Why current measures no longer stimulate the development of the agro-industrial complex
Initially, the measures taken were of a stimulating nature: growth of domestic production and processing, stabilization and reduction of domestic prices, development of non-resource exports, reduction of import dependence, etc. But today it can already be stated that all government regulation policies have a fiscal function. This places a heavy burden on the agricultural business , and in the long term can lead to negative consequences for the entire agro-industrial complex.
Reasons, factors, prerequisites
The CORONAVIRUS pandemic that broke out in 2020 has had a number of negative consequences throughout the world.
Firstly, all supply chains were disrupted. Which, in turn, limited the global supply of food products, thereby creating a shortage in the market. Many countries at the time closed their borders or imposed strict restrictions to prevent the spread of coronavirus.
Secondly, high morbidity and increased mortality have led to a shortage of personnel, and, as a result, to an increase in the cost of services, especially in the field of logistics and transport.
Thirdly, the decrease in demand in the HoReCa sector has led to increased demand for delivery (food to go). And the rush of demand in the household sector led to an increase in retail prices. All this contributed to the strengthening of world food prices , which reached historical peaks in the post-Covid period.
Soaring world prices caused an increase in domestic prices, and caused the government to introduce additional measures in 2020-2021 to curb the EXPORT of agricultural products - in the form of quotas and duties, as well as fixed prices for sunflower oil and SUGAR . All these measures really influenced the stabilization of domestic prices and their reduction. However, the effect was short-lived. Thus, from July 2021 to April 2022, the increase in domestic prices for wheat amounted to 24.5% with existing export restrictions. Their further decline was due to sanctions, high carryover stocks and expectations of a record harvest .
2. SVO and sanctions
In February 2022, RUSSIA launched a military action in Ukraine . During the same period, a grain export quota of 11 million tons was once again introduced , which was in effect from February 15 to June 30, 2022, and subsequently became permanent. Every year the volume of the quota itself changes. However, this did not stop the rise in domestic prices, but only led to an increase in inventories by the end of the 2021/22 season.
At the same time, the geopolitical factor had a strong influence on the ruble exchange rate, which “in the moment” - in March 2022 - exceeded 103 per DOLLAR . Since the formula for export duties on grains and oilseeds at that time was tied to the dollar, this could not but affect its excessive growth. At the same time, Western countries began to introduce anti-Russian sanctions, which affected the increase in the cost of freight and insurance, as well as problems in logistics and mutual settlements with external contractors. In view of this, the government decided to transfer the export duty to rubles in order to reduce both its and price volatility, as well as de-dollarization of the economy.
In fact, duties and price volatility actually decreased, and the transition to mutual settlements in national currencies accelerated the process of dedollarization, thereby reducing dependence on Western currencies. In addition, the Central Bank's strict monetary policy stopped the devaluation of the ruble, which also had a beneficial effect on the level of inflation, gradually reducing it.
Anti-Russian sanctions have exposed all the acute problems in all sectors of the economy. At the same time, they contributed to the development of domestic production and the replacement of imports where possible. Thus, in the agro-industrial complex, strong import dependence in the field of selection and seed production, agricultural machinery, and information technology led to the adoption by the state of a number of measures. This includes localization of seed production, quotas for their imports, state support for the development of domestic selection, and parallel imports . Quotas for the import of plant protection products are also being discussed. For many industries, the traditional markets were unfriendly countries, which resulted in a reversal of trade flows and the active development or increase in trade with friendly countries. At the same time, domestic processing and the transition to non-resource exports are growing.
Despite all the measures taken, the sanctions imposed against Russia continue to have a negative impact on its economy. The latest packages of sanctions adopted by Western countries are already aimed at preventing Russia from circumventing them and/or smoothing out their negative impact. In addition, the ongoing military war in Ukraine for the second year is gradually putting the Russian economy, so to speak, on a war footing. The annexation of new regions and their restoration, as well as integration into Russia as a whole, requires additional resources. This, of course, affects the state budget, as a result of which the government is forced to tighten the manual regulatory mechanism - including the agro-industrial complex, gradually replacing the stimulating function with a fiscal one.
3. Workload increases, motivation decreases
Despite the high harvest and carryover stocks, which provoked a sharp collapse in domestic prices for almost all agricultural crops, export restrictions continued to apply in 2022-2023. Moreover, the Ministry of Agriculture has repeatedly stated that it does not intend to cancel them. On the contrary, as part of government decree No. 1538 dated September 21, 2023, export duties were introduced from October 1 on almost the entire list of goods exported outside the customs territory of the EAEU . The exceptions were goods for which there are already export duties (grain, sunflower oil, etc.), as well as import-dependent goods with a significant share of imports in the cost, plus a number of other goods - MEAT, dairy products, grain processing products , molasses .
The only easing was an increase in the cut-off price in the duty formula and the transfer of export duties on oilseeds and their processed products from dollars to rubles. In addition, in the new season, the Russian authorities have already recommended selling wheat for export at a price of no less than $240 per ton, and in the future they are considering the possibility of establishing a minimum price for it.
Earlier, on November 24, 2022, government decree No. 2132 approved a list of types and categories of self-propelled vehicles and trailers for which a recycling fee is paid, as well as the size of the recycling fee for 2023.
