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Historic, Archive Document Do not assume content reflects current scientific knowledge, policies, or practices. INTERNATIONAL AGRICULTURE AND TRADE REPORTS FORMER USSR United States Department of PXeolg(ereiiielg:) /exoreyalaaol )i es Research Service RS-93-1 May 1993 Situation and Outlook Series 7 - lida # You need the International Agriculture and Trade Reports to: [7 learn how much farm subsidies cost EC consumers and taxpayers DY benefit from China's food market privatization and: tries up-e [Wf see if you should bank on continued Russian wheat imports This six-report series includes Africa and the Middle East, Asia and the Pacific Rim, China, Europe, Former USSR, and Western Hemisphere. USDA economists draw on original foreign source materials to explain how basic forces are changing agriculture and agricultural trade around the world. Each report anticipates short- and long-term production, consumption, and trade of the region’s key commodities. Detailed analysis backs up forecasts on how agricultural policies and structure, as well as macroeconomic and trade policies, will affect world food and fiber markets. Each report includes consistent, up-to-date data bases on key agriculture and trade indicators. Call toll free 1-800-999-6779 Subscription rates for International Agriculture to subscribe from the and Trade Reports (WRS) are: United States and Canada. Other areas, call 703-834-0125 or fax 703-834-0110, or Domestic order subscriptions from: Foreign ERS-NASS, 341 Victory Drive Herndon, VA 22070. INTERNATIONAL AGRICULTURE ANDT RADE REPORTS USSR United States Department of Agriculture Economic Research Situation and Outlook Series Service RS-93-1 Contents May 1993 Report Economic Reform in Former USSR Slow and Difficult ................... Coordinators Agricultural Reform in Russia in 1992: One Step Forward, William M. Liefert and Oneporepipacksmet ee eeu rcte er hicreree eae seid cb eee ce Let ee edhe Christian J. Foster Recent Changes in Ukrainian Agricultural Price Policy ................. (202) 219-0620 As Food Demand Falls, Input Use Declines ...............cccccccccccceeeeeeeees Disruption of Former USSR Trade Continues.................cccceccceeeeeeees Contributors Republics Heavily Dependent on Food Imports ...............:::cccccceeeeees Christian J. Foster U.S. Agricultural Credits and Aid to Republics Total Jason M. Lamb OvG e SONS LIOn) er ee Mee ea tee sooe loces cakcascstoncostaantoevetrevaiaahlcoent e William M. Liefert Projected 1993/94 Grain Imports Will Not Make Up Mark R. Lundell OVI gee MITRE Mette tees scents case acs cescendewsrt stGnacssteecesicadertenss Yuri Markish State Moves To Slow Market-based Restructuring in David J. Sedik PVE SLOC KOC CLOI pee rerresee etn. eee oc ines Mates costes taco cou k ess caches can ncnseteetee me Sharon S. Sheffield Little Improvement Seen in FSU Oilmeal Supplies......................... Jaclyn Y. Shend BUsAEpeet CroGluctlolel O HEDOUMC mmr: scv.sitecclcads.asestidenaesddosdoamuiner . Andrew Solomon Gorton Continues ts 4-Y ear DECUNC..:,..:..s101+-2+ssncensreccrstersseneviadteerace POT CUISOLE Steen teers tcc cette eee Stee oes caneccneas certs occsesieuconstt se teaectarstaemmets Technical HOES WL Camere etn sten ress ee ccesac gece cece eaos ccnsosnc ss ics tors or eaeuenncetenneearanee Assistants METST EO EOMITE Ca mare ee re tecn hte seco daa sky ccasacopbcensieniea ier taneeh Genes ins uibar@ontas Denise A. Gardiner ier MRC coe eae clea seeds cts casieniiedosekseseencital abc necnosemnantedacenee temass Shawn E. Levsen Tanya M. Malcolm William H. Wickham Approved by the World Agricultural Outlook Board. Summary released May 18, 1993. The Former USSR International Agriculture and Trade Report is one in a series of six regional reports in the 1993 Situation and Out- look series. Other titles are Africa and the Middle East, Asia and Pacific Rim, China, Eu- rope, and Western Hemi- sphere. Summaries and text of reports are also available electronically. Call (202) 720-5505. Summary Economic reform in the nations of the former Soviet Union Progress was made in 1992 on privatization in agriculture, (FSU) has been slow and difficult. The Baltic States have particularly in Russia and the Baltic States. By the end of pursued the most ambitious reform programs, followed by 1992, 184,000 private farms existed in Russia, comprising 6 the Russian Federation. The two main reform changes in percent of arable land and contributing 4-5 percent of the Russia have been price liberalization and the beginning of year’s total agricultural output. The Russian Government privatization. required that, by the end of 1992, collective and State farms re-register, the main options being re-registering as coopera- In every FSU country in 1992, national income and industrial tives or joint-stock companies, or breaking up into private and agricultural output fell substantially. The shortrun dis- farms. Only 4 percent chose the last option. The change in ruptions caused by economic reform are responsible for part official status by the rest to cooperatives or joint-stock com- of the decline, as the transition from a centrally planned to a panies has so far done little to change the nature or behavior more consumer-oriented market economy changes the struc- of farms. ture of production and consumption. The large rise in prices following price liberalization has reduced demand for many U.S. agricultural exports to the FSU republics in fiscal year goods, and output has fallen accordingly. The need for certain 1993 are projected to be down about 30 percent from $2.7 industries to downsize, however, involves the threat of enter- billion in fiscal 1992. The drop reflects reductions in U.S.