Grain market and its role in ensuring Russia's national Security

Makhotina Irina Alekseevna PhD in Technical Science Associate Professor, Department of Commodity Science and Commodity Expertise, Plekhanov Russian University of Economics 117997, Russia, g. Moscow, ul. Stremyannyi Pereulok, 36 irina_mahotina@mail.ru Other publications by this author     Agapkin Aleksandr Matveevich PhD in Agriculture Associate Professor, Department of Commodity Science and Commodity Expertise, Plekhanov Russian University of Economics 117997, Russia, Moscow, lane. Stremyanny, 36 Agapkin.AM@rea.ru Goncharenko Oksana Anatol'evna PhD in Technical Science Associate Professor, Department of Commodity Science and Commodity Expertise, Plekhanov Russian University of Economics 117997, Russia, Moscow, lane. Stremyanny, 36 Goncharenko.OA@rea.ru

Raikova Elena Yur'evna PhD in Technical Science Associate Professor, Department of Commodity Science and Commodity Expertise, Plekhanov Russian University of Economics 117997, Russia, Moscow, lane. Stremyanny, 36 elena_raikova@list.ru

According to the National Security Strategy of Russia, national security is commonly understood as a state of protection of the national interests of the Russian Federation from various threats, both external and internal, in which a decent level and quality of life of citizens, harmony and civil peace in the country, the sovereignty of Russia will be ensured, the constitutional rights and freedoms of the population will be respected, the country will develop socially-economically ^[1].

To ensure national security and sustainable development of the country, it is extremely important to correctly set strategic national priorities. One of such priorities is food security, due to which one of the most important criteria is achieved – improving the quality of life of the population ^[2].

Food security means, among other things, sufficient provision of food for all citizens of the country. The grain market is an integral part of the food food market. The value of such an indicator as the level of self-sufficiency in grain should not fall below 95%. Self-sufficiency is defined as the relationship between own production and consumption of a product.

Historically, grain production has been the basis for the sustainable functioning of the national food market, has a system-forming character for other sectors of the country's economy and determines the level of food security of the state ^[3].

The level of development of the grain market as an indicator of the quality of the country's economic development also largely determines the level of development of many related markets, as well as the level of social stability of society. One of the features of the grain market is that grain, according to many economic scientists, can act as a measure of value. For example, during the turmoil of the Russian market in 1998, grain was almost the only "hard" currency. The consequences of the global financial crisis of 2008 also had a significant impact on the grain market of both Russia and the world ^[4,5].

In May 2014, the Eurasian Economic Union was established on the basis of the member countries of the Customs Union. From this moment on, when fulfilling the criteria for ensuring food security, Russia also takes into account trade with the EAEU countries, the possibility of receiving and supplying food products by the member countries of the Union.

Since the creation of the EAEU was based on the need to ensure the free movement of capital, services, labor and, most importantly, goods between the participating countries, the formation of a single market somewhat complicated the issue of meeting the criteria of self-sufficiency in grain, since in the current economic situation (2020-2022) and the increased export potential of grain, many agricultural producers first of all, grain crops were reoriented from the domestic market to the external one, which could not but negatively affect the degree of security of the population of the Russian Federation with domestic agricultural products.

The formation of a single grain market in the CIS countries has been going on for more than 30 years. The individual stages of this long-term retrospective differed both in the general economic and political context of integration, as well as in the composition of the States participating in it. There was one thing in common – a big gap between declarations of intent, expressed expectations and real achievements in this area. In order to achieve economic integration, it is extremely important to reach an agreement on the main directions of market development, but this compromise of interests of economic entities is hindered by structurally complex conflicts both within individual countries and at the interstate level.

The inability to find a compromise on mutual grain trade is largely due to the authorities' fear that national grain producers will focus their products on the foreign market, and they will be replaced by suppliers from other EAEU countries. Therefore, in the current situation, countries are in no hurry to abandon foreign trade restrictions, as they become a mechanism for protecting national food security. The reduction of grain imports is regarded as one of the conditions for the development of the national agro-industrial complex (AIC). However, protectionist measures contradict the concept of forming a single economic space, which is the cornerstone of Eurasian integration. The sharpness of the regulator's perception of the proportions emerging in the domestic market between domestic and imported products and the ways of responding largely depend on the level of satisfaction of domestic needs for agricultural raw materials and food, on the available potential for increasing their production, on the capacity of those markets based on which the national agro-industrial complex is developing. The borders in which integration processes will take place in this economic sphere largely depend on these factors.

