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Russia’s WTO Accession: 
Interregional Barriers to Agricultural 
Trade in the
Russian Federation




Grigoriy E. Zadorozhniy

Master’s Project
Commercial Diplomacy
Monterey Institute of International Studies

Professor William F. Arrocha
Professor Geza Feketekuty
Professor Bill Monning



March 26, 2002



This project is required for the Master of Arts in Commercial Diplomacy (MACD) at the Monterey Institute of International Studies (MIIS)

Table of Contents






Structural Reforms 
Market Infrastructure Development

Components of Domestic Support

Current Trends in the Agricultural Production, Trade, Investment, Insolvency, Loaning, and Land Reform. 

Agricultural Production
Regional Distribution of Agricultural Production..

Agricultural Trade

Insolvency of the Agricultural Entities.

Investments in the Agricultural Sector.

Agricultural Crediting and Leasing.

Agricultural Land Market.


Regionalization of the Russian Agrarian Policy
Procurement: Federal Funds versus Regional Funds



Executive Branch
Legislative Branch

Agro-industrial Business Associations

Farmers Associations

Research and Consulting Organizations

International Stakeholders


Legislative Module on Federative Economic Relations
Legislative Module on Agricultural Reforms

Legislative Module on Regional Development

International Law


Price Disparity and Arbitrage
Distribution of Revenues between Farmers and Monopolistic Regional Trading Companies – Export Restrictions

Aggregate Effect of National and Sub-national Protectionism -Import Restrictions 

Economic Effect of the Common Market

Analysis of Expected Benefits from Eliminating the Interregional Barriers to Agricultural Trade


Regional Funds – Commodity Credit - Trade Restrictions
Credit - Land

Regional Food Funds – Food Security

Coordination of Foreign Trade Regulation between Federal and Regional Authorities


Executive Branch
Legislative Branch

Agro-industrial Business Associations - Regional Agribusiness

Farmers Associations - Regional Farmers

Research and Consulting Organizations

International Stakeholders


General Agreement on Tariffs and Trade (GATT)
WTO Agreement on Agriculture

The Russian Constitution

Law on Competition and Restriction of Monopolistic Activity in Commodity Markets

A Draft Code On Basic Principles Of Federative Economic Relations In The Russian Federation



Coalition Building Strategy
Legislative Strategy

Institutional Strategy

International Strategy


Media/Public Relations Strategy







For the purpose of this project, I assume a fictitious role of Adviser to the Russian Deputy Minister of Economic Development and Trade, Mr. Medvedkov, who is in charge of Russia ’s WTO accession. A number of concerns were voiced during the WTO accession Working Group meetings with regards to sub-federal quantitative restrictions on agricultural goods. In light of these concerns, Mr Medvedkov assigned me to study the problem of interregional barriers to agricultural trade and to develop a strategy for their reduction and eventual elimination.



Interregional barriers to agricultural trade across the Russian Federation have negatively affected both Russia ’s WTO accession and the development of the Russian national economy. In particular, they have harmed the agricultural sector. Negative consequences of these barriers include the following:  

  • Inconsistency with provisions of the GATT and WTO Agreement on Agriculture

  • Substantial price disparity due to inefficient arbitrage

  • Restrictions on market access for agricultural imports

  • High prices for agricultural products, which hurt Russian consumers and food processing industries

  • Insolvency of farmers due to their inability to sell products efficiently 

  • Underdevelopment of national agricultural market infrastructure, for example commodity exchanges and wholesalers

  • Infringement on the economic unity principle laid down by the Constitution

  • Obstacles to efficient development of rural areas in Russia


For the purpose of this project I will consider only the administrative restrictions on agricultural goods imported and/or exported from the region.




The objective of this project is to analyze the problem of interregional barriers to agricultural trade in the Russian Federation , and to propose recommendations and a strategy to reduce and eventually eliminate such barriers. The issue of interregional barriers is important because it (i) affects Russia ’s WTO accession, and (ii) undermines a unified economic space of the Federation laid down by the Constitution.  

