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Is there an Employment Cost to Agro-Industrial Innovation?

May 26, 17:10 UTC+3
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As compared to most of the other industries, agriculture in Russia is growing at a relatively fast pace. Last year, agricultural exports rose to a record high. Yet further development of the sector largely depends on innovation and competitive position in global markets.

In 2016, agriculture proved to be one of Russia's fastest-growing industries, as it expanded by a whopping 4.8% against the overall GDP drop of 0.2%. In 2015, the agricultural output increased by 2.6%, while the GDP declined by 2.8%.

Government support, import substitution and growing exports were the main drivers behind this expansion.

  • In 2016, the agricultural industry received some RUB 222 billion from the federal budget, with RUB 214.5 billion slated for 2017.
  • At a Government meeting held in April 2017, Alexander Tkachev, Minister of Agriculture, announced that owing to the counter-sanctions food imports to Russia in 2016 had contracted by 6%, as the expanding import substitution had been putting an increasing pressure on them. Imports have been declining for the third consecutive year: in 2014, they decreased by 8% to USD 41 billion, while in 2015, the drop was nearly two-fold. Now Russia is fully self-sufficient in key food products, including grain, sugar, oil and potatoes. Even the food security threshold for meat has been exceeded.
  • Also, the exports of agricultural products are growing. In 2016, exports exceeded USD 17 billion, an all-time record for Russia, while in 2018, this figure is expected to go up to USD 19 billion. In his address to the Federal Assembly, President Vladimir Putin said that agricultural exports brought in more than arms sales.

One way or another, the industry still faces a number of challenges, like the need for upgrade, innovation, and a framework to support small producers.

  • According to the Russian Agricultural Census 2016, over the past 10 years, the number of farmers went down by 38.7% from 285,100 to 174,600, which was, among other things, due to the lack of government support, including the shortage of subsidised loans.
  • According to the Federal State Statistics Service, the depreciation of fixed assets in the industry stood at 41.6% as of the end of 2015. Even though this is better than averages in the wider economy and agriculture is one of the few industries to show a decline rather than an increase in depreciation levels over the past few years, this number is still very high.
  • The high leverage ratio in agriculture is still an issue, as debt is comparable to revenue volumes. Until recently, farmers were only allowed to take out loans at a commercial rate and thereafter apply for subsidies. In 2017, the short-term lending system was changed, enabling farmers to borrow at a rate within 5% straight from banks, while the Ministry of Agriculture transfers the required funding directly to the banks.

To help agriculture expand at the current pace, the Government will need to address the issue of technical overhaul. Due to low margins in the sector, farmers have difficulties attracting investments without support from the Government.

  • According to Alexander Tkachev, the current budget provides for RUB 6 billion to subsidise low-interest investment loans. On top of that, in 2017 the Government will allocate nearly RUB 60 billion to service the previously discharged loans. The Ministry of Agriculture insists that government support should be raised by another RUB 36 billion, including allocations of RUB 10 billion to subsidise low-interest investment loans and RUB 7 billion to finance an equity injection for Rosagroleasing.

The improvement in the agricultural employment requires support to farmers and development of rural infrastructure.

  • The Ministry of Agriculture estimates that, in 2016, some 4,500 farmers received dedicated grants. In the near future, at least 1,200 agricultural cooperatives are scheduled to come on stream (vs over 300 co-ops last year), with budget allocations of over RUB 15 billion to develop rural infrastructure in 2017.

At the same time, innovation and efficiency improvement in agriculture pose new challenges, as the industry becomes increasingly dependent on talent, while redundancy in the sector may contribute to higher unemployment and population outflows. According to the Federal State Statistics Service, unemployment in rural areas is twice as high as in cities and towns. Hence, we need to come up with a comprehensive approach that would include the creation of processing facilities close to the agricultural production sites, along with employee development and retraining programmes.

 
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