1

Deliverable 4.4: Report on institution and supply chain performance Submission date: December 2016

This project has received funding from the European Union’s Seventh Framework Programme for Research, Technological Development and Demonstration under grant agreement no 612755

Herzfeld, T.1, Kulyk, I. 1, Wolz, A. 1 1 Leibniz Institute of Agricultural Development in

Transition Economies (IAMO)

2

Abbreviations and acronyms

BEEPS: Business Environment and Enterprise Performance Surveys. CA: Central Asia. CEEC: Central and Eastern European Countries. COMECON: Council for Mutual Economical Assistance. DCFTA: Deep and Comprehensive Trade Agreement. EAEU: Eurasian Economic Union. EBA: Enabling the business of agriculture. EBRD: European Bank for Reconstruction and Development. ECA: Europe and Central Asia. ETI: Enabling Trade Index. FSU: Former Soviet Union. GNI: Gross National Income. ISIC: International System of Industry Classification. SPS: Sanitary and phyto-sanitary. TFI: Trade Facilitation Index.

Acknowledgement We gratefully acknowledge research assistance by Nadeshda Onofrei and Katerina Momcheva. Additionally, we acknowledge support during the development of the survey and comments on an earlier version of this deliverable by Siemen van Berkum.

3

Table of Content

Executive Summary ..................................................................................................................................... 4

1. Introduction and Background ................................................................................................................. 6

2. Perspectives from previous literature .................................................................................................... 7

2.1 On the business environment ..................................................................................................... 7

2.2 On agricultural trade integration ................................................................................................ 8

3. Quantifying institutional quality ........................................................................................................... 10

3.1 Description of available data .................................................................................................... 10

3.2 Introduction of data used in analysis ........................................................................................ 13

4. Major obstacles to business operation ................................................................................................. 16

4.1 Corruption ................................................................................................................................. 18

4.2 Competition with informal competitors ................................................................................... 19

5. Food safety issues and standards ......................................................................................................... 20

6. Conclusions ........................................................................................................................................... 25

References ................................................................................................................................................ 26

Websites and Statistics ............................................................................................................................. 29

Annex: List of food safety laws by country ............................................................................................... 30

4

Executive Summary

The main goal of the EU 7th Framework Programme project AGRICISTRADE is to assess the trade potentials of the CIS 8 (Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Moldova, Russia, and Ukraine) agro-food sectors. Since the early 1990s, the countries have started a transition from a centrally planned to a market-oriented economy. In the context of agricultural production and trade, economic and institutional reform meant the abolishment of central controls and planning, privatisation of production assets, reductions in government intervention in internal markets and business development, price and trade liberalisation and economic stabilisation. The eight countries covered by this project progressed at different speed and with different ambitionson this reform agenda. Last but not least the efforts of some of these countries to engage in deeper integration with the European Union and others to establish a separate trade agreement underline the heterogeneous views on the status to be reached though the transition process.

Besides formal policies, scholars realised already quite early during the 1990s that a broader set of institutions matters in determining economic restructuring and growth. Against this background we have attempted to analyse the the business environment and obstacles to further trade integration for agribusiness. More specifically, we investigate the present insights from enterprise surveys across all eight countries of the Former Soviet Union neighbouring the European Union and Kazakhstan (CIS-8). Furthermore, these insights will be complemented with a very recent survey among traders of grains, meat and dairy products in these countries. Besides the identification of perceived major obstacles to business operations, the paper presents an analysis of differences across countries and the perceived business obstacles. Furthermore, a cursory description of food safety and trade classification systems across the CIS-8 countries will be provided as earlier literature repeatedly mention the lack of harminsation of standards as one remaining important trade barrier.

The empirical analysis of obstacles to business presented in this deliverable bases on the Business Environment and Enterprise Performance Survey (BEEPS) and the AGRICISTRADE survey covering firms in food manufacturing and agricultural trade. All surveys have been conducted between 2012 and 2016. Whereas the BEEPS sample covers responses from all eight CIS countries within this project, the AGRICISTRADE survey covers only six out of the eight countries.

The results show a rather heterogeneous picture. While traders mention customs and trade regulation, certification requirements and permits as well as taxes as the three most important obstacles, food manufacturers mention tax rates, corruption as well as political instability most often. Due to the limited sample size meaningful country-level results are available for the BEEPS sample only. Asked about the biggest obstacle to business operation Access to finance has been named in Belarus, Kazakhstan and Ukraine, Corruption has been mentioned in Kazakhstan and Moldova, Tax administration in Armenia, Tax rates in Russia, Practices competing with the informal sector in Azerbaijan and Political instability in Georgia. Looking closer at the issue of corruption, one-fifth of the respondents to the BEEPS agree with the statement that private payments or gifts to local officials will have a moderate or high direct impact, whereas the rate of agreement drops when asked about parlamentarians or government officials. Finally, while close to one-third of respondents to the AGRICISTRADE survey report a moderate competition with informal firms in local trade, among the respondents of the BEEPS both answer options ‘moderate competition’ and ‘major or very severe competition’ received close to one-fifth of the responses each.

This work may be regarded as preliminary. Especially low response rates and relatively high frequencies of ‘no answer’-options in the AGRICISTRADE survey limit the analytical potential of the datasets. Follow-up studies need either to broaden the samples or to swith to case study analyses in

5

order to receive more transaction-specific evidence. Furthermore, the obvious discrepancy between micro-level data and internationally established rankings of corruption in the case of Belarus call for a careful interpretation of the results.

Keywords: Agribusiness; Quality of institutions; Business obstacles; CIS countries

6

1. Introduction and Background

On average and in comparison with the new EU Member States, the eight CIS countries (CIS-8) show a rather slow economic transformation into market economies. Using the EBRD transition indicator and focusing on the sub-index of trade and foreign exchange rate liberalisation shows that the now EU Member States among the transition countries liberalised very quickly. Their country values reached already in 1994 an average of 4 (full market economy). The average for the CIS-8 stayed at that time around 1.6 and passed a value of 3.5 in 2002 only (EBRD, 2016).

A number of authors described the development of international trade after the breakdown of the COMECON and the Soviet Union (e.g. Gorton and White (2009) and literature cited herein). Recently, the integration into international trade is differing across countries. Whereas firms in successor states of the former Yugoslavia show comparatively high trade participation, the Russian Federation, Kazakhstan, and Azerbaijan (only with respect to exports) are among the least integrated countries. Data from the Enterprise Surveys suggest that across all countries of the ECA region the food sector shows the lowest trade intensity compared to other manufacturing industries (Seker, 2010). Based on the widely accepted indicator of trade-to-GDP ratio, openness to trade ranges between 53 and 120 per cent of GDP (World Development Indicators, 2016). Whereas Russia, Azerbaijan and Armenia report ratios of 53, 70, and 75 per cent, respectively, Belarus and Moldova head the list with ratios of 115 and 120 per cent.

Furthermore, an increased activity of negotiating regional trade agreements promoted the division of CIS countries into two economic blocks. While three countries signed agreements with the EU (Georgia, Moldova, Ukraine), others joined the Russia-led emerging Eurasian Economic Union (Armenia, Belarus, Kazakhstan, Russia) while Azerbaijan remains somewhere in-between. These political developments directly affect trade flows as can be illustrated in the case of Moldova. While 50 per cent of Moldovan exports went to CIS countries in 2000, this share declined to less than 40 per cent in 2013 whereas the EU accounts for half of Moldova’s exports. For vegetables and foodstuffs this shift to EU markets is even more evident (Mera, 2016). However, as described by Gorton and White (2009) and Disdier, et al. (2008), quality standards, both private and public, act as critical gatekeepers to Western markets which is fundamentally different within the CIS market where standards are less important. However, the authors identify Russian language skills as one important asset required to orient in business networks of CIS countries.

Against this background, this report analyses the business environment and obstacles to further trade integration for agribusiness. More specifically, we investigate the present insights from enterprise surveys across all seven countries of the Former Soviet Union neighbouring the European Union and Kazakhstan (CIS-8). Furthermore, these insights will be complemented with a very recent survey among traders of grains, meat and dairy products in these countries. Besides the identification of perceived major obstacles to business operations, the paper presents an analysis of differences across countries and the perceived business obstacles. Furthermore, a cursory description of food safety and trade classification systems across the CIS-8 countries will be provided. This deliverable figures as a complement to AGRICISTRADE Deliverable 4.1 (Wijnands, et al., 2015) which uses similar indicators in order to assess the competitiveness of agrifood chains. However, the delivarable does not go beyond governance indicators measured for the whole economy.

7

2. Perspectives from previous literature

2.1 On the business environment

The business environment, defined as a combination of formal and informal institutions, physical infrastructure, human resources, and geographic features, influences the efficiency of firms and industries. Incentives to invest and where to invest are directly and indirectly shaped by the business environment. One central theoretical argument is that in countries with weak institutions contracts between private economic parties as well as between private economic parties and publc authorities tend to be incomplete. That is, the fulfilment of a given contract will be uncertain and/or the enforcement by a third party will be impossible. Eifert, et al. (2008) provide an empirical illustration using data of manufacturing firms across developing countries in Africa and Asia. The authors demonstrate that manufacturing firms’ indirect costs related to transport infrastructure and public services account for a relatively high share of firms’ total costs. Inappropriate policy and institutional frameworks are among the most relevant factors associated with poor performance of agricultural sector in developing and transition economies (Chang, 2012). Dethier, et al. (2010) provide a review of the existing literature using micro level data.

