Glowing Rhetoric on Russian Agriculture May be Hard to Swallow

By Steven Weirich

In the past few years, the increase in production from the Russian agricultural sector has been greeted with praise and glowing rhetoric from the Russian government. According to a USA Today article by Daria Litvinova, officials in the Agriculture Ministry released statements saying how “For the first time in many years, Russian food items started to dominate on the shelves”, and that “Achievements of the agricultural sector in recent years allowed us to edge even closer to full self-sufficiency when it comes to food.” Raw numbers back up the perception of an expanding agriculture sector. In 2016, Russian firms produced about 17.5 per cent more beef than they did in 2014, while poultry production rose by 11.9 percent, milk by 5.8 percent and pork by 30.6. However, this raw data does not necessarily indicate a rosy future of continued growth for the agriculture industry. The industry’s future is more likely be determined by a number of political factors and economic conditions within Russia.

The rise in Russian agriculture production should be placed in the context of sanctions and counter-sanctions, the ruble’s falling value and the government’s economic policy decisions. The sanctions placed on Russia by the West in 2014 led to a series of counter measures designed to strike back at the European Union and the United States. The Russian government banned the import of various items such as dairy, poultry, fish and fresh produce from the US and EU, as well as others. The hope was the counter measures would both boost Russian food production and punish Western countries for implementing the sanctions, however, since the bans were only targeted towards the West, agriculture imports from other nations continued to flow into the country. Certainly, the inability to import items such as European cheeses and American poultry influenced what Russian consumers could purchase, but the targeted nature of the counter measures means the rise in agriculture production is a bit more complicated to explain.

Russia’s real exchange rate has also influenced the direction of the agriculture sector. The Russian ruble tumbled at the end of 2014, due to a myriad of factors ranging from the imposition of sanctions to the fall in global oil prices. Since then, while the ruble has appreciated, it has remained low against other major currencies. The ruble’s weakness, however, increased the competitiveness of Russia’s agriculture products internationally. Producers have also been able to adjust to changed demand structures in both domestic and international markets, boosting production of high-demand goods. The last area which has greatly influenced the agriculture sector in Russia has been the economic policy decisions of the central government, specifically its import substitution policies. Generally, import substitution is put into action by creating barriers to trade or by giving subsidies to domestic industries. The idea is to establish conditions where domestic producers will have the upper-hand over their foreign competitors. Russia intensified a policy direction of economic nationalism in 2014, when its economy began to stall, specifically targeting the agriculture sector along with others. Countersanctions would become a key part of Russia’s import substitution plans, acting as trade barriers for so many agricultural products. Consequently, Russian producers benefitted in revenue from higher prices on the domestic market.

The other part of the import substitution plans, the agriculture subsidies, have become a central focus of the Ministry of Agriculture. For the 2017 budget, the ministry was allocated around 214 billion rubles. All the subsidies were reshaped to fit into seven major budget lines, with funds distributed by local agricultural authorities throughout Russia. Some of the programs for the year included “Encouragement of Investment in Agriculture”, which was allocated 91.7 billion rubles, as well as a “Development of Sub-Sectors in Agriculture” which received 55.31 billion rubles.

So, what exactly do all these factors mean for the future of the Russian agriculture sector? Again, it is clear from the raw numbers agricultural production has increased. However, the import substitution policies may have had several negative externalities. Researchers at the Centre for Economic and Financial Research in Moscow point to how the policies may have resulted in negative impacts on the Russian economy due to inept use of production factors such as labor and capital, and Russia may also be in a disadvantageous position in relation to more liberal economies. While the government will likely continue to pump money into agriculture subsidies, it is difficult to say whether it will help to increase production in the long run. It is also important to note that inflation in Russia has fallen considerably in the past few years, in comparison to the sharp increase seen in 2014. So, the increased prices which producers benefitted from a few years ago are unlikely to continue. Finally, while the ruble has stayed depressed since 2014, there is no guarantee that will continue in the long run, either. All in all, it may be positive for the Russian economy if agricultural production continues to increase, but there is plenty of evidence the conditions which facilitated their growth may not continue in the long term. If the Russian government is serious about improving its economy, no amount of support mechanisms will substitute for structural reforms. Tackling issues such as overhauling the legal system and scaling back the role of the state would both probably help, but those are not simple tasks to complete. Until those reforms can move forward, it would be best not to think too optimistically about the future of Russian agriculture.

Steven Weirich is a senior at Mississippi State University, where he is a staff writer for the campus newspaper, The Reflector. There, he writes columns focused mostly on economics, foreign affairs and politics.

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