Collective farm system

10 October 2018, 08:07

This month, the Belarusian media reported on the bankruptcy of the company Stotz Agro-Service. This is almost the only agricultural enterprise in Belarus with foreign capital. Official state newspapers and radio hailed its creation as recognition of the success of the Belarusian agricultural model by Western businesses. Here is its ignominious ending.


More alive than dead?


If you look at the shelves of Belarusian, Ukrainian and Russian shops, you might think that Belarusian agriculture is flourishing. The range of exported products is impressive. There are practically no quality issues, except for "political" reasons. Those more informed about the "food wars" know that Russian agricultural safety watchdog Rosselhoznadzor regularly gives Belarusian meat and dairy enterprises a good dressing down, limiting exports first from one industry, then from the other. Belarusian officials invariably reply that Russia is the only country that complains about the quality of our products. Indeed, enterprises of the Belarusian Ministry of Agriculture and Food supplied products to 70 countries around the world in 2017. Last year, exports of agricultural products by enterprises with various forms of ownership amounted to 4.905 billion dollars. So it would seem that all is well, but… it is not actually that simple.


In 2016, the share of unprofitable agricultural enterprises in Belarus amounted to 65.6%. According to results for 2017, 62% of agro-industrial enterprises remained unprofitable. It turns out that more than half of the collective farms can not only not make ends meet, but are also "in the red".


How is that possible at all?


Whatever the cost


As is well known, Alyaksandr Lukashenka was a collective farm director before he came to power. His thinking has not changed since then. He does not know and does not want to know about any form of working the land other than collective and state farms, nor about any type of economy except a planned one. In addition, Lukashenka is a vivid example of a populist leader. Almost every New Year, he orders the country's numerous regulatory bodies to monitor pricing to make sure the "profiteers" cannot raise food prices during the holidays so that the people can celebrate them "properly". De facto, this means government regulation of prices.


In addition, the state has retained the system of public procurement. As a result, like in the USSR, agricultural producers cannot independently form a price for their products. The collective and state farms were renamed into Agricultural Partnerships and Joint-Stock Companies, but in essence, they remained under state control (production volumes and purchase prices are set by state bodies, which also appoint farm managers). As such, they inherit all the advantages and disadvantages of the state system. From state support and subsidisation (a plus) to the requirement to maintain social infrastructure and the number of jobs (a minus).

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Not by skill, but by numbers


The biggest disadvantage of Belarusian agriculture, which makes it chronically unprofitable, is that it is not managed by the farm operators at all. Decisions on the development of the agro-industrial complex are taken by people who are far away (sometimes very far away) from the realities of agriculture – all the way up to the top man in Belarus. It will suffice to quote one phrase from Alyaksandr Lukashenka that has already entered textbooks on political rhetoric alongside the aphorisms of former Russian PM Viktor Chernomyrdin. In the early 2000s, when there was a shortage (what a forgotten word!) of certain products in Belarusian shops, the president rued, "As soon as I grabbed the eggs, the milk was gone!"


This aphorism cost Belarusian agriculture dearly. On the initiative of Lukashenka, it was decided to focus on the development of dairy cattle breeding in 2005-2006. Then-minister Leanid Rusak tried to show the president that this project would cause the country losses, since the cost of Belarusian agricultural products in collective and state farms is about one and half times higher than in Europe. He insisted that we must first reduce costs and only then think about dairy products. After one of his articles was published in the press (writing for a newspaper is an unprecedented activity for a Belarusian minister), he was dismissed. Rusak himself says that it was a mutual decision, but few believe that. Currently, Belarus is the third largest exporter of butter in the world, but its production is unprofitable.


Later, in 2012, Lukashenka started to worry about the production of marble beef. "The Party said it is necessary!" and a considerable amount of funds was allocated for this project. Pedigree bull calves were purchased in America and production was established, but that too was unprofitable for one simple reason: the export price of Belarusian milk, meat and sausages is one thing, but the domestic purchase price for which the farms have to sell produce is quite another.


Belarusian collective and state farms exist, live and survive thanks to enormous state support. The agro-industrial complex has turned into a black hole in the economy. According to former prime minister and now speaker of the upper chamber of parliament Mikhail Myasnikovich, funding of state programs for the agrarian and industrial complex in 2011-2015 amounted to $43.8 billion. In other words, over just four years, agriculture "ate" almost the annual GDP of the country!


According to estimates from Belarusian economist and head of the Mises Research Centre Yaroslav Romanchuk, the state allocated about $100 billion to supporting the agro-industrial complex from 1995 to 2015. This only includes state programmes. Which does not take into account the fact that $2-3 billion are invested in the "battle for harvest" (as Belarusian state media call the sowing and harvesting period according to Soviet tradition) as agricultural subsidies for spare parts, fuel, seeds and purchasing equipment…


What to do


At the same time, it cannot be said that the Belarusian authorities did not try to do anything at all with the collective and state farm system in order to make its operations profitable (or at least not unprofitable).


The thoughtless "modernisation" of agriculture (see the above examples of butter and meat) has driven most enterprises into a debt hole: the billions of dollars poured into the agro-industrial complex are officially considered to be development loans. They are unable to pay them off independently and the "restructuring" of loans and new subsidies sink them even deeper into debt.