One of the key indicators used to assess the agricultural potential of the EAEU is the availability of farmland and arable land per capita. In terms of the total area of agricultural land, Russia is in fifth place in the world, and Kazakhstan is in eighth. In terms of arable land, Russia ranks fourth in the world, second only to India, the USA and China ^[6]. According to World Bank statistics ^[7] for 2020, the EAEU member countries have 450 million hectares of agricultural territories, including Russia – 215.5, Kazakhstan – 214, Belarus – 8.3, Armenia -1.7, Kyrgyzstan – 10.4, which is approximately 10.5% of the world (4738.9 million hectares). Arable land in the EAEU occupies 49.3 million hectares, including in Russia – 12.2, Kazakhstan – 29.6, Belarus – 5.7, Armenia – 0.5, Kyrgyzstan – 1.3 ^[8]. According to the statistical data of the EEC for 2020 and 2021, the size of acreage significantly differs from the figures provided by the World Bank (Fig.1) ^[9].

Figure 1 – Total acreage in the EAEU countries in 2020 and 2021, in million hectares

The size of the acreage of the EAEU is more than 110 mlg ha. According to 2020, Kazakhs are in the first place in terms of availability of arable land – 1.58 hectares per person (1st place in the world), if we talk about the EAEU member states, then Kazakhstan is followed by Russia - 0.84 hectares (4th place in the world), Belarus – 0.6 hectares (12th place in the world), Kyrgyzstan – 0.195 ha (67th place), Armenia – 0.15 ha (84th place), which is lower than the global average of 0.179 ha ^[10]. The world population continues to grow, which leads to an increase in the growth of food demand, the burden on agricultural land is increasing, caused, among other things, by global climate change, the global average indicator of the availability of arable land per capita continues to decrease. According to FAO, the value of this indicator has more than halved over 50 years, from 0.45 ha per capita in 1961 to 0.22 ha in 2020, and by 2050, according to FAO forecasts, it will drop to 0.18-0.19 ha ^[11].

The structure of the sown areas of the EAEU is sufficiently heterogeneous, a large area is occupied by grain crops, the smallest part falls on vegetables (not including potatoes) (Fig.2) ^[9].

Figure 2. Structure of acreage in the EAEU in 2021

According to Figure 2, grain crops account for almost two-thirds of all cultivated land.

In 2020, grain production in the EAEU (in weight after completion) increased by 11.1% to 164.6 million tons, and in 2021 it decreased to 146.8 million tons (a decrease of 10.8%). Grain production in 2021 decreased in all EAEU countries: in Armenia – by 37% (up to 0.15 million tons), in Belarus – by 15.5% (up to 7.4 million tons), in Kazakhstan – by 18.4% (up to 16.4 million tons), in Russia – by 9.1% (up to 121.4 million tons) and in Kyrgyzstan – by 27.2% (1.5 million tons) ^[9,12].

Figure 3 shows data on the gross harvest of grain and leguminous crops in Russia ^[9].

Figure 3. Gross harvest of grain and leguminous crops in Russia in weight after completion, million tons

According to Figure 3, despite the various features of the climatic regime and economic risks, in general, there is a tendency to increase grain production in Russia.

According to the forecasts of the EEC for the EAEU in 2022, gross agricultural production is expected to grow by 2.1% to the level of 2019 to 120.5 billion US dollars (based on the exchange rates of national currencies to the US dollar for 2020) ^[12].

In 2022, the EAEU predicts an increase in acreage by 1.7 million hectares (1.6%) to 111.3 million hectares, due to an increase in acreage of cereals and legumes – by 2.8 million hectares (4.2%), oilseeds – by 169.6 thousand hectares (0.9%), melons – by 2.7 thousand hectares (1.1%), as well as grapes – by 3.0 thousand hectares (2.3%) compared to 2019 ^[12].

The largest share (about 61%) of the acreage in the EAEU is devoted to grain and leguminous crops. In 2021, the growth of areas for grain crops was noted in Armenia, Kazakhstan and Russia – by 4.5 thousand hectares (2.0%); 343.4 thousand hectares (1.5%) and 488.7 thousand hectares (0.6%), respectively. In Belarus, there was a decrease in this indicator by 1.7%.

The average annual grain production per capita in the EAEU for the period 2017-2021 amounted to 835 kg, and in Russia – 852.6 kg ^[9].

According to forecasts of the Ministry of Agriculture, the grain harvest in Russia in 2022 may amount to 123 million tons ^[13]

In 2022, in general, the EAEU expects an increase in gross grain harvest by 13.7 million tons (9.3%) to 161.8 million tons in weight after completion compared to 2019 ^[12].