The new coefficients used to calculate it came into force on January 1, 2023. In June, the Cabinet of Ministers approved the indexation of the recycling fee from July 1 for seven categories of agricultural wheeled tractors with power from 30 to 340 horsepower. Taking into account indexation, the recycling fee for a wheeled tractor imported into Russia, for example, manufactured in 2019 and with an engine power of 240 hp. increased in price by 58%, or almost 2 million rubles. for a unit. This, as well as problems with parallel imports, led to a significant increase in prices (reaching 30-40%) for all agricultural machinery, and, as a result, a reduction in farmers’ demand for it.
On August 4 of this year, Russian President Vladimir Putin signed a law that introduces a 10% tax on excess profits of large companies in the country. It will come into force on January 1, will be credited to the federal budget and will be one-time in nature.
The list of those exempt from paying tax was significantly expanded during the consideration of the law in the State Duma in the second reading. This included, in particular, small and medium-sized enterprises (SMEs) and payers of the unified agricultural tax.
According to the Ministry of Finance, the introduction of the tax will give the budget an additional 300 billion rubles. Earlier, Finance Minister Anton Siluanov stated that the tax is only a “one-time fee by agreement with business,” and its introduction on a permanent basis is impractical. At the same time, the financial department did not have a unified public position - for example, Deputy Minister of Finance Alexei Sazanov argued that the authorities could return to this collection if it was necessary to finance the federal budget deficit.
Meanwhile, the introduction of a tax on excess profits of large companies, albeit a one-time one, increases their tax burden, unplannedly withdrawing funds from circulation and thereby reducing investment opportunities.
In connection with the increase in annual inflation, which on August 7 of this year amounted to 4.4%, as well as the dollar exchange rate, which reached 101 rubles on August 15, a number of measures were taken. From August 10, 2023 until the end of 2023, the Bank of Russia will not buy currencies on the market. On August 15, he raised the key rate to 12%, on September 15 – to 13%, and on October 27 – to 15% per annum.
This tight monetary policy is aimed at curbing inflation and strengthening the national currency. However, the measures had negative consequences, including for agricultural business. Firstly, loan rates increased, which was very untimely before the autumn sowing season. Secondly, due to an increase in the key rate, the Ministry of Agriculture suspended accepting applications for preferential loans, effectively reducing state support for the industry - since preferential lending provides loans for the development of crop and livestock production, construction, reconstruction and modernization of processing. The conditions before the Central Bank's decision were lenient - up to 5% per annum, up to one year (if the loan is short-term) or 2-15 years (if it is an investment loan).
However, at the end of September the government allocated an additional 45 billion rubles. for preferential loans to farmers for the production and processing of agricultural products. The source of funds was the Reserve Fund. In early October, it became known about the allocation of another 10 billion rubles. for a preferential lending program for agricultural producers.
Of course, all this is better than nothing at all. But, if you compare with how much is withdrawn from the industry due to duties, an increase in the recycling fee, an excess profit tax, an increase in transportation tariffs (railway and Platon) and interest on loans to the budget - and all against the backdrop of rising prices for fuel and means of production - then this becomes a “drop in the ocean”.
During August, the government held discussions with the country's largest companies regarding the situation regarding the non-return of export revenues to Russia. The authorities insisted that this situation was unacceptable, and that this primarily concerned non-energy companies. Since the oil sector is forced to sell most of its export earnings, since half of their revenue is taxes. According to the authorities, it was mainly producers of mineral fertilizers who ignored the return of foreign exchange earnings to the country.
In mid-August, the Cabinet of Ministers managed to informally agree with exporters to increase the sale of foreign currency earnings. Therefore, it was decided for now to limit ourselves to monitoring their actions, without establishing standards for the sale of foreign currency earnings by exporters, and not introducing restrictions on the movement of capital. Business representatives generally agreed to sell more revenue. However, on October 11, Vladimir Putin signed a decree introducing for six months a requirement for mandatory repatriation and sale of foreign currency earnings on the Russian market by individual exporters, including grain.
The decision was made primarily in order to stabilize the ruble exchange rate, which then exceeded 100 rubles per dollar. Although the authorities have announced their intentions to increase the transparency and predictability of the foreign exchange market, to reduce the possibility of currency speculation.
Thus, recent measures of state regulation of the agricultural market are aimed at replenishing the budget. They do not in any way stimulate the domestic agricultural business to develop further, reducing its investment opportunities and profits, which, in turn, creates risks for the future harvest: against the background of rising costs and fiscal burden, agricultural producers begin to save on means of production, switch to less expensive agricultural technologies and crops, curtail foreign economic activity, etc.
Small and medium-sized businesses, which are simply threatened with bankruptcy, may suffer the most.
On the other hand, the state really needs to replenish the budget, the expenses of which have increased significantly against the backdrop of the Central Military District and sanctions, as well as assistance in the restoration of new regions.
In this case, it is necessary to look for alternative sources of budget replenishment. Alternatively, it is possible to raise transit tariffs for foreign partners, import duties, and increase land rental rates for foreign investors. After achieving complete self-sufficiency in the rolling stock, container fleet and fleet, you can lease them to foreign partners.
In other words, you need to try to replenish the budget not only at your own expense, but also at someone else’s. This is what other countries have been doing successfully for a long time.
Author: Marina Sidak – Candidate of Economic Sciences, independent expert on agro-industrial complex, agribusiness consultant.