- prise bankruptcy and unemployment. On the other hand, the Government-backed commercial credits to the republics and re-deployment of resources in response to the increasing role forecasted contractions in total FSU agricultural imports this of markets should be a means by which the FSU republics year. Because of the severe financial difficulties facing the grow richer and better satisfy consumer desires. region, most, if not all, U.S. exports to the republics since fiscal 1991 have been covered by special USDA export pro- Another cause of falling output is continued high inflation, grams—primarily GSM-102, but also PL 480 Title I, Section which reduces incentives to work, produce, and sell goods. 416(b), and Food For Progress. GSM-102 credits, currently A major cause of inflation is that governments are resisting totaling over $5 billion, have financed the vast majority of moving toward a market economy by extending subsidies and U.S. sales since 1991. Russia’s default on GSM-102 pay- soft loans to farms and enterprises threatened with downsiz- ments, which from November 1992 through mid-May 1993 ing. A difficult tradeoff is between maintaining existing en- totaled $850 million, resulted in suspension from further terprises and jobs and restructuring and reducing inflation. GSM-102 credits. In April, the United States announced a new $900-million Russian food assistance package. Within agriculture, the livestock sector is facing strong pressure for restructuring. Evidence indicates that by the late In fiscal year 1992, U.S wheat exports to the FSU republics 1980’s per capita consumption of meat and other livestock slightly exceeded $1 billion, making the region the largest products in the former USSR was substantially higher than importer of U.S. wheat. GSM-102 credits and Export En- in other countries having about the same level of per capita hancement Program subsidies, the latter equalling $85 mil- Gross National Product. The reduction or elimination of large lion, financed almost all the exports. The FSU was the second subsidies to both livestock producers and consumers that largest foreign market for U.S. coarse grains in fiscal 1992, accompanied the 1992 price deregulation in the republics with a total value of $725 million. This made the United lowered consumer demand and worsened producers’ terms of States by far the FSU’s largest supplier of coarse grains. The trade. As a result of the fall in real consumer income from United States was also the FSU’s primary supplier of soybeans overall inflation, consumers have switched from livestock and meal in fiscal 1992, with exports totaling $602 million. products to less expensive bread and potatoes. The U.S. share of the FSU soy market has increased substantially, as other competitors have not matched U.S. credit Price liberalization and subsidy reduction also sharply raised packages. the relative prices of many farm inputs. For this reason, as well as disruptions involving distribution, the quantity of Total FSU grain imports in 1993/94 are projected to just top inputs used in production fell for most agricultural goods. the 1992/93 estimate of 27 million tons, despite a forecasted Evidence suggests that the marginal productivity of some 11-million-ton drop in 1993 grain production. Considerations agricultural inputs is low, such that the effect of a decrease underlying the FSU grain-import forecast are continuing hard in input use on output could be small in the short run. currency constraints, an expected decline in availability of foreign credits and assistance, projected reductions in total Livestock output and inventories fell 5-15 percent in most grain use, and forecasted stock drawdowns. Anticipated mi- republics in 1992, following 1991 declines. In Russia, nor changes in the State grain procurement systems of the Ukraine, and certain other republics, the State acted in summer republics, including decentralization of control over supplies 1992 to slow down restructuring by reintroducing subsidies and freer prices in Russia, are not expected to significantly for livestock producers. Though the livestock sector is ex- affect estimated import demand for grain in 1993. Grain pected to continue to downsize in 1993, subsidies will make marketed outside State channels is expected to pick up this the decline smaller than it otherwise would be. year, but will not break the States’ predominant role in the milling and mixed feed sector. Former USSR/RS-93-1/May 1993 Economic Reform in Former USSR Slow and Difficult In the countries of the former USSR, national income and aggregate industrial and