The Impact Of Russia’s 2010 Grain Export Ban
Oxfam Research ReportsThe Impact of Russia’s2010 Grain Export BanGeorge WeltonGeoWel Research28 June 2011This report looks at the short- and long-term impact of the grain export banissued by the Russian government during 2010-11. It shows that the bandid not bring food prices down in Russia, that it increased the price ofgrain internationally, and helped create an enviroment where price spikesand general instability are far more likely in the future. The reportconcludes with recommendations for alternative policies to increase foodsecurity in the future.www.oxfam.org/grow
CONTENTS1History of food production and food security in Russia - overview. 52.The 2010 food crisis and export ban . 123.Alternative policies. 26NOTES . 292The Impact of Russia’s 2010 Grain Export Ban, Oxfam Research Report, June 2011
EXECUTIVE SUMMARYOne of the key factors in global food price volatility is the way that states react todisruptions in supply. There is a strong inclination for exporters to impose export bans inreaction to potential food price increases in their own country. This reaction, however, is apoor strategy for managing food prices at home and has a range of unintendedconsequences for the domestic and international economy. In general, export bansexacerbate problems created by interruptions in food production and may damageincentives to increase production at home long-term.This research project looks at how these issues played out in the case of the Russiangrain export ban that was imposed in August 2010. In the summer of 2010 Russiaexperienced a heat wave that included the highest temperatures recorded in 130 years.As news of this disaster, and the resulting drop in Russia’s grain crop became known,international grain prices increased dramatically. In response to this increase, and in aneffort to protect local consumers and local meat producers, the Russian governmentinstituted a grain export ban that pushed grain prices higher in the international markets.The export ban is set to end on 1 July 2011. Now, therefore, seems a good time to reflecton its effectiveness. The report looks at the short-term and long-term impact of the ban.In the short-term, it focuses on the impact of the ban on food prices inside Russia andconsequently looks to see if the ban helped vulnerable Russian families. It also looks atthe short-term impact of the policy on the countries that buy Russian grain. In the longterm, it looks at the impact of the ban on global food price instability and on investment inthe Russian agricultural sector.Main findingsShort-term domestic impact1. The ban did not bring down food prices inside Russia. Food prices generallycontinued to rise after the ban was imposed. Flour prices went up by 18 per cent fromJuly to December and bread went up by ten per cent.2. The impact of this price rise clearly hit Russia’s poorest hardest. The average price ofthe official subsistence basket of food rose even more than bread prices. In most ofRussia’s regions, particularly those directly affected by the drought, the subsistencebasket went up by 20-30 per cent between July 2010 and March 2011.3. As the cost of the subsistence basket provides a bench-mark for poverty in Russia,and as incomes have remained flat during this period, we can say that poverty willalmost certainly have gone up as a result.4. Since poverty is usually most concentrated in young people, they were probably thehardest hit. Women were also probably worse hit than men. According to officialstatistics, this gendered variation was small, but it may be worse when one takes intoaccount the greater role played by Russian women in providing food for their families.Short-term impact internationally1. The ban did increase prices outside Russia. In countries that imported Russian grain,the most immediate impact of the import ban was to require countries to pay the newand higher international rates for grain that was contracted at lower rates.2. The export ban set prices higher still across the world. The immediate impact of theban was certainly a further rise in prices, as we saw in the reaction of commoditymarkets immediately following the announcement of the ban. This impact was felt byeveryone and not just Russia’s customers.3. Inside importing countries, the negative impact of the rise in prices depended on theway governments responded.The Impact of Russia’s 2010 Grain Export Ban, Oxfam Research Report, June 20113