Analyzing these statistics, it can be concluded that the EAEU as a whole, and, in particular, Russia, are sufficiently provided with their own grain, produce it in excess and export the surplus.

Grain exports, along with domestic consumption and the needs of the livestock industry, are a determining factor in the development of the market, since about 30% of the volume of grain produced is exported. The main suppliers of grain to the markets of third countries among the EAEU countries are Russia and Kazakhstan. In total, they provide 99.9% of all grain exports from the EAEU.  In 2019, the joint export of grain by the EAEU member states amounted to 44.6 million tons.

Figure 4 shows the export of grain by the EAEU countries to third countries ^[12].

Figure 4. Grain exports by the EAEU member states to third countries, thousand tons

The volume of grain exports by Belarus amounted to 10.7 thousand tons in 2019, and 65.8 thousand tons in 2020.

The EEC forecasts an increase in grain exports in 2022 by 22.7% compared to 2019. The largest increase in exports is projected in Russia, it is expected that in 2022 Russia will send 48.5 million tons of grain to the markets of third countries. Based on unfavorable weather conditions in Kazakhstan over the past few years, it is possible to reduce grain exports to third countries by 6.9% in 2022. Kyrgyzstan plans to export about 1.0 thousand tons, Belarus – 13.4 thousand tons. Armenia does not plan to export grain in the current period.

If we talk about grain imports by the EAEU member states, its share is extremely insignificant, and amounts to less than 1% of domestic consumption.

The EAEU countries fully satisfy their domestic demand for grain at the expense of their own agro-industrial complexes and, according to forecasts for 2022, has a significant export potential exceeding 50 million tons ^[12].

Nevertheless, in September 2021, the Grain Union recognized the problem of illegal export of grain crops, including oilseeds, from Russia to Kazakhstan. The Ministry of Agriculture proposed the return of phytosanitary control at the border, as well as the introduction of measures to track the movement of goods shipments, as a result of which employees of the Ministry of Internal Affairs and the FSB of Russia will be given access to information about certificates issued for each of the shipments crossing the border, as well as information about vehicles involved in transportation. At the same time, the government of Kazakhstan may not agree with such measures, since earlier the unification of wheat export regulation, including tracing the origin of goods, was also discussed at the EAEU level, but actual results have not yet been achieved ^[14,15].

Another problem, also covering mutual trade between Russia and Kazakhstan, is the fact noted by the President of the Russian Grain Union that grain exported duty-free from Russia to Kazakhstan is then re-exported by Kazakh companies to third countries ^[14]. As a result, Russian manufacturers miss the opportunity to supply goods abroad at possibly higher prices and open new markets, and the Russian budget misses possible revenue from duties for supplies to third countries.

As for duties, the mentioned problem of the threat of illegal supplies from Russia to Kazakhstan is one of the negative consequences of systemic restrictions on the export of Russian grain crops introduced in stages from April 2020, as a result of which it became less profitable for the producer to export goods outside the EAEU. Thus, by Decree of the Government of the Russian Federation No. 385 of 31.03.2020, from April 1, 2020, grain export quotas were started, which did not affect only the countries of the Union. The quantitative restriction on the export of wheat and meslin, rye, barley and corn beyond the borders of Russia to countries outside the EAEU amounted in total to no more than 7 million tons. The restriction was set for the period from April 1 to June 30, 2020.

According to the Center for Agricultural Analytics at the Ministry of Agriculture, the Russian Federation exported 34.1 million tons of grain from July 1, 2020 to February 1, 2021, which is 24.3% more than a year earlier. Including wheat exports increased by 23.4%, to 28.4 million tons, barley - by 48.8%, to 3.9 million tons, other crops - by 45.1%, to 0.3 million tons. Corn supplies decreased by 4.8%, to 1.5 million tons ^[16].

In Russia, from February 15 to 28, 2021, wheat exports to third countries within the quota were subject to a duty of 25 euros per ton, and then it was planned to increase it to 50 euros per ton. Also, from March 15, 2021, duties on corn and barley were introduced at 25 and 10 euros per ton, respectively. The quota for the export of grain crops was 17.5 million tons, and exports in excess of the quota were subject to a duty of 50% of the customs value of products, but not less than 100 euros per ton. The export of rye was not affected by restrictive measures due to its insignificant volumes. Since June 2, a floating duty on shipments of wheat, barley and corn abroad has been launched. The purpose of the introduction of duties was to promote the development of exports of agricultural products with high added value, that is, with a high level of processing, and, accordingly, to reduce the export of unprocessed grain. The Grain Union estimated the reduction in grain exports from Russia at 15%.