Common arguments state that a poor business environment, unpredictable changes in policies, corruption, and capture of the state by the political and economic elites have a significant negative impact on the FDI inflows and sales’ growth (Kaufmann, et al., 2003). However, with respect to corruption two opposing arguments persist in the literature. Corruption could act as a strategy to circumvent restrictive regulation (“grease the wheel of commerce”) and at the same time increases transaction costs by providing incentives to maximise regulation or undermine enforcement of regulation at the costs of others (i.e. consumers, competitors, general public). Analysing the impact of corruption on investments, Campos, et al. (1999) conclude that more predictable attempts to request bribes are less harmful to investors compared to more unpredictable environments.

Looking closer at the transition economies, a number of studies provide empirical evidence of the relationship between bureaucracy and corruption as well as its consequences for firms. For repeated waves of the Business Environment and Enterprise Performance Survey (BEEPS) conducted in 26 transition economies between 1999 and 2005, Duvanova shows that excessive bureaucratic requirements are positively correlated with the level of corruption (Duvanova, 2014). Furthermore, privately created firms report higher corruption costs and foreign owned firms report a lower level of corruption. However, the hypothesis of no correlation between the degree of economic reforms, measured by the EBRD transition indicator, and the cost of corruption cannot be rejected. Clarke and Xu (2004) analyse bribe takers and bribe payers in 21 transition economies of Europe and Asia. Their results indicate that de novo private firms and more profitable firms, respectively, are more likely to pay bribes. Based on BEEPS panel data Mera (2016) analyses determinants of Total Factor Productivity (TFP) of firms in 32 European and Central Asian (ECA) countries surveyed over eight years. The results suggest that the more corruption has been reported as major obstacle, the lower the productivity of firms.

Besides internal conditions for conducting business, international trade is affected by the business environment in various ways. Djankov, et al. (2010) demonstrate how delays in trading procedures affect bilateral trade negatively. Measuring trade delay by a composite measure of time to transport a standard container from a factory gate to the border, the authors show that agricultural exports as well as manufacture industry exports are lower for countries with a higher time delay of exports.

8

With help of a theoretical model as well as empirically using US import data, Levchenko (2007) provides evidence that countries with a better institutional environment capture a larger share of more institutionally dependent industries. Similarly, analysing industry-level trade shares, Nunn (2007) demonstrates that institutional quality has a bigger impact on the composition of trade than the sum of physical capital and skilled labour. A weak institutional environment favours institution extensive sectors like processing of raw materials compared to institution intensive sectors like manufacturing of automobiles, aircrafts or electronic equipment. Looking more closely on transition economies, Schuler (2003) compares the composition of trade flows before and after the first economic and political reforms. His results show that the more integrated countries in East-East trade lost most from disintegration due to the transition process. Furthermore, he finds evidence that weak institutions affect net exports of complex goods to a stronger extent.

Against the background of centrally planned legacy with pervasive controls and prohibitions in the state and household sectors, informal exchanges provided a welcome and broadly established means of business activities (see for instance Ledeneva (2008)).These practices did not disappear with the introduction of a market economy. While a number of authors provide a broad range of estimates of the informal economies’ size in transition countries, insights into the determinants of informal activities are rather scarce. As one exception, Smith and Thomas (2015) analyse the relationship between corruption, measured by reported economic crimes by capita, and informal business activities, measured by growth in electricity consumption deviating from growth of official GDP, across Russian regions. Although methodologically subject to discussion, their econometric results suggest a negative correlation between the activity of multinational firms and the size of the informal economy. Similarly, regions with a higher share of exports and imports seem to be characterised by a smaller informal sector.

2.2 On agricultural trade integration

The literature on trade intensification due to economic reforms and the political will to join the European Union (EU) has grown quite rapidly. Quickly after the start of the economic reforms and against the background of experiences in China and Viet Nam, scholars were very optimistic about prospects for trade integration and economic development (World Bank, 1996). After realising the declining output levels due to liberalisation and lack of competitiveness compared to Western agricultural sectors, expectations became more modest (see for instance, Tangermann (1994)).

A number of studies analyse the performance in trade integration of the transition economies. Based on trade performance during Soviet times, where inter-state trade has been higher compared to western levels (Djankov and Freund, 2002), estimates of future trade between the FSU and EU countries have been rather optimistic (Raballand, et al., 2005). However, countries’ trade performance is heterogeneous. For instance, Bussière, et al. (2008) prove that up to 2003 countries like Albania, Bosnia and Hercegovina, Moldova, Macedonia or Belarus have been far less open to foreign trade outside their neighbouring region than other transition economies. Looking exclusively at regional trade integration, the picture changes somewhat. Russia, Czech Republic, Hungary and Poland trade above average with their neighbouring countries, while Albania, Bosnia and Moldova still trade less than the sample average. The authors document a strong rise in trade integration with the EU due to economic and legal reforms for Bulgaria and Romania. However, this literature focuses on trade in general. Trade of agricultural and food products received much less attention.

Bojnec and Fertö (2012) provide evidence of a longer duration of agro-food exporter status for the countries recently acceded. As a consensus emerges that besides standard trade barriers like tariffs or quotas a broad range of additional factors could potentially inhibit trade. Such factors can be grouped

9

into other formal regulations like food safety and quality standards and informal trade barriers like weak contract enforcement or business networks (Anderson and Marcouiller, 2002); (Rauch, 2001).

The structural change partly caused by the introduction of EU food standards in the Central and Eastern European countries (CEEC) has been modelled by Rau and van Tongeren (2009). The authors use the case of the Polish meat sector to illustrate the pre-accession compliance process initiated by the trade liberalisation implanted in the pre-accession treaties. Thus, experience of Poland and other countries might be especially useful for countries like Georgia, Moldova and Ukraine which entered a similar institutional arrangement. Compliance costs consist of two parts: Fixed costs cover all necessary investments to modernise facilities and equipment. The change in production processes, including stricter documentation requirements, signifies a more variable compliance cost component. At the same time, the EU supported the adjustment process with substantial financial means. In the case of Poland, almost 40 per cent of the pre-accession financial funds went to agro-food processing (Rau and van Tongeren, 2009). As documented by Rau and van Tongeren, large processors were able to attract the greatest financial support.

Literature focuses increasingly on non-traditional barriers to trade (i.e. other than tariffs and quotas). With increasing interest in trade facilitation, efforts to quantify non-tariff trade barriers and the business environment of traders intensified. Over the last decade, a number of indicators and measures have been developed (see for example Maskus and Wilson (2001) on harmonized regulation, Hertel, et al. (2001) on standards, Wilson, et al. (2003) on four different aspects of trade facilitation among APEC members). de Sousa and Disdier (2002) show evidence of a stimulating effect of reforms of the legal framework in CEFTA countries on exports from the EU between 1995 and 1998. Finally, Mogilevskyi (2004) discusses potential factors which potentially impact trade between the CIS and EU countries. Among those factors which reduce the competitiveness of EU exports to the CIS are depreciating currencies following the Ruble crisis in 1998 and a contraction of foreign aid after 1999. In the other direction, Mogilevskyi argues that the existing high trade concentration (i.e. dominance of few products) of CIS exports to the enlarged EU and the short history of direct trade with the EU requires additional investments to explore new markets and to be abl to diversify the export portfolio.

Trade costs impose a substantial burden to producers who want to explore markets beyond their home country. Besides tariffs and non-tariff measures, trade costs cover all endogenous costs which cause a difference between export and import prices (Arvis, et al., 2013). There is empirical evidence that trade costs are highest for developing countries (Arvis, et al., 2013). For transition economies there is less evidence. One exception is Raballand, et al. (2005) which highlight the role of transportation costs especially due to low volumes, as one reason for the low level of exports from Central Asia (CA) to the EU/ low level of trade between CA and EU. Railway companies, still state monopolies, are accused to charge prohibitively high freight rates for small exporters.

Some scholars have been using econometric approaches in order to measure trade costs within the EU. Especially gravity-type models seem to provide a useful tool to quantify otherwise unobserved variables which tend to reduce the trade flow between country pairs (Chen and Novy, 2011, Novy, 2008). Besides transportation costs, these authors conclude that Technical Barriers to Trade and public procurement procedures impose substantial costs for trade integration.

In addition, agricultural markets are characterised by problems with access to tradable products, such as low shares of agricultural production by small households marketed, high costs of logistics, and/or uncertainty about product quality. In the case of Moldova, Gorton and White (2003) discuss these factors as barriers of supply chain development in dairy. Similarly, World Bank (2016) illustrates the result of a low attention for product quality in exports of apple, table grapes and plums from Moldova. A final impediment for agro-food trade especially towards Russia is the imposition of import bans by

10

the Russian government. Examples are for Ukrainian dairy products in January 2006 (Gorton and White, 2009), Moldovan wine exports starting in 2006 or a range of fruit, wine and meat exports starting in 2014 (AgraEurope (2006); Hutchison (2014)).