With respect to WTO accession, interregional barriers directly undermine GATT Article XXIV:12 and the WTO Agreement Article IV. GATT Article XXIV:12 addresses a member-country’s obligations to ensure national and sub-national policies compliant with the GATT provisions. Article IV of the WTO Agreement on Agriculture sets forth market access obligations. Among the negative economic consequences of interregional protectionism are:  

  • High prices, reduced output, and diminished product and service quality

  • Chronic farmers’ insolvency and indebtedness due to restricted market access

  • Diminished incentives for transactions between regions, which hampers the development of a unified economic space

  • Reduced foreign investment in business

  • The stifling of innovation and technological advancement

Russian consumers, farmers, food-processing industries dependent on imported agricultural inputs, and foreign importers are those who are hurt most. The regional authorities restrict both agricultural exports and imports, depending on regional political and economic motivations. As in-kind payment for credits provided, regional authorities mandate that farmers give their products to the regional food funds operated by the regional monopolistic food trade corporations. The regional authorities then restrict the agricultural exports to ensure repayment. By restricting agricultural imports, the regional administrations protect local farmers. However, in many cases, monopolistic trade mediators are the only winners. The following are the main causes for interregional protectionism in the Russian agricultural market:  

  • Lack of transparency and consistency in economic regulation between the federal government and the regions

  • Lack of governmental coordination in matters of foreign and internal trade

  • Lack of clarification of interregional barriers in the federal anti-trust law

  • Fragmentation of agricultural policy across the Russian regions

  • Absence of regulations on agricultural land circulation and mortgages; insufficiency of credit resources

  • Disproportional and unequal socio-economic development of the Russian regions

  • Political influence of regional agro-businesses (monopolistic trade corporations and food processors favoring exports and/or imports restrictions) on regional leaders


To tackle the problem of interregional barriers to agricultural trade, I recommend the following:  

  • Amend the anti-trust law by providing a detailed classification of barriers, exceptions, and criteria for justification of the prohibition

  • Introduce a Code stipulating the main principles of federal economic relations in the Russian Federation

  • Introduce federal jurisdiction for the regulation of the Russian agri-food market

  • Push for bills on agricultural land circulation and mortgage; credit cooperation; and social development in rural areas that are being currently considered in the Russian parliament (the State Duma)

  • Push for the bill on financial support to the depressed regions of the Russian Federation currently being considered by the State Duma

  • Improve coordination between the Ministry of Economic Development and Trade, the regional authorities, and the Ministry of Agriculture and Food regarding foreign and internal trade relations.

To accomplish the recommended actions, I propose a coalition among the respective federal agencies in order to establish an Interagency Commission for Interregional Agricultural Trade. This Commission will take a lead in running a broader coalition involving all the interested parties, including the regional leaders, political parties/parliamentary factions, farmers associations, agro-business associations, and research and consulting organizations. It will forward a legislative and media strategy under the umbrella of a campaign “Unified Economic Space — a Key to Russian Unity, Food Security, and Prosperity.”




A general concern of Russia ’s WTO accession is regional fragmentation of agricultural policy. Decentralization of the federal government in the early 1990s gave each region more policy-making responsibility, including decision-making over product flows. Many regions currently restrict agricultural inflows and outflows. The Russian regional authorities apply a wide range of administrative barriers to the Russian agricultural market, including physical restrictions on agricultural goods imported and/or exported from the regions, additional standards and certification requirements, erratically enforced customs regulations, licenses and quotas, pricing, local taxes and fees, and preferential treatment for local economic entities. The rise of regional policy making has generated concern that regional authorities might not honor agreements made by the federal government.  

Interregional barriers are one of the most important problems in the development of economic federalism in present-day Russia . The unified economic space must be well configured and organized to be effective. Interregional barriers are caused by regional disjunction on economic and political development, impeding the formation of the Russian market. Serious controversy between federal and regional macroeconomic policies has resulted.  

Interregional trade barriers are a new phenomenon of the Russian economy and have not adequately been addressed. As with many other aspects of a transition economy, the barriers are incongruously treated by different federal and regional institutions. Not only is there no assessment methodology for the economic consequences of such barriers, but there is not even a common terminology. The international experience and the possibilities of applying measures used abroad in this area have not received sufficient attention in Russia .  