agricultural output all fell substantially in 1992. High inflation and the corresponding weakness of money have continued to be destabilizing problems, contributing to the decline in output. However, some of the drop in income and output can be viewed as part of the short-term costs of adjusting to a more market-oriented economic system. Reformers continue to face the economic and political dilemma that pursuit of longer-term reform goals requires short-run hardships. [William M. Liefert] From the point of view of conventional macroeconomic indicators, the 15 republics of the former Soviet Union (FSU) Table 1——Net material product, FSU republics all fared badly in 1992.' In every republic, national income (or net material product), industrial output, and aggregate agricultural output fell significantly, following declines in Republic 1990 1991 1992 1991 as well (tables 1-3). Soaring inflation accompanied falling production, as most countries had price rises exceeding 1,000 percent (table 4). Yet, in every republic unemployment Percent change remained low, less than 1 percent in most. Russian Federation —5.0 -—11.0 —20.0 Ukraine -1.6 -11.0 —15.0 Virtually every newly independent state of the FSU began Belarus —1.4 —3.0 —11.0 1992 with at least an official commitment to some degree of Moldova -12.0 economic reform along market lines. An alternative way to examine the republics’ 1992 economic performance would be Kazakhstan -1.7 -10.0 -—14.2 from the point of view of their success in moving toward the Uzbekistan 1.4 -10.8 -12.9 major goals of market-oriented reform. Such an approach Kyrgyzstan -0.9 -14.5 —26.0 would put the macroeconomic figures in perspective. The Tajikistan -8.9 -9.0 —31.0 Turkmenistan -—10.6 nature and dynamics of reform are such that successful move- ment toward some longer-term objective could worsen short- Armenia -—11.0 run performance, as measured by a conventional macroe- Azerbaijan -7.9 -10.3 —28.2 conomic indicator. For example, changing the economy so Georgia —4.3 -23.1 na that enterprises respond to consumers’, rather than planners’, Lithuania -10.1 —6.4 na desires for goods could reduce output for certain industries. Latvia -3.1 —6.0 na An evaluation of reform and its major goals also allows one Estonia -8.9 to examine the main tradeoffs between reform’s benefits and costs, and thereby help identify reform’s hurdles. na = not available. Sources: 1990 and 1991-—-—PlanEcon, Review and Outlook for If 1992 has been a disappointing year for radical reformers Former Soviet Republics, April 1992; 1992—-—CIS Statistical in Russia, Ukraine, and the other republics, they should not Committee, Statisticheskii byulleten 3, February 1993, pp. 4-5. be disappointed because strong reform policies were enacted which then failed. Rather, governments have shied away from adopting strong and consistent reform programs, largely out of concern for the short-run costs of reform. A major worry his small group of radical reformers appeared politically iso- has been unemployment that would come from enterprise lated. However, Yeltsin received a boost in the April 25 bankruptcies. Inconsistent policies have delayed major re- referendums intended to help break the reform deadlock. In form, while contributing to the short-run difficulties. a turnout of close to two-thirds of the electorate, 58 percent expressed support for Yeltsin as President, and 53 percent The Russian Federation’s ambitious 1992 reform led by Presi- support for the continuation of his economic reforms. dent Yeltsin and his then (acting) Prime Minister Yegor Gaidar seems to have ebbed for these reasons. Both conservatives Reform’s Main Objectives and reform moderates have retreated from reform because of Among the various goals of market-oriented reform in the its perceived short-term costs. By spring 1993 Yeltsin and republics, two appear most important. A longer-term goal is 3 Former USSR/RS-93-1/May 1993 Table 2—-—Industrial output, FSU republics Table 4——Growth in money income and consumer prices, selected FSU republics, 1992 Republic 1990 1991 Republic Per capita Consumer Change in Percent change money income prices per capita real income Russian Federation : -9.5 Ukraine : —10.5 ———1991=100-——--— Percent Belarus —2.5 Moldova —11.5 Russian Federation 750 1,570 —52 Ukraine na 1,750 peyet Kazakhstan —9.5 Belarus 820 1,160 -—29 Uzbekistan ; —9.5 Moldova 490 1,210 Kyrgyztan : —9.3 Tajikistan : 9:0 Kazakhstan 1,070 Turkmenistan —9.5 Uzbekistan 510 Kyrgyztan 1,190 Armenia Tajikistan 1,010 Azerbaijan Turkmenistan 870 Georgia Lithuania Armenia 900 Latvia Azerbaijan 1,210 Estonia na = not available. na = not available. ! Estimated by comparing growth in per capita money income Sources: 1990 and 1991——PlanEcon, Review and Outlook for and consumer prices. Former Soviet Republics, April 1992; 1992—-—CIS Statistical 2 Cannot compute. Committee, Statisticheskii byulleten 3, February 1993, pp. 4—5. Sources: CIS Statistical Committee, Statisticheskii byulleten 3, February 1993, p. 18. Table 3——Agricultural output, FSU republics geared to satisfying consumers’ rather than planners’ desires for goods. The second reason is that the FSU economies have Republic 1990 