AGRICULTURE AND FOOD PRODUCTION IN RUSSIA

Text by: Antti Helanterä,
Aleksanteri Institute
September 2001

Russian agriculture and its food industry have undergone a dramatic structural change in the 1990s, caused by both internal and external forces at play. The structural change concerns all parts of the food processing chain from primary production to wholesale and retail trade.

The inefficiency of the food processing chain has reduced the income for primary production. The most notable structural change in Russian agriculture has been the fragmentation of large-scale agricultural production into household plot production. Approximately a half of all agricultural production in Russia is now produced on household plots. In some sectors of agriculture their share is even greater, e.g. in potato and vegetable production the figures are as high as 90% and 80% respectively. Also almost a half of Russia's meat and milk is produced on household plots. Grain and sunflower production, however, are mainly concentrated on large farms and in the southern parts of Russia.

Russia is relatively self-sufficient in potatoes, vegetables and grain, and their production hardly decreased in the 1990s. The importance of potatoes and vegetables in the food supply is highlighted by the relatively even distribution of their production between the different regions, and also by the large proportion of household plots involved in their production.

When discussing the problems of the food sector, then agriculture, the food industry and the trade in foodstuffs, i.e. the food chain, should be taken as a single whole. No single link in the chain can be pointed out as the main cause of the problems in the whole chain. The inefficiency and shortcomings in the functioning of the food chain are due to the inefficiency of both the parts of the chain, i.e. agriculture, the processing industry and trade, and the structures linking the parts to each other.

As a result of the structural changes of the food industry in the 1990s, production has declined the most in the least profitable sectors, such as livestock production, and in the meat and dairy industries processing these products. The competitive position of food production in Russia improved after the devaluation of rouble in 1998. However, several sectors of the processing industry, especially meat, have been unable to increase production.

The problems in the 1990s are well illustrated by the fact that when discussing the difficulties of agriculture, one of the main problems referred to is the lack of demand for the products, while in the case of food industry it is argued that there are problems related to the availability of raw material. However, the cultivation of household plots, which is the most secure and profitable form of organising agricultural work from the perspective of individuals, is inadequate and too inefficient to constitute the raw material basis for the food industry.

The enterprises of the food processing industry have been the most important factors behind the growth of the food sector. They have been obliged to integrate vertically to the primary production. The integration of the food processing chain is based on the efforts to abolish the factors impeding the functioning of the chain. The purpose of this is to keep as large a share of the processing chain and the value adding of firms as possible in the control of each actor. The reasons for this strategy are obvious. The more an actor is dependent on the other actors, the more the manifestations of the uncertainty of the economy, such as the negative impact of payment arrears or barter on the company's efficiency, burden the actor.

By controlling the processing and distribution chain of foodstuffs, the large processing companies secure the availability of raw material and the access of the products to the retail stores. Income from the retail sale of the products makes it possible for companies to accumulate capital for investments. However, this model of operation reveals certain factors that weaken the competitiveness of the Russian food industry, because the food industry also has to carry the responsibility of agricultural support and investments.

The factors behind the structural changes in Russian food production have not vanished, although the competitiveness of Russian food products has improved due to the devaluation of the rouble. The development of an efficient food production chain for the entire country is a long process, which requires the entire operating environment to become increasingly stable.