The federal government has attempted, inefficiently, to rid of interregional barriers. The problem is complex, and an administrative approach to the problem without a firm understanding of the causes is bound to fail. An efficient resolution of the issue of interregional trade barriers would require an understanding of their essence and causalities.




The Russian Federation is comprised of 89 regions with administrative and political status. These 89 regions are known in the Russian Constitution as “subjects of the federation.” The Federation consists of 21 republics, 50 regions (“oblasts”), 6 territories (“krays”), 10 autonomous region/areas (“okrugs”), and two federal cities ( Moscow and St Petersburg ).[1] The 89 regions are further subdivided into more than 2,000 districts (municipalities and “rayons”). Though local administrations have independent budgetary and administrative status, they are responsible to the regional governments and are subject to regional regulations.  

The Federation Treaty of 1992 provides the framework for federal-provincial relations. It differentiates sub-federal from federal power, as long as these do not contravene Russia ’s Constitution. The Russian Constitution defines the scope and division of federal and sub-federal jurisdictions. However, due to the central government’s inefficiency and the improper regulation and enforcement of the separation of powers, around 47 subjects of the Russian Federation chose to sign treaties on the division of authorities and power with the Federal Government. In addition, 290 agreements on joint jurisdiction (mostly in 1994–98) were signed. Most treaties provided for a special tax arrangement with the central authorities and gave regions the leeway to develop their own foreign economic policies. In addition, over 30 regions have drawn up their own constitutions. Overall, most treaties and regional constitutions are believed to directly contravene the Federation’s own constitution, because the provisions undermine the constitutional principle of equality of the Federation’s subjects and lead to separatism. Some movements towards separatism in the regions include the following:  

  • Prevalence of regional interests over the national ones

  • Intention to divide public wealth (first of all, natural resources) basing on a national-regional principle

  • “Barterization” of the merchandise exchange among the regions; tax evasion

  •  Issuance of regional surrogate means of payment

  • Introduction of regional control over pricing

  • Suspension of tax payments to the federal budget

  • Creation of regional foreign exchange reserves

  • Restrictions in the free movement of goods, capital, labor and information among the regions

The aforementioned forms of separatism and protectionism are expressed through regulations (decrees, resolutions, orders, etc.) by regional administrations and/or through conspiratorial agreements between regional administrations and legal entities operating in their territories. Russian regions have in place a number of regulatory measures directly intervening interregional trade and economic relations, which are expressly forbidden under the WTO rules. These measures include excessive and burdensome regulations in certification and standardization, price controls, taxation and fees, licensing and quotas, unfair domestic support to regional businesses, direct prohibition or restriction of imports and exports, and uneven enforcement of customs regulations.  

The state of affaires outlined above undercuts the federal government’s claim that Russian law should be consistently enforced across the country. In 1997, the Russian President signed a Decree establishing the Presidential Representative Office in a region. According to that decision, the Presidential Representative should overlook the consistency of regional and local laws and regulations with the federal laws and Constitution. S/he should report any breach in law and/or improper implementation of the federal laws and resolutions by regional authorities to the head of the region and to the Chief Control Department of President’s Administration. However, due to the inefficiency of such an institution, in May 2000 the President signed a decree establishing seven federal districts based on the territorial principle — Central ( Moscow ), North-West ( St Petersburg ), North-Caucasian (Rostov-na-Donu), Volga (Nizhniy Novgorod), Ural (Ekaterinburg), Siberian ( Novosibirsk ), and Far Eastern ( Khabarovsk ). According to the Decree, the institution of Presidential representatives in the regions was replaced by the institution of Presidential representatives in the federal districts. The responsibilities of the Presidential representatives remained essentially the same. This decision was in line with the President’s policy of strengthening vertical power.



