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Yeltsin's Agricultural Policies

IThe Russian agricultural sector struggled to rebuild as it transformed itself from a command economy to a more market-oriented system. Climatic and geographic factors limit Russia's agricultural activity to about 10 percent of the country's total land area. Of that amount, about 60 percent is used for crops, the remainder for pasture and meadow.

Reform began in Russia shortly before the final collapse of the Soviet Union. In December 1990, the Congress of People's Deputies of the Russian Republic enacted a number of laws that were designed to restructure the agricultural sector and make it more commercially viable. The Law on Peasant Farms legalized private farms and allowed them to operate alongside state and collective farms, to hire labor, and to sell produce without state supervision. The same session of the congress passed the Law on Land Reform, which permitted land to be bequeathed as an inheritance from one generation to the next, but not to be bought or sold. The government also established the State Committee for Agrarian Reform, whose responsibility was to oversee the transfer of available land to private farming.

Following the breakup of the Soviet Union in 1991, large State farms had to contend with the sudden loss of heavy government subsidies. Livestock inventories declined, pulling down demand for feed grains, and the area planted to grains dropped by 25 percent in less than ten years. The use of mineral fertilizer and other costly inputs plummeted, driving yields downward. Most farms could no longer afford to purchase new machinery and other capital investments.

The Yeltsin government attempted to address some of the fundamental reform issues of Russian agriculture. But agricultural reform moved very slowly, causing output to decline steadily through the mid-1990s. The main thrust of Yeltsin's agricultural reform was toward reorganizing state and collective farms into more efficient, market-oriented units. A decree of December 1991 and its subsequent amendments provided several options to state and collective farmers for the future structure of their farms. The decree required that farmers choose either to reorganize into joint-stock companies, cooperatives, or individual private farms, or to maintain their existing structure. Under the first two arrangements, workers would hold shares in the farms and be responsible for managing the enterprises. An individual farmer could later decide to break from the larger unit and establish private ownership of his or her share of the land, as determined by an established procedure.

This restructuring program progressed slowly. Although 95 percent of the state and collective farms underwent some form of reorganization, about one-third of them retained essentially their earlier structure. Most of the others, fearing the unstable conditions of market supply and demand that faced individual entrepreneurs, chose a form of collective ownership, either as joint-stock companies or as cooperatives. The conservatism of Russia's farmers prompted them to preserve as much as possible of the inefficient but secure Soviet-era controlled relationships of supply and output.

As of 1996, individual private farming had not assumed the significance in Russian agriculture that reformers and Western supporters had envisioned. Although the number of private farms increased considerably following the reforms of 1990, by the early 1990s the growth of farms stalled, and by the mid-1990s the number of private farms actually may have dropped as some individuals opted to return to a form of cooperative enterprise or left farming entirely. By the end of 1995, Russia's 280,000 private farms accounted for only 5 percent of the arable land in Russia.

A number of factors contributed to the slow progress of agricultural reform. Until the mid-1990s, the state government continued to act as the chief marketing agent for the food sector by establishing fixed orders for goods, thus guaranteeing farmers a market. The government also subsidized farms through guaranteed prices, which reduced the incentive of farmers to become efficient producers.

Perhaps most important, effective land reform was not accomplished in Russia. The original land reform law and subsequent decrees did not provide a clear definition of private property, and they did not prescribe landholders' rights and protections. The nebulous status of private landholders under the new legislation made farmers reluctant to take the risk of proprietorship. In March 1996, President Yeltsin issued a decree that allows farmers to buy and sell land. However, in April 1996 the State Duma, heavily influenced by the antireform Communist KPRF and its ally, the Agrarian Party of Russia (representing the still formidable vested interests of collective and state farms), passed a draft law that prohibited land sales by anyone but the state. Opposition to the new notion of private landownership was based in a strong traditional Russian view that land must be held as collective rather than individual property.

However, in the mid-1990s several factors were exerting pressure on the agricultural sector to become commercially viable. The federal government retreated from its role as a guaranteed purchaser and marketer, although some regional governments are stepping in to fill the role. And private markets are emerging slowly. Increasingly, Russian agricultural production must compete with imported goods as the gap between domestic prices and world prices narrows. In addition, the fiscal position of the federal government forced it to reduce subsidies to many sectors of the economy, including agriculture. Subsidies were among the targets of major budget cuts to comply with the standards of the IMF and other Western lenders and achieve macroeconomic stabilization.

Like the rest of the economy, the Russian agricultural sector experienced a long, severe recession in the 1990s. Even before the dissolution of the Soviet Union, the output of grains and other crops began to decline, and it decreased steadily through 1996 because of the unavailability of fertilizers and other inputs, bad weather, and major readjustments during the period of transition. In 1995 overall agricultural production declined 8 percent, including a drop of 5 percent in crop production and 11 percent in livestock production. That year Russia suffered its worst grain harvest since 1963, with a yield of 63.5 million tons.

The most dramatic declines occurred in livestock production. Farmers reduced their holdings of animals as the price of grains and other inputs increased. As meat prices rose, the composition of the average consumer's diet included less meat and more starches and vegetables. Reduced demand in turn exacerbated the decline in livestock production.

In 1996-97, markets for both agricultural outputs and inputs in Russia were still operating imperfectly. For many goods, the law of one price still did not hold throughout the country. The main problem was (and remained) regional segmentation of markets. The main causes are poor physical and market infrastructure and government policies, such as restrictions on agricultural flows (mainly outflows) by regional authorities (Liefert and Swinnen). Yet, within regions, state restrictions on markets are not onerous, such that intra-regional prices correspond fairly well to production costs. In 1996-97 Russia was a major importer of meat, with imports in the two years accounting for about 30% of total meat consumption. The country was also a major exporter of energy products, which made up almost half of its exports in value terms. The country was a small net exporter of wheat and grain in total.

Fertilizer use in Russian agriculture rose substantially during the postwar period, with total use of mineral fertilizer growing from 3.3 million metric tons (mmt) in 1970 to 9.9 mmt in 1990. During the transition period, however, Russian fertilizer use plummeted, to only 1.4 mmt (mineral fertilizer) in 2000. In 1990 Russian fertilizer was even more underutilized from the point of view of domestic prices than in 2000, with the returns to farm profitability of using more fertilizer being from four to twelve times the fertilizer's price. During the Soviet period, however, the state set prices for both agricultural inputs and outputs, and allocated inputs. From the point of view of trade prices, Russia in 1990 was overusing fertilizer, and in 2000 was very close to its optimal level of fertilizer use.

During Russia's economic transition, the amount of fertilizer (as well as other tradable inputs such as fuel) used in agricultural production fell substantially. Mineral fertilizer use in 2000 was 86% lower than in 1990, while since the mid 1990s Russia has exported more than 80% of its fertilizer output. Russia was also a major exporter of fertilizer. In fact, in 1996 and 1997 Russia exported over 80% of its total fertilizer output, mostly to EU countries. During the transition period, Russian fertilizer export prices fluctuated considerably, largely following changes in world energy prices. For example, in 2000 Russia's unit value for fertilizer exports was relatively low at $74 per ton, compared to the average annual unit value for the country's fertilizer exports during 1994-2002 of $95 per ton.