a.Egypt was Russia’s biggest customer and the Egyptian government committed tomaintaining the price of the cheapest bread. This was enormously expensive forthe government and ultimately the population as a whole, but will have minimisedthe impact of the price-rise on the poorest households.b.In contrast, Pakistan - Russia’s fourth biggest customer and also one of itspoorest - saw a 16 per cent increase in the price of wheat, just as the governmentwas reducing food price protections. As a result, according to the World Bank,Pakistan saw a 1.6 per cent increase in poverty over this period.Long-term impact1. By instituting a ban, Russia and other exporters helped create an environment whereprice spikes and general instability are far more likely in the future. If grain importersexpect small interruptions in supply to be met with protectionism on the part ofexporters, they will be more likely to increase demand whenever they are presentedwith supply problems, thus exacerbating those problems.2. The export ban will probably lower investment in grain production. One of the ironiesof the export ban is that it simultaneously increased prices worldwide and yet made itimpossible for Russian farmers to profit from them. Export bans aim to send priceslower. To the extent that they succeed, they create lower incentives to increaseinvestment in grain production and less cash with which to do it.3. Protectionism in the meat sector, which is prevalent in Russia, keeps both meat andgrain prices higher as it does not allow international competition for meat, andincreases the demand for domestically-produced grain.4. Export bans damage Russia’s reputation as a good supplier. This may negativelyaffect overall demand for Russian grain in the future and, at the least, will damage theability of Russian traders to engage in forward-pricing. This will increase theunpredictability facing Russian farmers and traders.5. Reduced investment in agriculture will lead Russia to under-use a key resource.Russia clearly has massive untapped opportunities in grain production. Even if someof the agricultural land that was farmed under the Soviet system was fairly marginal,as grain prices continue to rise, increasingly large section of Russia’s territory willbecome viable for cultivation in the future.Recommendations1. Export bans should be avoided. While they may be politically necessary in extremecircumstances, they are always unreliable economic management tools.2. If the aspiration is to keep domestic food prices low then subsidies to the finalproducer of the food (like a bread or flour producer) are more likely to be effectivethan bans on export.3. Policies aimed at alleviating the difficulties faced by vulnerable groups need to targetthose groups. Export bans, even if they were to work as planned, are universal andso have very small impact on anyone in particular.4. Russia should try to balance its support for the meat industry with greater support forinvestment in grain as this would help both industries long-term.5. Russia should try to avoid the use of import quotas to support the meat industry asthese push up meat prices and increase pressure on grain production. They are alsoless effective than market solutions for forcing efficiency gains.The Russian government should engage with other exporting countries to try and agreeprinciples to manage supply interruptions without the use of export bans. This could helpRussia gain even wider support for its WTO membership.4The Impact of Russia’s 2010 Grain Export Ban, Oxfam Research Report, June 2011
1 History of food production and foodsecurity in Russia - overview1.1Structure of agricultural production in RussiaTo understand the impact of Russia’s food security and agricultural support strategy, weneed to look at the broad trends of Russian agriculture as they have emerged in the postSoviet period. Under the Soviet system in the 1970s, Russia became a massive producerof meat. This policy, which was designed to increase meat consumption, required hugeprice subsidies on animal feed, prompting a major expansion of Russian grain productionand large net imports of grain.Soon after the collapse of the Soviet system, Russia proved relatively inefficient in theproduction of meat. As a result, there was a massive contraction of domestic meatproduction in the post-Soviet period and a consequent increase in meat imports.Conversely, the reduced demand for feed-grain freed up grain production so that Russiabecame a large exporter even though production had fallen.Since 2000, in value terms, agricultural production has been evenly split between growingcrops and livestock 1, and while there has been growth in both imports and exports,imports have increased far faster in absolute terms. In 1995, imports of foodstuffs andagricultural raw materials were worth 13.2bn. Following the financial collapse of the mid1990s, that dropped to 7.4bn by 2000, but recovered to approximately the same level of 13.9bn by 2004. From there the value of imports rose rapidly, reaching 35.3bn in2008.2 In comparison, in 1995, Russia was exporting 1.4bn of foodstuffs and agriculturalraw materials. By 2005, this was 4.5bn and by 2009 10bn.3Even though food exports are low relative to imports, food