1991 1992 much lower productivity than the developed Western countries, that is, they use much more input to produce given levels of output. Productivity growth would raise output in existing Percent change consumer-oriented industries and also free resources for de- velopment of new consumer goods and services. These two Russian Federation —11.7 changes, the first involving demand shifts and the second Ukraine -—8.9 spurring production and supply, would interact through mar- Belarus -3.8 kets to transform the republics’ economies. Aggregate FSU SOS Yet, the greater the potential for increasing wealth and consumer welfare over the longer-run, the greater will be the Sources: 1990 and 1991——PlanEcon, Review and Outlook for short-term disruption and hardship caused by reform. In the Former Soviet Republics, April 1992; 1992——CIS Statistical near term, restructuring will require major reallocation of Committee, Statisticheskii byulleten 2, January 1993, p. 18. resources, especially labor and capital. Without State support, many enterprises, particularly those not catering to consumer demand, would go bankrupt. Because many laid-off workers would not be able to find new jobs immediately, high unem- to restructure the economy by changing the mix and quantity ployment could result. The reforming countries of Central of goods produced, consumed, and traded. A more short-term Europe—Poland, Hungary, and others—have suffered this objective is to reduce inflation and thereby restore the national experience. Yet, the short-term pain of unemployment is at currency as effective money. least part of long-term economic restructuring that could significantly raise the countries’ standard of living. Economic restructuring is important because it can be viewed as the main way by which the republics, especially consumers, A second goal of reform, more short term in nature, is to could grow richer. There are two major reasons why restruc- lower inflation and thereby restore money as a workable turing could increase wealth and living standards. The first means of exchange. Since Mikhail Gorbachev came to power is that, in a market system, investment and output would be in the former Union in 1985, the FSU has suffered from Former USSR/RS-93-1/May 1993 debilitating inflationary pressure.” Before 1992 inflation was major reason for the 1991 fall in FSU Gross Domestic Product kept repressed through price controls, whereas with price (GDP) of 17 percent (according to official Soviet figures), deregulation in the republics in 1992 the inflation became and the continued drop in aggregate output in the republics open. The high inflation, whether repressed or open, reduced in 1992. Unlike the fall in output and employment that would incentives to work, produce, and sell goods. Disruption in be part of the short-term cost of economic restructuring, the the flow of industrial intermediate inputs to factories and decrease in output because of inflation and weak money is farms upset output further. The adverse effects of inflation industry-indiscriminate and without long-term benefit. and the corresponding weakness of money were probably a Russia Begins 1992 With Reform Figure 1 Following the breakup of the Union in late December 1991, Cumulative Index of Consumer Prices, the newly independent states began independence committed Russian Federation, 1992 officially to at least some degree of economic reform. After the Baltic States, Russia has pursued the most ambitious Percent (December 1991 = 100) reform program. Because of its size, its policies can strongly 3000 affect the other republics, and its reform problems are to a varying degree representative of those of the other republics. 2500 &L Z, Strongly supported by President Yeltsin, (acting) Prime Min- ister Gaidar led Russia’s reform program. 2000 4 Russia began 1992 with price liberalization, its main reform measure to date. Prices were freed at the national level for most producer and consumer goods. Though controls were 1500 kept at first for certain products, such as fuel, transport, and some foods (bread and milk, for example), prices were raised considerably. By June national controls existed for even fewer products (though fuel was among them). Price liberalization also involved the reduction or elimination of most 500 of the producer and consumer subsidies that supported the previous price system. Price liberalization and subsidy reduction allowed the country to pursue simultaneously the goals of strengthening the ruble as effective money and restructuring the economy. Within Source: O razvitii ekonomicheskikh just a few months the rise in prices eliminated the ruble reform v Rossiiskoi Federatsii v 1992 godu (1993), p. 9. overhang that had accumulated under repressed inflation. Re- storing money’s effectiveness required not only eliminating Figure 2 the surplus “stock” of money, but also substantially reducing Monthly Consumer Price Increases, the further growth of inflationary pressure. During the first Russian Federation, 1992 4 months of 1992, the Russian Government followed rela- tively strict fiscal and monetary policies, which kept the Percent inflation-causing rise in