The Mystery of Russian Grain Exports: It’s the Prices, Stupid!

A Soviet joke: A hick from the north is asked by his friend to bring back meat from Moscow. “I don’t know Moscow,” he responds. “How do I find meat?” Answer: “Just go stand in the longest line you can find.” The original punch line: The hick returns with no meat. He spent all his time standing in the line at Lenin’s mausoleum! My new punch line: The hick returns without meat and tells his friend: “I have brought you bread, instead.” Most readers will not understand what is going on. It is a joke because bread was the one food product you could buy anytime and anywhere. My joke sheds light on why Russia (and Ukraine) are again major grain exporters, despite the fact that grain production is no greater than in the 1970s and 1980s when Russia was a major grain importer. It also explains one of the reasons for the collapse of the USSR: the fact that low bread prices imposed huge costs on the Soviet state, exceeded only by its huge defense burden.

Let me start with some facts: Russia became Europe’s breadbasket in the 1870s. It was only around the turn of the century that the United States matched Russia in grain exports. Under Stalin’s rule, agriculture was collectivized and the best peasants deported, imprisoned or killed. By 1972, the Soviet Union started importing huge quantities of grain from the United States and other countries, driving up world food price throughout the rest of the 1970s.

Agriculture has been slow to reform after the breakup of the Soviet Union. The rural population is old; it is still not legal to buy and sell agricultural land; and there have been no substantial new investments in agriculture. Russia, in the last three years, has averaged around one hundred million metric tons of grain; The Russian Republic’s contribution to USSR grain production was also about one hundred million metric tons in 1985, a year in which one fifth of grain consumption had to be covered by imports.

Contemporary Russia has transformed itself from a grain importer to exporter not because it is producing more. It is consuming less grain domestically, leaving a “surplus” for export. Skeptics may say that this is a sign of poverty, that the Russian diet is deteriorating. It is the opposite: Russians no longer have to make do with just bread. They can buy what they want with the money they have. For the older generation, this is a novelty. In the Soviet period, the state set food prices low. After all, this was a worker-peasant state and food should be affordable to all. Low food prices were not simply an act of benevolence on the part of the leadership. Attempts to raise food prices were met with bloody riots, such as in Novocherkassk in June of 1962. After 1962, there were no more attempts to raise food prices, except by stealth. Party leaders could not forget that the Bolshevik Revolution began with bread riots in March of 1917. Communist functionaries thereafter lived with fear of a bread riot in their district. Near the end of Gorbachev’s chaotic rule, rumors of shortage could still empty bakeries of bread.

At low food prices, consumers had to stand in line for just about everything. They often returned home without the goods they wanted, but at least there was always bread, which cost only a few kopeks. Bread was like a safety valve into which unspent food money flowed. In effect, the Soviet state had an implicit contract with the people that they could always get cheap bread, no matter what. Cheap bread, however, also met waste. Throughout the Soviet period, there were accounts of peasants feeding bread to hogs.

This implicit contract sounds noble, but it had unintended consequences that hastened the end of the Soviet Union: It caused the USSR, with some of the richest agricultural land in the world, to become a grain importer. State agricultural subsidies became the second largest item (behind defense) in the state budget. Food problems revealed to Soviet citizens the weaknesses of the system.

The commitment to make bread available to all at a dirt-cheap price meant that there had to be enough of it. In terms of real economic costs, Soviet bread became among the most expensive in the world. Because its retail price was below the cost of production; state subsidies to state and collective farms equaled around four percent of GDP (more than the cost of running the entire government). Even that was not enough. There was no way Soviet agriculture was going to produce enough grain to satisfy the artificially-inflated domestic demand. Starting in 1972, the Soviet Union began to import large quantities of grain, which it paid for with foreign credits and energy exports. These policies made the contradictions of the Soviet system apparent to all: The country that should have been the bread basket of Europe was forced to import grain, paying for it with its earnings from the one product that it could sell at a profit in world markets – energy. When world energy prices were low, the Soviet Union had to borrow from the West, accumulating foreign debt that reached alarming proportions by the standards of the time. All of this to make sure that any and every family could buy bread for kopeks.

We economists (not all) tend to preach the “allocative efficiency” of market prices. We warn that rent controls, subsidized interest rates, and other interventions into the price system have unintended consequences that overwhelm the original “good” intention. In the case of Russia, the almost incalculable unintended consequences are evident from a “natural experiment.” We see a Soviet Russia with low prices of food products but bread prices are particularly low. We then see a Russian Federation with market prices for food. In both cases, the domestic production of grain is about the same. In the Soviet case, food subsidies consume a large portion of the state budget, scarce foreign exchange is used for grain imports, foreign debt is piling up, and people cannot buy the food products they want. In the Russian Federation case, food subsidies have disappeared, the country is earning foreign exchange not only from energy but also from grain, foreign debt is being repaid. In the Soviet Russia case, the country is hostage to grain suppliers. In the Russian Federation case, Europe is hostage to Russian natural gas supplies and world grain prices are affected by Russia’s export policies.

There will be a sequel to this piece. It shows that Russian agriculture is still in the early phases of reform. It is producing about the same amount as it did during the disastrous Soviet period of collective and state farming. When Russian and Ukrainian agriculture reach their potential, world grain markets will be changed forever. We do not know how long we will have to wait to see this happen.