represents a very significantproportion of Russia’s total non-oil exports. In 2009, Russia’s total exports were around 302bn (down from a high of 468 million in 2008). Only around 14 per cent of this wasunconnected to the extraction industry (if we count industries like chemical and rubberproduction as ‘extraction related’). Of the 41bn of non extraction-related business, 44per cent was the export of machinery, 24 per cent was foodstuffs and agricultural rawmaterials and 20 per cent was wood pulp and paper products.4However, while the agricultural sector as a whole has certainly recovered, the profile ofthat recovery is significantly different in the case of grain production and livestock.Therefore, for the rest of this overview we will distinguish between the two.1.1.1 GrainGrain production saw gradual increases between 2000 and 2008.The Impact of Russia’s 2010 Grain Export Ban, Oxfam Research Report, June 20115
Figure 1: Production of Grain 1992-2009 (million tons)19921995200020052006200720082009% of totalgrain cropin 2009Wheat,winter ,winter 4.54.95.45.85.46%Rye, winterand spring13.94.15.43.633.94.54.34%Corn et,buckwheatand 9263.465.377.878.281.510896.6100%Ref: Federal State Statistics Service of the Russian Federation (Reviewed April 2011)The most striking element of this overall picture is that production went up by around 50per cent from 2000–2009 (more if you take 2008 as the high-point). This is not the resultof increased land-use. As a group of Russian agriculture analysts have observed:The factors that explain why grain output has grown in the decade do not includea rise in grain production area. Average annual Russian grain area over 2001–08was 45 million hectares, a drop from 50 million hectares over 1996–2000, and alarge fall from 65 million hectares over 1987–90.5Rather than the expansion of land, improved yield is probably the result of the adoption ofbetter management practices, investment in physical infrastructure (supported by somegovernment finance), and good weather. Eugenia Serova argues that an important factorin this process has been the gradual movement into the market of integrated agricultural‘operators’ that bring a combination of technology, investment and better management,particularly in the more efficient southwest of the country.6However, in explaining the success of Russian wheat production it is also important toacknowledge that Russia, prior to 2010, had experienced unseasonably good weather forthe better part of a decade.Russia’s average annual grain yield over 2001–08 was 1.83 tons per hectare,compared to 1.30 over 1996–2000.The weather indicators show that in everyyear during the second half of the 1990s, Russia had unfavourable weather forgrain, except for 1997, while in every year during the 2000s, it has had relatively6The Impact of Russia’s 2010 Grain Export Ban, Oxfam Research Report, June 2011
good weather, except for 2003. Also, the surge in grain output in 2008 coincidedwith highly favourable weather.7This surge in production volumes has also seen Russia become an extremely significantexporter of grain.Figure 2: Exports of Wheat and Rye 2006-2010 (Calendar Year)Exports of wheat and rye20062007200820092010Volume (million tons)914121611Total value ( m)13193544287526241849Price per ton ( )142251245163175Ref: Deduced from Federal State Statistics Service of the Russian Federation (Reviewed April2011)It is worth noting that average annual price fluctuations have been severe. In 2007 pricesrose sharply and stayed high for two years, and this, even more than the increase inproduction, was the main determinant of increased revenue. Conversely, while 2009 wasthe biggest export year in volume terms, back-sliding of the price meant that the overallrevenue was somewhat lower. In 2010, exports were down about one-third, reflecting theban which had been in place for the last third of the year.As one might expect, the significant price increase in 2007 and 2008 had a hugelypositive effect on the profitability of the industry and the cash-flow available forinvestment. A national report on the implementation of the 2009 state programme onagricultural development suggested that, in the absence of subsidies, grain producedonly a 17 per cent profit on sales in 2006 and 2009, but in the two years where priceswent up dramatically the return on sales was more than 50 per cent. More significantly, inour discussions with experts, this was usually considered the one clearly profitable crop.8Russian agricultural production is fairly concentrated in the south-west of the country.The Impact of Russia’s 2010 Grain Export Ban, Oxfam Research Report, June 20117
