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Cablegate: The Problem with the Russian Far East's Moribund Agriculture

VZCZCXRO0943
RR RUEHAG RUEHAST RUEHCHI RUEHDA RUEHDF RUEHDT RUEHFL RUEHHM RUEHIK
RUEHKW RUEHLA RUEHLN RUEHLZ RUEHNH RUEHPOD RUEHROV RUEHSR RUEHYG
DE RUEHVK #0120/01 2960448
ZNR UUUUU ZZH
R 220448Z OCT 08
FM AMCONSUL VLADIVOSTOK
TO RUEHC/SECSTATE WASHDC 1029
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHVK/AMCONSUL VLADIVOSTOK 1126

UNCLAS SECTION 01 OF 02 VLADIVOSTOK 000120

SIPDIS

E.O. 12958: N/A
TAGS: EAGR ECON PGOV RS
SUBJECT: THE PROBLEM WITH THE RUSSIAN FAR EAST'S MORIBUND AGRICULTURE
SECTOR

VLADIVOSTO 00000120 001.2 OF 002


Summary
-------

1. Primorye is no longer the prosperous and productive
agricultural region it was during Soviet times. In hopes of
improving the region's stagnant rural economy, Moscow announced
a new regional agriculture promotion plan last March. The new
plan replaces the largely unsuccessful national plan that Moscow
implemented just two years ago. While keeping the same goals,
the new plan shifts the burden of funding from Moscow to the
regions. Farmers in Primorye continue to face a plethora of
problems, outlined below, only some of which the plan addresses.

Back in the Good Old Kolhoz Days
--------------------------------

2. Primorye had traditionally been the most productive
agricultural region in the Russian Far East. In Soviet times,
Primorye's produce output met the demand of its 1.5 million
residents, and 60 percent of meat and milk was produced locally.
Primorye lead Russian Far East rice production with 70,000
hectares yielding 113,000 tons annually.

3. Following the breakup of the Soviet Union in 1991, however,
large collective and state farms suddenly lost heavy government
subsidies. Livestock inventories declined, demand for feed
grains plummeted, and cultivated land area dropped by half.
Most farms could no longer afford to purchase new machinery and
inputs, drastically reducing production. All thirteen Primorye
rice producers folded. Between 1991 and 2007, land area for
grain cultivation dropped by 59 percent, the livestock
population decreased by 85 percent, poultry production declined
by 58 percent, and overall agricultural productivity decreased
by 66 percent.

Post-Soviet Case Study
----------------------

4. One illustrative example of the sudden downfall of Far
Eastern agriculture is the rice growing area around Lake Hanka
in Southwestern Primorye. During Soviet times, the area
produced abundant rice crops. After federal support declined in
the 1990's, the irrigation system pumping water from the lake to
the rice paddies deteriorated. Residents who suddenly found
themselves in difficult economic times stole the pipes from the
system to sell as scrap metal. An area that once produced a
rice surplus began importing rice from farms just across Lake
Hanka in China. According to Yuriy Nekras, the Director of
Primorye's Agency for Irrigation and Agricultural Water Supply,
restoring even just a single rice farm would cost several
million dollars -- an amount that would be impossible without
government support.

National Program, or Maybe Regional Plan?
-----------------------------------------

5. The federal government launched a national program in 2006
to promote agricultural development and help farmers modernize
through favorable machinery leasing terms, low-interest bank
loans, and investment in infrastructure. Under the program so
far, agriculture in Primorye has shown little improvement other
than a slight increase in overall cultivated land area.

6. Two years into the program, the federal government changed
tack, replacing the national program with a series of regional
agricultural plans. The goals remain the same, but Moscow
shifted the burden for funding projects to the regional
governments. According to the Primorye Regional Agricultural
Department, if implemented as planned, the project will cost
14.75 billion rubles (USD 600 million), of which 4.28 billion
rubles will come from the regional budget. Bank loans and
farmers' own funds would cover the rest.

