Why food remains an important geopolitical factor

The issue of food security in Russia, which the authorities have been talking about for several years, arose with renewed vigor after the destruction of supply chains and the departure of some Western suppliers of equipment and raw materials from the country. However, the first walls of the “sovereign fortress”, which was built throughout 2023, where regulators intend to settle farmers, turned out to be not very strong. The weak link remains the domestic production of equipment, seeds and vaccines. As a result, the industry is building an alternative defense strategy, using remaining windows of opportunity to build up stockpiles.

At the end of 2023, President Vladimir Putin said: “Russia cannot give up its sovereignty in exchange for sausage.” Obviously, this was a reference to the not so distant beginning of the 1990s by historical standards, when throughout the country, which was going through the painful experience of transition to a market economy, citizens found themselves with half-empty store shelves. They dreamed of sausage as an attribute of basic prosperity. And when sausage, the notorious “Bush legs” and a whole range of food began to arrive in the country from the then friendly West, most of the citizens made the obvious choice in favor of food.

Now the issue has arisen with new urgency, and the state is trying to make sure that the choice in favor of food does not end up being a choice against the authorities.

The best hope is to expect the worst

Today, when the Russian Federation finds itself in the epicenter of another storm caused by geopolitical confrontation due to a military conflict, for many citizens, just like 30 years ago, a full refrigerator is one of the important indicators of the social well-being of society. A November HeadHunter survey, for example, showed that 47% of respondents are not ready to save on products, but their cost is “sensitive.” The authorities are forced to take this factor into account at least in every crisis or election cycle.

Confirmation of this is the noise that reached its maximum volume by the end of 2023 due to the rise in price of chicken by more than 20% and by 40% for eggs. The Ministry of Agriculture had to extinguish the intensity of consumer passions by canceling duties on the import of products from “friendly” countries. But targeted measures will not solve systemic food problems.

“Hope for the best, but prepare for the worst”—this is roughly how Ministry of Agriculture officials advised participants in a series of meetings in the spring of 2023, where the results of the first year of the next crisis were summed up and alternatives found to the destroyed import supplies of equipment, raw materials and components were discussed.

According to Kommersant’s sources, the regulator made it clear that the industry, although it was not subject to direct sanctions, must prepare to live in a “sovereign fortress” filled with everything necessary – from seeds and vaccines to equipment.

The problem is not new – the Russian agricultural industry has been trying to solve it for ten years. A serious protectionist measure for the industry was the food embargo introduced by Russia in 2014 on a whole list of food products from the EU and the USA as counter-sanctions to the restrictions imposed by the West after the referendum in Crimea.

By the beginning of 2023, as a study by the Central Bank of the Russian Federation showed, in agriculture, direct imports accounted for up to 30% of the total intermediate costs of companies – lower than, for example, in the automotive industry or pharmaceuticals.

But this relatively small share often becomes critical: it consists of equipment, technologies and raw materials that simply do not grow in Russia or are presented in limited quantities.

Enough for a year

Market participants do not argue that without the fortification model promoted by the regulator, designed to ensure the food market’s survival in the event of any external shocks, it will not be easy to work. But there is no clear idea of ​​how to build a fortress now. Therefore, the industry is preparing for a siege first of all by simply purchasing equipment and raw materials for future use.

“Former suppliers of equipment for poultry farms from Germany and Italy have stopped supplies to Russia,” says Kommersant’s source in the industry. “We are trying to squeeze into the still open window of import opportunities from Poland, although products there have risen in price by an average of 25% over the year.” Another crop producer spent the entire year not only importing equipment, but also buying it from struggling farmers. “Enough for a year,” he describes his planning horizon.

With the purchase of means of production in “friendly” countries, not everything is simple either.

The service life of equipment for poultry farms from Turkey and Brazil, according to one of the farmers, is half as long as that of European equipment. Tractors 150–250 hp. from China have already occupied 40% of the Russian market. But finding potato seeders, plows and combines for grain growers that suit the Russian specifics of farming in China is much more difficult than in Europe.

Russian equipment has traditionally not been in demand among farmers. According to the All-Russian Association of Fishery Enterprises, Entrepreneurs and Exporters, in recent years, food industry companies have allocated about 3% of the 800–900 billion rubles to purchase domestically created means of production. investments.

But it is difficult for local producers to get even part of the vacated niche due to their heavy dependence on imports. “In many Russian models, only the body is domestic, electronics are purchased from China, hydraulics are purchased through parallel imports from countries that have imposed sanctions, and this is fraught with problems with service maintenance,” explains Oleg Shenderyuk, director of Yakov and Partners.

Manufacturers agricultural technology They admit that they are not yet able to radically change the situation. It is unprofitable to develop the same electronics or hydraulics with a focus only on Russia due to the relatively narrow demand and high cost of borrowed funds, and the foreign market has long been divided.

The situation is reminiscent of what is happening in the pharmaceutical industry, from which regulators have been demanding for several years to increase the number of new developments of innovative drugs. A third of Russian pharmaceutical companies do not have a single such drug in their portfolio, and those who do have them have created them using a minimal number of technology platforms, a recent study by the Agency for Transformation and Economic Development showed. 17% of manufacturers explained that they are in no hurry to introduce modern medicines due to the low capacity of the domestic market, and 10% due to limited export potential.

Partners under duress

The state is trying to change the situation through direct pressure on those partners who are still ready to work with the Russian Federation. Thus, in May 2023, the Ministry of Agriculture achieved the adoption of a government resolution on the localization in the country of foreign companies of production for the full cycle of seeds of corn, potatoes, beets and other crops, where there is a low level of use of domestically produced seed materials. In exchange for allowing supplies, foreign companies must create a joint venture with local players with a non-resident share of no more than 49%.

The measure will lead to an increase in prices for seeds from foreign companies in the next season, admits the managing partner of the breeding and seed company Ruseed, Mark Hecht. But, he hopes, this will allow Russian material to compete on price. Farmers are not so optimistic: the yield of Russian seeds is lower than imported ones.

Events followed a similar scenario with foreign vaccines for livestock and poultry. The regulator is trying to convince businesses to use more domestic drugs so that local vaccine manufacturers have stable domestic demand. But the first experience was not very successful. Producers were in no hurry to vaccinate their livestock with Russian analogues, fearing, among other things, for export.

As a result, according to Kommersant’s sources, against the backdrop of the summer outbreak of bird flu, the number of livestock in the poultry industry decreased by 3%, which also led to an increase in prices for chicken meat and eggs at the end of the year.

The question of how long and how effectively the Russian food fortress will be built is not idle and far from obvious. Even the biggest politicians often succumb to the threat of an empty stomach, as exemplified by the grain deal that was in force for almost a year and a number of exceptions to sanctions related to food supplies. Yes, Russians survived food counter-sanctions. However, they did not touch on chicken and eggs for New Year’s salads.

Khalil Aminov, Ekaterina Rakitina