3. Quantifying institutional quality

3.1 Description of available data

A number of initiatives aim at quantifying the quality of the business environment in the countries of interest. Here the most relevant initiatives will be briefly introduced.

Enterprise Surveys (www.enterprisesurveys.org)

A series of surveys has been conducted by the World Bank covering currently up to 139 countries. Based on a stratified random sampling procedure following the strata firm size, business sector and geographic regions within a country, a varying number of manufacturing firms per country have been selected. Data for sampling are usually coming from business directories. Thus, informal establishments will not be included in the sample. Only establishments with more than five employees are included. Food manufacturers form a separate group within the manufacturing sector. The survey covers a wide range of business environment topics including general business characteristics, infrastructure and services, sales and supplies (imports, exports, supply and demand conditions), access to finance, degree of competition, crime (extent of crime and losses due to crime), business-government relations, investment climate constraints, labour, and productivity.

The Business Environment and Enterprise Performance Survey (BEEPS) form a subset of Enterprise surveys jointly conducted by the World Bank and EBRD in Eastern Europe and Central Asia. Regarding the CIS-8, survey waves have been conducted in all eight countries in the years 2002/03, 2005, 2008/09, and 2012/13.

Doing Business (http://www.doingbusiness.org/)

The Doing Business indicators encompass a set of 109 indicators summarised in 11 categories compiled by the World Bank. Dimensions covered include among others starting a business, dealing with construction permits, getting public services, getting credit, taxation, contract enforcement, cross-border trade, and labour market regulation. The indicators base on expert assessments and on analysis of laws and regulations. Data for the eight countries analysed here are available since 2005, for some economies like Russia even at the level of cities. However, due to the nature of the index quantitative information for the sector agriculture and food manufacturing is not available. The data set has been used, inter alia, by Jovanovic and Jovanovic (2013) to explain the determinants of Foreign Direct Investment into CEEC and Central Asian countries. The aggregated index as well as the subindices Starting a business and Getting credit have been included by Wijnands, et al. (2015) in their computation of Porter#s diamond.

Regarding the overall focus of the AGRICISTRADE project, business conditions for trading enterprises are of special relevance. Therefore, the indicator “Time to export” will be highlighted separately. The indicator has been developed as an outcome of a World Bank survey among trade facilitators assessing time and official costs required to transport a standard 20-foot container from the factory gate to the most common port, including transit through neighbouring countries (Djankov, et al., 2010). Both aspects, time and costs, are quantified for the case of export as well as import of this standard

11

container. The survey has been completed by at least two respondents per country across 146 countries for the first time in 2005. Currently, it forms a sub-index of the Doing Business indicator dating back to the 2006 issue of Doing Business.

Enabling the business of agriculture

The World Bank initiative Enabling the business of agriculture (EBA, eba.worldbank.org) aims at quantifying practices of regulatory dimensions in agriculture. Eighteen indicators cover the topic regulation with respect to seed, fertilizer, machinery, finance, markets and transport. They base on assessments by experts in each target country. A composite indicator, as one product of the assessment, ranges from 0 to 100 with higher values indicating better regulation. Current data and analysis are available for 40 countries, including: Georgia, Russian Federation, and Ukraine. Armenia, as one of the countries covered here, will be added soon.

Other trade related indices

The Enabling Trade Index (ETI) assesses “the extent to which economies have in place institutions, policies, infrastructures and services facilitating the free flow of goods over borders and to their destination” (p. 13). The ETI expresses the extent on a scale between 1 and 7 with higher values indicating a more enabling environment.

Based on objective trade data Moise, et al. (2011) and Moise and Sorescu (2013) construct the Trade Facilitation Index (TFI). The TFI bases on observed bilateral trade flows estimated using a gravity approach.

World Governance Indicators

Finally, compiling six indicators from more than 30 individual sources capturing dimensions of quality of governance Kaufmann, et al. (1999) developed the World Governance Indicators (WGI) (http://info.worldbank.org/governance/wgi/index.aspx#home). The compilation should reduce the influence of single sources and provide a wider coverage of countries worldwide. The six dimensions of governance are voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption. The indicators provided by the individual data sources represent survey responses as well as expert assessments. The aggregated indicators range from -2.5 to 2.5 with higher values indicating a better quality of governance. The most recent data (2015) include indicators for over 200 countries and territories including all eight counties covered by the AGRICISTRADE project. All six dimensions of the WGI have been included by Wijnands, et al. (2015) while computing Porter’s diamond for the agricultural sector within the AGRICISTRADE project. However, the WGI respresent country-level indicators and cannot further disaggregated for sectors of the respective economy. Thus, it provides at best an approximation of the business environment within agribusiness.

12

Table 1: Comparison of selected indicators of business environment

Doing Business EBA Enabling Trade Index

WGI Regulatory quality Score 2015

Country Rank 2016 Score 2016 Score 2016

Armenia 35 74.22 4.32 0.25 Azerbaijan 63 67.8 4.30 -0.25 Belarus 44 72.33 -1.00 Georgia 24 77.45 75 4.8 0.92 Kazakhstan 41 72.68 4.05 -0.03 Moldova 52 70.97 4.20 -0.05 Russian Federation

51 70.99 67 3.79 -0.52

Ukraine 83 63.04 74 3.97 -0.58

Sources: Doing Business; Enabling the business of agriculture; World Governance Indicators

Depending on the coverage of the respective indicators, Table 1 summarises the scores of the CIS-8 countries. However, average scores mask a great heterogeneity across topics covered by each of the initiatives. For instance, in the EBA Georgia scores above 85 with respect to the dimension ‘regulation of markets’ but with respect to the dimensions ‘machinery’, ‘finance’ and ‘transport’ it scores far below the average of all countries covered by this initiative. For Russia the dimension ‘transport’ and for Ukraine the dimensions ‘finance’ and ‘transport’ are the ones with the lowest rating. Similarly, Doing Business indicators for subcategories reveal substantial differences across aspects of the business environment. Whereas all eight countries belong to the top quarter out of 189 countries according to ‘starting a business’, for ‘resolving insolvency’ only Kazakhstan reaches the last position in the top quarter (47th). ‘Registering property’ and ‘enforcing contracts’ are further categories where almost all countries perform above average.1 Categories where at least one of the countries analysed belongs to the lowest quarter are ‘dealing with construction permits’ (Moldova, Ukraine), ‘trading across borders’ (Russia), and ‘resolving insolvency’ (Ukraine). Finally, Georgia joins seven times (out of ten) the top quarter and Ukraine only twice.

Comparing the ETI score across the eight countries and conditional upon their gross national income (GNI) level indicates an above-average rating for Georgia, while Russia and Kazakhstan received a score below the average of other countries with a comparable GNI per capita. With respect to the WGI dimension ‘regulatory quality’, presented in Table 1 as one example, Georgia scores best and Belarus worst among the CIS-8 countries.

Out of the Doing Business dataset, the sub-index ‘trading across borders’ focuses exclusively on trade related aspects. The indicator aims at quantifying the costs to export or import as well as the time to export or import a standard container (see Table 2). Here the picture is more diverse. While Georgia scores again best with respect to the costs to export related to the documentary compliance, with respect to costs to import it belongs to the more expensive countries. Taking the cost components border compliance and documentary compliance together Moldova shows the lowest costs to export but Belarus and Kazakhstan the lowest costs to import.

1 Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Moldova and Russia belong to the top quarter with respect

to ‚registering property‘. Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan and Russia belong to the top quarter with respect to ‚enforcing contracts‘.

13

Table 2: Comparison of sub-index Trading across borders (2016)

Costs to export (in USD)

Time to export (in hours)

Costs to import (in USD)

Time to import (in hours)

Country Border compli-ance

Docu-mentary compli-ance

Border compli-ance

Docu-mentary compli-ance

Border compli-ance

Docu-mentary compli-ance

Border compli-ance

Docu-mentary compli-ance

Armenia 100 150 39 2 100 100 41 2 Azerbaijan 214 300 34 214 423 200 32 41 Belarus 108 140 5 4 0 0 1 4 Georgia 383 35 14 48 396 189 15 24 Kazakhstan 574 430 133 132 0 0 2 6 Moldova 76 44 3 48 83 41 3 2 Russian Federation

765 92 96 25 1125 153 96 43

Ukraine 75 292 26 96 100 212 52 168

Source: Doing Business

3.2 Introduction of data used in analysis

BEEPS sample Out of 7652 interviewed firms in the sample, 504 report to be food manufacturers.

