8 18.6 100 Moldova 35.4 25.1 24.7 2.8 1.9 10.0 100 Ukraine 38.8 35.4 13.7 3.2 1.8 7.0 100

Azerbaijan 34.8 37.4 3.9 8.7 0.3 14.6 100 Kazakhstan 20.0 34.5 6.4 28.5 5.5 4.7 100 Kyrghyzstan 23.6 22.9 5.2 37.8 4.8 3.8 98 Tadjikistan 25.2 36.9 7.2 16.8 1.5 12.6 100 Turmenistan 17.9 27.8 11.5 28.4 2.6 10.6 99 Uzbekistan 30.0 35.9 8.0 13.2 1.5 11.4 100

Estonia 39.3 28.6 23.9 0.1 0.7 6.6 99 Latvia 38.6 32.3 18.5 0.4 1.6 7.6 99 Lithuania 32.1 38.0 20.6 0.1 2.5 6.2 100

FormerUSSR 34.8 34.1 12.2 8.6 2.4 7.5 100 a. Total shareexcludes other livestock such as rabbitsand reindeer.Total maynot add to 100because of rounding. Source:Derived from GoskomstatUSSR data.

Table4.7 Estimatedproduction of principallivestock products in the former USSR,1986 to 1992 (thousandsof tons) 1986-91 1991 1992 Product Average Actual Estimates Beef 8,420 8,160 7,200 Pork 6,413 6,150 5.400 Muttonand lamb 955 965 850 Poultry 3,171 3,090 2,800 Other meat 257 250 250 Totalmeat 19,216 18,615 16,500 Milk 105,213 101,662 92,000 Eggs (millionunits) 82,406 79,225 74,000

Note:Carcass weight for all meatproducts. Source:Derived from GoskomstatUSSR data and WorldBank staff estimates.

189 Table 4.8 Production of principal livestock products in the former USSR, 1986-92 (thousandsof tons) Meat' Eggs Beef Mlutton and (million Year and veal Pork lamb Poultry Other Total Milk units)

1986 7,840 6,065 894 2,988 270 18,057 102,173 80,746 1987 8,288 6,324 905 3,126 252 18,895 103,774 82,737 1988 8,616 6,595 960 3,235 274 19,680 106,754 85,150 1989 8,800 6,700 1,000 3,300 237 20,037 108,529 84.854 1990 8,814 6,646 1,008 3,286 257 20,011 108,384 81 725 1991 8,160 6,150 965 3,090 250 18,615 101,662 79.225 1992 7,200 5,400 850 2,800 250 16,500 92,000 74.000

a. Carcass weight. Source:Derived from GoskomstatUSSR data; 1992figures are World Bankstaff estimates.

Table 4.9 Annual distribution of livestock inventories in Russia, by region, 1990-92 average (thousandsof headas of January1) Inventc7ries Percentage regional share Sheep Sheep Region Cattle Cows Hogs and goats Cattle Cows Hogs and goats

North 1,304 530 829 396 2.3 2.6 2.2 0.7 Northwest 1,466 611 1,195 326 2.6 3.0 3.1 0.6 Central 8,253 3,177 4,466 2,230 14.5 15.5 11.7 3.8 Volga-Vyatsk 3,765 1,366 2,293 1,656 6.6 6.7 6.0 2.9 Central Black Soils 4,796 1,750 4,887 2,977 8.4 8.5 12.8 5.1 Volga 8,034 2,796 5,624 13,334 14.1 13.6 14.8 23.0 North Caucasus 6,887 2,333 6,640 16,369 12.1 11.4 17.5 28.2 Urals 8,742 3,125 4,332 6,579 15.4 15.2 11.4 11.3 West Siberia 7,521 2,707 3,580 5,483 13.2 13.2 9.4 9.4 East Siberia 3,953 1,363 2,287 8,642 6.9 6.6 6.0 1 4.9 Far East 1,711 626 1,617 51 3.0 3.0 4.3 0.1

Totala 56,894 20,539 38,032 58,100 100 100 100 100 a. Includes Kaliningrad Oblast. Source:Derived from GoskomstatRussia data.

190 Table 4.10 Estimatedfood importrequirements of the formerUSSR, 1989-92 (millionsof currentUS dollars) 1989 1990 1991 1992 Foodcommodity Actual Actual Preliminary Estimate Grains 5,220 4,880 4,400 3,800 Sugara 5,200 5,100 2,400 Meat and meat products 1,150 2,040 1,670 7,200 Beverages 1,180 1,320 800 Other food 4,750 3,960 2,730

Total food 17,500 17,300 12,000 11,000 Russia 10,800 10,600 7,500 7,000 Other republics 6,700 6,700 4,500 4,000

a. The largedecline in thevalue of sugarimports between 1990 and 1991reflects changes in pricingfor Cubansugar rather than a declinein volume of imports. Source:U.S. Departmentof Agricultureand World Bankstaff estimates.

Table4.11 Grainproduction and procurementin Russia,Ukraine, and Kazakhstan,1987-91 (millionsof tonsclean weight) Production Procurement Procurementas a percentageof production Former Former Former Year Russia Ukraine Kazakhstan USSR Russia UkraineKazakhstan USSR Russia Ukraine Kazakhstan USSR 1987 98.6 48.0 25.2 193.8 35.0 18.1 14.6 73.3 35 38 8 38 1988 93.7 45.4 21.0 180.2 29.2 17.3 9.7 61.4 31 38 46 34 1989 104.8 51.2 18.8 197.6 31.2 17.7 5.9 59.0 30 35 31 30 1990 116.8 51.0 28.5 218.0 33.8 15.4 14.8 67.8 29 30 52 31 1991 89.1 38.6 11.9 163.0 22.5 11.5 3.2 40.7 25 30 27 25

Source:Derived from GoskomstatUSSR data.

Table4.12 Annualgrain procurementand importsfor the former USSR,1986-91 (millionsof tonsclean weight) Importas a Total percentageof Year Procurement Imports state supplya totalstate supply 1986 78.8 27.5 106.3 26 1987 73.3 32.0 105.3 30 1988 61.5 39.0 100.5 39 1989 59.0 39.5 98.5 40 1990 67.8 26.5 94.3 28 l99lb 40.7 38.3 79.0 48

Note:On a July-Junetrade year basis. a. Grainprocurement plus grain imports. b. Preliminary;represents 1991/92 trade year. Source:Derived from GoskomstatUSSR and U.S. Departmentof Agriculturedata.

191 Table 5.1 Number and size of state and collective farms in the former USSR, 1960-90 (hectares) State farms Collective farms Average Average Year Number size Number size 1960 7,375 26,200 44,944 6,446

1961 8,281 28,300 41,314 6,197 1962 8,570 28,300 40,504 6,234 1963 9,176 28,200 39,495 6,067 1964 10,078 27,200 38,298 5,984 1965 11,681 24,600 36,917 6,100

1966 12,189 23,700 37,108 6,000 1967 12,783 22,800 36,784 6,000 1968 13,398 21,900 36,172 6,100 1969 14,310 21,400 34,703 6,000 1970 14,994 20,800 33,561 6,100

1971 15,502 20,200 32,800 6,200 1972 15,747 20,000 32,100 6,200 1973 17,300 19,300 31,400 6,200 1974 17,717 19,100 30,000 6,300 1975 18,064 18,900 28,500 6,400

1976 19,617 18,000 27,700 6,600 1977 20,066 17,800 27,100 6,600 1978 20,484 17,600 26,700 6,700 1979 20,767 17,400 26,000 6,600 1980 21,057 17,200 25,900 6,600

1981 21,603 16,900 25,900 6,500 1982 21,991 16,600 25,900 6,500 1983 22,313 16,300 26,000 6,500 1984 22,515 16,100 26,200 6,400 1985 22,687 16,097 26,200 6,400

1986 22,929 15,888 26,300 6,456 1987 23,348 15,612 26,600 6,361 1988 23,323 15,551 26,900 6,290 1989 23,303 15,616 27,900 6,075 1990 23,499 15,277 29,100 5,873

Source: USSR Statistical Yearbook, various years.

192 Table5.2 Contributionof householdplots to grossvalue of agriculturalproduction in the formerUSSR, by republic,1989 ArableLand Grossagrculturalproduction Grosscrop producton Grosslivestock production Shareof Shareof Shareof Shareof Totalarea household Totalvalue household Totalvalue household Totalvalue household Republic (thousha) plots (%) (mill rubles) plots (%/.) (millrubles) plots (%) (millrubles) plots(%) Russia 2,661.9 2.0 23,767.5 22.4 6,708.3 16.9 17,059.2 25.8

Armenia 26.9 5.5 388.5 34.8 181.4 36.8 207.1 33.3 Belarus 457.4 7.5 3,276.9 25.3 1,573.9 28.8 1,703.0 22.7 Georgia 92.9 12.0 1,218.9 44.4 679.3 39.0 539.6 53.6 Moldova 140.3 8.0 938.5 18.6 465.4 15.1 473.1 23.9 Ukraine 2,086.6 6.2 13,181.4 25.9 4,925.1 21.0 8,256.3 30.2

Azerbaijan 55.2 3.5 1,257.4 35.7 511.4 23.9 746.0 53.9 Kazakhstan 163.0 0.5 4,251.9 29.0 457.1 9.3 3,794.8 38.9 Kyrghyzstan 62.0 4.5 907.1 30.4 144.5 12.9 762.6 40.8 Tadjikistan 41.3 4.8 561.9 24.5 226.8 15.2 335.1 41.9 Turmenistan 26.9 2.3 443.0 16.7 71.0 3.9 372.0 45.3 Uzbekistan 263.0 5.8 2,642.3 25.3 666.4 10.0 1,975.9 52.5

Estonia 43.5 4.5 407.9 21.3 195.9 33.8 212.0 15.9 Latvia 87.0 5.2 447.9 24.5 257.8 26.0 490.1 23.7 Lithuania 239.0 10.5 1,524.4 30.6 525.0 30.8 999.4 30.5

FormerUSSR 6,446.9 2.9 55,215.5 24.7 17,589.3 18.4 37,926.2 29.3

Source:Derived from GoskomstatUSSR Agricultural Production on PersonalHousehold Plots, 1990.

Table5.3 Regionalland use patternsin the former USSR,by republic,as of November1,1990 (millionsof hectares) Agriculturalland Republic Totalland Arable Meadows Pastures Totap Russia 1,707.5 131.8 20.0 60.1 213.7

Armenia 3.0 0.5 0.1 0.6 1.3 Belarus 20.7 6.1 1.3 1.8 9.3 Georgia 7.0 0.8 0.1 1.9 3.2 Moldova 3.4 1.7 0.0 0.3 2.5 Ukraine 60.4 33.4 2.2 4.8 41.4

Azerbaijan 8.7 1.6 0.1 2.1 4.2 Kazakhstan 271.7 35.5 4.6 157.2 197.6 Kyrghyzstan 19.8 1.4 0.2 8.4 10.1 Tadjikistan 14.3 0.8 0.0 3.3 4.3 Turkmenistan 48.8 1.2 0.0 34.4 35.8 Uzbekistan 44.8 4.5 0.1 21.5 26.6

Estonia 4.5 1.1 0.3 0.0 1.4 Latvia 6.5 1.7 0.2 0.6 2.5 Lithuania 6.5 2.3 0.3 0.8 3.4

Total 2,227.6 224.4 29.5 297.8 557.3 a. Includesorchards. Source:USSR Statistical Yearbook, 1990.

