Russia approves $70bn support to help agriculture meet WTO challenge

By bne IntelliNews July 16, 2012

bne -

With the country's farmers amongst the most exposed to the challenges that WTO membership will bring, the Russian government approved a RUB2.28 trillion ($70bn) agricultural development program for 2013-2020 on July 13.

Despite its impressive size, the approved package is actually smaller than had originally been suggested. It will see support to the sector from the federal budget reduced by 39% to RUB1.5 trillion, whilst regional governments will now provide RUB780bn, a 42% drop from an earlier suggestions of RUB1.35 trillion. According to Agriculture Minister Nikolai Fyodorov, his ministry will provide RUB1.423 trillion, while the Federal Service for Veterinary and Phytosanitary Oversight will put RUB85.8bn on the table.

As a result of the program, the government expects to boost agricultural production by 19.6% in the next seven years. "Pursuant to the Agriculture Ministry's calculations, the average annual rate of growth of agricultural output may reach 2.5% or more thanks to the programme, and by 2020 the industry should reach the key figures listed in the food safety doctrine," Prime Minister Dmitry Medvedev said.

Given that Russian is the largest country in the world, the sector has long been a target for development by the government, which has regularly imposed trade restrictions on imports - particularly meat - in recent years. However, Russian agriculture remains inefficient and under-capitalised to develop crucial infrastructure, and the opening of the markets when Russia joins the WTO later this year is clearly a threat, both in terms of increased competition and greater regulatory and fiscal restrictions.

Prime Minister Dmitry Medvedev pointed out that membership of the WTO and the Eurasian Customs Union (a free-market being established with Kazakhstan and Belarus) will bring both increased prospects and challenges to Russian farmers. "Thus, we need to stimulate competitiveness of domestic agricultural enterprises, their transition to a new technological level, as well as create a modern infrastructure for storage, processing and transportation of products," he said.

One of the challenges is the form of state support that Russia will be allowed to offer its farmers. The latest programme shifts the emphasis towards supporting margins in the sector, rather than just handing out cash. "We are gradually leaving behind the model of direct subsidies, shifting to support the growth of farmers' income," Fyodorov said, adding that financing is to be gradually increased from RUB15bn a year to almost RUB38bn.

For instance, a current 30% discount for farmers on the retail price of petrol and diesel supplies will be discarded, following the WTO rules. However, the subsidy will be shifted into the overall subsidy. Meanwhile, the plan is to ensure that the country's at least 10% margins. According to Deputy Prime Minister Arkady Dvorkovich, the average margins in the industry are currently less than 9%. The optimal level of profitability for agriculture companies is 15%, he said.

At the same time, the government has also submitted a draft bill to the State Duma that aims to extend a zero-tax regime for farmers until the end of 2016. The current regulations rule that profits in the sector should start to be taxed at 18% in 2013, with that rate rising to 20% three years later 2016. Dvorkovich however says that Russia needs to extend the zero rate for an indefinite period.

Analysts at Alfa Bank suggest the news is a mixed bag for listed Russian agricultural players. "The news is negative for Cherkizovo and Rusagro," they write in a note, "as lower state support, particularly during the WTO transition phase, might be negative for agriculture producers' profitability. Apart from this, Vice Prime Minister Arkady Dvorkovich suggested that 0% corporate income tax for agriculture producers should be prolonged for an indefinite period of time, which is obviously positive."

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