14

Table 3 presents the distribution of the BEEPS sample over the eight countries. Obviously, the share of food manufacturers in the sample ranges between 3 per cent and 16 per cent. Compared to the relevance of the food sector in a country’s manufacturing sector (last column), with the exception of Ukraine, food manufacturers seem to be underrepresented in the BEEPS sample. In the following, this food subsample forms the core of the analysis. More specifically, surveyed enterprises engage mainly in the following ISIC categories: manufacture of bakery products (24%), processing of meat, fish, fruit, vegetables, oils and fats (20%), manufacture of beverages (14%), manufacture of grain mill products (10%), manufacture of dairy products (7%) as well as retail and wholesale activities (5%).2

2 Others report main products or services which fall into other ISIC divisions than 15, 512 or 522.

15

Table 3: Characteristics of BEEPS sample

Country Year of interview

Total observations

Food manufacturers Share in real economy Number Share in national

BEEPS sample [%] Employment food industry [%]

Armenia 2013 360 27 7.5 26.1 Azerbaijan 2013 390 47 12.1 24.5 Belarus 2013 360 13 3.6 16.0 Georgia 2013 360 45 12.5 35.3 Kazakhstan 2013 600 37 6.2 - Moldova 2013 360 43 11.9 26.5 Russia 2012 4220 130 3.1 12.1 Ukraine 2013 1002 162 16.2 13.5

Source: BEEPS; National Statistical Service of the Republic of Armenia (2016), p. 264; State Statistical Committee of the Republic of Azerbaijan (2015), p. 216 ; National Statistical Committee of the Republic of Belarus (2016), p. 47 ; National Statistics Office of Georgia (2016) ; National Bureau of Statistics of the Republic of Moldova (2016) ; Federal State Statistics Service (2016), p. 137 ; State Statistics Service of Ukraine (2016), p. 55 Note: The last column displays the share of employment in food, drink and tobacco processing industry on total employment in the industrial sector for the year of the interview.

Own survey In order to get a better insight into the business environment within the agribusiness, questionnaires have been distributed in all eight countries via local research partners. The sampling procedure had to be adapted to local conditions and does not represent a random sample. Furthermore the response rate was very low.

The questionnaire aimed at collecting assessments of the quality of public services, obstacles for conducting business, characteristics of trade exchanges as well as details about non-tariff trade barriers. In order to maintain some comparability, the list of public services and obstacles relied on the survey instrument of the BEEPS.

Out of a total of 60 responses received, 32 firms operate in grain trade, 18 in meat trade and 10 in the dairy sector. The highest number of responses has been received from Georgia (52%) and Russia (25%), respectively. In interpreting the result below, this non-representativeness has to be kept in mind. The sample does not contain any response from Belarus and Moldova. Therefore, the sample is far from representative and allows rather anecdotal evidence instead of statistically sound insights into the business environment for agricultural traders.

Characteristics of firms The majority of firms covered by the AGRICISTRADE survey are in individual ownership (53%) or owned by a foreign company (18%). The overwhelming majority of them have been established as private firm (86%). As displayed in Figure 1, the median firm employs between 20 and 99 permanent workers. Compared to the BEEPS sample the share of micro firms (less than five workers) is much higher in the AGRICISTRADE sample. Whereas the micro and small firms are almost exclusively located in Georgia, the group of large firms is constituted by one to four respondents from each country.

The majority of firms covered by the BEEPS (80%) report a legal status as shareholding company with non-traded shares. Sole proprietorship applies for ten percent and shareholding company with traded shares for eight per cent of the firms. Most firms, more than 90 per cent, started operation after 1990. However, two firms report even the 19th century as year of formal registration. Across all countries

16

most firms in the BEEPS sample are small, i.e. they employ between 5 and 19 employees, or of medium size (between 20 and 99 employees). The only exception is Belarus where 62 per cent of the surveyed firms employ more than 100 employees.

Figure 1: Distribution of establishments' size across the two surveys

Source: AGRICISTRADE survey, BEEPS Among the trading companies covered by the AGRICISTRADE survey, 39% do export products and 86% engage in import activities. Obviously, 16 out of 59 (27%) of the firms engage in both activities. These are firms in Georgia, Kazakhstan and Ukraine. The main export destinations are Armenia, Azerbaijan, and other non-EU destinations. Among the EU countries mentioned by three firms are Germany, Poland, and the Netherlands. Given the higher share of firms engaging in imports, the list of import origins is longer. Besides Russia, Ukraine and Kazakhstan, other non-EU countries have been mentioned most often as countries of origin. Among the EU countries, Germany, France and Poland have been mentioned as main sources of imports.

In the BEEPS sample, enterprises have been asked about the distribution channels of their establishment’s sales. Here domestic markets represent by far the most important sales platform (mean between 82 and 97 per cent). Across all countries 14% of firms export products directly and 9.5% of firms report the use of a third-party to export products indirectly. More specifically, direct exports play an above-average role in Armenia (33%), Belarus (53%), Georgia (20%), Kazakhstan, and Moldova (16% each). Furthermore, relatively more Moldovan enterprises seem to rely on indirect exports (28%). Very much in the same direction points the answer to the question whether the manager sees international markets as their main market for the establishment’s main product. Only a minority agrees with this statement (4.5%).

17

4. Major obstacles to business operation

In the following, the major obstacles to current business operation perceived by the firms will be identified. Both surveys included a list of items covering access to inputs and other aspects of the business environment. Respondents were asked to rate whether items represent an obstacle to business on a five-point Likert scale. Summing the responses ‘major obstacle’ and ‘severe obstacle’ as one category, allows ranking the obstacles for both samples. Traders mention most often the items customs and trade regulation, certification requirements and permits, taxes, corruption as well as political instability in the AGRICISTRADE survey. Food manufacturers, represented by the BEEPS sample, rank the items tax rates, corruption, political instability, access to electricity as well as access to finance highest. Figure 2 presents a comparison of both samples. Trade related items seem to be more important in the AGRICISTRADE survey. However, the magnitude of the responses is not directly comparable. One reason is a substantially higher share of respondents who did not answer this question in the AGRICISTRADE survey (18-28%) compared to the BEEPS survey (0.2-13%).

Figure 2: Responses items perceived as major or very severe obstacle

Source: AGRICISTRADE survey, BEEPS A disaggregation at the level of the eight individual countries makes sense for the BEEPS sample only. Table 4 shows the percentage of responses ‘major’ and ‘very severe’ for each country and item. Out of the 15 options there is no single obstacle dominating across all eight countries. However, access to finance and corruption appear more than once. In interpreting the frequencies associated with the various potential obstacles, countries with few responses have to be handled more cautiously. That is, data for Russia and Ukraine are the least prone for measurement error due to single responses/ outliers. Focusing, somewhat arbitrarily, on obstacles which have been mentioned by more than 30 per cent of the respondents reveals that electricity and tax rates appear to be an issue in more than one country. Tax rates have been rated as obstacle by even more than the half of the respondents in Armenia and Russia. Electricity seems to be special obstacle for Moldovan, Kazakh and Russian

18

enterprises. Among the other items, political instability seems to be especially relevant in Georgia and corruption in Ukraine. Moldovan and Russian managers complain about inadequately educated workforce. Crime, courts, and labour regulations form the obstacles which have been mentioned the least across all eight countries.

Table 4: Frequency of responses major and severe obstacle (%)

Country ARM AZE BLR GEO KAZ MDA RUS UKR

Access to land 4 2 8 2 5 20 9 Access to finance 22 32 16 5 9 26 17 Business licensing and permits

7 5 2 16 7

Crime, theft and disorder 7 5 5 8 7 Corruption 19 4 7 22 23 20 33 Courts 7 3 3 5 Customs and trade regulation

19 2 2 8 5 9 6

Electricity 15 2 20 32 42 30 8 Inadequately educated workforce

4 8 16 14 35 31 8

Labour regulations 8 2 3 5 5 4 Political instability 22 40 3 21 21 27 Practices of competitors in the informal sector

11 6 27 14 12 13 22

Transport 30 9 16 14 28 10 Telecommunications 4 16 11 5 21 3 Tax rates 52 4 15 18 8 21 53 36 Tax administration 33 9 2 3 9 14 13

Source: BEEPS Furthermore, Table 5 presents the most frequent response to the question “Which elements of the business environment […] currently presents the biggest obstacle faced by this establishment”. Access to finance appears three times in this list, followed by corruption. Relatively low percentages, e.g., Kazakhstan, Moldova and Ukraine, demonstrate a rather broad spectrum of biggest obstacles reported by respondents. Table 5: Biggest obstacle to business

Country Biggest obstacle Name of obstacle Percentage

Armenia Tax administration 38 Azerbaijan Practices of competitors in the informal sector 43 Belarus Access to finance 36 Georgia Political instability 35 Kazakhstan Access to finance/ Corruption 20/ 20 Moldova Corruption 24 Russia Tax rates 37 Ukraine Access to finance 23

Source: BEEPS

19

The limited sample size for most of the eight countries restricts an analysis of the regional heterogeneity in perceptions. Other studies using the complete BEEPS data suggest substantial differences in the perceived quality of public services between businesses in metropolitan centres and areas further away from the capital (see for instance Mera (2016) for Moldova).

4.1 Corruption

Corruption practices are usually hidden and difficult to measure. The BEEPS survey asks for the frequency of unofficial payment or gifts in relation to a number of public authorities and the expected impact of such irregular activities with respect to the behaviour of public officials. The answers from the BEEPS reveal that more than ten per cent of all respondents experience unofficial payments as frequent, very frequent or even always required to get things done. Looking at more concrete occasions (e.g. customs, courts or tax collectors), however, the share of these three answer options drops. It is noteworthy that with respect to customs and courts more than 60 per cent respond “never” and also the response “don’t know” has been selected by more than ten per cent. More than 50 per cent don’t believe that private payments to public officials will have any direct impact (Figure 3).

