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23 March 2000 The Consequences of Russias Looming Food Shortage Summary In the coming weeks, the Russian government will likely take extreme measures to head off the prospects of a significant food shortage for its 146 million people. Across the spectrum there are signs that Russia will not produce enough grain and meat to feed the country in the coming year. Unwilling to allow hunger, the government in Moscow will most likely tap into its currency reserves to import food from abroad. The looming food shortage will, in turn, destabilize the Russian economy and make it more difficult for Russia to service its already staggering load of foreign debt. Analysis On March 21, the U.S. Agriculture Department released a report forecasting that Russias chronic problems in producing animal feed will continue into 2001. The Washington report is only one of many indications that Russia will have extreme problems feeding its people in the coming year. Russian analysts are openly pessimistic about the countrys ability to increase its production dramatically, as the government has hoped. And Russian farmers are behind in their planting of wheat, as well. The shortage in food for livestock has been a reliable leading indicator of Russias escalating struggle to feed its people. Every year, feed stocks fall and so does the human food supply. In 1998, Russia suffered its worst harvest in 40 years and had to turn to the outside world for help. Last year, imported grain for animals was 9 percent of the countrys total animal feed supply; this year it will exceed 20 percent. At the current rate, it appears the country will produce 10 million metric tons of grain less than the population will require in the coming year. The Russian government has announced lofty ambitions for boosting food production but it is battling a grossly inefficient agricultural sector. The government has planned to boost production by "boosting farmers incomes," according to acting President Vladimir Putin, as well as intervening on the domestic grain market and boosting agricultural exports. Russian agriculture, however, remains based on cooperative farms; boosting individual incomes will have no effect. Government intervention in the market to date has led to cut-rate sales that drive farmers out of business. Last year Russia sold the food aid that the international community had sent on the open market, for $68 per metric ton of grain, far below the market price of domestic grain, $124 per metric ton. Increasing exports would only make domestic scarcity worse. And the governments own ham-handedness was illustrated on March 15, when acting President Vladimir Putin scolded senior officials for their tardiness in getting agriculture subsidies - for equipment and seed supplies - to farmers in Chechnya. The planting of wheat will likely be delayed, as a result. In recent years, the international community has shipped vast amounts of food; the United States alone sent 3.1 million metric tons last year. But that much aid is unlikely. The war in Chechnya has hardened the hearts of Western officials and the misuse of previous aid further discourages generosity. In January the Russian Audit Chamber revealed that several aspects of agreement regulating American and European food shipments had been violated. To date, the United States has announced plans to send just 500 million tons of food through the spring months. The European Union has not merely frozen $29 million in food aid credits. It has rejected any more long-term aid. To prevent food lines from forming, the government is preparing to intervene - mainly by drawing down its currency reserves and, subsequently, tinkering with the value of the ruble. Most nations staring hunger in the face would take out loans from international lending institutions to pay for food from abroad. For Russia - having defaulted on payments and refused reforms - this is no longer an option. Without a credit card, the government must turn to its wallet: $15 billion in hard currency reserves and gold. Indeed, Deputy Prime Minister Kasyanov has said throughout March that Russia will borrow from these funds to deal with another problem, a pending government budget shortfall of $4.5 billion. In turn, the value of the ruble will fall, from 28.36 to the U.S. dollar, the rate at which it currently trades. The government will likely use some of its currency reserves to artificially raise the value of the ruble. A stronger ruble will help Russia make large-scale food purchases on the open market. It will also give the Central Bank greater room to print money to solve other problems, like the countrys budgetary shortfall. Such printing will cause the value of the countrys currency to fall. A predictable timetable of events is now set to unfold in the coming months. Large-scale food purchases should occur in April once the Kremlin has an idea of how the planting season fared. Barring an outpouring of international goodwill and loans, Russia by then will be drawing from its currency reserves. This mass draining of the countrys reserves will cause confidence in the Russian economy - such as it is - to plummet. In May and June, Russia will likely print a large amount of currency to pay off its internal debts and overdue wages. Inflation will creep upwards and the ruble will slide. Another poor harvest will complicate Russias already dire situation. (c) 2000, Stratfor, Inc. http://www.stratfor.com/

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