Most farms across Russia are so unproductive that investors have long shied away from planting cash in them, leaving agriculture with prospects as black as the country’s fabled soil.
The neglect has beaten down many farming villages: Cows are not milked, chickens go hungry and fields do not get plowed, though the villagers do – alcoholism is rampant. Desperate residents are resigned to buying imported butter, flour and meat.
The dire situation could brighten if a bill to permit the private sale of agricultural land in Russia for the first time since the Bolshevik Revolution in 1917 passes the State Duma, which gave early approval on May 16 and is to debate the bill further this summer and fall. President Vladimir Putin has pushed parliament to approve reforms allowing private ownership of urban, commercial and rural land; legislation on the first two was adopted – and signed into law by the president – last year.
Since the early 1990s, private investment in agriculture has come through deals with former collective farm workers who were given title to – but not the right to sell – the tracts on which they had toiled. Today, 87 percent of agricultural land in Russia is privately owned, from subsistence farmers to large agribusiness enterprises.
"Investing in agriculture started in the last two or three years," said Yury Kostyuk, head of the agrarian department at GK Rusagro, one of Russia’s largest agricultural holding companies. "This is the second wave of privatization – after investors bought out all the oil, gas and metals enterprises."
For the most part, what the former "kolkhozniky," or state farm workers, inherited from the Soviet state was a mess. Russia’s agricultural output today is far less than it was during Soviet times – the worst decline of any former communist country in eastern Europe, according to a report by the World Bank.
In 1990, amid reforms by then-Soviet President Mikhail Gorbachev, agriculture accounted for 16.4 of Russia’s GDP and was a key part of the economy. By 1998, the share of agriculture in GDP had fallen to less than 6 percent, edging up slightly to 6.8 percent in 1999. In 2000, the share of agriculture rose to 7.5 percent, the World Bank report says.
Almost one-quarter of Russia’s 1.7 billion hectares of land is classified as agricultural, the report says. Of that figure – 406 million hectares – about 190 million are suited to growing crops or raising livestock. Some 27 million people, roughly 19 percent of the national population, live in rural areas. This means that nearly one in five Russians struggles to make ends meet from an industry that generates less than one-tenth of the national income.
According to the estimates of experts interviewed for this article, Russian agriculture will be on par with that of the world’s developed economies in five to 20 years.
Many see salvation in the farmland-turnover bill the Duma last month approved on the first of three readings.
Analysts say amendments are likely to be submitted for consideration on the second reading, adding that the law, once enacted, will ignite investment in the largely decrepit industry.
"For 10 long years, the agricultural sector has been stymied by this political and ideological fight over buying and selling agricultural land. Once this fight is over, potential investors will see the climate in the sector as stabilized and should start being more aggressive in seeking out investment opportunities," said Leonard Rolfes, a lawyer with the nonprofit Rural Development Institute in the United States, who has researched land development issues in Russia.
Like many other researchers and investors, Rolfes said the draft law now before the Duma, while crucial, is just a first step. Its impact would be limited to giving legal weight to farmland-use arrangements already in place – those reached in the early to mid-’90s on the basis of decrees issued by then-president Boris Yeltsin.
Still to be resolved would be a bevy of legal issues, each of them likely to face contentious debate: determining precisely which part of the government owns which piece of land, and therefore has the right to sell; creating a system to calculate land prices; and establishing how sales should be carried out.
Assuming the Duma backs the Putin government’s bill, regional legislatures and governors will have to enact their own laws to implement its reforms.
While it may be a first step, supporters of the pending bill say the time has come to pull farmland out of the gray economy and unleash its economic potential.
"The right to private ownership of land is entered into the Constitution, into a civil code and a land code, yet there is no law" to make this a reality, said Alexander Fomin, a member of the Duma’s agrarian affairs committee from the right-wing Union of Right Forces, one of the parties strongly backing the government’s proposal.
SPS, as the party is known, also favors selling land to foreigners, a particularly touchy aspect of what is, overall, one of Russia’s most heated debates ever. The SPS faction in the Duma presented its own version of the bill, which called for allowing anyone, regardlesss of nationality, buy land of unlimited acreage.
The government-drafted bill that legislators endorsed this month does set some limits on the size of parcels, and bars noncitizens from buying plots near national borders.
"Right now, when wild grass has overgrown tens of millions of hectares, it is not right to set strict limits," Fomin said.
One of the proposed law’s biggest supporters says it would take the smoke and mirrors out of land transactions.
"There are many gray areas in buying land, such as [an owner] forcing an enterprise to go bankrupt, then buying it [for the price] of its miserable debt," said Gennady Kulik, chairman of the Duma’s Agrarian Affairs Committee and a former deputy prime minister in charge of agriculture under former President Boris Yeltsin as well the last agriculture minister of the Soviet Union.
He was referring to a practice common in Russia, whereby an investor grabs control of a state-owned enterprise by taking part in a scheme to force it into bankruptcy by calling in debts, then buying the enterprise on the cheap in the form of a debt settlement. In many of these deals, the investor is a manager or management group of the enterprise itself.
Kulik, like his Duma colleague Fomin, is among those who say the draft law would merely codify land ownership rights guaranteed by the Constitution. Under the Yeltsin-era decrees, land has been bought and sold in Russia for a decade, albeit on a rickety legal foundation.
The committee chairman, who has lobbied – successfully – to pass an amendment to the bill that would permit buyers of agriculture land to be eligible for mortgage financing, stressed the need for the right to purchase. He disagrees with the Communist-aligned Agrarian Party – of which he was a member before joining the pro-government Fatherland-All Russia faction – on the question of whether leasing farmland is sufficient.