Figure 3: Incidence and perceived impact of corruption

Source: BEEPS

Table 6 displays the answers separated by country. With 17% and 14%, respectively, of the responses, firms in Russia, Ukraine and Kazakhstan perceive the highest requirement to bribe officials among the eight countries. In Moldova, Armenia and Azerbaijan managers of food manufacturing firms agree with this statement to a much lower extent. Among the respondents in Belarus and Georgia nobody chose the categories ‘frequent’ or ‘always’. However, when being asked about specific occasions, strong differences appear. In Armenia and Azerbaijan more managers claim to pay irregular payments frequently or always when dealing with customs compared to the general question. With respect to tax administration 11% of the respondents from Armenia report frequent or always the existence of irregular payments which is above the rate of answers to the more general question “to get things done”. It is important to be aware of the very low number of absolute responses by food manufacturers disaggregated by country. Thus, only the values for Russia and Ukraine base on more than 100 valid responses. Therefore, relative differences between the categories do not represent large differences in absolute numbers in the case of Armenia and Azerbaijan.

20

Table 6: Incidence of corruption by country (share)

Country ARM AZE BLR GEO KAZ MDA RUS UKR Frequency of irregular payments

Sum of answers in categories ‘frequent’ or ‘always’

To get things done

4 4 - - 14 2 17 17

Customs 7 6 - - 14 - 7 8 Courts 4 2 - - 14 - 5 7 Taxes and tax collection

11 2 - - 14 - 8 17

Answers in category ‘never’

To get things done

30 47 77 84 38 51 41 12

Source: BEEPS A positive sign are the high shares of responses in the category ‘never’ for Georgia which is in line with reports of successful attempts to reduce corruption (World Bank, 2012). Surprisingly, corruption does not seem to exist in Belarus, which stands in contrast to the country’s ranking in international corruption indicators where it is very close to its neighbours Ukraine and Russia.3

In the framework of the AGRICISTRADE survey only 10% report corruption to be a major or very severe obstacle. All of them are either from Russia or Ukraine. Asked whether additional costs are expected when dealing with customs 20%, all of them from Georgia, responded ‘very frequently’. Similarly, 20% again all from Georgia respond additional costs to be ‘very frequently’ expected when dealing with certificates, licenses and permits. With respect to other procedures such as inspection of economic and financial activity, taxes or inspections of fire safety or worker safety no respondent answered to face ‘frequently’ or ‘very frequently’ expectations of additional payments.

4.2 Competition with informal competitors

It is widely accepted in the literature that there exists a negative impact of regulation on firm’s entry in cross-country analyses as well as within-country studies (e.g. Bipri (2016)). While results for total trade and manufacturing trade show a statistically significant impact of TFI, the indicators seem to be less useful in explaining agricultural trade (Moise and Sorescu, 2013) (Liapis, 2015).

Among the AGRICISTRADE survey only three responses assess competition with informal firms as major or severe problem. While 15 % of the respondents report a moderate competition in local trade due to informal firms, only 5% do so with respect to long-distance trade. In international trade informal competition does not play any role (Figure 4, left panel). Among the firms surveyed by the BEEPS, close to 50% perceive activities of informal competitors as no obstacle and 17% perceive them as major or very severe obstacle (Figure 4, right panel). Disaggregating responses by countries reveals that especially firms in Georgia (27.3%) and Ukraine (23.7%) perceive informal competitors’ activities as major or very severe obstacle. Among Azeri food manufacturers, 40% perceive informal competitors as moderate obstacle. Again nine out of eleven firms in Belarus neglect any obstacle due to informal competitors (82%).

3 According to Transparency International’s Corruption Perceptions Index 2015 Belarus occupies rank 107,

followed by Russia on the 119th and Ukraine on the 130th position (Transparency International, 2016).

21

Figure 4: Competition with informal firms

Source: AGRICISTRADE survey, BEEPS Note: Calculation of percentages excluded categories‘don’t know’ and ‘refuse to answer’. Number of observations amount to 466 (BEEPS), 25 (AGRICISTRADE, international trade), 27 (AGRICISTRADE, domestic long-distance trade), and 31 (AGRICISTRADE, local trade). Critical reflection upon underlying data Generally, all results are based upon subjective assessments. There is a vivid debate in the literature about the risk of capturing unobserved sentiments (see for instance (Weber Abramo, 2008). The high correlation among perceptions of institutional indicators leads scholars to the assumption that respondents demonstrate a latent dissatisfaction with existing conditions instead of providing an effective assessment of the respective indicator.

Although evidence of different expressions of the business environment within each country (e.g. capital versus hinterland) has been reported in earlier studies, data constraints restrict exploring within-country heterogeneity in both data sets.

5. Food safety issues and standards

Besides factors of the internal business environment, trade between countries is among others influenced by each partner’s requirements of market access. Traditional trade restrictions like tariffs or import quotas became less and less relevant. In the framework of the DCFTAs between the EU and Georgia, Moldova and Ukraine they should be phased out within a very short period. However, a range of non-tariff barriers persist and are often seen as the most important remaining area of action in order to facilitate trade. In the following special attention should be devoted to public food safety regulation and standards. Private standards which are crucial for accessing certain marketing channels in the EU, especially supermarkets, will not be covered here due to space contraints.

A very recent comparison of the food safety regimes in the EU and the EAEU has been published by Sedik, et al. (2016). The authors conclude that there are cardinal differences between both unions. Whereas within the EU member states delegated a substantial share of decision making authority to

22

the EU level, the system is “extremely decentralized” in the EAEU (Sedik, et al. (2016); p.6). The result is non-uniform implementation of the legislation among the EAEU members.

Interestingly, Disdier and co-authors observe that the EU shows the lowest number of non-tariff measures (NTB), i.e. standards notified to the WTO under the TBT and SPS agreements, in their sample of OECD countries. However, they appear to be more demanding than the average OECD NTBs (Disdier, et al., 2008). Separating product groups, Disdier, et al. (2008) report highest ad-valorem equivalents of SPS and TBT for imports to the EU for Cocoa HS18 (0.81-0.78), dairy products and eggs HS04 (0.74), Cereal preparations HS19 (0.75-0.71), and Edible preparations HS21 (0.61-0.55). Thus, all producers have to fulfil these requirements in order to be able to access the EU market.

Additional challenges were identified due to fragmented production structure where pooling of delivery by small producers and missing quality control along the supply chain introduces food safety risks, including intentionally non-compliance of farmers. Illustrative examples have been reported by Gorton, et al. (2006) for Moldova. Furthermore, Gorton, et al. (2006) describe, based on a case study of a Moldovan dairy plant, how contractual adjustments with respect to large scale producers and more transparent testing procedures at milk collecting stations were successful in increasing the quality of delivery and strengthening compliant behaviour of raw milk producers.

From the perspective of the governments, compliance could be supported by harmonising standards. Harmonisation by part of exporters to the EU could imply harmonisation rents due to protected access to high quality markets with most likely higher prices. That is, accession countries which adopted EU’s acquis communautaire faster than other accession countries might have generated additional revenues compared to a situation where all countries implement standards at the same speed. Based on this expectation, deFrahan and Vancauteren (2006) quantify gains from harmonisation of food safety standards with respect to intra-EU trade. Obviously, consumer preferences and the so-called ‘home bias’ will prevent the complete abolition of all trade frictions (Chevassus-Lozza, et al., 2008). More specifically, Georgia, Moldova and Ukraine will have to implement the principles of EU’s Food Safety Law (EU Council Regulation 178/2002) in national legislation. For instance, this implies the establishment of a public monitoring system. The primary responsibility to comply with the provisions of the law and to ensure traceability along the supply chain rests with the food and feed business operators.

Taking the case of Croatia’s accession to the EU as the most recent example, demonstrates the high relevance of appropriate administrative capacities in order to carry out inspection and control of food products which involves the provision of appropriate laboratory capacities (Sedik, et al., 2016). Upgrading the food production facilities in the meat and dairy sectors has been indentified as the most difficult step in achieving compliance with the Acquis communautaire. The EU provided technical as well as pre-accession financial assistance (Sedik, et al., 2016). In a strong contract appear the experiences of Armenia while acceeding the EAEU. As claimed by Sedik, et al. (2016) the process went extremely fast (from September 2013 to January 2015) and amendment of technical regulations of the EAEU has not been realised at that time.

Country-level assessment

Across all CIS-8 countries, agricultural policy is strongly guided by a focus to ensure national food security. The provision of sufficient food of adequate nutritional value for the population is a primary concern. In Russia, Belarus, Armenia and Azerbaijan this goal is of highest priority. The need of meeting highest food safety standards is also of high priority but in general it comes next to the food security goal and the objective of achieving higher levels of competitiveness. Especially those countries

23

attempting to access the European and other international markets must conform to certain standards of quality in order to do so (Volk, et al., 2015). One of the most urgent weaknesses of the agricultural and food development is the need for certification as well as the set-up and control of agro-food standards (Drozdz, et al., 2015).

Import protection is present in all the countries and largely depends on different general political economy orientations, the incidence of regional conflicts, and trade liberalisation efforts. Its level ranges (though fluctuating from year to year) from low or modest, mostly in the form of non-tariff barriers in some cases, to heavy-duty tariffs and tariff quotas (Belarus), in certain cases even bans. It has to be pointed out that in this region many countries facing demands imposed by the international community resort to the utilisation of non-tariff barriers (NTBs) to trade (Volk, et al., 2015).