At first, the authorities decided that loss-making agricultural enterprises could be combined with more successful ones, consolidating farms and creating agroholdings. The idea was that their managers would teach the others how to work. But here's the problem: no one ever planned to write off the debts of the unprofitable enterprises at the same time. As a result, not only did it fail to raise the level of collective farms that were lacking behind, but also ruined those that were operating more or less well, transferring the debt burden onto them.


Then came the idea to "sell" unprofitable collective farms to private individuals at a symbolic price – more or less for 1 rouble. Few were tempted by this either. After all, when buying such an enterprise, the new owner automatically receives the unpaid loans and debts that need to be settled. In addition to social obligations, i.e. the impossibility of reorganising a collective farm into another enterprise or dismissing its workers. Of course, no one was willing to buy under such conditions.


One of the most "Soviet" attempts was to attach agricultural enterprises to more or less successful industrial enterprises and other organisations (for example, banks). Do you remember how in the USSR workers, engineers and students were sent to "affiliated" collective farms to dig for potatoes? This idea did not work out either, because the "bosses" were, for the most part, not too interested in such a management model.


The most high-profile attempt if not to reform, then to "raise up" the collective farms was the construction of so-called agro-towns. In other words, creating infrastructure in the countryside similar to that in cities. It was expected that this would stop the outflow of young people from rural areas to cities, as well as filling collective farms with young, energetic and ambitious personnel. New cottages, clubs and shops were built in villages. Some people, of course, were tempted by the opportunity to move into "their own house" immediately after being employed at the collective farm. Then it turned out that there was no sewage system or utilities available there (they were built in a rush), and actually the house was not "their own", but owned by the agricultural enterprise, and salaries in the village are meagre, and there are no opportunities to do some work on the side to feed the family… As a result, a third of the "tidy cottages for rural workers" that Lukashenka loves to brag about are empty.


Such attempts only increased the debt load and raised the arrears rate of Belarusian agribusinesses. After all, the half-empty agro-towns were not built for free originally and now they have to be maintained… The fact that everything has to be paid for does not seem to have crossed anyone's mind – Lukashenka gave the order!


There’s a way out, but it’s not there


Is it possible at all to make Belarusian agriculture turn a profit? Of course it is. For example, Mikhail Shrub owns a farm in the Zhytkavichy District, close to Ukraine. It occupies slightly more than 3% of the district's land area, but provides 25-30% of all its agricultural revenues. His sales margin is about 25% and net profit for the past five years is $4.3m.


According to Shrub, only three things have to be done for agriculture to function properly. First, introduce a mechanism that allows debt accumulated by the enterprise to be restructured. Secondly, privatise the enterprises of the agro-industrial complex, taking into account the interests of those who work there. "The state should share responsibility for the results of farming with the people by allowing owners to make decisions and be responsible for them," says Shrub. The main thing is to deal with the issue of allocating land to farms. "The current legislation actually makes us dependent on getting consent from the current land users, i.e. the manager of the collective farm. If he refuses to give the land to the farmer, there are no consequences. Not even land that isn't being used properly will be taken away from collective farms! A dependable mechanism is needed to take it away from inefficient users and transfer to successful ones. This is not just about the introduction of private land ownership, but also leasing. The contracts should be inviolable: if you rent a plot for 25 or 99 years, you should be confident that it will not be taken away before then," says the farmer.


It should be noted that Shrub got his "own" land in the early 1990s, before Alyaksandr Lukashenko came to power. While the first and so far only leader of Belarus has been in power, he has tried to expand his land allocation more than once, but always unsuccessfully. Even a personal meeting with the president in 2010 did not help: he was delighted with the farmer's management skills, but did not grant him any more land.


Private land ownership is a fundamental issue for investors. After all, land is the means of production in agriculture, so what sort of investor will put up money for something where he does not own this resource?


This correspondent once visited the farm of JMR Flowers, one of the largest flower manufacturers in Poland. Its founder Jarosław Ptaszek asked if he could buy 10 hectares of land near Minsk to put some greenhouses there, bringing his technology, seeds and know-how with him… The Belarusian journalists were forced to answer that there is no such thing as private land ownership in their country. "Then the issue is closed," the businessman resigned. Meanwhile, Belarusians still have to buy tulips, roses and orchids imported from Ptaszek's Polish farm.

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Not in this life


What does it mean for Lukashenka to introduce private property? That he will cease to be the sole "master" of the country. You cannot give a private owner orders what to plant and when to sow it. They will set the prices for products themselves and sell them to whoever will pay the most. At the same time, the much-vaunted Belarusian "food security" will fall into oblivion.


It will not be possible to force private owners off their land. They will not oblige their employees to cast the "right" vote when elections come around. They cannot be dismissed by decision of the local government and left without a job.


The introduction of private land (and not only land) ownership threatens the existence of the Belarusian system of government and Mr Lukashenka personally. Therefore, despite the packed shelves, Belarusian architecture will remain chronically unprofitable and eternally subsidised by the state, eating away at the budget and GDP. There is no other way for it to operate in the current circumstances.

Translated by Jonathan Reilly

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