193 Table 5.4 Share of productionof majoragricultural commodities and populationin the formerUSSR, by republic,1986-90 average (percentages) Commodity Russia Armenia Belarus Georgia Moldova Ukraine AzerbaijanKazakhstan KyrghyzstanTadjikistanTurkmenistan Uzbekistan Estonia Latvia Lithuania Total Grain 53.1 0.2 3.5 0.3 1.3 24.1 0.6 12.3 0.8 0.2 0.2 0.9 0.5 0.8 1.5 100 Raw cotton ...... 7.7 3.8 0.9 10.8 15.7 61.0 .. .. 100 Sugarbeets 37.7 0.1 1.8 0.1 2.9 54.2 .. 1.6 0.0 ...... 0.5 1.1 100 Sunflower 50.0 .. .. 0.1 4.1 43.8 .. 1.9 ...... 100 Flax 36.2 .. 25.9 .. .. 32.1 ...... 0.3 1.5 4.1 100 Potatoes 49.6 0.3 14.5 0.5 0.5 24.8 0.3 2.9 0.5 0.3 0.0 0.4 1.1 1.7 2.5 100 Vegetables 38.9 1.8 2.9 2.0 4.4 26.0 3.1 4.3 1.8 1.9 1.3 9.2 0.5 0.7 1.2 100 Grapes 11.9 3.1 .. 11.0 18.7 13.3 22.6 2.0 0.7 3.0 2.7 11.0 ...... 100 Citrus .. .. . 96.3 ...... -...... 100 Fruits and berries 27.4 2.0 5.0 6.8 11.0 27.5 4.3 2.7 1.4 2.2 0.5 6.5 0.4 0.7 1.5 100 Meat 50.0 0.5 5.9 0.9 1.8 22.3 0.9 7.6 1.2 0.6 0.5 2.3 1.2 1.7 2.7 100 Milk 51.2 0.5 6.9 0.7 1.4 22.7 1.0 5.1 1.0 0.5 0.4 2.6 1.2 1.8 3.0 100 Eggs 57.6 0.7 4.3 1.0 1.4 20.7 1.2 5.0 0.8 0.7 0.4 2.8 0.7 1.1 1.5 100 Wool 47.7 0.8 0.3 1.4 0.6 6.3 2.3 22.8 8.0 1.1 3.4 5.2 0.0 0.1 0.0 100

Population 51.3 1.1 3.6 1.9 1.5 18.0 2.5 5.8 1.5 1.8 1.3 7.0 0.5 0.9 1.3 100 .. Negligibleor none. Note: Totalmay not addto 100because of rounding. Source:Derived from USSRStatistical Yearbook, 1990. Table 5.5 Cropping patterns in Russia, 1988-90 (thousandsof hectares) 1988-90 Average Percentage Crop 1988 1989 1990 area share Grain 66,025 64,938 63,068 64,677 54.7 Winter 17,134 17,865 18,411 17.803 15.1 Spring 48,891 47,073 44,657 46,874 39.6 Sugar beets 1,473 1,474 1,460 1,469 1.2 Oilseed crops 3,755 3,823 4,007 3,862 3.3 Sunflower seed 2,438 2,565 2,739 2,581 2.2 Soybeans 598 651 675 641 0.5 Flax 493 460 418 457 0.4 Potatoes 3,290 3,235 3,124 3,216 2.7 Vegetables 394 670 618 561 0.5 Feed crops 43,396 43,978 44,560 43,978 37.2 Annual grasses 16,953 17,504 18,287 17,581 14.9 Perennial grasses 12,962 12,898 12,612 12,824 10.8 Corn for silage and green chop 9,293 9,652 10,089 9,678 8.2 Clean fallow 13,716 13,722 13,808 13,749 n.a. Total 119,631 119,058 117,705 118,220 100.0

n.a. Not applicable. Source: Derived from Goskomstat Russia data.

Table5.6 Distribution of agricultural, arable, and irrigable lands in the former USSR, by republic, 1990 Agricultural lancf Arable land Irrigable land Irrigation Area Share Area Share Area Share intensity Republic (mill ha) (%) (mill ha) (%/0) (mill ha) (%/-) (°%)c Russia 213.7 38.4 131.8 58.7 6.16 29.5 5

Armenia 1.3 0.2 0.5 0.2 0.31 1.5 62 Belarus 9.3 1.7 6.1 2.7 0.15 0.7 3 Georgia 3.2 0.6 0.8 0.4 0.47 2.2 59 Moldova 2.5 0.4 1.7 0.8 0.29 1.4 17 Ukraine 41.4 7.4 33.4 14.9 2.60 12.4 8

Azerbaijan 4.2 0.8 1.6 0.7 1.40 6.7 88 Kazakhstan 197.6 35.5 35.5 15.8 2.31 11.1 7 Kyrghyzstan 10.1 1.8 1.4 0.6 1.03 4.9 74 Tadjikistan 4.3 0.8 0.8 0.4 0.69 3.3 86 Turkmenistan 35.8 6.4 1.2 0.5 1.25 6.0 100 Uzbekistan 26.4 4.7 4.5 2.0 4.16 19.9 92

Estonia 1.4 0.3 1.1 0.5 0.01 .. 1 Latvia 2.5 0.4 1.7 0.8 0.02 0.1 1 Lithuania 3.4 0.6 2.3 1.0 0.04 0.2 2

Former USSR 557.1 100.0 224.4 100.0 20.9 100.0 9

Negligible or none. a. Arable land, meadows, and pastures. b. Under state and collective farms and other state agricultural enterprises; accounts for 98% of all irrigable land. c. Irrigable land as percentage of arable land. Source:Derived from USSRStatistical Yearbook, 1990.

195 Table 5.7 Production of major agricultural inputs in Russia, 1980-91 (thousands of tons, nutrient weight)

Agricultural input 1980 1985 1986 1987 1988 1989 1990 1991 Fertilizer 11,772 17,304 17,712 18,454 19,071 17,506 15,979 14,756 Nitrogen 5,394 8,013 8,491 8,554 8,642 7,812 7,186 6,509 Phosphate 2,859 4,437 4,769 4,937 5,069 4,973 4,943 4,160 Potassium 3,518 4,852 4,449 4,959 5,358 4,719 3,848 4,086

Pesticides 189 215 213 208 201 162 111 87

Tractors (thousand units) 249 261 264 262 253 235 214 178 Grain combines (thousands units) 117 112 112 96 71 62 66 55

Source: Derivedfrom GoskomstatRussia data.

Table 5.8 Size of agricultural machinery and equipment fleet in the former USSR, end-year 1986-90 (thousands)

Percentage Agricultural change from machinery 1986 1988 1990 1986 to 1990 Tractors 2,776 2,692 2,666 (4) Trucks 2,057 1,613 1,532 (26) Grain Combines 827 751 683 (17) Ploughs 1,145 1,079 1,060 (7) Drilling machines 1,477 1,363 1,236 (16) Cultivators 1,295 1,227 1,145 (12) Windrowers 506 421 375 (26) Maize combines 30 33 35 17 Potato combines 60 58 55 (8) Sugarbeet harvesters 52 49 50 (4) Forage harvesters 254 222 216 (15) Cotton pickers 63 58 53 (16) Flax combines and reapers 24 22 21 (13) Mowers 673 576 509 (24) Fertilizer spreaders 224 223 215 (4) Pick-up balers 165 149 147 (11) Loaders 212 194 163 (23) Milking machines 408 365 334 (18) Irrigation machines 160 158 153 (4)

Source: Derivedfrom USSR Statistical Yearbook, 1990.

196 Table5.9 Deliveriesof grain combines,feed harvesters,and corn harves'ersin the formerUSSR, by republic,January-October 1991 (percentages)

Grain combines Feed harvesters Com harvesters Number Republic Share of Number Republic Share of Number Republic Share of Republic delivered share Jan-Oct 1990 delivered share Jan-Oct 1990 delivered share Jan-Oct 1990 Russia 30,143 64.6 119 9,592 57.4 151 1387 34.3 124

Armenia 80 0.2 56 63 0.4 100 Belarus 1,929 4.1 95 1,288 7.7 181 22 0.5 76 Georgia 68 0.1 87 67 0.4 44 13 0.3 30 Moldova 322 0.7 54 292 1.7 76 334 18.3 133 Ukraine 5,631 12.1 60 3,269 19.5 87 1573 38.9 88

Azerbaijan 506 1.1 111 121 0.7 91 6 0.1 20 Kazakhstan 4.893 10.5 79 1,031 6.2 62 301 7.4 162 Kyrghyzstan 318 0.7 91 170 1.0 78 66 1.6 97 Tadjikistan 99 0.2 72 134 0.8 103 41 1.0 164 Turkmenistan 617 1.3 3 97 0.6 87 69 1.7 87 Uzbekistan 727 1.6 91 499 3.0 82 232 5.7 141

Estonia 78 0.2 52 6 0.0 100 .. Latvia 472 1.0 137 13 0.1 39 .. Lithuania 774 1.7 102 81 0.5 84 ..

Former USSR 46,657 100 n.a. 16,723 100 n.a. 4044 100 n.a.

n.a. Not applicable. .. Negligible or none. Source: Derived from Economics of the Republics in January-October, 1991, Goskomstat USSR.

197 Table 5.10 Interrepublictrade in tractorsin the former USSR,January-October 1991 (numberof units) Internal trade Foreign Republic Imports Exports Net exports Russia 108,194 81,620 (26,574) 12,389

Armenia 1,535 (1,535) Belarus 14,467 74,676 60,209 21,656 Georgia 2,941 .. (2,941) Moldova 6,071 9,132 3,061 15 Ukraine 50,355 57,142 6,787 9,805

Azerbaijan 8,873 .. (8,873) Kazakhstan 23,013 23,437 424 53 Kyrghyzstan 2,636 (2,636) Tadjikistan 3,704 (3,704) Turkmenistan 5,030 .. (5,030) Uzbekistan 12,238 6,654 (5,584) 191

Estonia 3,342 .. (3,342) Latvia 5,116 .. (5,116) Lithuania 5,146 (5,146) Former USSR 252,661 252,661 0 44,109

Negligible or none. Source:Derived from Economicsof theRepublics in January-October,1991, Goskomstat USSR.

Table5.11 Interrepublictrade in grain combinesin the formerUSSR, January-October 1991 (numberof units) Internal trade Foreign Republic Imports Exports Net exports Russia 23,042 23,042 1,127 150 (150) Armenia Belarus 2,663 .. (2,663) Georgia 94 .. (94) Moldova 606 .. (606) Ukraine 8,962 .. (8,962)

Azerbaijan 606 .. (606) Kazakhstan 6,872 . (6,872) Kyrghyzstan 350 .. (350) Tadjikistan 150 (150) Turkmenistan 228 (228) Uzbekistan 826 (826)

Estonia 174 .. (174) Latvia 389 .. (389) Lithuania 968 .. (968) Former USSR 23,038 23,042 4 1,127

Negligible or none. Source:Derived from Economicsof the Republicsin January-October,1991, Goskomstat USSR.

198 Table5.12 Interrepublictrade in feed harvestersin the formerUSSR, January-October 1991 (number of units)

Intemal trade Foreign Republic Imports Exports Net exports Russia 9,390 3,673 (5,717) 2

Armenia 93 (93) Belarus 729 8,638 7,909 2 Georgia 169 (169) Moldova 455 (455) Ukraine 3,929 6,587 2,658 316

Azerbaijan 113 .. (113) Kazakhstan 2,476 .. (2,476) Kyrghyzstan 315 (315) Tadjikistan 171 .. (171) Turkmenistan 126 .. (126) Uzbekistan 762 .. (762)

Estonia 8 .. (8) Latvia 38 .. (38) Lithuania 123 (123) FormerUSSR 18,897 18,898 1 320

Negligible or none. Source: Derived from Economics of the Republics in January-October, 1991, Goskomstat USSR.

199 Table5.13 Deliveriesof gasolineand dlieselfuel to the agroindustrialcomplex in the former USSR, January-September1991 (percentages) Gasoline Dieselfuel Quantity Quantity delivered Republic Shareof delivered Republic Shareof Republic (thoustons) share Jan-Sept 1990 (thoustons) share Jan-Sept 1990 Russia 8,906 50 102 15,661 51 99

Armenia 103 1 86 102 0 89 Belarus 838 5 99 1,425 5 101 Georgia 151 1 80 199 1 76 Moldova 303 2 94 597 2 92 Ukraine 3,651 21 101 5,550 18 98

Azerbaijan 262 1 91 396 1 9.7 Kazakhstan 1,672 9 102 2,708 9 99 Kyrghyzstan 216 1 100 286 1 101 Tadjikistan 160 1 96 264 1 104 Turkmenistan 254 1 102 581 2 104 Uzbekistan 669 4 96 1,822 6 102

Estonia 127 1 94 169 1 94 Latvia 183 1 93 293 1 95 Lithuania 258 1 94 428 1 92 Former USSR 17,753 100 n.a. 30,481 100 n.a

n.a.Not applicable. Source:Derived from GoskomstatUSSR data.

200 Table 5.14 Feed supplies in the former USSR, in oat-unit equivalents, 1976-91 (millionsof tons) Standard Feedper Feed Sources animal standard units animal Agriculturalyear Coarsea Pasture Succulentsb Concentratesc Total (millions)d unit (tons) 1976/77 78.1 64.6 95.1 157.9 395.7 138.4 2.86 1977/78 78.7 64.6 86.9 171.2 401.4 143.9 2.79 1978/79 87.8 64.5 88.8 175.5 416.6 147.0 2.83 1979/80 76.4 61.7 83.9 169.5 391.5 148.7 2.63

1980/81 82.4 61.2 85.9 166.0 395.5 149.4 2.65 1981/82 80.2 61.4 78.3 165.1 384.9 150.8 2.55 1982/83 86.2 62.6 98.1 166.0 412.9 153.4 2.69 1983/84 93.7 64.0 100.8 166.6 425.0 156.3 2.72 1984/85 88.4 63.8 106.6 170.6 428.9 157.0 2.73

1985/86 96.3 64.1 105.5 175.3 441.3 156.9 2.81 1986/87 94.1 63.4 106.5 181.7 445.6 158.3 2.81 1987/88 98.9 61.3 116.6 184.9 461.7 156.5 2.95 1988/89 98.8 62.9 107.5 188.0 456.7 155.6 2.94 1989/90 99.8 59.5 116.1 194.5 469.9 156.1 3.01 1990/91 96.2 61.5 105.9 197.8 461.1 153.3 3.01

Note:One oatunit = 600grams of starch. a. Hay,haylage, and straw. b. Silage,green chop, potatoes, feed roots, melons, and beet pulp. c. Grain,mill feeds,oilseed meal, fish and animalmeal, dehydrated grass meal, feed yeasts,and milk. d. As of January1 of eachyear. Source:Derived from U.S.Department of Agriculturedata, basedon availableUSSR data.