With respect to trade, DCFTA aims at its expansion leading to economic development. It is envisaged to open the markets through progressive removal of customs tariffs and quotas, and harmonising laws, norms and regulations. One focus will be on the modernisation of the agricultural sector to produce higher quality products. For the time being, not all of their agricultural products comply with EU’s food safety regulations. The countries will be supported in meeting the safety and health standards of those in the EU, but information is scarce. It is anticipated that it will take some time to implement a free trade area fully. The countries themselves will decide how long the process of adaptation will take place for each specific product (Emerson and Kovziridze, 2016, Emerson and Movchan, 2016).

Short description of food safety issues in individual countries

Based on the country reports of the AGRICISTRADE project a short summary of the role of food safety has been drafted. This has been complemented by a couple of expert interviews, one in Armenia (grain) and four in Georgia (1 x grain, 2x milk, 1x meat), asking for trade classification schemes for cereals, meat and dairy products.

Armenia: Food security for population and productive utilization of agricultural inputs as well as increase in volumes of agricultural production and increased self-sufficiency levels for essential commodities are of very high priority. In recent years, self-sufficiency level for main products was nearly 60%. The goal is to increase self-sufficiency levels of essential products to 80% and self-sufficiency of wheat to 60%. Considering the fact that Armenia has closed borders with two of its neighbours, this problem might become vital and will raise the need for self-sufficiency (Urutyan, et al., 2015). The Law on Food Safety (November 2006) provides the legal foundation of the Hazard Analysis and Critical Control Points (HACCP) system. However, the food safety and food certification system is not well developed, so far. Improvements in this field will contribute to increased competitiveness of Armenian products abroad. Legislation improvements, personnel training and development of technically equipped labs are necessary in this field. It is assumed that increased investment in improving food safety today will lead to higher profits earned in the foreign markets in the future (Urutyan, et al., 2015).

Azerbaijan: The provision of national food security is a major objective of the government since the adoption of the “Food Security Concept” in 2001. In order to ensure the country’s food independence the government applies subsidies particularly for wheat and rice production. However, there is a problem with the quality of wheat which is produced by local farmers (Khalilov, et al., 2015). Regarding sanitary and phytosanitary (SPS) issues, Azerbaijan has been working towards WTO accession and gradual harmonization with Codex Alimentarius and, to some extent, with EU rules. Food is the subject

24

to the Act on Food Stuffs (1999), aimed at managing quality, manufacturing and organisation of the food stuffs and provision of food security. It developed several food standards on milk and canned meat and advanced work on amendments to the food safety and hygiene laws. Nevertheless, increasing efforts will be required to improve production standards and modern management systems in agriculture (Khalilov, et al., 2015).

Belarus: The issue of providing food security is not explicitly discussed, but indirectly an important political topic. The contribution of agriculture to the GDP is higher than in the new EU member states and it generates significant foreign trade surplus. The agri-food sector is heavily subsidised which guarantees food security. Nevertheless, the sector stays largely inefficient. The provision of food safety issues is also not discussed. But Belarus is committed to create a common system of veterinary, sanitary and phytosanitary standards and control within the Eurasian Economic Union (Akhramovich, et al., 2015).

Georgia: The issue of food security is not a big political issue. The provision of food safety standards and control is of major relevance. Under the framework of the Association Agreement with the EU, Georgia assumed responsibility to improve food quality inspection services. The Georgian Food Agency, step by step, implements EU practices of food quality inspection. This not only applies to the improvement of national production, but also imported agricultural goods become subject to more thorough sanitary and phytosanitary regulations (Bluashvili and Sukhanskaya, 2015). During expert interviews it has been claimed that the phytosanitary office is unorganized. Most problems are related to the frequent change of laws, which usually increases costs. Respondents are not aware of contact points or trade facilitation initiatives to promote export to the EU, but also nurture no plans to export.

Kazakhstan: As one of the major wheat exporting countries of the world, the provision of food security is not an explicit objective of national agricultural policy. However, subsidies to increase agricultural production increased by almost 40 per cent between 2008 and 2012. The improvement of the food safety system is a major political objective. The last decade is characterised by major reforms of veterinary and phytosanitary systems. Food production and quality is regulated on national level and within the Eurasian Economic Union. As a result of integration processes into the EAEU and the planned accession into WTO, legislation in Kazakhstan has undergone a series of harmonisation procedures and amendments (Syzdykov, et al., 2015).

Moldova: The issue of food security is not a political objective although agricultural production declined between 2004 and 2013 and the country is a food importer. The Food Safety Strategy for the years 2011-2015, approved by the Government Decision no. 747 from 3 October 2011, has the main goal to achieve the highest standards of health protection and protection of customers on the matters of food safety. The majority of food business operators are not in a position to export processed food products to the EU due to the incapability to meet relevant food quality requirements. Food business operators need training in meeting general hygiene requirements for food processing and modern food safety and quality management practice such as GMP, HACCP and the ISO quality management systems (Moroz, et al., 2015). National Food Safety Agency (NFSA) is in charge of implementing state policy for food safety regulation. Among others the agency conducts controls required by the Moldova-EU trade agreement. The agency is a subordinated body of the Ministry of Agriculture.

Russia: The issue of food security has become a policy objective since the early 2000s. Since 2006 there is a strong subsidy support from the federal budget. The priority is given to those industry branches where one could achieve rather quick and sizable import substitution. Besides a range of subsidies, the Russian government pursues a strong import tariff regulation for food (from 2004 onwards) and applies various nontariff import measures against major exporting nations in many branches of food economy in parallel. Concerning food safety regulations, the development of these rules was moving

25

forward very slowly. Quite a number of regulations are temporary rules. Within the Customs Union individual countries are responsible for drafting common food safety technical rules. But it is a cumbersome process which complicates and postpones the final adoption of rules (Rylko, et al., 2015). Expert interviews in Armenia and Georgia reveal that exporting companies must have a registered organisation in Russia or a trusted local partner and are required to get on the Russian RosGosNadzor list to get a permission to enter Russian market.

Ukraine: Particularly, with the adoption of the DCFTA with the EU, food safety standards and control become dominant political issues. The current and largely Soviet-type SPS system does not ensure effective food safety control but rather undermines agriculture’s export potential and competitiveness through high compliance costs. The present sanitary and phytosanitary control system is complicated and characterized by fragmented supervisory agencies, significant bureaucracy and corruption. Strong efforts will be needed to modernise the SPS system to European and international standards (Nivievskyi, et al., 2015).

Mirco-level evidence of quality certification

Using once again the BEEPS data set reveals that three-quarter of the surveyed firms do not possess any internationally recognised quality certification such as ISO 9000, 9002, 14000 or HACCP (Figure 5). The share of certified firms among the sample is highest in Belarus (54%), Kazakhstan (38%), Armenia (30%), and Georgia (27%). Unfortunately, the data do not report the type of certificate.

Figure 5: Firms reporting internationally recognised certification

Source: BEEPS

26

6. Conclusions

The deliverable tackled a very broad and heterogenous subject. Therefore, general conclusions summarising all aspects are not available. Furthermore, as discussed above a larger dataset would have allowed going more into depth especially with respect to differences across the CIS-8.

With respect to the business environment, micro-level data for food manufacturers exist (BEEPS). Especially for Russia and Ukraine sample sizes reach a useful size for further quantitative analyses. However, the dataset covers food manufacturers only and risks excluding micro enterprises. Among the business obstacles Access to finance and Corruption have been mentioned as biggest obstacle in at least two countries of the CIS-8. Tax rates and tax administration, Political instability and Practices of competitors in the informal sector follow on the list of biggest obstacles. A survey among traders of agricultural products (AGRICISTRADE survey) yields Customs and trade regulation, Certification requirements and permits as well as Taxes as the biggest obstacles. At the level of individual countries, the results underline the efforts of the Georgian government in reducing corruption as reported elsewhere. Among the food manufacturers Georgia is the country with the highest response to the option ‘never’ when asked about the frequency of irregular payments. In the case of Belarus, doubts are in place what causes the discrepancy between the micro-level evidence of almost no corruption and the rather low rating by international corruption rankings.

The analysis of potential trade frictions related to national food safety regulation and business’ efforts to comply with international standards fails to show a final picture. Three out of the CIS-8 countries strive for a closer integration with the EU. They will have to harmonise national food laws with EU regulation and implement the necessary administrative procedures. Experiences of recent EU accessions show that this process is complex and takes some time. Within the Eurasian Economic Union the harmonisation of food laws and the establishment of a common monitoring and enforcement system are far from established. Agribusiness firms in Armenia, Belarus, Kazakhstan and Russia have to wait in how far processes will lead. Based on micro-level evidence it must be concluded that compliance with international quality standards is not the rule.