money incomes in check. After an initial rise in prices of about 250 percent in January, inflation during February-April averaged about 30-40 percent per month. Price liberalization and subsidy reduction also began the economy’s restructuring toward a more market-oriented system. Not only were direct budget subsidies reduced or eliminated, but also indirect subsidies implicit in the previous price system. As is discussed in the next article, a heavily subsidized part of the Soviet economy before price liberalization was the livestock sector. Producers were subsidized with both direct budget and indirect price subsidies, and consumers were subsidized by paying prices far below real production costs. Price liberalization has created a double contraction in the sector by negatively affecting both demand and supply. Conse- quently, production and consumption are falling substantially. The output of many heavy and military industries is also dropping significantly. Source: O razvitii ekonomicheskikh reform v Rossiiskoi Federatsii v 1992 godu (1993), p. 9. Former USSR/RS-93-1/May 1993 Figure 3 Index of Real Monthly Income, In response to strong pressure, the authorities compromised Russian Federation, 1992 1/ by increasing income compensation for price increases, financial support to agricultural producers, and credit to enterprises. Credit expansion in late spring led to an estimated Percent (December 1991 = 100) growth in the money supply of 700-800 billion rubles. This action began a steady decline in fiscal and monetary discipline. In May subsidies were reintroduced for meat and milk producers. Also, the Russian Central Bank began to extend credit to enterprises and farms almost without limit, the ap- parent goal being to keep virtually every producer solvent. Although the radical reformers in Yeltsin’s Government de- plored the lack of financial discipline, the Central Bank is officially subordinate to the increasingly less reformist Rus- sian Parliament. The loose fiscal and monetary policies fuelled_an inflation rate in 1992 of about 2,500 percent (figures 1-3).~ As a result of high inflation, the ruble/dollar exchange rate fell from 200 rubles (for 1 dollar) in January 1992 to 420 rubles in Decem- ber, and to 800 rubles in May 1993 (figure 4). The purpose of the lax extension of subsidies and soft credits was to prevent output from falling further, enterprises from 1/ Computed. going bankrupt, and workers from losing their jobs. By the Source: Rossiiskaya gazeta, end of 1992, all but the most reform-committed politicians 1/16/93, p. 3. and economists were arguing that the government’s main Figure 4 economic concern should be to stop and reverse the economy- Ruble/Dollar Market Exchange Rate in wide drop in output. Because enterprises can remain solvent Moscow and St. Petersburg in 1992 as long as the State is willing to extend funds without limit, the goal of preventing bankruptcy and unemployment was achieved. Virtually no State or collective farms or State Rubles per dollar 500 enterprises have yet gone bankrupt, and the unemployment rate in early 1993 was still less than 1 percent. 450 Despite the best efforts of such entities as the Central Bank, 400 production in most sectors of the economy fell in 1992. Price 350 liberalization and the demise of central planning created strong pressure for restructuring. Without the State guaran- 300 teeing orders, demand for much of the output of military and heavy industries ceased. Demand also fell substantially for 250 consumer goods, especially those for which controls and 200 heavy subsidies kept consumer prices far below real production cost (such as meat). Even if producers remain subsidized, 1650 consumers apparently lack the purchasing power to buy enough to maintain output at previous levels. Many workers 100 continue to be paid to produce goods the economy no longer 50 wants, or are being paid whether their employing enterprises produce or not. Jan Mar May Jul Sep Nov Thus, government policies are trying to maintain the existing structure of production capability and employment, even Monthly average. Source: Kommersant, No. 5, 1993. though fundamental changes in demand are making this structure increasingly obsolete. Because most of the industries suffering falling output for this reason are those producing Opposition to Russian Reform goods consumers least want, the fall in Russia’s aggregate Starts in April 1992 output figures overstates the drop in consumers’ real standard By April, reform moderates as well as conservatives were of living. The main criticism of policies intended to defend concerned that the reforming government’s strict fiscal and the economy’s existing structure of production should not be monetary policies could soon threaten bankruptcy and unem- that they are failing to keep output from dropping, which, ployment in enterprises and sectors that could not easily adapt short of the full reimposition of central planning, is inevitable. to a self-financing consumer-oriented system. Many conser- Rather, the policies’ main harm is that they are preventing the vatives remained opposed to even the idea of market reform. Former USSR/RS-93-1/May 1993