201 Table 5.15 Area under fodder crops in the former USSR, by republic, 1990 and 1991 (thousandsof hectares) 1990 1991 Republic Preliminary Final Preliminary Russia 43,446.6 44,560.4 42,583.0 250.1 251.3 203.3 Armenia Belarus 2,498.6 2,553.6 2,458.6 Georgia 332.8 329.0 309.7 Moldova 494.7 560.3 467.9 Ukraine 11,042.2 11,998.8 10,986.7

Azerbaijan 520.6 522.4 483.3 Kazakhstan 11,372.3 11,065.4 11,285.4 Kyrghyzstan 619.8 641.4 611.5 Tadjikistan 229.2 229.2 230.0 Turkmenistan 313.8 337.4 285.9 Uzbekistan 1,031.7 1,039.7 1,061.1

Estonia 644.0 466.6 474.3 Latvia 808.9 819.7 816.8 Lithuania 919.9 932.7 913.4 Former USSR 74,525.2 76,307.9 73,170.9

Note:Including areas planted to perennial crops. Source:Derived from Goskomstat USSR data.

Table 5.16 Area under silage crops in the former USSR, by republic, 1990 and 1991 (thousandsof hectares) Silagecrops without maize Maizefor silageand greenfodder 1990 1991 1990 1991 Republic Preliminary Final Preliminary Preliminary Final Preliminary Russia 2,628.0 2,717.1 2,292.1 9,492.2 10,088.8 9,090.5 Armenia 29.9 19.2 18.2 20.5 21.2 14.1 Belarus 19.4 19.5 17.9 468.2 469.2 434.4 Georgia 11.3 9.5 13.7 53.0 55.0 52.0 Moldova 1.2 2.7 0.7 230.8 292.4 204.2 Ukraine 80.8 87.1 81.9 3,749.6 4,636.9 3,765.2

Azerbaijan 6.5 7.0 2.8 95.6 98.5 103.7 Kazakhstan 155.5 152.0 131.3 2,263.4 2,281.8 1,944.1 Kyrghyzstan 16.8 11.9 10.8 80.4 89.6 86.1 Tadjikistan 4.1 3.0 3.1 41.1 42.7 40.7 Turkmenistan 0.8 0.3 0.4 46.4 59.5 36.9 Uzbekistan 16.4 12.8 20.5 192.9 208.9 225.7

Estonia 2.1 - - 2.5 2.4 - Latvia 8.3 11.5 7.7 44.8 44.8 39.5 Lithuania 73.9 82.7 69.9 78.1 77.8 66.3 FormerUSSR 3,055.0 3,136.3 2,671.0 16,859.5 18,469.5 16,103.4

- Not available. Source:Derived from Goskomstat USSR data.

202 Table 5.17 Delivery of agrochemicals to the agricultural sector in Russia, 1986-91 (thousands of tons)

Percentage change from Agrochemical 1986 1987 1988 1989 1990 1991 1986 to 1991 Herbicides 170 168 148 115 76 77 -55 Insecticides 96 77 67 43 31 25 -74 Fungicides 50 45 41 40 38 32 -36 Defoliants 32 35 45 48 43 47 47 Subtotal 348 325 301 246 188 181 -48 Pesticides 354 333 308 255 195 188 -47

Note:Quantity is reported in active ingredients. Deliveries are not necessarily equal to actual use because of losses in the distribution chain. Source: Derived from Goskomstat Russia data.

Table 5.18 Fertilizer production and deliveries to agriculture in the former USSR, 1986-91 (millions of tons)

Percentage Plant Nutrienta change from Year Nitrogen Phosphate Potassium Total previous year

Production 1986 15.2 9.3 10.2 34.7 n.a. 1987 15.7 9.7 10.9 36.3 5 1988 15.8 10.0 11.3 37.1 2 1989 14.4 9.7 10.2 34.3 -7 1990 13.2 9.5 9.0 31.7 -8 1991 12.1 9.2 8.8 30.1 -5

Deliveriesb 1986 11.5 8.4 6.7 26.6 n.a. 1987 11.8 8.6 7.1 27.5 3 1988 11.6 8.6 7.0 27.2 -1 1989 9.9 8.2 6.4 24.5 -10 1990 8.7 7.8 5.1 21.6 -12 1991 7.7 7.5 4.8 20.0 -7 n.a. Not applicable. a. Average nutrient content: Nitrogen fertilizers 20.5% N Phosphatefertilizers 18.7% P205 Potassium fertilizers 41.6% K20 Groundphosphate rock, which is includedin phosphatefertilizers, contains about 19% P 205. b. Deliveries to the agricultural sector for use on farms. Actual fertilizer use on farm is lower than deliveries because of high distribution losses (over 20% accordingto some estimates). Source: Derived from Goskomstat USSR data.

203 Table5.19 Interrepublictrade in fertilizers(nutrients) in the formerUSSR, January-October1991 (thousands of tons of plant nutrients)

Net Internal Intemal Internal Foreign Republic Import Export Trade Export

Russia 1978 2320 342 3525

Armenia 83 -83 Belarus 624 2270 1646 2113 Georgia 53 82 29 4 Moldova 161 -161 Ukraine 2270 538 -1732 1434

Azerbaijan 122 135 13 Kazakhstan 242 983 741 21

Kyrghyzstan 233 . -233 Tadiikistan 254 50 -204 Turkmenistan 225 54 -171 6 Uzbekistan 234 803 569 221

Estonia 146 201 55 Latvia 351 95 -256 Lithuania 461 152 -309 26 - Total 7437 7683 246 7350

Negligible or none. Source: Derived from Economics of the Republics in January-October.1991, Goskomstat USSR.

204 Table 6.1 State procurement of selected agricultural products in the former USSR, 1980-90 (millionsof tons) 1981-85 Product 1980 Average 1986 1987 1988 1989 1990 Grain 69.4 66.6 78.8 73.3 61.5 59.1 68.0 Cotton Raw 9.1 8.3 8.2 8.1 8.7 8.6 8.3 Lint 2.7 2.5 2.7 2.5 2.8 2.7 2.6 Sugarbeet 65.2 68.2 70.7 78.9 78.0 91.9 73.9 Sunflowerseed 3.4 3.9 4.3 4.9 4.9 5.6 4.7 Potatoes 10.7 15.3 17.7 15.8 12.3 13.6 10.4 Vegetables 18.4 20.1 21.3 20.4 20.0 19.4 17.2 Livestockand poultry (live weight) 16.2 17.7 20.5 21.6 22.6 23.1 22.7 Milk andmilk products 57.2 62.2 71.8 74.3 76.9 78.1 77.0 Eggs(billion units) 42.0 47.1 52.9 54.8 56.6 54.8 52.3

Source:USSR Statistical Yearbook, various years.

205 Table6.2 Overviewof estimatedlosses; of agriculturalproducts in the formerUSSR

Agriculturalproduct Quantitylost Causesand sources

General 30-40% Greatestlosses in transport and storage (Vestnik sel'skokhozyaistevnnoy nauki,6/1989, p. 6).

Grains General 30-40million tons Lossesoccur between harvest and processing because of shortagesof machinery,vehicles, storage capacity, and labor (e.g., combine harvester drivers,seasonal harvest workers from the towns).(USSR Statistical Year- book,1988, p. 427 andother Sovietsources).

1988and 1989 40 milliontons Sameas above.This quantitycorresponded roughly to the levelof Soviet imports(Argumenty i fakty,30/1990, p. 1).

1990 55-60million tons Differencebetween the potentialand the actualgross ("bunker weight") harvest,due inpart to unfavorableweather but mainlyto a late start in har- vestingand delays and interruptionsbecause of shortagesof fuel andspare partsin 1990.

Meatand meatproducts Logisticsand transport almost1 million Lossescaused by a lackof refrigeratedtransport and storage, poor logis- tons tics,and on the way intothe retailtrade (Sotsialisticheskayaindustriya, 30 October,1988, p. 1).

Total 2-3 milliontons Includeslosses in retailtrade andanimals which perish or are culledon farms andon the longhauls to the slaughterhouses.Does not includede- ductionsfor fat and by-products.

Milk andmilk products 12 milliontons Lossesduring processing (APK: ekonomika,upravleniya p. 15); othe's un- knownbut certainlysizable.

Sugarbeet and sugar Sugaralone 25-30% Causedmainly by harvestingtoo early,shortage of transportand storage Over 1 million capacity,technical shortcomings in the processingindustry, excessively tons longprocess campaigns.

Potatoes 30-50%of the Low degreeof mechanizationin harvesting,shortages of labor,transport. harvest Abouthalf the overalllosses-I 7 tonsbefore 1988-Sel'skayazhizn' 20 August1988) during storage, processing, and retailing. Vegetablesand melons General 30-40%of the harvest

1989 20%spoiled in Lackof laborand transport from the fields(Argumentyi fakty, 30/1990, p. 1). the fields

Fruitand berries 40% of the harvest

Roughageand 1/3 of harvest Notharvesting at the optimumtime, inadequatestorage eedcapacity, short- succulentfeed age of preservingagents (Planovoe khozyaistvo, 3/1990, p. 114).

Cotton Over 10%of Lossesin storage,processing, and trade(Ekonomicheskie nauki, 7/1990, the crop p. 102). Note:Estimates include field losses and are based on the various sources listed, plus interviews. Source:OECD, 1991.

206 Table 6.3 Productionof majorfood commoditiesin the formerUSSR, selected years, 1980-90 (thousands of tons)

Food commodity 1980 1985 1988 1989 1990 Meat 9,140 10,808 12,826 13,164 12,954 Beef and veal 4,392 4,957 5,846 6,012 6,018 Mutton and lamb 346 357 457 472 458 Pork 2,446 2,894 3,419 3,542 3,473 Poultry 1,224 1,744 2,137 2,188 2,166 Other meat and by-products 732 856 967 950 839 Fish products 5,000 5,600 5,700 5,600 5.400 Butter 1,278 1,517 1,724 1,734 1,739 Cheese, full fat 648 814 894 899 887 Whole milk productsa 25,500 29,800 33,500 34,600 34,600 Margarine 1,263 1,411 1,494 1,503 1,403 Sugar 10,100 11,800 12,100 13,300 12,500 From sugar beets 6,600 7,600 8,200 8,800 8,700 Vegetable oil 2,650 2,545 3,142 3,249 3,264 Fresh and frozen vegetables 2 3 4 5 4 Confectionary products 3,861 4,285 4,859 5,101 5,244 Pasta products 1,554 1,654 1,781 1,802 1,842

a. Milk equivalent. Source: USSR Statistical Yearbook.

Table6.4 Productionof majorfood commoditiesin the former USSR,January-October 1991 (percentages) Production Share of Russian share in Commodity (thous tons) Jan-Oct 1990 production

Meat 7,807 88 54 Butter 1,281 87 53 Whole milk productsa 24,686 190 63 Cheese 629 87 57 Margarine products 915 78 57 Vegetable oil 2,426 96 37 Flour 29,707 101 51 Pasta 1,575 107 58 Bread and baked goods 25,592 104 57 Confectionary products 3,726 90 58

a. Milk equivalent. Source: Derived from Economics of the Republics in January-October, 1991, Goskomstat USSR.

207 Table6.5 Grain production,consumption, and net foreigntrade in the former USSR,1987/88 (millions of tons)

Commodity Production Consumption Net trade Importing regions Russia Excluding Non-Black Soil Region 72.70 75.03 (2.24) Non-Black Soil Region 19.57 37.36 (17.79) Belarus 7.27 9.40 (2.13) Moldova 1.84 2.92 (1.08) Baltic states 5.30 7.93 (2.63) Trans-Caucasus 1.81 7.33 (5.52) Central Asia statesa 3.89 13.94 (10.05) Exporting regions Ukraine 45.12 41.10 4.02 Kazakhstan 24.12 16.71 7.42

Total 181.62 211.72 (30.00) a. ExceptKazakhstan. Source:Derived from U.S.Department of Agricultureclata.

Table6.6 Transportof grainand grainproducts in the formerUSSR, 1986-89 1987-89 Average Mode ot transport 1986 1987 1988 1989 Averagea share (%) Total volume hauled (million tons) Rail 145.0 148.6 151.0 148.3 149.3 50.8 Road -134.5 134.9 115.4 101.3 117.2 39.9 Sea 20.2 21.5 21.3 19.7 20.8 7.1 Inland water 6.8 6.1 6.2 6.7 6.3 2.2 Total 306.5 311.1 293.9 276.0 293.7 100.0

Total movement (billion ton-kilometers) Rail 150.4 159.2 169.9 - 159.8 93.6 Inland water 7.2 6.4 6.6 - 6.7 3 9 Road 4.5 4.3 3.7 - 4.2 2 5 Total 162.1 169.9 180.2 - 170.7 100 0

Average distance hauled (kilometers) Rail -1037 1071 1125 - - Inland water 1058 1049 1064 - - -- Road 33 31 32 - - --

- Not available. a. Total movementaverage is based on 1986to 1988data. Source:Ministry of Railways,Rosrechflot, and Minmorflot.

208 Table6.7 Grainand milledproducts handled by seaportsin the former USSR,1988 (thousandsof tons)

Seaport Imports Exports Russian ports Archangel 488 Murmansk 68 St. Petersburg 5,315 Kaliningrad 840 Novorossiysk 3,730 1,265 Vladivostok 1,617 51 Nakhodka 1,192 34 Vanino .. 122 Other .. 170 Subtotal 13,250 1,642

Baltic ports Novotalinn 3,202 Talinn 975 Riga 1,853 Ventspils 305 Klaipeda 1,613 Subtotal 7,948

Ukrainian ports Utoch .. 663 Khhi .. 32 Reni 360 Ismail 202 49 llichievsic 337 40 Odessa 13,725 1,109 Nikolaev 29 Kerch 10 Maritopol 230 Other 22 Subtotal 14,915 1,893

Georgian ports Poti 296 Batumi 156 Subtotal 452

Total 36,565 3,535

Negligible or none. Source: Minmorflot.