27

References

AgraEurope. 2006. "Moldova hit by Russian food ban." Agra-Europe. Akhramovich, V., A. Chubrik, and G. Shymanovich. "Country Report: Belarus." Research Centre of the

Institute for Privatization and Management, March 2015. Anderson, J., and D. Marcouiller. 2002. "Insecurity and the Pattern of Trade: An Empirical

Investigation." Review of Economics and Statistics 84:342-352. Arvis, J.-F., Y. Duval, B. Shepherd, and C. Utoktham. "Trade Costs in the Developing World: 1995-2010." Bipri, F. "The Role of Regulation on Entry: Evidence from the Italian Provinces." April 2016. Bluashvili, A., and N. Sukhanskaya. "Country Report: Georgia." The Fund Georgian Center for

Agribusiness Development, March 2015. Bojnec, S., and I. Fertö. 2012. "Does EU Enlargement Increase Agro-Food Export Duration?" World

Economy 35:609-631. Bussière, M., J. Fidrmuc, and B. Schnatz. 2008. "EU Enlargement and Trade Integration: Lessons from a

Gravity Model." Review of Development Economics 12:562-576. Campos, E.J., D. Lien, and S. Pradhan. 1999. "The Impact of Corruption on Investment: Predictability

Matters." World Development 27:1059-1067. Chang, H.-J. (2012) "Rethinking Public Policy in Agriculture: Lessons from History, Distant and Recent."

In H.-J. Chang ed. Public Policy and Agricultural Development. London, Routledge, pp. 3-68. Chen, N., and D. Novy. 2011. "Gravity, Trade Integration, and Heterogeneity Across Industries." Journal

of International Economics 85:206-221. Chevassus-Lozza, E., K. Latouche, D. Majkovic, and M. Unguru. 2008. "The Importance of EU-15 Borders

for CEECs Agri-food Exports: The Role of Tariffs and Non-tariff Measures in the Pre-accession Period." Food Policy 33:595-606.

Clarke, G.R.G., and L.C. Xu. 2004. "Privatization, Competition and Corruption: How Characteristics of Bribe Takers and Payers Affect Bribes to Utilities." Journal of Public Economics 88:2067-2097.

de Sousa, J., and A.-C. Disdier. "Legal Framework as a Trade Barrier - Evidence from Transition Countries: Hungarian, Romanian and Slovene Examples."

deFrahan, B.H., and M. Vancauteren. 2006. "Harmonisation of Food Regulations and Trade in the Single Market: Evidence from Disaggregated Data." European Review of Agricultural Economics 33:337-360.

Dethier, J.-J., M. Hirn, and S. Straub. 2010. "Explaining Enterprise Performance in Developing Countries with Business Climate Survey Data." World Bank Research Observer 26:258-309.

Disdier, A.-C., L. Fontagné, and M. Mimouni. 2008. "The Impact of Regulations on Agricultural Trade: Evidence from the SPS and TBT Agreements." American Journal of Agricultural Economics 90:336-350.

Djankov, S., and C. Freund. 2002. "Trade Flows in the Former Soviet Union, 1987 to 1996." Journal of Comparative Economics 30:76-90.

Djankov, S., C. Freund, and C.S. Pham. 2010. "Trading on Time." Review of Economics and Statistics 92:166-173.

Drozdz, J., L. Golubevaite, N. Jurkenaite, A. Krievina, and A. Volkov. "Macroeconomic Context of the Agri-food Sector in the European Union's Eastern Neighbours." Lithuanian Institute of Agrarian Economics, 31. July 2015.

Duvanova, D. 2014. "Economic Regulations, Red Tape, and Bureaucratic Corruption in Post-Communist Economies." World Development 59:298-312.

Eifert, B., A. Gelb, and V. Ramachandran. 2008. "The Cost of Doing Business in Africa: Evidence from Enterprise Survey Data." World Development 36:1531-1546.

Emerson, M., and T. Kovziridze. 2016. Deepening EU-Georgian Relations: What, why and how? London: Rowman & Littlefield International.

28

Emerson, M., and V. Movchan. 2016. Deepening EU-Ukrainian Relations: What, Why and How? London: Rowman & Littlefield International.

Gorton, M., M. Dumitrashko, and J. White. 2006. "Overcoming Supply Chain Failure in the Agri-food Sector: A Case Study from Moldova." Food Policy 31:90-103.

Gorton, M., and J. White. 2009. "Export Strategies and Performance in the CIS: Case Study Evidence from the Dairy Sector." Post-Communist Economies 21:475-494.

---. 2003. "The Politics of Agrarian Collapse: Decollectivisation in Moldova." East European Politics and Societies 17:305-331.

Hertel, T.W., T. Walmsley, and K. Itakura. 2001. "Dynamic Effects of the "New Age" Free Trade Agreement between Japan and Singapopre." Journal of Economic Integration 16:446-484.

Hutchison, P. 2014. "Russia bans Moldovan fruit imports along with wine, meat." Agra-Europe. Jovanovic, B., and B. Jovanovic. "Ease of Doing Business and Investment in Eastern Europe and Central

Asia." Kaufmann, D., A. Kraay, and M. Mastruzzi. "Governance Matters III: Governance Indicators for 1996-

2002." World Bank, June 2003. Kaufmann, D., A. Kraay, and P. Zoido-Lobaton. "Governance Matters." World Bank, November 1999. Khalilov, H., N. Shalbuzov, and R. Huseyn. "Country Report: Azerbaijan." Research Institute of

Agricultural Economics, April 2015. Ledeneva, A. 2008. "Blat and Guangxi: Informal Practices in Russia and China." Comparative Studies in

Society and History 50:118-144. Levchenko, A.A. 2007. "Institutional Quality and International Trade." Review of Economic Studies

74:791-819. Liapis, P. "Agricultural Specific Trade Facilitation Indicators: An Overview." Maskus, K.E., and J. Wilson, eds. 2001. Quantifying the impact of technical barriers to trade: can it be

done? Ann Arbor: University of Michigan Press. Mera, V.G. "Analysis of Trade Competitiveness." Mogilevskyi, R. "CIS-7 Perspective on Trade with EU in the Context of EU Enlargement." Moise, E., T. Orliac, and P. Minor. "Trade Facilitation Indicators: The Impact on Trade Costs." August

2011. Moise, E., and S. Sorescu. "Trade Facilitation Indicators: The Potential Impact of Trade Facilitation on

Developing Countries' Trade." Moroz, V., A. Stratan, A. Ignat, and E. Lucascenco. "Country Report: Republic of Moldova." National

Institute for Economic Research. Nivievskyi, O., O. Stepaniuk, V. Movchan, M. Ryzhenkov, and Y. Ogarenko. "Country Report: Ukraine."

Institute for Economic Research and Policy Consulting, March 2015. Novy, D. "Gravity Redux: Measuring International Trade Costs with Panel Data." Department of

Economics, November 2008. Nunn, N. 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade." Quarterly

Journal of Economics 122:569-600. Raballand, G., A. Kunth, and R. Auty. 2005. "Central Asia's Transport Cost Burden and its Impact on

Trade." Economic Systems 29:6-31. Rau, M.-L., and F.W. van Tongeren. 2009. "Heterogeneous Firms and Homogenising Standards in Agri-

food Trade: The Polish Meat Case." European Review of Agricultural Economics 36:479-505. Rauch, J.E. 2001. "Business and Social Networks in International Trade." Journal of Economic Literature

39:1177-1203. Rylko, D., D. Khotko, S. Abuzarova, N. Yunosheva, and I. Glazunova. "Country Report: Russian

Federation." Institute for Agricultural Market Studies, June 2015. Schuler, P. 2003. "Institutions and the Changing Composition of International Trade in the Post-Socialist

Transition." Paper presented at Annual Conference of the International Society of New Institutional Economics. Budapest, September 11-13, 2003.

29

Sedik, D., C. Ulbricht, and N. Dzhamankulov. "The Architecture of Food Safety Control in the European Union and the Eurasian Economic Union."

Seker, M. "Trade Performance in Eastern Europe and Central Asia." Smith, N., and E. Thomas. 2015. "Determinants of Russia's Informal Economy: The Impact of Corruption

and Multinational Firms." Journal of East-West Business 21:102-128. Syzdykov, R., K. Aitmambet, and A. Dautov. "Country Report: Kazakhstan." Analytical Centre of

Economic Policy in Agricultural Sector. Tangermann, S. 1994. "West looks East." European Review of Agricultural Economics 21:375-392. Urutyan, V., A. Yeritsyan, and H. Mnatsakanyan. "Country Report: Armenia." International Center for

Agribusiness Research and Education, March 2015. Volk, T., E. Erjavec, I. Rac, and M. Rednak. "Agricultural Policy in the European Union's Eastern

Neighbours." Agricultural Institute of Slovenia University of Ljubljana, 30. June 2015. Weber Abramo, C. 2008. "How Much Do Perceptions of Corruption Really Tell Us?" Economic: The

Open-Access, Open-Assessment E-Journal 2:56. Wijnands, J.H.M., S. van Berkum, and D. Verhoog. "Competitiveness of CIS and EU Agrifood Chains:

Quantifying Porter's Diamond." LEI Wageningen UR, November 2015. Wilson, J.S., C.L. Mann, and T. Otsuki. 2003. "Trade Facilitation and Economic Development: A New

Approach to Quantifying the Impact." World Bank Economic Review 17:367-389. World Bank. "Competitiveness in Moldova's Agricultural Sector." ---. 2012. Fighting Corruption in Public Services: Chronicling Georgia's Reforms. Washington D.C. ---. 1996. World Development Report 1996: From Plan to Market. New York: Oxford University Press.