Figure 3: Gross Production of Grain by Region (Million Tons)200720082009% total(2009)Southern Federal District23.83728.930%Central Federal District1423.921.622%Volga Federal District22.327.221.722%Siberian Federal District1513.918.319%Urals Federal 7.1Ref: Deduced from the Federal State Statistics Service for the Russian Federation (Reviewed April2011)As the table shows, 74 per cent of production comes from the combination of theSouthern, Central and Volga regions of Russia, which together make-up the south-west‘corner’ of the Russian federation. Only 19 per cent comes from the massively largerSiberian Federal District and a barely negligible amount comes from the rest. This issignificant, for our purposes, because it is in those regions with highest production thatthe heat-wave had the greatest impact.1.1.2 MeatMeat production has also seen impressive growth over the last decade. Total productionvolumes increased by about 50 per cent in the ten years from 2000-2009, though theincreases were uneven across different sub-sectors. Beef production actually fell byabout 10 per cent in that period, while pork production went up by 40 per cent, andproduction of poultry expanded by 230 per cent.9 Pigs and poultry have tended to dobetter because the industry as a whole is more concentrated and developed, andbecause they are more responsive to capital investment as their life-cycle is shorter.108The Impact of Russia’s 2010 Grain Export Ban, Oxfam Research Report, June 2011
The same period, however, has seen a gradual shift in the production of meat away frompeasant farmers to larger agricultural businesses. In 2000, large agricultural enterpriseswere responsible for 40 per cent of meat production, but by 2009 they were responsiblefor 57 per cent.11Meat is important for our purposes as a food group, but also as a large consumer ofgrain. Large quantities of wheat are consumed directly as animal feed, and so increasesin locally-produced pigs and poultry result in increased demand for grain and higherprices. While the grain used for human consumption is generally different from that usedfor animal feed, the two types of grain compete for use of the same land, and high-qualitygrain which could be used for people is sometimes consumed as animal feed. As oneUSDA report highlights, ‘Outdated transportation, storage, and milling infrastructuresometimes result in feeding food-quality wheat to poultry and pigs’.12The increase in the production of meat has certainly been driven by government support.As we will suggest below, while the Russian government has intervened to stabilisefluctuations in grain prices, the bulk of government support for agriculture has beendirected at the meat-producing sector. This support has included significant subsidies forinvestments, but perhaps more importantly, large barriers to trade. As we will discusslater, this is significant because of its impact directly on meat prices and indirectlybecause of its effect on the price of grain for food.1.2Russian agricultural policy up until 2010While President Yel’tsin offered some support for agricultural producers in the first fewyears of the 1990s, this quickly evaporated. As Stephen Wegren, a researcher onRussian food security, comments, ‘From the end of 1993, most financial advantages [toagriculture] disappeared and private farming essentially was dropped as a priority forpolicy-makers for the remainder of the Yel’tsin period’.13However, the Yel’tsin years can be seen to have set the tone for agricultural policy in adifferent way. The uncertainty of agricultural support in the 1990s and Yeltsin’s liberalmarket reforms failed to create a recovery in agricultural production. This set the politicalenvironment for a far more intrusive agricultural policy. On top of that, the 1998 financialcrisis saw dramatic increases in food prices and this reaffirmed food prices as animportant political issue.In 2005, the Russian government highlighted agriculture as a national priority and overthe next two years increased spending on the sector by more than 50 per cent in terms ofinflation adjustment.14 The general terms of the current Russian agricultural policy werelaid out in 2007 in the Programme for the Development of Agriculture, Regulation ofCommodity Markets and Rural Development for the Period of 2008-2012. This was basedon the Law on the Development of Agriculture that went into effect the same year. As thetitle suggests, this had multiple components. It envisaged an expenditure of 551.3bnroubles ( 19.7bn)15 of federal government spending and roughly the same of provincialgovernment spending. Its main aims were: to increase rural employment to raise standard of living in rural areas soil conservation increased access to credit better risk management modernisation of capital stockThese objectives were to be achieved through five interventions:The Impact of Russia’s 2010 Grain Export Ban, Oxfam Research Report, June 20119
Figure 4: Key components of the 2008-2012 Russia Agricultural Development
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