209 Table 6.8 Transportation of food products by mode in the former USSR, 1989 (thousandsof tons) Internal transport State Imports Total Inland Product purchases by sea supply waterway' Railroado Trucka Grain 59,000 44,450 103,450 4,717 121,300 80,000 Sugar beet 91,900 91,900 3,500 92,000 Raw Milk 78,100 78,100 - 78,100 Potatoes 14,600 53 14,653 183 10,000 29,000 Livestock 23,300 23,300 2,900 23,300 Vegetables 19,000 602 19,602 246 1,800 39,000 Fruit and grapes 8,300 - 8,300 - - 16,000 Milk products 34,600 - 34,600 3,900 34,600 Sugar 13,300 5,373 18,673 18,400 37,000 Meat and meat products 17,102 430 17,532 3,800 35,000 Fish and fish products 16,900 - 16,900 5,300 34,000 Confectionary 5,101 - 5,101 1,500 10,000 Vegetable oil 3,249 1,277 4,526 4,500 9,000 Pasta 1,802 1,802 900 3,000 Margarine 1,503 1,503 - 2,500 Total 387,757 52,185 439,942 5,146 177,800 522,500

- Not available. Note: Data for the haulage of food by sea, rail, and inland water come from official transport statistics. Comparable data for transport by road are not available. The road haulage estimates, which are conservative, are based on reported haulage by some road transport organizations and on the as- sumptions that most food is carried to and from other rnodes of transport by road and that all distribution to retail and other final destinations takes place by road. a. Total volume moved by different transport modes is generally larger than total supply due to multiple moves. Source: USSR Statistical Yearbook, 1989; Ministry of Railways; Rosrechflot; and Minmorflot.

210 Table7.1 Averageretail food pricesin the former USSR,1970-89 (rubles per kilogram)

Food product 1970 1980 1985 1986 1987 1988 1989 Pricepaid by blueand whitecollar workers Beef 2.16 2.72 2.86 2.89 2.91 2.94 3.03 Lamb and mutton 2.06 2.60 2.62 2.68 2.53 2.52 2.73 Pork 2.34 2.89 2.84 2.92 2.89 2.90 2.95 Sausage and smoked products 2.44 2.77 3.12 3.30 3.58 3.73 3.95 Fish and fish products 0.99 1.41 1.30 1.28 1.32 1.35 1.45 Potatoes 0.17 0.29 0.27 0.26 0.29 0.35 0.39 Vegetables and melons 0.35 0.49 0.51 0.53 0.56 0.58 0.67 Fruit 0.84 1.35 1.42 1.34 1.45 1.61 1.83 Confectionary 2.50 3.03 3.44 3.49 3.42 3.32 3.43

Price paid by kolkhoz members Beef 2.46 4.19 4.21 4.17 4.12 4.24 4.35 Lamb and mutton 2.73 4.47 4.48 4.42 4.23 4.38 4.74 Pork 2.28 2.88 3.14 3.25 3.21 3.25 3.18 Sausage and smoked products 2.58 3.20 4.06 4.28 4.60 4.81 4.97 Fish andfish products 0.84 1.20 1.14 1.11 1.13 1.14 1.21 Potatoes 0.16 0.35 0.40 0.33 0.36 0.43 0.49 Vegetables and melons 0.21 0.34 0.37 0.37 0.38 0.38 0.43 Fruit 0.49 1.22 1.30 1.17 1.32 1.45 1.60 Confectionary 1.88 2.21 2.62 2.68 2.65 2.58 2.66

Note: Findings of a household survey. Prices are weighted averages of prices prevailing in state and cooperative trade and in collective farm markets. Average prices published in the USSR Statistical Yearbook exclude the collective farm markets, and therefore are lower on all accounts. Source: Goskomstat USSR.

Table7.2 Retailprices in state and cooperativetrade and in collectivefarm marketsin Russia,1990 (rubles per kilogram)

Index of prices (state trade = 100) State Cooperative Farm Cooperative Farm Commodity trade trade markets trade markets

Meat 1.90 3.99 7.86 210 414 Butter 3.43 7.20 9.69 210 283 Vegetable oil 1.63 2.82 4.25 173 261 Eggs(perten) 1.10 1.14 1.60 104 145 Flour 0.45 0.85 1.00 189 222 Groats and pulses 0.43 2.69 2.87 626 667 Potatoes 0.28 0.57 0.99 204 354 Vegetables 0.61 1.63 2.80 267 459 Fruit and melons 1.51 3.00 4.03 199 267

Source: Russia Statistical Yearbook. 1990.

211 Table 7.3 Procurement prices for selected agricultural commodities in the former USSR, 1981-91 (rublesper ton)

Commodity 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 Grain 128 128 150 157 155 172 173 205 220 313 354 Potato 173 167 181 182 186 180 177 191 210 286 908 Sugar beets 38 39 56 55 55 56 57 56 58 56 - Vegetables 200 194 221 217 220 231 242 248 255 347 972 Sunflower seeds 210 211 270 272 270 276 375 382 498 453 453 Eggs 98 98 97 97 97 96 97 97 96 103 194 Milk 293 299 417 424 426 424 429 525 553 555 702 Fruits 306 302 299 313 320 328 395 413 421 553 - Cotton 646 679 800 800 808 765 781 841 923 1088 - Cattle 1690 1700 2340 2491 2506 2526 2631 2955 3120 3422 4563 Poultry 1951 1984 2148 2157 2215 2134 2198 2252 2377 2531 3735 Hogs 1644 1692 2107 2217 2214 2166 2220 2505 2642 2971 4080

- Not available. Note:Based on annualaverage for stateand collectve farms. Source:Derived from GoskomstatUSSR data.

Table 7.4 Farm input prices paid by a typical state farm in Russia, 1988-89 and 1991 (rubles)

Prices paid Percentage Inputs 1988-89 Dec. 1991 increase

Tractor (per unit) 5,000 15,000 200 Urea (per ton) 120 250 108 Phosphate (per ton) 80 180 125 Pesticides (per ton) 300 700 133 Fuel (per liter) for Tractor 0.05 0.15 200 Other farm machinery 0.15 0.20 33 Wages (per month) 250 350 40 Source:World Bank staff estimates.

Table 7.5 Marketing margins for selected food commodities in Russia, 1990 (rublesper ton) Farrrigate Procurement and trans- Industrial Wholesale and Commodity pricea portation processing retail trade Beef 7,914 23 281 244 Pork 5,229 19 311 252 Whole milk 574 7 40 32 Butter 12,785 118 682 238 Sunflower seed oil 1,179 77 190 246 Sugar 685 89 270 181 a. Pricespaid at farmgateto obtainone ton of output.Prices of cattle, hogs,sunflower seeds, sugar beets, and raw milk havebeen adjustedusing publishedRussian cut-out and extractionrates. Source:The Structureof RetailPrices for ConsumerGoods in 1989-90,Goskomstat Russia.

212 Table7.6 Retailprices for majorfood commoditiesin Russia,by week, 1992 (rublesper kilogram)

Commodity Jan.21 Jan.28 Feb.4 Feb.11 Feb.18 Feb.25 Mar.3 Mar. 10 Mar. 17 Apr. 14 Apr.21 Apr.28 May5 Beef, grade 1 83.99 77.47 77.82 75.68 72.59 69.43 69.98 65.35 71.07 78.39 74.89 73.60 78.26 Pork 82.69 78.37 73.48 76.12 71.30 73.93 75.91 75.11 75.99 80.45 73.03 78.29 85.78 Vegetableoil 29.85 22.67 18.98 20.88 22.31 23.31 19.63 23.85 31.22 35.86 36.03 35.53 35.67 Butter 82.01 114.34 83.82 94.19 86.67 82.76 81.40 91.95 108.18 157.98 157.18 154.18 164.97 Milk, fluid (per liter) 2.45 1.95 1.95 1.91 2.26 2.51 2.83 3.13 3.57 5.44 5.48 5.49 5.48 Hard cheese 57.81 132.92 76.13 69.20 63.91 88.96 99.81 101.53 116.53 120.01 125.38 125.74 130.06 Eggs (per 10) 17.39 16.78 14.87 14.98 15.01 14.86 14.29 14.73 14.71 21.36 22.27 23.32 23.09 Bread,wheat 2.49 2.38 2.45 2.52 2.52 2.80 3.04 3.31 3.39 4.30 4.37 4.57 4.69 Bread, best quality 5.12 5.77 5.92 6.31 6.52 6.27 6.68 7.21 7.36 9.77 9.61 10.01 10.31 Sugar 9.10 11.41 8.18 8.57 12.58 17.72 10.20 14.78 19.17 25.09 31.66 37.23 39.05 Potatoes 5.51 5.43 5.65 5.89 5.64 5.69 6.05 6.45 6.53 6.83 7.19 7.25 7.17

Source:Goskomstat Russia.

Table 7.7 Growthin retailfood pricesin Russia,1990-92 (rublesper kilogram) Increase in prices (number of times) from 1990 from 1991 April March to to Commodity 1990 1991 1992 March 1992 March 1992 Beef 2.00 7.00 71.07 35.54 10.15 Pork 1.90 6.00 75.99 39.99 12.67 Poultry 3.40 5.60 50.00 14.71 8.93 Milk (per liter) a 0.28 0.50 3.57 12.75 7.14 Butter 3.60 8.80 108.18 30.05 12.29 Bread (loaf) b 0.20 0.60 3.39 16.95 5.65 Wheat flour 0.46 1.40 8.86 19.26 6.33 Sugar 0.94 2.00 19.17 20.39 9.59 Vegetable oil 1.70 3.40 31.22 18.36 9.18 Margarine 1.50 3.00 35.78 23.85 11.93 Rice 0.88 2.20 17.01 19.33 7.73 a. Subsidizedprice. b. Subsidizedprice for wheatbread, medium quality. Depending upon the quality, prices ranged from 2 to 9 rublesper loaf in March1992. Source:Derived from GoskomstatRussia data.

213 Table7.8 Growthin agriculturalfarmgate prices in Russia,1990-92 (rublesper ton) Increase in prices U.S. farmgate (number of times) prices March From 1990 From 1991 March 1992 Commodity 1990 1991 1992 to 1992 to 1992 (US$ per ton)

Outputs Wheat 300 322 3,400 11.3 10.6 147 Corn 380 420 3,600 9.5 8.6 98 Cattle 3,888 4,655 20,700 5.3 4.4 1,342 Hogs 3,097 4,116 25,000 8.1 6.1 880 Poultry 2,560 3,809 19,200 7.5 5.0 660 Milk 654 822 4,608 7.0 5.6 278 Eggs (per thousand) 105 232 1,270 12.1 5.5 36

Inputs Mixed feed 178 377 4,500 25.3 11.9 179 Grain combine (per unit) a 47,000 75,000 1,000,000 21.3 13.3 109,000 Tractor (per unit) b 7,839 17,584 240,000 30.6 13.6 18,700 Urea 116 201 7,840 67.6 39.0 182 Diesel fuelc 133 167 835 6.3 5.0 265 a. Largecapacity. b. 45-60horsepower. c. In May1992, the new pricefor diesel was 6 rublesper liter or approximately7,000 rubles per ton, implyinga 53-foldincrease over 1990prices and a 42-foldincrease over 1991prices. Source:Derived from GoskomstatRussia and RussianMinistry of Agriculturedata andWorld Bankstaff estimates.

Table7.9 Marketingmargins for selectedcommodities in Russia,March 1992 (rublesper ton) Share Cut-cut Farmgate Retail price Producer processing Value of equivalent of Retail minus 28% Marketing Product price rate by-productsa retail price price VAT margins (%)b Beef 20,700 0.50 0.10 37,260 71,070 55,523 49 Pork 25,000 0.65 0.10 34,615 75,990 59,367 72 Poultry 19,200 0.75 0.10 23,040 50,000 39,063 70 Milk 4,600 1.00 0.00 4,600 3,570c 2,789 (39)

Butter - - - 73,600 108,180 84,516 1 5 d

Wheat flour 3 ,400 e 0.72 0.05 4,486 8,860 6,922 54

- Not available. a. Shareof producerprice. b. Priorto January1992 marketingmargins were 10%or lower,except for wheatflour. c. Subsidizedmilk price; hence implied negative marketing margins. d. Marketingmargins for butterincreased in April to about50%. e. Wheatprice. Source:Derived from GoskomstatRussia and Russian Ministry of Agriculturedata and World Bankstaff estimates.

214 Table7.10 Comparisonof energyintensities in the formerUSSR, and selectedcountries, 1990 Energy Energy GNP consumption consumption per capita per capita per US$of Country (US$) (kg)a GNP (kg)b FormerUSSR (estimate) 2,400 4,800 2.00 China 370 598 1.62 Czechand SlovakFederal Republic 3,140 5,081 1.62 FederalRepublic of Germany 22,320 3,491 0.16 Japan 25,430 3,563 0.14 Korea 5,400 1,898 0.35 Poland 1,690 3,416 2.02 UnitedStates 21,790 7,822 0.36 a. Oil equivalentper person. b. Oil equivalentper U.S.dollar. Source:World Development Report 1991 and World Bank staff estimates.

