Russian milling embraces rapid shift to privatization
July 01, 1994
by Teresa Acklin
A review of the 1994 General Assembly of the International Milling Association
The problems, trauma and progress faced by the Russian flour milling industry in moving in a relatively few years from rigid central control to operating as independent businesses free of regulation provided a fascinating subject for the 1994 General Assembly of the International Milling Association held recently in Florence, Italy.
Vladimir Efremov, chairman of the Russian Millers' Association and a former vice-minister in the once all-powerful Ministry for Cereal and Bread, made a last-minute appearance on the assembly program.
He related how flour milling in Russia had been transformed to being “highly developed and extensive,” as a business worthy of serious consideration for joint ventures by Western companies and investors interested in exploring opportunities in the Russian market for flour and bread.
Indeed, Mr. Efremov underscored how millers in his country eagerly looked forward to re-establishing relations with millers of the West.
He said contacts already had been established with companies making milling equipment, and he estimated that 30% of the mills in Russia had been “modernized” in the past five or six years. “We do have modern mills that are capable of producing high quality flour,” he added.
“We millers have mutual interests. We are linked together by roots extending back many years. Prior to 1917, Russia sold both flour and wheat to Europe and even to America.
“Today, we cannot claim to be your competitors in any of these markets, but we are anxious to reinstate the contacts from the past, and who knows what the future may hold?”According to Mr. Efremov, the commercial Russian flour milling industry is made up of 355 milling plants with a total capacity to produce annually 20 million tonnes of flour. He declared that 63% of these mills had a daily capacity of more than 150 tonnes, and that 24% of the plants had a daily capacity above 250 tonnes.
In reviewing events since Russia embarked on a program to end state ownership and move toward private ownership, Mr. Efremov said flour milling was decontrolled in 1991 with the abolishment by presidential decree of the old Ministry for Cereal and Bread, of which he had been vice-minister.
He recalled that this Ministry operated through three tiers of tight controls central authority in Moscow, regional authority and milling management selected by Moscow. “This system seriously constricted each mill's decision-making and required that everything be done according to rigid plan,” he said.
The initial decontrol steps in 1991 not only dissolved the apparatus of the old Ministry, but also established a new non-state body, a corporation that was designed to own the mills and to operate in procuring wheat and supplying flour through an extensive system of contracts.
While acknowledging that privati-zation in Russia is “an extremely complicated matter and is difficult to explain,” Mr. Efremov stressed the importance of realizing that privatization in Russia involves steps different from those pursued in any other country following a similar course.
“We have privatization especially made for Russia,” he said, noting that the people in charge had tried to learn from the mistakes and successes of other nations.
When it came to flour milling, the first stage in removing state control was to place 49% to 51% of the ownership of each plant in the hands of the work force, including the managers. The state retained ownership of the balance in this initial stage.
Mr. Efremov estimated that about 80% of the mills in the Russian Republic had gone through this first stage of privatization. He said the Russian Association of Millers, which he headed, met with the managers of the mills still under state control to discuss the best way of achieving privatization. Mr. Efremov cited the law allowing joint ventures with Western companies and investors.
In the second stage, the state is seeking to reduce its ownership by the auction of shares to public buyers who may only use vouchers created for the purpose of share buying. No shares may be bought for cash at this stage. The third phase of milling privatization will come about when shares in the individual milling enterprises are bought and sold for cash in an open auction market, Mr. Efremov said.
In noting the many problems that Russian milling faces in the execution of this privatization program, he said the principal difficulty was not in updating milling plants, which may be done over a few months, but in having the plants managed by people “who are not ready for this privatization process.”
Mr. Efremov pointed out that the old managers still had control of many of the mills and that they were not “able entrepreneurs.”
He stressed, “While we can rebuild our mills in a relatively short period of time, changing the personality of managers and workers to accommodate to the market system is not easy.”
This is a particularly serious problem in light of the removal of nearly all controls on the flour mills. Plants may buy wheat on a free market and may sell their flour and feed products freely. Because of poor crops of the past year and concern over this year's harvest, he said he doubted whether Russian mills could sell flour for export, if that was a desirable outlet.
At the same time, he noted that mills were affected by the decision of the government to maintain price controls on bread. Mr. Efremov said bakers in Russia also were currently undergoing the process of privatization.
Whereas bread production a few years ago under total state control was the sole domain of huge baking plants (bread factories), the freeing of the economy has witnessed a proliferation of small baking plants making loaves to capture purchases by consumers who can afford to pay.
Mr. Efremov said that in some instances, alliances had developed between millers and bakers. The result is a number of baking operations being directly linked with mills.The 1994 General Assembly of the International Milling Association (Association Internationale de la Meunerie) attracted a total attendance of nearly 200. Following is a list of the national milling associations represented and the number of delegates in attendance, including spouses:
Flour milling values in selected countries
A highly informal survey during a luncheon of the General Assembly of the International Milling Association in Florence, Italy, provided insight into relative flour prices, wheat costs and millfeed credits around the world.
In sampling millers from Russia, Britain, Italy, Switzerland, the United States and Morocco, World Grain established a monetary flour value of 100 based on each country's currency, along with wheat costs and millfeed returns in relation to that flour value index.
The survey determined that flour milling is “best,”or most profitable, in Russia, where wheat costs in relation to flour prices are the lowest and millfeed returns are the highest. It was indicated that any advantage U.S. mills may have in relatively lower wheat prices was more than made up for by relatively lower millfeed credits. The measurement of profitability did not include flour extraction rates and other cost considerations.
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