30

Websites and Statistics

Doing Business: http://www.doingbusiness.org

Enabling the business of agriculture: http://eba.worldbank.org

Federal State Statistics Service (2016): Промышленное производство в России 2016: Статистический сборник. Moscow.

National Statistical Service of the Republic of Armenia (2016): Statistical Yearbook of Armenia 2015. Yerevan.

National Bureau of Statistics of the Republic of Moldova (2016): Statistical databank "Statbank", http://www.statistica.md/

National Statistical Committee of the Republic of Belarus (2016): Tруд и зaнятость в Республике Беларусь. Minsk.

National Statistics Office of Georgia (2016): Geostat Database, geostat.ge

State Statistical Committee of the Republic of Azerbaijan (2015): Azerbaijan in figures 2015. Baku.

State Statistics Service of Ukraine (2016): Industry of Ukraine, 2011-2015. Kiev.

Transparency International - Corruption Perceptions Index: http://www.transparency.org/research/cpi/

World Development Indicators: http://data.worldbank.org/data-catalog/world-development-indicators

Worldwide Governance Indicators: http://www.govindicators.org

31

Annex: List of food safety laws by country

Country Law/ regulation Comment

Eurasian Economic Union (Custom Union)

Decision of CU Commission №625 “About harmonization of legislation of Customs Union in the field of applying sanitary, veterinary and phytosanitary measures with international standards”, April 7,2011

Decision of CU Commission №835 “About equivalence of sanitary, veterinary and phytosanitary measures and risk assessment”, October 18, 2011

Decision of Eurasian Economic Commission №161 “About Consultative committee on technical regulation, applying sanitary, and veterinary and phytosanitary measures”, September 18, 2012

Decision of Eurasian Economic Commission № 212 “About the provision on unified procedure of expert review of regulatory acts in the field of applying sanitary, veterinary and phytosanitary measures” November 6, 2012

Decision of Eurasian Economic Commission № 31 “About ensuring transparency in adoption of Eurasian Economic Commission in the field of applying sanitary, quarantine, phytosanitary and veterinary measures”, March 5, 2013

Regulations

«On food safety» (TR CU 021/2011)

«Labelling of food products» (TR CU 022/2011)

«Technical regulation for fruit & vegetables juices» (TR CU 023/2011)

«Technical regulation for oil and fat products» (TR CU 024/2011)

«On safety of certain types of specialized food products, including dietary health and dietary preventive food » (TR CU 027/2012)

«Safety requirements for food additives, flavourings, and processing aids » (TR CU 029/2012)

«Grain safety» (TR CU 015/2012)

«Dairy safety» (TR CU 033/2013)

«Meat and meat products safety» (TR CU 034/2013)

These regulations have come into force since July 2014.

32

Belarus Sanitary rules and norms for tobacco products (№ 2, January 10, 2003)

Sanitary rules and norms "Hygienic requirements for drinking water packaged in containers" (№ 59, June 29, 2007)

Sanitary norms, rules and hygienic standards "Hygienic requirements for the food industry" (№ 83, July 17, 2009)

Sanitary norms, rules and hygienic standards "State Sanitary-hygienic examination of storage of food raw materials and food products." (№ 119, September 1, 2010)

Sanitary norms, rules and hygienic standards "Hygienic requirements for plants processing and bottling of mineral water" (№ 126, December 21, 2011)

Sanitary norms and rules "Sanitary requirements for production control in the manufacture, sale, storage, transportation of food raw materials and (or) food" (№ 32, March 30, 2012)

Sanitary norms and rules "Sanitary requirements for organizations engaged in the production of wine" (№ 51, May 30, 2012)

Sanitary norms and rules "Sanitary requirements for organizations engaged in the production of ethyl alcohol, vodka and other alcoholic beverages" (№ 69, June 12, 2012)

Sanitary norms and rules "Sanitary requirements for organizations engaged in the production of meat and meat products" (№ 73, June 15, 2012)

Sanitary norms and rules "Sanitary requirements for organizations engaged in the production of oil and oil products" (№ 74, June 15, 2012)

Sanitary norms and rules "Sanitary requirements for organizations engaged in the production of beer and soft drinks" (№ 78, June 23, 2012)

Sanitary norms and rules "Sanitary requirements for organizations engaged in the production of poultry products" (№ 113, July 24, 2012)

Sanitary norms and rules "Sanitary requirements for organizations engaged in the production of milk" (№ 119, July 31, 2012)

Sanitary norms and rules "Sanitary requirements for organizations engaged in the production of tea" (№ 121, August 7, 2012)

Sanitary norms and rules "Sanitary requirements for organizations engaged in the production of ice cream" (№ 124, August 9, 2012)

Sanitary norms and rules "Sanitary requirements for organizations engaged in the fish production" (№ 129, August 24, 2012)

Sanitary norms and rules "Sanitary requirements for organizations engaged in the

All decrees have been issued by the Ministry of Health

33

production of bread, bakery and confectionery products" (№ 130, August 24, 2012)

Sanitary norms and rules "Sanitary requirements for organizations engaged in the production of food concentrates" (№ 136, September 6, 2012)

Sanitary norms and rules "Sanitary requirements for organizations engaged in the pasta production" (№ 153, October 1, 2012)

Sanitary norms and rules "Sanitary requirements for organizations engaged in the production of dairy products" (№ 177, November 12, 2012)

Sanitary norms and rules "Sanitary requirements for organizations engaged in the production of canned fruits and vegetables" (March 12, 2013)

Sanitary norms and rules "Sanitary requirements for organizations engaged in processing and sale of mushrooms" (№ 27, April 12, 2013)

Sanitary norms and rules "Sanitary requirements for organizations engaged in the production of starch…" (№ 39, May 7, 2013)

Sanitary norms and rules "Requirements for organizations engaged in the production of baby food" (№ 42, June 3, 2013)

Russia No specific laws given; referred to EEU (CU) regulations. Slow process of adopting regulations. There are many on a temporary basis.

Kazakhstan Code «Health of People and Healthcare System» (No date given) Law «On Food Safety» Law «On Technical Regulation» Law «On Veterinary »

Major bodies in charge under the Ministry of Agriculture are the Dept. of Veterinary and Food Safety, Dept. of Production and Processing of Plant Growing Products and Phytosanitary Safety, and Committee of State Inspection. Member of Codex Alimentarius and OIE

Armenia Law on Food Safety (1999, amended in 2005) Law Protection and Plant Quarantine (2000) Veterinary Law (no date given) Law on Organizing and Carrying Out Inspections (17 May 2000) Law on the Protection of the Consumer Rights (24 November 2004)

Main institution that sets and implements legislative control is the State Food Safety Service under the Ministry of Agriculture. The State Food Security Service by the

34

Ministry of Agriculture ensures conformity of food products with the standards and controls veterinary and sanitary services. Project “Food Safety Capacity Building” funded by the World Bank; effective since late 2012

Azerbaijan Act on Food Stuffs (1999) Law on Sanitary Veterinary Activity (2007) Azerbaijan is modernising its sanitary and phytosanitary measures. It developed several food standards on milk and canned meat and advanced work on amendments to the food safety and hygiene laws. But no specific laws are mentioned.

The Phytosanitary Control Service under the Ministry of Agriculture is established as well as the State Veterinary Service (SVS). Member of the Codex Alimentarius Commission AZ aims at a close integration of its system to be in line with the EU framework.

Georgia Law on “Quality and Safety of Food” (no date given) GEO has adopted a strategy of harmonising its sanitary and phytosanitary norms with the EU as part of the Association Agreement. But no specific laws /regulations are mentioned.

The National Food Agency is responsible for the food safety situation in the country. The Ministry of Agriculture is currently working on a new strategy of development for agriculture. Among the 7 key issues is the provision of food safety.

Moldova Food Law (adopted in 2004) reflects most provisions of Regulation (EC) No. 178/2002 Law on Sanitary – Epidemiological Assurance of the Population (1993, revised 2003) Law on Sanitary Veterinary Activity (2007) Law on Identification and Registration of Animals (2006) Law on Plant Protection (1999)

The National Food Safety Agency (NFSA) is responsible for implementing policies of food safety, veterinary, animal husbandry, plant protection and plant quarantine, seed

35

Law on Protection of Consumers (2003) Law on the Establishment of Principles and General Requirements of the Legislation Regarding Food Safety (May 18, 2012)

control, quality of primary products and animal feed. The Food Safety Strategy for the years 2011-2015, approved by the Government Decision no. 747 from 3 October 2011, has the main goal to achieve the highest standards of health protection and protection of customers on the matters of food safety.

Ukraine No specific laws given, but country has to observe the Agreement on Application of Sanitary and Phytosanitary Measures, and Agreement on Import Licensing Procedures since joining the WTO as well as Art. 64 of the Association Agreement with the EU.

Fragmented system of supervisory agencies (25 different ones), outdated and very costly for the companies (consumers) Since Sept. 2014 a single Food Safety and Consumers’ Protection Agency

Source: Own compilation from Country Reports of the AGRICISTRADE-project, 2015 (http://www.agricistrade.eu/)