Table7.11 Food processingcosts in the former USSRas a shareof the total value of output,1987 (percentages) Meatand Fruit and Oilsand Cereal Cost component dairy vegetables fats products Sugar Other Agriculture 44 43 20 27 31 30 Own-sectorpurchases 26 11 32 19 18 13 Transport 2 4 2 3 3 4 Fuel 1 2 1 1 1 3 Importedinputs 0 0 10 11 17 9 Laborcosts 6 14 3 7 4 5 Other 21 26 32 32 26 36 Total 100 100 100 100 100 100

Source:Derived from the USSRNational Input/Output Table (1987).

Table7.12 Cost of productionand financialprofitability for selectedlivestock products in Russia, Marchand May 1992 (rublesper ton) Withoutnew price subsidy(March 1992) With newprice subsidy(May 1992)8 Priceas a Priceas a Averagecost Farmgate percentage A veragecost of Farmgate percentage Commodity of production price of cost production price of cost Milk 4,845 4,608 95 6,377 7,084 111 Cattle 34,425 20,690 60 40,500 29,565 73 Hogs 31,195 24,960 80 36,700 33,764 92 Poultry 25,670 19,170 75 30,200 24,462 81 Eggs(per thousand) 1,050 1,270 121 1,157 1,385 120

Note:Livestock prices are in terms of live weightequivalent. a. Basedon priceand subsidydata obtainedfrom the Russiangovernment. Source:Dervied from RussianMinstry of Agriculturedata.

215 Table 7.13 Farmgateprices for selectedagricultural commodities in Russia,1990 and 1991 (rublesper ton)

Percentage Commodity 1990 1991 increase Grain 264 405 53 Oilseeds 464 790 70 Sugar beets 67 83 24 Potatoes 283 997 252 Vegetables 429 1,197 179 Melons 204 375 84 Fruits 659 1,496 127 Grapes 665 1,629 145 Caftle 3,428 4,974 45 Sheep and goats 3,313 4,143 25 Hogs 2,868 4,333 51 Poultry 2,694 4,496 67 Milk 624 828 33 Eggs 111 231 108 Wool 13,419 35,662 166

Average output prices received by farmers - - 60 Average input prices paid by farmers - - 93 Shifts in terms of tradea - - 65

- Not applicable ,Note: Prices are procurement prices,including bonus. a. Outputprice increase divided by inputprice increase. Source:Derived from Goskomstat Russia data.

Table7.14 Farmgateand internationalprices for wheat and maize in Russia,March 1992 (U.S. dollars per ton) Farmgateprices in Russia Internationalprice Estimated c.i.f. Rubles At At At Farmgate price ci.f Russian Crop per ton US$1=R75 US$1=R100 US$1=R125 in the U.S. fob.a Russiab farmgate price0

Wheat 3,400 45 34 27 147 161d 186d 206d Maize 3,600 48 36 29 98 117 142 162 a. MaizePrice: U.S., No. 2, Yellow,f.o.b., U.S. Gulf. WheatPrice: U.S. No. 2, Soft red winter,f.o.b., U.S. Gulf. b. Includes,on average,$25/ton for insuranceand international freight. c. Includes,on average,$20/ton for internaltransport and handlingcosts. d Subsidizedinternational U.S. f.o.b., c.if. RussianDort and c.i.f. Russianfarmgate prices are estimatedto be $106,$131, and $151,respectively. The impliedsubsidy under the ExportEnhancement Program by the UnitedStates was about $55/ton. Source:World Bankstaff estimates;U.S. Departmentof Agriculture;World Bank Monthly Commodity Price Data.

216 Table 7.15 Farmgateprices for selectedlivestock products in Russia,March and May 1992 (US dollars per ton)

Without new price subsidy (March 1992) With new price subsidy (May 1992)A Rubles At At At Rubles At At At Farmgate price Commodity per ton US$1=R75 US$1=R100 US$1=R125 per ton US$1=R75 US$1=R100 US$1=R125 in the U.S. Milk 4,608 61 46 37 7,084 94 71 57 278

Cattle 20,700 276 207 166 29,565b 394 296 237 1,342

Hogs 25,000 333 250 200 33 ,764b 450 338 270 880

Poultry 19,200 256 192 154 24 ,462 b 326 245 196 660 Eggs (per thousand) 1,270 17 13 10 1,385 18 14 11 36

NoteS:Livestock prices are in terms of live weight equivalent. a. Based on price and subsidy data obtained from the Russian government. b. Estimates based on Russian government data. Source: Russian Ministry of Agriculture and U.S. Deparment of Agriculture.

Table 7.16 Farmgateand internationalfertilizer prices in Russia,March 1992 (U.S. dollars per ton)

Farmgate prices in Russia Farmgate Intemational price Estimated c. i. f. Rubles At At At price in c.i.f Russian Fertilizer per ton US$1=R75 US$1=R100 US$1=R125 the U.S. fo.b.a Russiab farmgate pricec

Urea 7,840 105 78 63 182 121 d -d __d

Triple superphosphate 7 ,78 4e 104 78 62 168 120 145 165 Diammonium phosphate 9,360 125 94 75 197 153 178 198

a. Urea: Bagged, spot, f.o.b., West Europe. Urea price is adjusted to bulk by subtracting $20 (from $141) for bags and bagging cost. Triple superphosphate: bulk, spot, f.o.b., US Gulf. Diammonium phosphate: bulk,spot, f.o.b.. US Gulf. b. Includes, on average, $25/ton for insurance and international freight. c. Includes, on average, $20/ton for internal transport and handling costs. d. Russia is a net exporter of urea.

e. Converted from the price for double superphosphate (33% P20 5) to the price for triple superphosphate (46% P20 5). The price for double superphosphate was R5584/ton. Source: World Bank Monthly Commodity Price Data; World Bank staff estimates; US Department of Agriculture.

217 Table 8.1 Retailfood subsidiesin the former USSR,selected years, 1960-90 (billionsof rubles) 1990 Percentage Item 1960 1965 1970 1975 1980 1985 Amount Share Meat 1.4 2.8 8.8 12.2 14.0 26.6 48.0 46.1 Fish 0.1 0.2 0.2 0.2 0.2 2.1 3.1 3.0 Milk - - 2.1 4.0 7.5 18.9 31.0 29.8 Grain - 0.3 0.8 0.6 0.8 4.4 13.3 12.8 Potatoes - - 0.2 0.7 1.4 3.0 4.4 4.2 Sugar - - 0.2 0.7 1.4 3.0 4.4 4.2

Total 1.5 3.3 12.3 18.4 25.3 58.0 104.2 100

Percentage of state 2.1 3.2 7.8 9.2 8.1 14.5 20.0 n.a. expenditure

n.a. Not applicable. - Not available. Source: USSR Ministry of Finance.

Table8.2 Explicitfood and agriculturalsubsidies in Russia,1988-91 (billionsof rubles)

Type of subsidy 1988 1989 1990 1991 Food subsidies Consumer price 27.5 28.6 39.5 80.0 Subtotal 27.5 28.6 39.5 80.0

Agricultural subsidies Producer price 20.1 22.6 17.2 0.0 Farm investmenta 8.2 8.1 7.1 16.4 Inputsb 0.9 0.1 0.0 0.0 Operational expendituresc 2.1 2.2 2.2 2.4 Fuel and energy 4.5 5.0 5.0 1.3 Interest rated - - - 3.0 AKKORe n.a. n.a. n.a. 1.0 Subtotal 35.8 38.0 31.5 24.1

Total subsidies 63.3 66.6 71.0 104.1 GDP 540.0 560.0 600.0 1042.0 Subsidies as percent of GDP 11.7 11.9 11.8 10.0 n.a. Not applicable. - Not available. a. State budget funding for on-farm construction work on both state and collective farms for livestock housing, storage, and other production investments. b. Fertilizer and farm machinery. c. Includes subsidies for items such as soil improvement and animal health control. d.Does not include agricultural credit write-offs. e. Subsidies channeled through the Russian Peasant Farmers' Association (AKKOR). Source:Derived from Goskomstat Russia and Russian Ministry of Finance data, and World Bank staff estimates.

218 Table8.3 Subsidiesas a shareof retail prices in the statetrade networkfor majorfood commodities in the former USSR,1989 (rublesper kilogram) Average Shareof subsidy retailprice Average in totalcosts Commodity in statetrade price subsidy Totalcost (percent)a Bread 0.32 0.08 0.40 20 Beef 1.81 5.20 7.01 74 Pork 1.86 2.79 4.65 60 Mutton 1.52 5.79 7.31 79 Poultry 2.82 1.60 4.42 36 Wholemilk 0.25 0.39 0.64 61 Butter 3.40 8.88 12.28 72 Cheese,full fat 2.36 2.16 4.52 48 Sugar 0.86 0.14 1.00 14 a. Totalcost = Averageretail price + Averageprice subsidy. Source:Derived from Goskomstat USSR data.

Table8.4 Retailfood price subsidiesin the formerUSSR, by republic,selected years, 1970-90 (billionsof currentrubles)

Republic 1970 1980 1985 1990 Russia 7.1 12.3 32.0 56.7

Armenia 0.1 0.2 0.4 0.6 Belarus 1.2 1.8 4.2 6.9 Georgia 0.1 0.3 0.6 1.0 Moldova 0.2 0.3 0.7 1.6 Ukraine 2.5 4.2 8.9 17.2

Azerbaijan 0.2 0.3 0.6 0.9 Kazakhstan 1.2 1.6 3.5 6.8 Kyrghyzstan 0.2 0.3 0.5 1.1 Tadjikistan 0.2 0.2 0.3 0.9 Turkmenistan 0.3 0.3 0.5 1.1 Uzbekistan 0.9 1.1 1.7 4.5

Estonia 0.2 0.4 0.8 0.5 Latvia 0.4 0.5 1.3 1.3 Lithuania 0.7 0.9 2.1 2.5 FormerUSSR 15.5 24.7 58.1 103.6

Note:More than 75% of thesubsidy payments were for livestock products. Source:Derived from Goskomstat USSR data.

219

Annex tables

TableA1.1 Areaand populationof the formerUSSR, by republic,as of January1,1991

Population Area Growth Density Sqkm Percentage Number Percentage rate 1990 to per Percentage Republic (thousand) of total (thousand) of total 1991(%) sq. km rural Russia 17,075 76.2 148,543 51.2 0.3 8.7 26.1

Armenia 30 0.1 3,376 1.2 2.5 112.5 31.8 Belarus 208 0.9 10,260 3.5 0.0 49.3 32.9 Georgia 70 0.3 5,464 1.9 0.1 78.1 43.8 Moldova 34 0.2 4,367 1.5 0.1 128.4 52.5 Ukraine 604 2.7 51,944 17.9 0.2 86.0 32.5

Azerbaijan 87 0.4 7,137 2.5 0.1 82.0 46.5 Kazakhstan 2,717 12.1 16,793 5.8 0.6 6.2 42.4 Kyrghyzstan 199 0.9 4,422 1.5 1.3 22.2 61.9 Tadjkistan 143 0.6 5,358 1.8 2.1 37.5 68.6 Turkmenistan 488 2.2 3,714 1.3 2.5 7.6 54.6 Uzbekistan 447 2.0 20,708 7.1 1.9 46.3 59.7

Estonia 45 0.2 1,582 0.5 -0.1 35.2 28.5 Latvia 65 0.3 2,681 0.9 -0.2 41.2 28.9 Lithuania 65 0.3 3,728 1.3 0.1 57.4 31.2

FormerUSSR a 22,403 100.0 290,077 100.0 0.5 12.9 33.9 a. Area of the FormerUSSR included 127,300 square kilometers for theWhite Seaarea and Sea of Azov,that were not includedin the areaof individual republics. Source:Derived from USSRStatistical Yearbook, 1990.

TableA1.2 Averageannual growth in net materialproduct in the formerUSSR, by sector,1981-89 (percentages,based on comparable prices)

Shareof total 1981-85 1986-89 outputfor Sector Average Average 1986 1987 1988 1989 1989a Industry 2.9 3.3 0.6 3.6 6.1 3.1 41.9 Agriculturea 1.0 2.4 7.1 -1.4 2.5 1.7 23.4 Construction 3.2 6.6 12.1 5.5 7.6 1.6 12.8 Transportand communication 2.9 0.8 4.2 0.3 5.8 -6.5 5.6 Agriculturalprocurement 0.7 7.8 4.9 6.2 6.7 13.5 0.6 Material-technicalsupply 3.2 0.4 3.7 5.4 -9.5 2.9 0.9 Dataprocessing 3.6 22.0 3.0 15.9 13.9 63.7 0.2 Forestry 1.9 3.8 0.7 0.9 2.1 12.0 0.1 Otherbranches 0.1 7.6 0.3 5.2 22.8 3.5 0.9 Receiptsfrom foreigntrade 9.5 -4.2 -8.8 -4.7 -6.6 3.8 8.5 Total 3.2 2.7 2.3 1.6 4.4 2.5 100.0 a. Basedon constantprices. Part of net materialproduct created in agriculturewas realizedin theform of turnovertaxes and profitsin food industry andother branch industries of materialproduction. Source:Derived from GoskomstatUSSR data.

