The Consequences of Russia's Looming Food Shortage
Summary
In the coming weeks, the Russian government will likely take
extreme measures to head off the prospects of a significant food
shortage for its 146 million people. Across the spectrum there are
signs that Russia will not produce enough grain and meat to feed
the country in the coming year. Unwilling to allow hunger, the
government in Moscow will most likely tap into its currency
reserves to import food from abroad. The looming food shortage
will, in turn, destabilize the Russian economy and make it more
difficult for Russia to service its already staggering load of
foreign debt.
Analysis
On March 21, the U.S. Agriculture Department released a report
forecasting that Russia's chronic problems in producing animal feed
will continue into 2001. The Washington report is only one of many
indications that Russia will have extreme problems feeding its
people in the coming year. Russian analysts are openly pessimistic
about the country's ability to increase its production
dramatically, as the government has hoped. And Russian farmers are
behind in their planting of wheat, as well.
The shortage in food for livestock has been a reliable leading
indicator of Russia's escalating struggle to feed its people. Every
year, feed stocks fall and so does the human food supply. In 1998,
Russia suffered its worst harvest in 40 years and had to turn to
the outside world for help. Last year, imported grain for animals
was 9 percent of the country's total animal feed supply; this year
it will exceed 20 percent. At the current rate, it appears the
country will produce 10 million metric tons of grain less than the
population will require in the coming year.
The Russian government has announced lofty ambitions for boosting
food production but it is battling a grossly inefficient
agricultural sector. The government has planned to boost production
by "boosting farmers' incomes," according to acting President
Vladimir Putin, as well as intervening on the domestic grain market
and boosting agricultural exports. Russian agriculture, however,
remains based on cooperative farms; boosting individual incomes
will have no effect.
Government intervention in the market to date has led to cut-rate
sales that drive farmers out of business. Last year Russia sold the
food aid that the international community had sent on the open
market, for $68 per metric ton of grain, far below the market price
of domestic grain, $124 per metric ton. Increasing exports would
only make domestic scarcity worse. And the government's own ham-
handedness was illustrated on March 15, when acting President
Vladimir Putin scolded senior officials for their tardiness in
getting agriculture subsidies - for equipment and seed supplies -
to farmers in Chechnya. The planting of wheat will likely be
delayed, as a result.
In recent years, the international community has shipped vast
amounts of food; the United States alone sent 3.1 million metric
tons last year. But that much aid is unlikely. The war in Chechnya
has hardened the hearts of Western officials and the misuse of
previous aid further discourages generosity. In January the Russian
Audit Chamber revealed that several aspects of agreement regulating
American and European food shipments had been violated. To date,
the United States has announced plans to send just 500 million tons
of food through the spring months. The European Union has not
merely frozen $29 million in food aid credits. It has rejected any
more long-term aid.
To prevent food lines from forming, the government is preparing to
intervene - mainly by drawing down its currency reserves and,
subsequently, tinkering with the value of the ruble. Most nations
staring hunger in the face would take out loans from international
lending institutions to pay for food from abroad. For Russia -
having defaulted on payments and refused reforms - this is no
longer an option. Without a credit card, the government must turn
to its wallet: $15 billion in hard currency reserves and gold.
Indeed, Deputy Prime Minister Kasyanov has said throughout March
that Russia will borrow from these funds to deal with another
problem, a pending government budget shortfall of $4.5 billion.
In turn, the value of the ruble will fall, from 28.36 to the U.S.
dollar, the rate at which it currently trades. The government will
likely use some of its currency reserves to artificially raise the
value of the ruble. A stronger ruble will help Russia make large-
scale food purchases on the open market. It will also give the
Central Bank greater room to print money to solve other problems,
like the country's budgetary shortfall. Such printing will cause
the value of the country's currency to fall.
A predictable timetable of events is now set to unfold in the
coming months. Large-scale food purchases should occur in April
once the Kremlin has an idea of how the planting season fared.
Barring an outpouring of international goodwill and loans, Russia
by then will be drawing from its currency reserves. This mass
draining of the country's reserves will cause confidence in the
Russian economy - such as it is - to plummet. In May and June,
Russia will likely print a large amount of currency to pay off its
internal debts and overdue wages. Inflation will creep upwards and
the ruble will slide. Another poor harvest will complicate Russia's
already dire situation.
(c) 2000, Stratfor, Inc. stratfor.com
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