7. Consulate contacts have expressed doubt about the
effectiveness of the plan. A quick calculation shows that each
of 200 agricultural enterprises, 1,900 small farms, and 155,000
private farmers currently registered in Primorye would be able
to spend on average 94,000 rubles to invest over the course of
four years. The average cost of a combine harvester, however,
is over 500,000 rubles.

The Problems with Primorye's Agricultural Sector
--------------------------------------------- ---

8. Electricity Rates. The cost of electricity, currently at
3.2 rubles per kW, is a significant financial issue for farmers.
The regional power company in 2007 implemented a new contract
system that obligates farmers to a pre-set monthly power
consumption amount. Thus, similar to old cell phone pricing
plans, the farmer pays the set amount whether or not actual
consumption reached that level, and pays triple for each kW over

VLADIVOSTO 00000120 002.2 OF 002


the limit. The price has proven excessive for farmers, who
consider the new system unfair.

9. Chinese Agricultural Imports. Though total agricultural
output in Primorye has increased modestly in recent years, local
agriculture only supplies about half of the area's consumption
needs. Some food products come from other Russian regions, but
China remains the main source of produce for Primorye. Produce
from China is available year round, while local fruits and
vegetables are available only in summer. Supermarkets tend to
sell only meat imported from China -- locally produced meat can
be found only at markets. Sixty percent of meat and forty per
cent of milk used in food manufacturing was imported from China
last year.

10. Insufficient Labor Force. Out-migration from Primorye
rural areas continues to increase despite efforts by the Kray
administration to attract newcomers. Only one fourth of
Primorye residents currently live in rural areas. Lack of
economic opportunity, health services, and educational
facilities leads many inhabitants to seek better opportunities
elsewhere. Most migrants from rural Primorye areas resettle in
Vladivostok, often leaving their rural homes unattended.

11. As a result, agricultural production in Primorye depends
heavily on foreign labor. According to statistics provided by
the Primorye Migration service, there were about 4,500 Chinese
agricultural workers at local farms in 2007. In that year, one
quarter of the 6,000 hectares of rice fields in Primorye were
cultivated by Chinese workers, which, tellingly, produced twice
the average regional yield.

12. Bureaucratic obstacles. Consulate contacts have stated
that the biggest obstacle for farmers is not nature or the
markets, but the mighty Russian bureaucracy. Procuring
agricultural loans or subsidies takes a burdensome amount of
time to prepare and requires literally reams of documentation.
Large agricultural companies are able to hire lawyers to
facilitate the process, but small, private farmers do not have
the means to. They must not only prepare the paperwork
themselves, but take time from their farms to make the several
hundred-kilometer trek to Vladivostok in order to submit the
documents to the regional government offices.

13. Lack of Funding Sources. Though federal subsidies are
intended to be available for all farmers, in practice most
available funds are divided between a few large businesses such
as Ussuriisk Poultry and Mikhailovskiy Chicken Broilers. Only
five percent of the 175,000 small farms and individual
entrepreneurs received financial support from the regional
government last year. Low-interest agricultural loans of 15
percent are also supposedly available, but banks require
collateral and do not accept the obsolete farm machinery that
the farmers have to offer.

14. The twenty or so private agricultural cooperatives set up
in Primorye over two last years under the national agriculture
program have proven ineffective at raising sufficient funds to
help farmers. Rosselkhozbank, the bank established under the
plan to finance farmers, largely ignores small-scale farmers in
favor of larger producers. As a result, small farms have little
leverage and must rely their meager profits to fund investment
in modernization.

Comment
-------

15. Providing farmers easy credit, establishing agricultural
cooperatives, and developing leasing schemes may be effective
measures to increase agricultural productivity and profitability
in Primorye. Though the new plan does address some of these
issues, bureaucratic impediments will likely remain. Tax
incentives and power subsidies, issues not addressed in the
plan, would also help Primorye farmers increase profitability.
The fact that Moscow has shifted the funding burden to the
regions, however, shows that the Kremlin is not sufficiently
committed to solving the Russian Far East's agriculture problems.
ROTERING

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