223 Table A1.3 Average annual growth of net material product in Russia, by sector 1986-90 (percentages,based on comparableprices)

Sector 1986 1987 1988 1989 1990 Agriculture 10.3 -3.0 4.0 2.8 -6.2 Industry 0.1 1.7 6.2 2.0 -2.2 Construction 17.1 7.1 7.5 0.8 -4.3 Transportationand communication 5.7 0.8 4.9 -9.1 -5.4 Domestictrade andpublic catering 0.6 -4.3 7.6 8.2 3.2 Receiptsfrom foreigntrade -8.9 -4.7 -6.8 3.9 -0.7 Othera 2.5 6.2 2.3 10.2 -25.7 Total 2.4 0.7 4.5 1.9 -3.6

a. Materialsupplies, forestry, computer applications, and miscellaneousitems. Source: Derivedfrom GoskomstatRussia data, and World Bankstaff estimates.

Table A2.1 Annual growth of agricultural production in the former USSR, 1981-90 (percentages)

1981-85 1986-90 Production category Average Average 1985 1986 1987 1988 1989 1990

Gross value of agricultural output (in 1983 prices) 1.0 1.9 0.1 5.3 -0.6 1.7 1.3 -2.8

Output (in physical volume) Graina 2.5 3.1 11.8 8.3 -0.1 -7.0 9.2 10.2 Meatb 1.8 3.6 0.6 5.3 5.0 4.2 2.0 -0.6 Milk 0.4 2.3 0.7 3.7 1.6 2.9 1.6 -0.1 Eggs 3.3 2.2 1.0 4.5 2.5 2.9 -0.3 -3.7 Potatoes 1.0 -1.6 -14.6 19.5 -13.0 -17.4 15.2 -11.9 Vegetables 2.1 -0.4 -10.8 5.7 -1.7 0.3 -2.0 -7.3 Fruit (including grapes) 3.2 -2.7 -10.8 10.9 -21.3 4.2 -1.3 2.0 Sugarbeets -2.9 2.7 -3.5 -3.8 14.4 -3.0 10.7 -16.1 Cotton lint -1.3 1.4 7.1 -4.4 -7.3 12.0 -3.8 -2.6 Other 0.7 0.7 -4.0 5.0 -1.6 3.6 0.3 -0.9

a. Grainoutput statistics refer to cleanweight, which is derivedby excludingdirt, moisture,and otherforeign matter from bunkerweight. b. Meat'sshare of grossvalue of agriculturaloutput for 1989includes the outputvalue of cattleand poultryraising. Source:USSR Statistical Yearbook, various years.

224 TableA2.2 Grossvalue of agriculturalproduction in the formerUSSR, by republic,1981-90 (billions of 1983 rubles)

1981-85 1986-90 Republic Average Average 1980 1985 1988 1989 1990 Russia 92.4 103.0 86.3 95.6 104.1 105.9 102.1 Armenia 1.4 1.2 1.2 1.4 1.4 1.1 1.0 Belarus 11.3 12.5 9.5 12.0 11.9 13.0 11.9 Georgia 3.2 3.1 3.0 3.2 3.3 2.7 2.9 Moldova 4.6 4.8 4.1 4.5 4.8 5.1 4.4 Ukraine 45.4 49.1 41.5 47.1 48.4 50.8 49.0

Azerbaijan 3.9 3.8 3.6 4.1 3.9 3.5 3.5 Kazakhstan 13.3 15.4 14.1 13.8 15.8 14.6 15.7 Kyrghyzstan 2.5 2.9 2.4 2.6 2.9 3.0 3.0 Tadjkistan 2.3 2.4 2.3 2.4 2.6 2.3 2.4 Turkmenistan 2.1 2.6 2.0 2.4 2.6 2.6 2.8 Uzbekistan 10.2 10.5 10.1 10.2 10.9 10.5 11.1

Estonia 1.7 1.8 1.7 1.8 1.8 1.9 1.7 Latvia 2.7 2.9 2.4 2.9 2.9 3.1 2.7 Lithuania 4.3 4.8 3.6 4.6 4.9 5.0 4.5 FormerUSSR 201.3 220.8 187.8 208.6 222.2 225.1 218.7

Source: USSR Statistical Yearbook, various years.

TableA2.3 Productionof majoragricultural commodities and grossagricultural output in Russia,1981-91 (millions of tons)

1981-1985 1986-1990 1991 as a Production category Average Average 1990 1991 share of % 1990 Grain(clean weight) 92.0 104.3 116.7 89.1 76 Sugarbeets 25.1 33.2 32.3 24.4 76 Sunflowerseeds 2.3 3.1 3.4 2.9 85 Potatoes 38.4 35.9 30.8 34.0 110 Vegetables 12.1 11.2 10.3 10.5 102 Fruit (excludinggrapes) 2.8 2.6 2.4 2.2 92 Meat(carcass weight) 8.1 9.7 10.1 9.3 92 Milk 48.7 54.2 55.7 52.1 94 Eggs(billion units) 43.1 47.9 47.5 46.8 99 Grossagricultural output (billionsof 1983rubles) 92.4 103.0 102.1 97.0 95

Source:Derived from GoskomstatRussia data.

225 TableA2.4 Cultivatedarea for selecte!dcrops in the formerUSSR, by republic,1989-91average (thousandsof hectares)

Republic Grain Sunflower Cotton Sugar beets Potatoes Vegetables Russia 63,267 2,627 n.a. 1,444 3,182 650

Armenia 141 0 n.a. n.a. 22 19 Belarus 2,647 n.a. n.a. 47 647 44 Georgia 259 13 n.a. 1 26 34 Moldova 800 130 n.a. 83 44 75 Ukraine 14,850 1,617 n.a. 1,601 1,475 474

Azerbaijan 542 1 240 n.a. 23 40 Kazakhstan 23,305 152 110 44 210 74 Kyrghyzstan 539 2 25 n.a. 23 21 Tadjkistan 216 0 286 n.a. 14 25 Turkmenistan 204 0 558 n.a. 4 31 Uzbekistan 988 2 7,237 n.a. 39 1 43

Estonia 396 n.a. n.a. n.a. 32 5 Latvia 682 n.a. n.a. 9 55 l 1 Lithuania 1,111 n.a. n.a. 22 77 17

Former USSR 109,966 4,540 8,457 3,253 5,873 1,642

n.a. Not applicable. Source: Derived from Goskomstat USSR data.

226 TableA2.5 Yieldof selectedcrops in the former USSR,by republic,1981-91 (tonsper hectare)

Graine Sunflowerseed Cotton 1981-85 1986-90 1981-85 1986-90 1981-85 1986-90 Republic Average Average 1991 Average Average 1991 Average Average 1991 Russia 1.3 1.6 1.4 1.0 1.3 1.1 n.a. n.a. n.a.

Armenia 1.8 2.0 2.0 n.a. n.a. n.a. n.a. n.a. n.a. Belarus 1.9 2.5 2.4 n.a. n.a. n.a. n.a. n.a. n.a. Georgia 2.0 2.4 2.0 0.7 0.7 0.9 n.a. n.a. n.a. Moldova 3.2 3.4 3.8 1.8 2.0 1.3 n.a. n.a. n.a. Ukraine 2.3 3.1 2.6 1.5 1.7 1.5 n.a. n.a. n.a.

Azerbaijan 2.4 2.4 2.0 n.a. n.a. n.a. 2.4 2.2 2.2 Kazakhstan 0.8 1.0 0.5 0.9 1.0 0.6 2.3 2.6 2.5 Kyrghyzstan 2.4 3.0 2.5 n.a. n.a. n.a. 1.9 2.6 2.4 Tadjkistan 1.4 1.5 1.2 n.a. n.a. n.a. 3.0 2.9 2.8 Turkmenistan 2.2 2.0 1.9 n.a. n.a. n.a. 2.1 2.1 2.4 Uzbekistan 2.0 1.8 1.8 n.a. n.a. n.a. 2.7 2.6 2.7

Estonia 2.1 2.1 2.2 n.a. n.a. n.a. n.a. n.a. n.a. Latvia 1.8 2.2 2.0 n.a. n.a. n.a. n.a. n.a. n.a. Lithuania 2.1 2.7 3.1 n.a. n.a. n.a. n.a. n.a. n.a.

Former USSR 1.4 1.7 1.5 1.2 1.5 1.3 2.6 2.5 2.6

Sugar beets Potatoes Vegetables 1981-85 1986-90 1981-85 1986-90 1981-85 1986-90 Republic Average Average 1991 Average Average 1991 Average Average 1991

Russia 16.6 22.4 17.4 10.4 10.8 10.7 15.7 15.4 14.7

Armenia 35.3 33.4 n.a 14.6 12.0 12.5 28.6 27.9 21.0 Belarus 25.4 31.2 25.9 15.4 15.7 13.7 17.5 18.4 17.4 Georgia 42.3 33.3 15.4 11.7 11.3 9.7 14.4 13.4 10.8 Moldova 24.3 29.0 28.2 8.9 8.5 7.4 15.7 15.8 12.2 Ukraine 25.9 28.8 23.4 12.3 12.1 9.5 14.2 14.2 11.9

Azerbaijan n.a n.a n.a 8.0 7.9 8.6 21.2 20.6 20.3 Kazakhstan 25.6 28.9 16.0 9.9 10.6 9.9 16.5 16.5 11.8 Kyrghyzstan 20.9 16.9 16.5 12.8 13.7 12.7 20.3 20.9 17.4 Tadjkistan n.a n.a n.a 16.8 16.5 14.7 20.4 20.7 19.4 Turkmenistan n.a n.a n.a 7.0 8.4 9.8 15.5 12.7 14.1 Uzbekistan n.a n.a n.a 9.7 9.2 8.0 21.8 19.8 18.4

Estonia n.a. n.a. n.a. 14.5 14.9 - 19.5 19.8 - Latvia 27.3 29.1 - 14.5 14.1 - 16.0 15.9 Lithuania 26.2 28.9 - 13.9 14.5 - 15.8 17.1 -

FormerUSSR 21.8 26.0 20.7 11.5 11.8 10.7 16.1 15.9 14.4

-- Notavailable. n.a. Not applicable. a. Clean weight. Source:Derived from GoskomstatUSSR data.

227 TableA2.6 Productionof selectedcrops in the former USSR,by republic,1981-91 (thousands of tons)

Graina Sunflowerseed Cotton 1981-85 1986-90 1981-85 1986-90 1981-85 1986-90 Republic Average Average 1991 Average Average 1991 Average Average 1991 Russia 92,000 104,300 89,100 2,328 3,121 2,895 n.a. n.a. n.a. Armenia 200 300 300 n.a. n.a. n.a. n.a. n.a. n.a. Belarus 5,400 6,800 6,300 n.a. n.a. n.a. n.a. n.a. n.a. Georgia 600 600 500 8 8 11 n.a. n.a. n.a. Moldova 2400 2,600 3,200 251 253 169 n.a. n.a. n.a. Ukraine 37,900 47,400 38,600 2,287 2,732 2,444 n.a. n.a. n.a.

Azerbaijan 1200 1100 1,300 n.a. n.a. n.a. 707 644 540 Kazakhstan 20,100 24,100 11,900 94 117 108 302 322 290 Kyrghyzstan 1,300 1,600 1,300 n.a. n.a. n.a. 87 75 62 Tadikistan 300 300 0,300 n.a. n.a. n.a. 917 904 818.0 Turkmenistan 300 400 0,500 n.a. n.a. n.a. 1,142 1,318 1,428 Uzbekistan 2,400 1,700 1,900 n.a. n.a. n.a. 5,159 5,113 4,643

Estonia 800 900 0,900 n.a. n.a. n.a. n.a. n.a. n.a. Latvia 1,300 1,500 1,300 n.a. n.a n.a. n.a. n.a. n.a. Lithuania 2,500 3,000 3,500 n.a. n.a n.a. n.a n.a. n.a

Former USSR 168,700 196,600 160,900 4,974 6,237 5,600 8,314 8,376 7,800

Sugar beets Potatoes Vegetables 1981-85 1986-90 1981-85 1986-90 1981-85 1986-90 Republic Average Average 1991 Average Average 1991 Average Average 1991 Russia 25,101 32,930 24,358 38,439 35,879 33,951 12,129 11,169 10,521 Armenia 151 71 - 291 250 277 517 517 438 Belarus 1,383 1,592 1,160 11,559 10,513 8,872 884 843 911 Georgia 102 46 18 393 336 226 590 576 363 Moldova 2,355 2,565 2,253 399 362 354 1,302 1,276 991 Ukraine 43,896 47,410 36,355 20,013 17,965 14,617 7,377 7,449 5,910

Azerbaijan n.a. n.a. n.a. 190 185 191 890 880 820 Kazakhstan 1,785 1,433 723 1,952 2,114 2,153 1,159 1,229 928 Kyrghyzstan 318 0.4 13 309 328 303 439 526 397 Tadjkistan n.a. n.a. n.a. 165 199 187 426 533 629 Turkmenistan n.a. n.a. n.a. 18 34 30 291 377 399 Uzbekistan n.a. n.a. n.a. 305 308 316 2,506 2,647 3,182

Estonia n.a. n.a. n.a. 929 814 - 126 132 - Latvia 365 401 - 1,468 1,228 - 244 203 Lithuania 923 989 - 1,921 1,812 - 347 332 -

Former USSR 76,379 87,437 64,900 78,351 72,327 61,300 29,227 28,689 25,100

-Not available. n.a. Not applicable. a. Clean weight. Source: Derived from Goskomstat USSR data.