The Soviet agrifood sector was always known as inefficient and undeveloped. In the last years of Soviet power, agricultural growth was almost negligible, and technical and economic efficiency declined. While the government maintained prices of basic foodstuffs unchangeable for several decades, nominal incomes grew. A chronic food deficit resulted, leading to various schemes of consumption rationalization. Furthermore, retail prices remained steady, whereas procurement prices of agricultural products rose. Such a policy resulted in increased subsidies, which constituted around 80 percent of the retail prices and one-third of the national budget. When world oil prices declined, so did budget revenues. The government was forced to reform the agricultural sector within the framework of a centrally planned economy. However, reforms were not productive.  

In the early 1990s, radical reform of the agricultural and food sector became critical for the national economy. The principal tasks of the Russian agrarian reforms were (i) transformation from the centrally planned system to the market one, (ii) more efficient production relations, and (iii) reduction of the agricultural pressure on the budget. These changes required not only market-oriented agricultural producers, but also new market infrastructure to ensure efficient movement of a product from the field to an end consumer, and efficient delivery of market information.


Structural Reforms

At the end of 1991, the Russian government decided to launch agrarian reforms. All collective farms were to be reorganized. In 1992, a campaign for reorganization of collective farms started. Its intentions were to (i) transfer land and non-land resources to work collectives, (ii) divide these funds by individual shares, and (iii) re-register legal entities by current Russian law.  Peasants obtained a right to leave collective farms with possession of land and some other property and set up their own farms. Though this provision accelerated the formation of private farms, most peasants stayed put. This was due to the historical stereotypes of collective work, the peasants’ narrow specialization, their lack of market and business knowledge, and agricultural infrastructure and technologies being better adapted to large farming industries than to small farms. Currently (2001), the rural Russian population makes up around 27 percent of the total population, or 39.2 million.[2] The share of the agricultural sector in total employment is 13 percent (2000).

During reform, the following three types of agricultural producers have developed:  

  • Large State and Collective Farms were forced officially to reorganize into joint-venture companies. However, the farms’ actual organization, managements system, and work incentives have not significantly changed.

  • Small Household Plots produce half of the country’s agricultural output with only 7 percent of its total farmland. Workers on large farms have small plots that average half a hectare (or 1.1 acres).

  • Private Farms represent a small portion of Russia ’s agricultural producers. About 290,000 private farms currently operating in Russia account for 6 percent of the country’s farmland and 2 percent of agricultural output. A typical private farm is about 50 hectares. Private farmers are workers on former state and collective farms who have taken advantage of the opportunity under reform to obtain land from their parent farm, which they operate independently. During the last few years, the number of private farms stagnated. Obstacles to the growth of private farms include undeveloped markets for obtaining agricultural inputs, selling output, and obtaining credit.


Market Infrastructure Development  

During agrarian reform, a new market infrastructure has developed. Since the privatization of catering, retail and processing industries, channels of agricultural sales have diversified. They represent an essential part of the new market infrastructure. Channels of agricultural sales now include processing industries, catering, retail stores, city markets, large wholesale mediators, other agricultural producers, consumers (direct sales), and procuring organizations of regional administrations. The agrifood market is now more vertically integrated due to the restricted supply of raw agricultural products, the regional restrictions, lack of sufficient market information, and poor contract responsibility. Agrifood processing industries integrate with the agricultural producers and establish their direct retail chains through which their products are distributed. Among the benefits of retail store ownership are (i) low retail prices; (ii) guaranteed cash; and (ii) quick inventory turnover. One of the important disadvantages is that vertical integration, like horizontal dominance, leads to barriers to entry for rival firms.

Components of Domestic Support  

Budgetary expenditures for agriculture in Russia remain on par with major industrialized countries. Among OECD member-countries, the percentage of domestic support for agriculture to GDP varies from almost 0 in New Zealand to around 2 percent in Turkey . From 1994–1999, the volume of financing of the agricultural sector decreased from 3.7 percent of the consolidated budget (federal plus regional) in 1995 to 2.7 percent in 1999. It also decreased as a percentage of GDP from 1.5 percent to 0.8 percent. This was mainly due to the overall budgetary restrictions in the country. In 2001, the agricultural budget support rebounded to 30 percent. The aggregate budgetary support for agriculture consists of the following three primary components: direct budgetary support for agricultural producers (43 percent), financing of common services (42 percent), and food funds (15 percent). In 1999, regional agricultural budgets were divided thus: 43 percent of the direct budgetary support for agricultural producers, 36 percent for the financing of common services, and 21 percent for food funds. The main programs of support are as follows: direct additional payment to price (livestock subsidies), minimal guaranteed prices, subsidization of inputs (fertilizers, power, gas, seeds, etc.), and credit programs.