"We cannot impose just one decision, the renting of land," Kulik said in a telephone interview. "We need spending of at least 100 million to 110 million rubles ($3.3 million to $3.7 million) per year. The budget can only allocate 20 to 25 million rubles (between $660,000 and $830,000). Private banks should provide the rest. If we do not have a civilized agrarian market that will include the turnover of land, private banks can’t [help]."
This year’s federal budget sets aside 21 million rubles in total spending on agriculture, a slight decrease from the 21.7 million rubles allocated in 2001, according to the World Bank.
Kulik, who ran the huge agricultural bureaucracy in the waning days of the Soviet Union, has gone from being a Communist opposed to private land ownership to a key proponent of just that. It’s no surprise, then, that the draft law also has strong support from the liberal Yabloko party. It wants to go even further.
"The general sense of our amendments is that there should be greater liberalization," such as guaranteed equal rights on land transactions everywhere in Russia, reads a statement on the Yabloko Web site from Sergei Ivanenko, first deputy leader of the party’s Duma faction.
Opponents of the draft law, mainly the Communist and Agrarian blocs, have been just as spirited in their arguments. One of the biggest is the fear that lifting a ban on land sales will lead to foreigners snapping up vast swathes of the motherland.
"What Napoleon and Hitler could not get can now become an easy victory for the big financial sharks of the West," the Communists said in a statement that also warned privatization would turn rural Russians into "farmhands" for rich owners – a kind of return to feudalism.
The Communists and their allies say they fear the rural poor will be made to endure the same pain as industrial workers who were pressured into selling their vouchers-for-shares as state factories were being privatized in the 1990s. As a result of rigged privatizations, many people lost money surrendering their small stakes in the factories where they worked, only to be hit soon after by a plunge in wages and high inflation as industrial production suffered.
Nikolai Kharitonov, the leader of the Agrarian Party in the Duma, said the land sale law would make life worse for most rural Russians.
"Those who live and work on the land are insolvent," he said in a telephone interview. "They will not be able to take part in the market system."
He noted that farm workers’ monthly pay is about 1,100 rubles ($37), and said they will lose the right to eke out a meager living so that the land on which they toil can be sold for gasoline stations and nightclubs.
"If the primary arable land market becomes cheap, the second [sales of land] will be accompanied by shooting," Kharitonov warned.
He says a long history of collective farming has served Russia well, particularly during the Soviet era. "The collective way of working the land has justified itself for centuries," he said.
The fierce debate over selling farmland has spread from the floor of the Duma to kitchen tables across the country. Agriculture Minister Alexei Gordeyev, said on NTV television in April that, "from a purely economic point of view, it would be more profitable for Russia to develop an institution of long-term leasing [of land] and [allow] a foreign company or a foreign citizen to acquire land under such conditions, invest in it and thus develop Russian agriculture."
Alexander Petrikov, director of the Agrarian Institute of the Russian Academy of Agricultural Sciences, said he believes the nation would benefit economically, if not politically, from selling land to foreigners.
While calling Russian claims of a coming foreign invasion an attempt to "appeal to ideological prejudices," he noted that states of the former Soviet bloc that are in line to join the European Union, such as the Czech Republic, are in the midst of seven-year transition periods during which foreigners can only rent land.
Russian businesspeople generally favor giving foreigners the right to buy land.
"Foreigners can significantly increase the amount of investment," said Rusagro’s Kostyuk. "Foreign capital helps any sector to stand on its feet. They [foreigners] will come not to grab the land, but to plow it."
Foreign investors, naturally, would welcome the historic change.
"This way you can put land as an asset on your balance sheet," said Tony van Leersum, vice president of McCain Foods Ltd., the Canadian agribusiness and food-processing giant. "Banks would be more willing to give you credit."
McCain, the world’s largest processor of potatoes, has so far limited its investment in Russia to the crop-growing research known as agronomic trails. But the New Brunswick-based company plans to sow capital into growing produce within two years. It is now evaluating where to grow potatoes in Russia to derive a hardy, profitable crop.
Sergei Filippov, co-owner of Fruchttrink, a Russian company with a German name that has some foreign capital invested in it, grows and processes potatoes and other vegetables in the Moscow region village of Bunyakino. He sells the harvest to Moscow supermarket chains and to McDonald’s. Filippov said he believes the draft law is needed but the option of buying land is not crucial to his business: His company signed a 49-year lease, currently the legal standard, on the land it uses.
"I can work without this law," he said. "But it will encourage other investors. They want to have their property; otherwise, they will not invest."
Kostyuk said buying land is not on his company’s list of priorities either. Rusagro, he said, prefers leasing, though he and other company executives support the new land bill. Kostyuk said the law would be of little help in fixing fundamental problems of Russian agriculture such as wide disparities in prices and a lack of government protection for domestic farmers.
Petrikov, of the Agrarian Institute, said many investors would do better to rent land. He cited the average cost of one hectare at 12,000 rubles ($400). He foresees a bigger problem in the form of bank loans to small farms that will still be hard to come by even if a workable farm mortgage system could be untangled from the many other complications tied to the pending legislation.
Even if the law passes the gantlet of amendment-wielding legislators to receive Putin’s signature, an investment boom in Russian farming is unlikely, Petrikov said.
"It not only depends on the land law but also on how profitable the product market is. It is already profitable, but the saturation level for investments has been reached."
More important, he said, is setting higher tariffs on imported food so that local producers can become more competitive. "This is what investment will depend on," he said.