228 TableA2.7 Productionof selectedlivestock products in the former USSR,by republic,1986-90 average (thousands of tons)

Republic Meata Milk Wool Eggs (million units) Russia 9,671 54,218 225 47,856 Armenia 106 528 4 589 Belarus 1,147 7,318 1 3,556 Georgia 173 709 6 857 Moldova 344 1,474 3 1,138 Ukraine 4,309 24,059 30 17,215

Azerbaijan 182 1,037 11 1,034 Kazakhstan 1,463 5,350 108 4,185 Kyrghyzstan 223 1,071 38 654 Tadjkistan 111 574 5 595 Turkmenistan 98 409 16 321 Uzbekistan 438 2,791 25 2,295

Estonia 223 1,266 0 566 Latvia 331 1,958 0 895 Lithuania 531 3,154 0 1,287 Former USSR 19,350 105,916 473 83,043 a. Carcass weight Source: USSR Statistical Yearbook, 1990.

TableA2.8 Annualfeed consumptionper kilogramof livestockproduction on state and collectivefarms in the former USSR,by republic,1981-85 and 1986-90averages (kilograms of oat units)

Cattlea Hogsa Milk b Republic 1981-85 1986-90 1981-85 1986-90 1981-85 1986-90

Russia 12.9 12.6 8.4 7.9 1.54 1.44

Armenia 13.5 14.5 9.5 9.9 1.55 1.50 Belarus 12.7 12.4 8.4 6.8 1.41 1.29 Georgia 16.9 16.0 11.7 10.4 1.69 1.53 Moldova 13.5 11.3 8.1 7.0 1.47 1.27 Ukraine 13.0 12.9 10.1 9.5 1.60 1.47

Azerbaijan 19.9 18.5 10.8 10.3 2.30 2.00 Kazakhstan 19.0 17.9 10.1 9.3 1.89 1.85 Kyrghyzstan 16.1 15.9 8.9 9.0 1.94 1.81 Tadjkistan 18.8 17.7 10.1 10.3 1.87 1.73 Turkmenistan 22.9 21.4 15.5 15.7 2.20 2.00 Uzbekistan 20.4 17.8 12.7 9.5 2.23 1.81

Estonia 8.8 9.2 5.8 5.4 1.08 0.98 Latvia 10.5 10.7 7.3 6.7 1.28 1.18 Lithuania 11.2 11.5 7.5 7.0 1.14 1.10 Former USSR 13.5 13.1 8.8 8.1 1.55 1.44

Note: Oat units from manufactured feed requirement per kilogram of livestock products in addition to those from roughage; one oat unit = 600 grams of starch. a. Oat units per kilogram of liveweight gain. b. Oat units per kilogram. Source: USSR Statistical Yearbook, various years.

229 TableA2.9 Net importsof selectedlivrestock commodities in the former USSR,by republic,1990 (thousands of tons)

Meat Milk Products Eggs Republic Intra-USSR Foreign Total lntra-USSR Foreign Total Intra-USSR Foreign Total Russia 645.4 786.1 1,431.5 2,729.0 4,412.2 7,141.1 594.9 -75.2 519.7

Armenia 10.5 49.6 60.2 487.7 451.0 938.8 52.9 .. 52.9 Belarus -174.0 -2.2 -176.2 -1524.9 -14.9 -1539.8 -74.6 -0.8 -75.5 Georgia 23.7 23.5 47.2 438.5 487.1 925.5 62.2 0.0 62.2 Moldova -53.4 -0.3 -53.7 -92.8 3.0 -89.8 -80.8 -25.4 -106.2 Ukraine -299.6 9.3 -290.3 -1605.0 22.9 -1582.1 -848.9 -128.9 -977.8

Azerbaijan 13.5 56.4 69.9 547.7 535.5 1083.2 130.7 .. 130.7 Kazakhstan -166.3 -1.8 -168.1 100.9 46.8 147.7 -127.8 -2.6 -130.4 Kyrghyzstan 0.4 0.1 0.5 31.4 29.8 61.2 16.7 .. 16.7 Tadikistan 18.3 15.8 34.1 128.4 95.8 224.2 43.6 .. 43.6 Turmenistan 38.1 16.6 54.7 133.2 204.9 338.1 50.1 50.1 Uzbekistan 128.6 77.3 205.9 506.5 611.0 1117.5 219.0 1.0 220.0

Estonia -36.1 .. -36.1 -363.9 1.7 -362.2 -29.4 -23.3 -52.7 Latvia -37.8 .. -37.8 -457.4 2.2 -455.2 -2.6 .. -2.6 Lithuania -111.3 -0.5 -111.8 -1097.1 0.7 -1096.4 -6.1 .. -6.1 Former USSR 0.0 1,029.9 1,029.9 -37.8 6,889.7 6,851.8 0.0 -255.4 -255.4

Negligible or none. Note: Figures may not sum to totals because of rounding or because o1 error in original data. Source: Derived from Goskomstat USSR data.

230 TableA4.1 State procurementof selectedagricultural commodities in the former USSR,by republic, 1986-90average (thouandsof tons)

Sunflower Sugar Fruit and Republic Grain seeds beets Potatoes Vegetables berries Grapes Russia 34,320 2,379 28,764 7,742 7,626 1,479 672

Armenia 62 n.a. 69 96 279 107 154 Belarus 1,527 n.a. 1,439 1,687 431 112 n.a. Georgia 92 4 43 144 339 448 419 Moldova 533 187 2,297 35 1,046 803 786 Ukraine 16,747 2,208 43,620 2,567 4,989 1,202 585

Azerbaijan 339 n.a. n.a. 50 617 294 1,105 Kazakhstan 12,356 87 1,323 537 814 108 99 Uzbekistan 845 n.a. n.a. 224 2,148 283 549 Kyrghyzstan 250 n.a. n.a. 110 398 68 35 Tadjkistan 63 n.a. n.a. 104 370 90 143 Turkmenistan 99 n.a. n.a. 17 279 23 135

Estonia 149 n.a. n.a. 141 74 9 n.a. Latvia 323 n.a. 311 207 120 25 n.a. Lithuania 431 n.a. 820 278 141 57 n.a. FormerUSSR 68,136 4,865 78,686 13,939 19,671 5,108 4,682

n.a.Not applicable. Note:Figures may notsum to totalsbecause of rounding. Source:USSR Statistical Yearbook, 1990.

231 TableA4.2 Annualstate procurementof selectedagricultural commodities in Russia,1976-91 (thousandsof tons)

1976-19801981-1985 1986-1990 Crop Average Average Average 1986 1987 1988 1989 1990 1991 Grain 42,400 35,000 34,300 42,100 35,100 29,200 31,200 34,000 22,500 Wheat 24,524 16,595 17,970 22,644 15,095 16,328 17,433 18,350 12,500 Rye 2,546 4,348 5,151 4,487 5,129 4,532 4,390 7,217 4,200 Corn 767 1,043 974 548 1,378 1,166 1,233 545 -- Barley 9,024 6,440 4,861 7,305 6,971 3,130 3,058 3,839 2,800 Oats 2,328 3,016 2,005 3,951 2,085 1,422 1,364 1,204 1,070 Millet 639 767 1,147 678 1,342 825 1,786 1,104 452 Buckwheat 210 217 268 249 315 189 298 287 146 Rice 775 793 752 883 798 857 661 560 480 Pulses 598 429 540 553 594 388 520 643 132 Peas 590 421 524 542 578 373 493 633

Sugar beets 22,400 22,600 28,800 26,300 29,900 29,600 32,900 25,100 18,600

Oilseeds 2,239 2,063 2,954 2,310 2,819 2,903 3,679 3,063 2,168 Sunflower seeds 1,880 1,822 2,378 1,885 2,397 2,319 2,952 2,339 1,745 Soybeans 251 150 393 344 332 445 462 381 -

Potatoes 8,300 9,000 8,000 10,500 9,200 7,400 7,300 5,700 5,400 Vegetables 6,700 7,700 7,400 8,200 7,600 7,500 7,200 6,600 4,750 - Notavailable. Source:Derived from GoskomstatRussia data.

TableA4.3 State procurementof selectedagricultural commodities in Russia,by region,1990 (thousandsof tons)

Wheat Paddy Sugar Sunflower Region Hard Durum TotaP Millet Rice beets seeds Potatoes Vegetables

North . 0.8 . .. 112.0 79.0 Northwest .. .. 15.1 .. . . 222.0 253.0 Central 612.2 2.2 1,596.0 1,541.0 1,244.0 Volga-Vyatsk .. .. 171.8 0.1 .. 150.0 .. 583.0 319.0 Central Black Soils 8.2 .. 1,844.5 45.3 .. 13,114.0 276.0 316.0 415.0 Volga 176.2 41.3 4,455.3 525.5 94.1 1,675.0 407.0 397.0 1,086.0 North Caucasus 1,584.6 4.1 6,262.4 166.7 418.7 6,715.0 1,381.0 291.0 1,624.0 Urals 26.1 189.1 5,675.6 361.4 .. 1,253.0 211.0 846.0 624.0 West Siberia 176.2 39.9 4,394.6 22.5 .. 625.0 64.0 854.0 440.0 East Siberia .. 0.5 846.0 0.1 ...... 277.0 208.0 Far East .. .. 234.3 .. 46.7 .. .. 253.0 240.0

Totalb 1,973.3 274.9 24,523.9 1,103.8 559.5 25,128.0 2,339.0 5,371.0 6,572.0

Negligibleor none. a. Includessoft wheat. b. IncludesKaliningrad Oblast. Source:Derived from GoskomstatRussia data.

232 TableA4.4 Stateprocurement of selectedlivestock products in Russia,by region,1990 (thousandsof tons)

Milk and Eggs Region Meata milkproducts (millionunits) North 298 1,224 1,592 Northwest 418 1,697 2,077 Central 1,631 7,483 7,159 Volga-Vyatsk 713 2,665 1,977 CentralBlack Soils 1,160 3,749 1,735 Volga 1,725 4,864 3,381 NorthCaucasus 1,667 4,324 2,769 Urals 1,452 5,215 4,917 WestSiberia 1,289 5,264 3,786 EastSiberia 710 1,912 2,182 Far East 394 1,193 1,777 Totalb 11,540 40,071 33,599 a. Livestockand poultry,live weight. b. IncludesKaliningrad Oblast. Source:Derived from GoskomstatRussia data.

TableA5.1 Distributionof land by farm organizationin Russia,as of November1,1990 (millionsof hectares)

Agriculturalland Farm organization Totalland Arable Meadows Pasture Total Statefarm enterprises 497.5 71.2 13.5 38.9 124.4 Collectivefarms 138.2 57.4 6.1 21.2 84.9 Agriculturalcooperatives 0.3 0.1 0.1 0.0 0.2 Privatefarms 0.1 0.1 0.0 0.0 0.1 Personalhousehold plots 3.3 2.4 0.3 0.0 2.9

Total 640.7 131.8 20.0 60.1 213.7 n.a. Not available. Source:Russia Statistical Yearbook, 1990.

233 TableA5.2 Distributionof croppedarea under irrigationin the formerUSSR, by republic,1990 (thousands of hectares)

Potatoes and Republic Grain crops Technical cropsa vegetables Feed crops Total Russia 1,337.9 123.0 380.3 3,297.1 5,138.3

Armenia 49.7 1.5 21.6 97.5 170.3 Belarus 21.6 0.7 10.5 38.8 71.6 Georgia 68.2 8.1 31.2 109.1 216.6 Moldova 92.2 26.2 38.7 81.7 238.8 Ukraine 803.3 144.7 211.1 1,254.4 2,413.5

Azerbaijan 337.3 276.4 35.5 365.0 1,014.2 Kazakhstan 561.5 197.1 131.1 1,082.1 1,971.8 Uzbekistan 423.6 1,863.1 168.3 876.8 3,331.8 Kyrghyzstan 283.7 61.5 35.8 474.3 855.3 Tadjkistan 71.1 309.5 33.6 156.2 570.4 Turkmenistan 184.7 624.9 68.0 325.4 1,203.0

Estonia 1.4 0.1 0.6 7.7 9.8 Latvia 2.4 0.0 1.3 3.0 6.7 Lithuania 3.0 0.1 3.0 5.0 11.1

Former USSR 4,241.6 3,636.9 1,170.6 8,174.1 17,223.2 a. Cotton, sugar beets, oil seed crops, flax and tobacco. Source: USSR Statistical Yearbook, 1990.

TableA5.3 Croppedarea underirrigation in Russia,selected years, 1980-90 (thousands of hectares)

Irrigation / Crop share 1980 1985 1986 1987 1988 1989 1990 Total irrigable area 5,009 5,822 6,112 5,757 5,980 6,119 6,180 Total irrigable area in the state sectora 4,994 5,805 6,095 5,740 5,963 6,101 6,159 Cropped area under irrigation 3,878 4,715 4,912 5,063 4,940 5,080 5,138 Share (percent) Grain 26 24 24 24 26 26 26 Industrial crops 2 2 2 2 2 2 2 Potatoes, vegetables, and melons 10 9 9 9 9 8 7 Feed crops 62 65 66 66 64 64 64 Total 100 100 100 100 100 100 100

Note: Figures may not add to 100 because of rounding. a. State and collective farms and other state agricultural enterprises. Source: Derived from Goskomstat Russia data.