Current Trends in the Agricultural Production, Trade, Investment, Insolvency, Loaning, and Land Reform  

Economic reforms substantially reduced agricultural production of both livestock and crops. The livestock sector has significantly contracted for both demand and supply-side reasons. Price liberalization reduced demand for most foodstuffs, and worsened livestock producers’ terms of trade, as input prices increased much more than output prices. The reduction of livestock production also contributed to a decline in grain output, because smaller livestock herds require less feed grain. Like livestock, crop production suffered from worsening terms of trade. However, due to the extreme depreciation of the Russian ruble after the 1998 crisis and, therefore, increased price competitiveness of domestic production vis-à-vis imports, the Russian agricultural sector began to rebound.

Agricultural Production

Grain, sugar beets, sunflower seeds, and vegetables are among the major crops grown in Russia . Cattle, poultry, milk, and eggs are the major products of Russian livestock breeding. In 2001, the growth of the agricultural sector continued at a rate of 6 percent (in 1999 – 4 percent, in 2000 – 7 percent). This growth was mainly due to the increase in crop production (14 percent). The total Russian grain production increased by an estimated 20 percent from 65.5 million tons in 2000 to 82 million tons in 2001, with wheat growing from 35.5 to 44.5 million tons, and barley from 14.1 to 19.5 million tons. In 2001, livestock output, including cattle and poultry, dropped by a negligible 1 percent, whereas production of milk and eggs increased by 1 percent and 1.5 percent, respectively.

Regional Distribution of Agricultural Production

Russian agricultural production operates on only 12–13 percent of Russian territory.[3] Moreover, it is distributed unevenly across the country: 14 regions produce over 40 percent of the agriculture; half of the grain is produced in 12 regions (see Figure 1); and more than a half of sugar beets and oilseeds are produced in 4 regions.

Figure 1 – Regional Distribution of Grain Production (1995-1999)


Livestock and potato production is distributed more evenly across the country’s territory. The self-sufficiency indicator developed by the Institute for Transition Economies suggests that 63 Russian regions are self-sufficient in potatoes, 62 in meat, 45 in milk, and only 24 in vegetables. This indicates that half of the Russian regions produce sufficient volumes of these products for local consumption, whereas the other regions depend on importing them.

Agricultural Trade  

During the Soviet period, the USSR heavily imported grain, soybeans, and soybean meal. The main reason for the grain and soybean imports was that the state-driven expansion of the livestock sector during the 1970s and 1980s required more animal-feed than Soviet agriculture could provide. Agricultural imports of feed helped maintain artificially high levels of livestock production and consumption. Due to contraction of the livestock sector during reforms, imports of grain reduced considerably—from an average of 37 million tons a year in the 1980s to just a few million tons in the late 1990s. On the other hand, imports of meat and other such high-value products as processed foods, fruit, and beverages have grown significantly.  

The economic crisis that began in August 1998 temporarily plunged Russia ’s food imports, though they recovered somewhat in 1999. Imports of most agricultural and food products are now 60 percent of the pre-crisis level. Imports dropped because the crisis reduced consumers’ real incomes, thereby decreasing demand for food in general. Furthermore, the severe crisis-induced depreciation of the ruble made imported food relatively expensive versus to the domestic substitutes.  

