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Russia’s boom (farming) economy

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The Kremlin claims it has won the sanctions war with the West — and points to the good news coming out of its agriculture sector. It is half right.

When the West slapped sanctions on Russia in 2014 and Moscow retaliated with a trade embargo, the consensus was that Moscow was shooting itself in the foot by banning fresh produce from the EU. A little more than two years later, the Kremlin insists the sanctions have galvanized a new generation of Stakhanovite farmers to smash production targets and propel the country toward self-sufficiency by 2020.

The Kremlin’s heroic tales of self-sufficiency are not pure, old-style propaganda — a fiction intended to show the West that its sanctions are in vain. Reliance on foreign food is reducing sharply and some sectors are genuinely prospering. Pigs and giant grain fields are hailed as particular success stories. Not competing with the EU means more Russian pigs to provide bacon proudly reared in the Motherland.

But it is wrong to attribute Russia’s agricultural boom to sanctions. Good land management and weather have played a far more significant role in turning Russia into the world’s biggest wheat exporter. Most critically, all the government’s talk of the lucky upside of sanctions helps distract from the far more emphatic downside: food-price inflation, widespread fake foods and a fragile ruble that has pummelled consumers.

Russians love Made in Russia

President Vladimir Putin has led the national charge toward self-sufficiency, arguing food generates more export income for Russia than arms. He has even vowed to become the world’s biggest supplier of organic food, ushering in a potential culinary Cold War with the bio-engineered mega-farms of the U.S.

Agriculture Minister Alexander Tkachev captured the mood in late September when he announced Moscow’s ban on European food was having such a positive effect in bolstering domestic output that he wanted sanctions to last longer. “We are interested in keeping them for another five years,” he told the Rossiya 24 TV channel, backsliding into one of the Kremlin’s more traditional timetables for economic plans. “Russian consumers are now happy to be looking for Russian-made goods in shops,” he added.

Food takes up more than a third of an average household budget in Russia, compared to 11 percent in Britain.

Russia hasn’t eradicated foreign products from supermarket shelves, but it has moved toward greater self-sufficiency. The country imported 36 percent of its food in 2013, before the EU’s sanctions and Moscow’s retaliatory embargo. In 2015, that figure dropped to 28 percent. In 2016, according to preliminary data, that fell again to 24 percent in the first quarter and 22 percent in the second.

Where Russia struggles to make up the shortfall — in fruit and dairy, for example — it has scrambled to find new trading partners. Moscow has approved dairy imports from New Zealand and has opened up to Asian dairy investments from Vietnam and Thailand.

Beyond the spin

Despite the rosy spin from Putin and Tkachev, Moscow is adopting a high-risk strategy. Sanctions, coupled with plunging oil prices, have hit the currency and driven up food prices by 14 percent in 2015. Fruit and vegetables cost on average 22.8 percent more in June 2015 than a year earlier, according to Rosstat, the state statistics bureau.

With local supply available for just three months of the year due to climate and growing conditions, Russia relies on imports for 90 percent of its fruit, according to the country’s agriculture watchdog Rosselkhoznadzor. On average, fruit prices jumped between 30 percent and 50 percent over 2015. The price of oranges shot up 58 percent.

While food prices have stabilized over the past few months, the high cost of produce has stretched family budgets. In the first half of 2016, food accounted for 35.5 percent of household expenditure, according to Rosstat. By comparison, the U.K.’s 2015 family spending survey indicated food amounts to 11 percent of household expenditure in Britain.

“Russia’s economy has hardly been reduced to tatters. Our industries, especially agriculture, are performing better than before” — Vladimir Chizhov, Russian ambassador to EU

At the higher end of the market, food fraudsters have taken advantage of the crackdown on smuggled French cheeses, replacing the real deal with fakes made out of blocks of grease. In October 2015, Rosselkhoznadzor revealed that in some regions of the country, up to 78 percent of cheese on the market was counterfeit. (The agency quickly walked back the findings, following a public and media outcry).