234 TableA6.1 Industrialenterprises in the former USSR,by sector,1970, 1980, and 1987 (number of enterprises)

Sector 1970 1980 1987 Electric power 1,569 1,431 1,424 Fuel industry 1,453 1,135 1,179 Metallurgy 619 674 711 Machine building 8,046 8,906 9,238 Chemistry and petrochemistry 1,107 1,043 1,072 Timber, woodworking, pulp and paper industries 6,568 5,330 5,547 Construction materials industry 4,755 3,905 4,336 Light industry 8,727 7,972 7,960 Food industry 10,649 8,186 9,554 Total 49,383 44,172 6,840

Source: Derivedfrom GoskomstatUSSR data.

TableA6.2 Averagenumber of employeesby type of industrialenterprise in the former USSR,1970,1980, and 1987 (number of employees per enterprise)

Sector 1970 1980 1987 Electric power 408 531 604 Fuel industry 1,047 1,427 1,476 Metallurgy 3,231 3,264 3,094 Machine building 1,491 1,752 1,796 Chemistry and petrochemistry 1,418 1,850 1,856 Timber, woodworking, pulp and paper in- 429 563 489 dustries Construction materials industry 421 563 530 Light industry 573 652 641 Food industry 263 366 314 All industry 640 835 813

Source: Derivedfrom GoskomstatUSSR data

TableA7.1 Share of collectivefarm marketsin total retail tradein Russiafor selectedcommodities and years, 1985-90 (percentages)

Commodity 1985 1988 1989 1990 Meat 3.7 3.8 3.6 3.0 Milk 1.2 1.2 1.0 0.5 Potatoes 26.5 24.4 21.4 21.2 Vegetables 9.6 11.6 11.1 11.5

Source: Russia Statistical Yearbook, various years.

235 Table A7.2 Average annual price increiases in the former USSR, 1971-90 (percentagesbased on currentprices)

1971-75 1976-80 1981-85 1986-89 Prices Average Average Average Average 1986 1987 1988 1989 1990 Retail pricesa -0.1 0.7 1.1 1.5 2.0 1.3 0.6 2.0 4.7 Food 0.3 0.5 1.7 2.8 5.2 4.9 0.5 0.8 3.6 Nonfood products -0.3 0.8 0.5 0.3 -1.5 -0.8 0.0 3.5 6.5 Collective farm market prices 4.8 6.4 2.0 2.7 -3.6 2.6 2.6 9.5 21.5 Agricultural procurement pricesb - - - 5.6 0.8 3.0 13.0 6.0 11.7

- Not available. a. In stateand cooperativetrade. b. The indexof agriculturalprocurement prices is not availablebefore 1984. Source:Domestic Trade of the USSR,1989; USSR Statistical Yearbook, various years.

Table A7.3 Monthly retail price indices of consumer goods and services in Russia, 1991 (December1990 = 100)

Month (1991) Goods and services Goods Services

January 106.2 106.6 103.2 February 111.4 111.7 108.6 March 118.4 118.9 114.5 April 180.2 183.5 142.4 May 184.7 187.9 147.4 June 185.1 187.9 151.6 July 184.7 186.6 160.0 August 184.9 186.2 163.5 September 187.5 188.7 167.1 October 195.4 197.0 170.6 November 212.2 214.7 177.1 December 237.7 241.7 184.7

Source:Derived from GoskomstatRussia data.

236 TableA7.4 Averageprocurement prices for selectedcrops in the formerUSSR, by republic,1990 (rublesper ton)

Sunflower Sugar Republic Grain Potatoes seeds beets Cotton Vegetables Fruit

Russia 300 295 428 69 n.a. 411 631

Armenia 343 417 n.a. n.a. n.a. 235 515 Belarus 299 248 n.a. 70 n.a. 394 264 Georgia 250 455 330 70 n.a. 364 542 Moldova 527 398 594 52 n.a. 309 569 Ukraine 309 240 465 50 n.a. 304 531

Azerbaijan 264 425 n.a. n.a. 984 270 640 Kazakhstan 338 344 534 58 845 332 441 Kyrghyzstan 337 383 n.a. n.a. 973 264 551 Tadjkistan 370 403 n.a. n.a. 1,074 254 464 Turkmenistan 369 554 n.a. n.a. 1,330 272 470 Uzbekistan 459 303 n.a. n.a. 1,049 266 470

Estonia 336 254 n.a. n.a. n.a. 800 1,190 Latvia 275 341 n.a. 68 n.a. 723 999 Lithuania 283 294 n.a. 74 n.a. 745 727

Former USSR 313 286 453 56 1,088 347 553 n.a. Not applicable. Source:Goskomstat USSR.

237 Table A7.5 Average procurement prices for livestock products in the former USSR, by republic, 1990 (rubles per ton)

Sheep and Republic Cattle Poultry goats Hogs Eggsa Milk Russia 3,688 2,560 3,797 3,097 105 654

Armenia 3,856 3,525 3,659 3,196 120 590 Belarus 3,659 2,538 5,037 3,140 93 511 Georgia 4,247 3,309 3,236 3,609 125 548 Moldova 3,144 2,093 3,365 2,703 103 399 Ukraine 2,968 2,391 2,404 2,671 93 426

Azerbaijan 3,437 2,099 3,099 3,152 115 534 Kazakhstan 3,243 2,316 2,882 2,910 96 569 Kyrghyzstan 3,231 1,920 2,766 2,850 95 378 Tadjkistan 3,271 2,404 2,592 2,440 109 501 Turkmenistan 3,015 2,540 2,081 2,494 85 436 Uzbekistan 3,465 3,458 2,643 2,546 120 566

Estonia 2,858 2,336 3,549 2,463 93 384 Latvia 2,908 2,360 4,371 3,000 119 326 Lithuania 3,028 2,461 4,381 3,065 93 371

Former USSR 3,422 2,531 3,232 2,971 103 555 a. Per thousands eggs Source: Goskomstat USSR.

238 TableA8.1 Averagemonthly nominal wages in Russia,by sector,1985-91 (rubles per month)

1991 Sector 1985 1986 1987 1988 1989 1990 1991 01 Q2 03 Q4 Total economy 201 208 216 235 259 297 530 318 426 554 820

Industry 218 224 230 250 275 311 580 340 447 596 937 Agriculture 198 211 220 233 259 307 450 259 302 440 799 Construction 247 257 271 307 339 376 678 401 539 759 1019 Transport 239 248 261 288 308 349 609 364 508 678 886 Communication 170 175 187 211 229 257 570 276 428 522 1054 Trade 159 163 167 177 202 258 443 271 347 460 692 Financial and insurance services 192 203 213 220 255 410 795 475 727 905 1073 Housing and municipal services 154 157 163 178 192 224 431 249 356 460 659 Public, economic administration 179 188 201 219 252 364 538 362 440 522 828 Public health,sport and social security 141 144 153 165 178 203 427 240 382 424 662

Minimumwagea 70 80 80 80 80 80 140 80 140 160 180 a. The minimum wage was raised from R70 to R80 in 1986. It was raised from Rubles R80 to R140 following the April 1991 price reform, and raised again to Ri 80 on October 1, 1991. On January 1, 1992, it was raised to R342. In practice, however, increases in minimum wage were introduced gradually by employers, since these price increases were linked to employers' ability to pay. Sources: USSR Statistical Yearbook, various years; Russian Ministry of Labor; and Goskomstat Russia.

TableA9.1 Outstanding debt of state and collectivefarms in the former USSR,end of year,1960-90 (billions of rubles)

Type of debt 1960 1970 1980 1985 1986 1987 1988 1989 1990 Long-term debts 2.4 10.8 42.4 57.1 60.2 61.0 2.7 55.6 30.1 State farms - 0.5 8.4 9.7 11.0 11.6 15.2 12.2 10.2 Collective farms 2.4 10.3 34.0 47.4 49.2 49.4 47.5 43.4 19.9

Short-term debts 3.0 8.6 57.6 82.3 84.5 87.0 81.6 75.6 28.5 State farms 2.3 6.1 31.9 45.8 46.2 47.6 46.5 43.9 17.4 Collective farms 0.7 2.5 25.7 36.5 38.4 39.4 34.1 31.7 11.1

Total debts 5.4 19.4 100.0 139.4 144.7 148.0 144.3 131.2 58.6 State farms 2.3 6.6 40.3 55.5 57.2 59.2 61.7 56.1 27.6 Collective farms 3.1 12.8 59.7 83.9 87.6 88.8 81.6 75.1 31.0

-Negligible or none, Source: USSR Statistical Yearbook, various years.

239

References

FAO (Food and Agriculture Organization). International Monetary Fund, The World Bank, Various years. Production Yearbook.Rome. the Organization for Economic Cooperation Goskomstat Russia. 1991. Statistical Yearbook of and Development, and the European Bank for Russia. Moscow. Reconstruction and Development. 1991. A Study of the Soviet Economy. Washington, D.C. 1991. "The Structure of Retail Prices for C onsumer GoodsConsmerGood inin198990. 1989-90." Moscow.Mosow.Organization Development.for 1991.Economic The CooperationSoviet Agro-Food and Goskomstat USSR. 1990. "Agricultural Produc- System and Agricultural Trade.Paris. tion on Personal Household Plots." Moscow. United States Department of Agriculture, Economic . 1991. "Economics of the Republics in Research Service. Various years. USSR Trade and January-October, 1991." Moscow. Agriculture Report. Washington, D.C. . Various years. Foreign Trade Yearbook. World Bank. 1992. "Russian Federation: Moscow. Agricultural Sector Strategy During the _.Various years. USSR Statistical Yearbook. Transition." Staff working paper, Europe and Moscow. Central Asia-Country Department III, Agriculture, Industry and Finance Division. International Finance Corporation. 1992. Small- Washington, D.C. Scale Privatization in Russia: The Nizhny Novgorod Model. Washington, D.C.

241 List of background working papers

Prepared by the international team Denham, Robert B. Lennox, Chris Nicolson, and Ashley C. Steel (consultants). 1, Price Liberalization in the Short-Run: Prices, 8. Rural FinancialMarkets: Policy Issues, Delbert A. Protection of the Poor, and Food Aid, Karen Brooks Fitchett (World Bank); Dale W Adams (consultant). and Harald Alderman (World Bank); Jonathan Morduch, Barry Popkin, and Alan Taylor Prepared by the commission for technical (consultants). cooperation with the World Bank 2. Price Policiesand TradeReform, Martin C. Evans, S. S. Johl, Stanley Johnson, Alex McCalla, Stefan 9. The Recent Food Supply Situation and Short-Term Tangermann, and C. Peter Timmer (consultants); Outlook, Eduard Baranov, Alexei Gendarov, Knud Munk (European Conmmunity); Anandarup Vladimir Kossov, and Iakov Urinson. Ray (World Bank). 10. Agricultural Technologyand Investment Options, 3. Land Reform and the Restructuring of Kolkhozes A. Lifanchikov, A. Gataulin, G. Yelistratov, I. Nikitin, and Sovkhozes, Csaba Csaki (World Bank); Kenneth V. Oreshin, A. Pivovarov, M. Polyakov, and M. Gray, Zvi Lerman, and William Thiesenhusen Shakhrnayev. (consultants). 11. Transportation Requirements for Agricultural 4. Agricultural Production and Technology,JitendraP~ Reform, Ivan Kozlov, Eugeny Makhlin, Boris Volkov, Srivastava adOaHVladimirLevin, L. Muchnik, and Stanislav Panov. Srnvastava and Oscar Honisch (World ]3ank); Alex Grobman and Helmar Ochs (consultants). 12. Financial Reform in Agriculture, Anatoly D. Akimenko, Alexey M. Lavrov, Boris N. Porfiriev, 5. Grain Storage and Handling, FoodPrcpsessing, and Andrev B. Berezkin, Mikhail P. Freidlin, and Sergey Wholesaleand Retail Food Sales, Sarnir Bhatia, Michel A. Nikolsky. Debatisse, and Enrique Rueda-Sabater (World Bank); Caroline Hoisington, Henry G. Lembeck, 13. Institutional Aspects of Food Production and Harold Riley, and Robert L. Walker (consultants). Distribution, Vladimir G. Grischenko, Ivan N. Buzdalov, Elmira N. Krylatykh, Eleonora I. Pavlova, 6. The Fertilizer Subsector: Current Problems, Vasily Y. Uzun, Nikolay G. Obushenkov, Nadezhda Privatization Potential, and Investment Opportunities, B. Medova, and Alexander A. Kalinin. Paul J. Stangel (consultant). 14. FoodImports and Humanitarian Aid, Vladimir D. 7. Food and Agricultural Transportation, Clell G. Rudashevsky, Vyacheslav M. Shironin, Igor I. Harral (EBRD); Andrew P. Sundberg, Peter A. Prostayakov, Alexander L. Margolin, Sergei V. Huchthausen, Paul E Apthorp, John J. Terry, Ronald Loginov, and VladimnirU. Razdukhov.

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