Current agricultural growth has led to an upswing in imports. This rise is also due to a decrease in price advantages of major domestic products caused by the 1998 crisis. In 2001 (1st half), imports increased for meat (210 percent), poultry (301 percent), fish (210 percent), butter (310 percent), cacao-based products (210 percent), and alcoholic and non-alcoholic beverages (38.6 percent). Wheat imports decreased by over 60 percent due to the increased domestic harvest. The trend of import substitution is now diminishing. Macroeconomic stabilization and the real income growth of 5.4 percent in 2001 have boosted both Russian agricultural imports and production. As the ruble strengthens, Russia is rehabilitating its positions as a net-importer for some agricultural products and ensuring stable competitive positions in the world market for others. Thus, the share of agricultural merchandise in total Russian exports is increasing. Among the traditional agricultural exports are vegetable oil, dairy and margarine products, macaroni products, and dried milk. Among the major Russian importers are the EU and the US .

Insolvency of the Agricultural Entities  

Insolvency of agricultural enterprises, absence of developed financial markets, and budget constraints characterize the financial situation of Russia ’s agricultural development. Finances for agricultural businesses began deteriorating in 1991. In 1992 the share of insolvent entities in Russian agriculture was 14.7 percent; in 1997 – 78.1 percent. However, since 1999 the situation has improved, with the share of insolvent entities decreasing from 61 to 54 percent in 2000. Indebtedness of agricultural enterprises, however, has not improved. According to the State Committee for Statistics, the share of indebted agricultural entities rose from 80 percent in 1998 to 90 percent in 2001.[4] To ensure recovery and boost agricultural production, the federal government launched debt restructuring in 2001.[5] According to the government’s resolution, agribusiness arrears of payments to the federal budget and non-budget funds, including penalties, were subject to a write-off.

Investments in the Agricultural Sector  

Crippled by the lack of credit resources and a steep reduction of budget financing in the 1990s, Russian agriculture is in dire need of investment. In terms of investment, agriculture lags far behind other sectors of the Russian economy. In 1992 agriculture made up some 11 percent of investments overall, whereas in 1999 it amounted to only 3.2 percent. Although investments in agricultural increased by almost 200 percent from 1999 to 2000,[6] the problem of obsolescence of agricultural assets remains critical. In 2001, agricultural investment continued to grow. The major foreign investors in the Russian agri-food sector are from the EU and the US .  

Lagging foreign investment in Russian agriculture reflects weak investor confidence in the Russian economy as a whole. Despite vast natural resources and highly qualified labor, annual per capita foreign direct investment amounted to $20 for Russia in 1994–1999, compared to $220 for Hungary and $134 for the Czech Republic . Structural investment barriers in the Russian agricultural sector are as follows:  

  • Economic instability

  • Poor law enforcement and abidance

  • Lack of transparency in customs and tax procedures

  • Interregional administrative barriers and red tape

  • Undeveloped investment infrastructure leading to high transaction cost

  • Non-compliance to international standards of bookkeeping and reporting rules  and procedures

  • Poor land law in respect to agriculture

Among the positive facets of the Russian agricultural investment climate are tax benefits, big market capacity, and a low-wage workforce. Insolvency, lack of credit resources, and high transaction costs of agricultural production and sales have resulted in vertical cooperation and integration. Vertical cooperation involves not only processing industries, but also the energy industry and other sectors. As a result, some agricultural businesses receive financing through the non-bank schemes of investment and crediting.

[1] Constitution Article 66: (1) The status of a republic is defined by the Constitution and the constitution of the republic in question. (2) The status of a territory, region, federal city, and autonomous region and autonomous area is determined by Constitution and the Charter of the territory, region, city of federal importance, autonomous region, autonomous area, adopted by the legislative (representative) body of the relevant subject of the Russian Federation .

[2] Russian National Committee for Statistics, Available online: 

[3] In contrast, the share of agricultural land in Ukraine and Kazakhstan amounts to nearly 70 percent of the entire territories, and in the US it accounts for 53 percent

[4] Bulletin 3 (9), 2001, Institute for Economies in Transition, Analytical Center for Agrifood Economics

[5] The Russian Government’s Resolution “On rules and terms of debt restructuring for the agricultural enterprises in 2001,” June 2001

[6] Overall investment in Russian agriculture increased from 5.2 billion rubles in the first half of 1999 to 9.5 billion rubles in the first half of 2000. Foreign direct investment increased from 8.8 million US dollars to 16 million US dollars over the same period (Institute for Economies in Transition, Moscow )



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