Ben Aris in Moscow -
Russia is on course for a poor harvest after rains failed in key agricultural regions in the south. Following a record harvest in 2014, this year's grain production could fall to levels last seen during the disastrous drought of 2010 – bad news for an economy already struggling.
Russia's Rostov region faces flat or lower wheat yields this year due to a lack of rain last autumn, and as Russia heads into its brief summer the outlook for future rainfall is poor, say meteorologists. This is the crucial period when wheat and other grains need precipitation if the harvest is to be good.
Rostov is the second region to report lower than usual rainfall. Krasnodar, which is home to Russia's viniculture business in addition to being a major wheat producer, has also reported lower than usual rainfall.
A poor harvest would be terrible for Russia's economy; the bad harvest in 2008 led directly to skyrocketing inflation as food still makes up about a third of the average Russian’s shopping basket. This would come on top of the situation where food prices are already being inflated by the Kremlin's self-imposed ban on agricultural produce from the US and EU. Basic foodstuffs like cabbage and buckwheat have already seen their prices soar this year; food prices between May 13 and May 18 were 29% higher than during the same period last year, Rosstat reported.
Inflation dropped below 16% for the first time in months in May. The Russian state statistical agency Rosstat reported that week-on-week inflation fell to 0.1% in the week ending May 24, bringing the annualised rate to 15.8%.
Inflation is a major drag on Russia's economic growth. Because of the economic slowdown, real wages began to fall in December, and rising prices deplete further the population's ability to buy goods, which in turn is amplifying the fall in retail turnover. In the bounteous summer months inflation typically falls to zero, however a poor harvest will keep food prices high and so further eat into growth.
With the fall in real wages accelerating to 13.2% on year in April compared with a 10.6% fall in March, and real disposable incomes contracting 4.0% in April versus 1.8% in March, consumer demand is getting weaker.
The problem is made worse by the fact that with the current sky high interest rates and political uncertainty, the other two main economic drivers – construction and investment – are both turned off for the meantime, although capital investment numbers in April were slightly better than expected. “Capital investment dropped 4.8% year-on-year in April, which was much smaller than the Interfax consensus of a contraction of 6.7% year-on-year, while we expected a drop of more than 10% year-on-year,” Alexei Devyatov, an economist with Uralsib, said in a note on May 25. "Rosstat revised the first quarter of 2015 investment figures upwards to about negative 3.3% year-on-year from the 6% year-on-year contraction reported earlier, as capital investments declined 3.7% year-on-year in the first four months of this year."
The upshot of the better-than-expected investment numbers is that Russia's economic slump has been milder than most feared. Moody's Investors Service on May 27 upgraded Russia's GDP forecasts to just a 3% contraction this year from its earlier estimate of 5%.
However, these beneficial effects are offset by the rapid recovery of the ruble after its collapse in December, which is hurting industry and contributed to a sharp fall in industrial production in April of 4.8% on year. Likewise, construction fell even harder, down by 5.2% in the same period. The Central Bank of Russia (CBR) has started buying foreign currency again over the last month in an effort to keep the ruble weak, in what has been dubbed a "dirty float" of the currency; the central bank was supposed to stay out of the forex markets and let the ruble float freely so it could concentrate on inflation targeting, but recently has returned to its old habits of trying to manipulate exchange rates.
All in all, agriculture is currently the only sector growing and is driving the economy by itself, but even that is slowing. Agricultural growth decelerated to 3.3% on year in April from 4.2% in March.
Kremlin invests into record grain harvest
A bad harvest would compound Russia's other problems. Russia produces about 100mn tonnes of grain a year, well in excess of its own needs of about 60mn tonnes. The rest is exported and last year Russia was the fourth largest exporter of grain in the world.
Russia's grain harvest has been growing steadily in recent years thanks to heavy investment in the food industry, backed by the state. The Kremlin granted a record $189bn in subsidies to the sector in 2014, which contributed to a record 105.3mn-tonne grain harvest the same year, according to Agriculture Minister Nikolai Fyodorov. That was up from the previous record of 101mn tones in 2007 and the second best result in post-Soviet history. And last year's 15.45mn tonnes of vegetables was a record too.
This year the US Department of Agriculture's (USDA) Moscow bureau is predicting a heavy blow to the grain harvest, which is expected to come in at a mere 92mn tonnes – one of the worst results since 2010.
Grain underpins Russia's entire agricultural sector, as it is also used as feed for livestock. Russia has become self-sufficient in poultry, is close to self-sufficiency in pork and has been investing heavily in cattle production that will take at least another four years to mature as a business while herds are built up. Russia is now feeding 39.6mn tonnes of grain to cattle and poultry a year compared with the previous 37mn tonnes, which is a sign of herd expansion, according to the Russian agricultural ministry.
But the crisis has disrupted the sector, and the state's own efforts to ensure food security and bring down the costs have also caused problems on the grain export markets.
Russia's grain exports between February and May 20 were down by more than half to 1.6mn tonnes, according to the agriculture ministry, after a new 15% wheat export tax plus a levy of €7.50 per tonne was imposed on February 1. The export duty was levied in an attempt to lower fast-rising domestic food inflation, but it doesn’t seem to be having any effect yet. The tax will cost farmers RUB20bn ($373mn) this season and RUB50bn next year if it’s extended, data from Moscow-based research firm SovEcon show, reported TASS.
Russia's curtailing of wheat exports is squeezing domestic farmers who rely on hard currency revenues to run their businesses. Smaller farmers have already been forced to cut back on investment and things like fertilisers to stay solvent, which will hurt yields further. Caught between the increase in the cost of imputs like fertilisers of around 14% and a fall in the domestic price of wheat of about 13%, according to the USDA report, Russian farmers are having a hard time of it. "Due to the ruble depreciation and high inflation, the cost of spring work and the cost of inputs skyrocketed in the spring of 2015, compared with the same period last year," the USDA said in a report in May.
And if the rains fail this year, then it could get ugly for everyone. For now, reduced shipments of Russian grain haven’t affected global wheat prices much because of bumper harvests almost everywhere else, though that could change if exports keep falling, say experts. In 2010, Russia banned wheat exports for 10 months after the worst drought in a half-century, which led to a doubling of prices in Chicago.
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