Still, Russia is casting itself as the defiant victor of the showdown by boasting it has spectacularly ramped up domestic production to become an agricultural powerhouse.

“One of the advantages of the anti-Russian sanctions and retaliatory Russian measures is that the country has become more actively engaged in agriculture and is now able to independently produce practically any food,” a spokeswoman for the Russian agricultural ministry said, adding that the industry overall had recorded a rate of growth of approximately 3 percent in 2015.

Russia’s Ambassador to the EU Vladimir Chizhov also insisted the EU was losing the sanctions clash.

“Russia’s economy has hardly been reduced to tatters,” he said. “Many of our industries, and especially agriculture, are performing better than before. On the contrary, it is the EU member states that have voluntarily locked themselves out of many Russian markets, thus losing some of their competitive edge against international rivals.”

Standout swine

Perhaps Russia’s most eye-catching success is its pigs.

Slaughtered pigs hang at a meat processing plant on June 5, 2008 in Veliky Novgorod | Mikhail Mordasov/AFP via Getty

Slaughtered pigs hang at a meat processing plant on June 5, 2008 in Veliky Novgorod | Mikhail Mordasov/AFP via Getty

In 2013, Russia imported a total of 868,000 tons of pork, according to the U.S. Department of Agriculture. By 2015, the country had halved its reliance on foreign pork, importing just 408,000 tons. Production jumped by 9 percent between 2013 and 2015, although this trend had been under way well before the sanctions hit.

Tkachev announced last month that Russia would simply no longer need to import any pork. In fact, Russia is now looking to switch to being a minor exporter, mainly to China, led by large companies such as Cherkizovo. This will require strong assurances to Chinese phytosanitary authorities that Russia’s pigs are free from African swine fever.

Superficially, home-grown wine would also seem to be doing well, although EU wines are not banned. The federal alcohol statistics service Tsiffra reported that domestic production was up 25 percent last year, with similar increases expected this year — Crimea’s addition to Russia has certainly helped.

“As people become poorer, they consume cheaper and fewer goods. And we are seeing that” — Russian economist

But wine production is a complex issue in Russia, as the country was only producing about a quarter of demand. And Russian wine is hard to define — often made from foreign grapes, which are processed abroad and simply bottled in Russia. People in the business also say Moldovan wine — while actually banned — still enters Russia in containers sent through Abkhazia, a disputed Black Sea statelet recognized by Russia, but seen by Georgia as illegally occupied. (In a similar fashion, a significant amount of EU food is still entering the country by being repackaged in the Balkans and Belarus, they say.)

And Russia’s headline agricultural growth figures are hardly a surprise given the runaway success of the grain business. The country has become the world’s wheat export powerhouse, surpassing the U.S. It looks set to overtake the EU this year, where France’s crop has been devastated by bad weather. Putin has predicted the harvest will come in at a record 115 million tons of grain, up from 104.8 million tons last year. Yet farm experts attribute almost none of Russia’s success in wheat to sanctions — Russian farmers have invested wisely and have benefited from good weather.

There’s another side to Russia’s greater ability to satisfy its own demands, said Nataliya Orlova, chief economist at Russia’s Alfa-Bank: lower consumption.

Take that standout pork: The country’s overall pork consumption dropped 7.7 percent from 2013 to 2015, and is forecast to fall further in 2016. As the economy flounders and household incomes decline, Russians have turned from pricier meat to poultry.

“When Russia brought in the counter-sanctions, some industries won out,” Orlova said. “Some sectors have used the sanctions on imports and the devaluation of the ruble to build up a long-term advantage, and that’s the story of the pork industry.

“But I think the positive impact will be neutralized. The population has become poorer because of the devaluation of the ruble and because the economy isn’t growing. As people become poorer, they consume cheaper and fewer goods. And we are seeing that reflected in the data — consumption is down overall. So even if one sector wins, another loses.”

Hans von der Bouchard and Barbara Surk contributed reporting.


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