The long-neglected tillers of Russia's soil are finally getting some state attention, as government officials preparing for entry into the World Trade Organization (WTO) realize their agricultural industry is woefully unprepared for competition.

But state officials are now facing up to what farmers have pointed out all along: that imports encouraged since the food shortages of the early ‘90s have now gained the upper hand in the country's grocery stores.

"If we do not manage to carry out a reasonable agricultural policy aimed at limiting food imports, we will not just lose years on restoring livestock breeding, but we will be addicted to the West," Alexei Gordeyev, Russia's Minister of Agriculture, told the Rossiiskaya Finansovaya Gazeta.

Russia's poorly subsidized farmers simply can't compete with their heavily assisted counterparts in Europe and the United States, said Sergei Guriev, a senior researcher at the Center for Economic and Financial Research, a Moscow-based think tank. Government officials and negotiators are now trying to figure out how to handle those subsidies.

"This is a very serious question that is now being discussed in [the] WTO," Guriev said. "The developing countries are demanding that the West open the market. Some partial concessions will take place, but what exactly will happen, no one knows."

About 27 percent of Russia's population lives in rural areas, and most of those are dependent upon agriculture. World Bank figures show the industry was worth $32.28 billion in 2000.

But, of Russia's agricultural producers, the World Bank found that 48 percent of them lost money that same year.

"The market is spontaneous; we survive on our own," said Yury Kostyuk, head of the agriculture department at GK Rusagro, a company that grows, processes and sells a variety of products including grain and livestock.

Kostyuk named the "catastrophic disparity in prices" as one of the main barriers to local agricultural development: Compared to 1990, prices for heavy machinery, oil and fuel have increased 20- to 30-fold. But supermarket prices have only increased five times, Kostyuk said.

Now, in its continuing quest to fully privatize Russia's economy and gain entry to the WTO, the government is stepping into this struggling industry to try to modernize agricultural policies.

"Today in front of us are discriminatory conditions [for entering the WTO] in the agricultural sector," said Arkady Zlochevsky, head of the food-market control department of the Agriculture Ministry. The government's task, he said, is to change those conditions, in part supporting local producers and encouraging exports.

Zlochevsky named state intervention into the grain market – allowing state purchases of grain to stabilize prices – as one of the government's main protective measures last year. Other steps aimed at supporting local producers included interest rate subsidies on loans to producers, and unified tariffs for grain transportation. Russian grain for export can now be loaded at ports under internal tariffs that are two-and-a-half times lower than export ones.

Zlochevsky also said last year's creation of a state supervisor to regulate leases of heavy machinery will assist small farmers in expansion. Previously, private operators set the rates and conditions of payments.

Part of the challenge for both government officials and producers is dealing with poor planning from the past. Zlochevsky blames the discrepancy between producers' costs and their share of the end supermarket price, which Kostyuk criticized so heavily, on outdated state policies on imports which caused a "colossal" surplus of grain.

In 1992, when people started panicking over food shortages, Russia imported 26 million tons of grain. Official statistics show that year Russia harvested 103 million tons of grain, to feed a demand of 130 million tons. But Zlochevsky says the Russian harvest was actually much higher, leaving an enormous surplus that fed Russia until 1995. Official statistics were skewed by farmers underreporting their harvest to minimize taxes, as well as government officials who may have been trying to justify imports.

"The state policy was built on crooked data," Zlochevsky said. The price discrepancy also grew sharply after a bumper crop in 1997 that dropped food prices, and was not assisted by a crop failure the following year. Last year, despite a plentiful crop of 85 million tons of grain, the state managed to keep prices at the same level and increase the area under cultivation, he added.

While government officials debate subsidies for agriculture producers and eagerly anticipate WTO entry, the prospect does little to boost farmers' spirits. Kostyuk said that he does not expect "anything good" for his company if Russia enters the WTO at the end of 2003 as scheduled. Nor are grain producers the only ones concerned: those producing vegetables and livestock are also worried.

"I am asking for equal conditions. I am not asking for privileged conditions," said Kostyuk. "Our business will just die because it will not be able to stand the competition [on basic products like meat, milk and butter]."

Sergei Filippov, general manager and co-owner of Fruchttrink, a Russian company that grows, processes and sells with the help of some foreign investment, said the supermarket price of vegetables grown in Bunyakino, a village outside Moscow, is just slightly lower than that of imported ones. He said local producers' costs are 30-40 percent higher than those in the West, in part because of high taxes and transportation expenses for imported seeds and machinery, which are preferred over lower quality domestic products.

Kostyuk complained of a similar situation in raising livestock. He said the cost to produce one kilogram of Russian meat is 50 rubles ($1.70), while one kilogram of imported meat sells for 44 rubles.

Kostyuk, like other agricultural producers, is seeking a six- to eight-year transition period with subsidies for Russian industries of $6.2 billion to cope with an influx of inexpensive imports, and also wants to see protective measures such as taxes and quotas on imports – neither of which are likely to be embraced by WTO authorities.

Guriev, at the Center for Economic and Financial Research, said Russian subsidies today amount to about $1.5 billion, far less than those used in the West. He said making local producers competitive after entering the WTO requires one of two policy changes: removing state subsidies from Western products, or increasing state subsidies from Russia's government. He believes Russia will choose to increase subsidies.

But Zlochevsky said removing subsidies on imported meat – one of his government's goals – would increase the price of imported meat to 72 rubles per kilogram and leave Russian producers quite competitive. He argues that simply increasing taxes on imported meat, as many producers demand, is not the answer since the burden falls on the consumer. World Bank figures show imported meat now makes up 20 percent of sales in Russia, an amount not easily compensated for domestically.

"We still consume an insufficient quantity of meat [for good health]," he said, adding that a price hike would lower consumption further. "If we reduce imports, this will [influence] the sale of our own products... People will not buy meat."

Zlochevsky said the way out may be through a tariff quota, which the state now uses only when regulating economic policy with developing countries. He added that, in February 2001, lawmakers tried to expand the tariff quota for all countries but the amendment was rejected by the Duma twice. Meanwhile, the imported share of the market has grown drastically over the last three years: 260,000 tons in 1999, 680,000 tons in 2000 and 1.3 million tons in 2001, Zlochevsky said.

Another coping mechanism may be to encourage exports to other countries, which would also require government assistance. Guriev said oilseed crops grown in Russia, such as flax and canola, are quite competitive and could be exported.

"Our hands and feet are bound by WTO entrance, international obligations and our own laws," Zlochevsky said. "[But] the ice has shifted. There is an understanding among the government that its [support] is necessary."