The trend of grain export quotas continued in 2022. Thus, in accordance with the Decree of the Government of the Russian Federation No. 2595 of 31.12.2021 ^[17], it was decided to annually establish tariff quotas for the export of rye, barley, wheat, meslin and corn from Russia to countries outside the EAEU for the period from 15.02 to 30.06. The volume of the tariff quota of wheat and meslin amounted to 8 million tons, rye, barley and corn in total – 3 million tons.

The introduction of such restrictive measures comes from the fact that in Russia there are relatively low levels of production orientation to the processing of grain crops into finished products. In 2021, cereals occupied a leading position in the structure of Russian agro-industrial exports both in value and in kind ^[18], and a characteristic feature of Russian exports in the agro-food sector is that about 70% of the products of this sphere supplied to the market of the EAEU countries have a relatively high degree of processing, which includes including products made from flour and grain of cereals, as well as animal feed consisting of cereals, but at the same time products supplied outside the EAEU mainly have a low degree of processing, and the leading positions are reserved for grain and fish. It is also important to note that Russia's exports outside the EAEU in value terms are twice the volume of supplies within the Union, which indicates a greater orientation of Russia's supplies to third countries, to which, at the same time, mainly unprocessed product is supplied.

Speaking about recent events, it should be mentioned that due to the tense political situation in Russia, Government Decree No. 362 of 03/14/2022 was adopted. According to it, from March 15 to June 30, 2022, the export of major grain crops – wheat, meslin, barley, rye, corn - was temporarily prohibited from Russia ^[19]. These measures were designed to ensure the country's food security in the face of sanctions. The ban applied to all countries, including the EAEU countries, except Belarus. An exception was provided for deliveries under export licenses issued by the Ministry of Industry and Trade. Shortly before the adoption of this Resolution, there was an increased level of severity of the previously mentioned problems – for example, on March 10, 2022, it was reported that "grain exports through Kazakhstan have increased fivefold in recent days." An important problem factor is that Russia has a long border with Kazakhstan, where the administration of prohibitions is quite difficult. As for the problems negatively affecting Kazakhstan, there has been a drought in the republic for the last two years, as a result of which most of the wheat was purchased in Russia. Accordingly, as a result of the Russian ban, there may be a threat of grain shortage in Kazakhstan. This also applies to other EAEU countries – for example, Armenia and Kyrgyzstan are heavily dependent on external grain supplies due to limited resources for the development of domestic production ^[20].

In the autumn of 2022, the situation on the grain market began to change in a positive direction, From November 1 to November 10, 2022, Russia exported about 2 million tons of wheat, which is 2.8 times higher than the values for the same period in 2021. The growth of wheat exports began in October and continues now. At the same time, shipments of barley decreased by 4.5%, to 196 thousand tons, and for corn to 25 thousand tons against 152 thousand tons a year in 2021. These changes in exports are related to the situation around the grain deal and its possible prospects. This can explain the sharp increase in wheat exports. The decrease in shipments of corn is due to the fact that Ukraine was its main exporter. The intensification of wheat shipments is also associated with the approach of winter and future difficulties caused by maritime logistics ^[21].

According to the Russian Grain Union, Turkey in the first decade of November increased purchases of Russian wheat by almost 2.7 times, to 503 thousand tons. Shipments to Libya -155 thousand tons, Sudan — 133 thousand tons, Algeria — 101 thousand tons, Bangladesh — almost 100 thousand tons, UAE — 96 thousand tons were actively growing. In 2021, there were no exports of Russian wheat to these countries. At the same time, shipments to Egypt decreased by 15%, to 347 thousand tons. There were no exports to Italy, Greece, Azerbaijan ^[21].

Thus, there are a sufficient number of problems in the field of grain trade, which are also becoming more acute due to the current geopolitical situation, and their solution is extremely important both for the EAEU countries in general and Russia in particular, since it is the largest global player in the grain market, especially wheat.

It is difficult to consider the restriction of supplies from Russia to third countries as a positive factor for trade, however, at the same time, it can help solve the problem of illegal supplies, especially pronounced in the case of Kazakhstan. Thus, the President of the Russian Grain Union noted that Kazakhstan often buys Russian grain according to "gray schemes", which is then issued as a local production, and sold to other countries, for example, Uzbekistan.

As for the work for the future, the EAEU requires the harmonization and unification of export regulation that has not yet been carried out. It would make it possible to increase the effectiveness of measures introduced by countries. For example, the measures proposed in the framework of the fight against illegal shipments to track the movement of goods shipments would help to increase the transparency of commodity flows.

After the lifting of the ban on the export of grain crops, the introduction and strengthening of measures to support producers of the agro-industrial complex will contribute to the development of Russian exports. In the context of ongoing import substitution, largely due to sanctions pressure, this area of work has been relevant for many years. Moreover, the development of production is relevant not only for Russia and Belarus, which are under sanctions, but also for other EAEU countries – both for economic development and in order to ensure their own food security, since, firstly, they are negatively affected by the ban on exports from Russia, which may be reintroduced and secondly, their being sanctioned is also likely. In particular, it is possible to introduce a full-fledged all-Union program for the development of the grain market, which would provide for legislative, economic and organizational measures.

Given the possible reduction or refusal of Western countries from buying Russian grain products, it is important to pay attention to other areas of trade. According to the Institute of Agricultural Market Conjuncture, the export of Russian wheat in the current agricultural year (July 2022-June 2023) may amount to 44 million tons. At the same time, there is a high demand for wheat from Russia in Turkey, Egypt, as well as Algeria, Saudi Arabia, Bangladesh, and Pakistan. The gross grain harvest in the current agricultural year is estimated by ICAR at 153 million tons, including 101.5 million tons of wheat ^[22].

During the expert session held in October 2020, "How to increase the export of high-quality agricultural products from the EAEU to China?" a significant undiscovered potential for the development of export supplies of agricultural products of the EAEU countries to China was revealed. Despite the fact that China is the largest consumer of Russian food products and is one of the three largest importers of Belarusian agricultural products, the participants of the event noted the prospects for exports to China, including cereals, soybeans, vegetable oils, oilseeds, confectionery. China's imports according to the positions selected by the participants in 2019 amounted to 84.3 billion US dollars. At the same time, the EAEU exports for them amounted to only 3.25 billion US dollars. The search for new directions is of the greatest relevance for Russia and Kazakhstan, as for the countries with the greatest availability of land resources in the Union. Additionally, while Russia's exports are mostly directed to third countries, the bulk of Kazakhstan's grain exports, on the contrary, fall on the CIS.

In turn, for Russia, in addition to realizing export opportunities, it is very important to implement a policy of transformation of the grain industry, especially in terms of the development of deep processing of grain, which will increase the presence of processed products with high added value on the foreign market.

Thus, it is necessary to adhere to the orientation to produce and supply abroad not agricultural raw materials, but finished products. A wide range of products of various degrees of processing can be produced from various types of grain products – flour, confectionery, pasta, canned food, beer products, soy analogues of dairy products, etc.

Thus, according to the EEC ^[12], the EAEU member countries mostly export agricultural raw materials to the markets of third countries, in 2020 its share in the structure of exports of agricultural products amounted to 70.3% (in 2019 - about 70.6%), its processed products amounted to 26.0% (in 2019 – 24.6%) of total cost volume.

In the structure of imports of agricultural products to the EAEU, the share of finished products in 2020 amounted to 30.7% (in 2019 – 30.3), the share of agricultural raw materials – 56.3%.

For Russia, it is important to expand the area for growing grain crops by involving previously retired arable land into circulation, as well as solving the problem of a long–term decline in the quality of Russian wheat, the reasons for which are explained by many factors - natural, technical, technological, economic, organizational. Accordingly, a serious integrated approach is required to solve this problem.

To increase the efficiency of mutual trade between the EAEU countries and reduce the share of "gray schemes" in it, it is possible to organize an authorized interstate agricultural exchange. Such a measure will contribute to increasing the transparency and stability of grain trade, as well as help streamline pricing. Logistics centers can be created to move large shipments of grain, which would help accelerate the movement of goods flows and their organization. The competitiveness of grain of the EAEU countries in the foreign market can be further increased through the use of investment and innovation factors ^[13].

To solve the problem of increasing the competitiveness of the Russian agro-industrial complex in general and the grain market in particular, it is necessary to create conditions for the speedy transfer of the industry to a new technological basis for increasing its competitiveness, which will be possible only with the provision of state financial support ^[4].

Thus, the Russian grain market has a large number of different development prospects, and, especially when overcoming the current crisis situation, first of all, lifting the ban on the export of basic grain crops from Russia, they can be successfully used to ensure Russia's national security.