Special Report No 18/2000 concerning the programme to supply agricultural products to the Russian Federation, together with the Commission's replies
Date: 2000-10-05
Institutions: European Court of Auditors
Subjects: Russia, action programme, agricultural product, food aid, supply

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(Information)

COURT OF AUDITORS

SPECIAL REPORT No 18/2000

concerning the programme to supply agricultural products to the Russian Federation, together
with the Commission’s replies

(submitted pursuant to Article 248(4), second subparagraph, of the EC Treaty)

(2001/C 25/01)

CONTENTS

Paragraph

Page

EXECUTIVE SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Programme objectives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Programme components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Scope of the audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PREPARATION OF THE PROGRAMME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Analysis of needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Preparation of the legal base and implementation framework . . . . . . . . . . . . . . . . . . . . . . . .

IMPLEMENTATION OF THE PROGRAMME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Budgetary resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Resources deployed by the Commission. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mobilisation of foodstuffs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Transport of products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Distribution in Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Implementation by the Russian authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Delivery of products to the regions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The selling price of products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Quality and use of the products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The counterpart funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

IMPACT OF THE PROGRAMME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

On the price of foodstuffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

On the private sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

On supplies to the regions and on the neediest groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1-5

1-2

3-4

5

6-14

6-11

12-14

15-47

15

16

17-21

22-27

28-41

28-29

30-31

32-37

38-41

42-47

48-54

48-50

51-52

53-54

55-61

ANNEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Commission’s replies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2

2

2

3

3

3

3

5

5

5

5

5

8

8

8

8

8

9

9

10

10

11

11

11

13

14

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EXECUTIVE SUMMARY

In 1998 the Russian Federation was simultaneously affected by
poor harvests and a financial crisis. As a result of the crisis the
European Union (EU) feared that its agricultural exports might fall
substantially, as the Russian Federation was its second largest meat
export market. The United States of America adopted a food aid
programme for Russia. The EU also wanted to secure its presence
there. In response to a request from the Russian Government, the
Council decided, in December 1998, to supply agricultural prod-
ucts to the neediest regions of the Russian Federation free of
charge (see paragraph 1).

The programme was not to be allowed to impede EU agricultural
exports to Russia (some of them subsidised), nor to disturb the
local market. For that reason the selling price of the products was
not to be lower than that of similar products obtained locally or
imported from the EU. As for the neediest regions, for which
these products were intended, they hoped to have them as cheaply
as possible. At the same time, the Russian authorities also wanted
to maximise the sales revenue in order to use it for social mea-
sures (see paragraph 2).

The Court found that there had been no prior analysis of needs.
The necessity of the aid was not proven. Moreover, Russia exported
cereals in 1999. Many Russians found it difficult to obtain proper
food supplies, but the difficulty was due to a lack of financial
resources rather than lack of food as such. Russia’s ability to
import EU food products in the long term was not examined suf-
ficiently. Even though the EU feared a drop in its meat exports to
Russia, they in fact increased in 1999, partly due to the export
refunds whose impact the Commission had underestimated (see
paragraphs 6 to 11).

Collection of the counterpart funds generated by the sale of these
products was often delayed, mainly because of the difficulty of
selling the meat. Regions which had problems in paying the funds
within the time allowed, and were already among the neediest,
were also threatened with financial penalties by the Russian fed-
eral authorities. Furthermore, the Commission was more con-
cerned with optimum collection of these funds than with their
utilisation (see paragraphs 14 and 42 to 47).

Generally speaking, the impact of the programme was reduced
because:

— the Commission agreed to the Russian federal authorities’
making a link between the allocation of aid to regions and the
latter’s ability to provide a financial guarantee, even though
the programme was supposed to give priority to assisting the
neediest regions (see paragraphs 11 and 53),

— as the selling price of the meat was very high, in order to pre-
vent its competing with Community imports, and with local
produce as well, the meat remained in storage in Russia for
many months and the consignments, although very expen-
sive, thus had no significant impact on the local market in
1999, even though at the end of 1998 the Council had con-
sidered it imperative that the products reach their destination
as soon as possible (see paragraphs 35 and 36).

The principal declared objective, of improving the precarious situ-
ation of the Russian people and regularising agricultural markets
by supplying to the neediest regions agricultural products that
were to reach their destination in the shortest time possible, was
only partially achieved. The aid was not essential, in so far as Rus-
sia was able to obtain supplies on the international market by
leaving private operators to take the necessary action. If the inten-
tion was that Russia should be given food aid, a humanitarian
programme on a smaller scale that targeted the neediest social
groups would have been more appropriate. As regards the desire
to keep the Russian export market, the aim was achieved more
effectively and at proportionately lower cost by means of export
refunds (see paragraphs 55 to 61).

INTRODUCTION

Programme objectives

In 1998 the cereal harvest in Russia was particularly poor (1).
1.
In August of the same year the country was hit by a serious finan-
cial crisis as well. On 6 November 1998 the USA decided to grant
food aid to Russia. The European Union (EU) also wanted to secure
its presence there, Russia being its second most important meat
export market (2). In response to the Russian Government’s request
of 12 November 1998 the Council adopted Regulation (EC)
No 2802/98 (3) of 17 December 1998, making provision for the
free supply of agricultural products to the neediest regions of the
Russian Federation. Selling these products on local markets was
to create a counterpart fund to finance social measures. Since this
operation was to help redress a precarious situation among the
Russian people, and at the same time regularise agricultural mar-
kets in Russia, the Council considered it imperative that the aid
reach its destination as soon as possible.

2. The Commission’s implementation of the Council Regulation
was subject to significant constraints. The programme must not
be allowed to impede EU agricultural exports to Russia (some of
them subsidised), nor to disturb the local market. For that reason,
the selling price of the products was not to be less than that of
similar products obtained locally or imported from the EU. On
the other hand, these products were intended for the poorest
regions, which wished to obtain them for the lowest price pos-
sible. In addition, since the Regulation (Article 1(4)) stipulated
that the revenue was to be earmarked for social measures, the
Russian authorities wanted to obtain the maximum possible coun-
terpart funds in order to use them as budget support.

(1) 48 Mio tonnes, compared with an average of 73 Mio tonnes over the
five previous marketing years, according to the Russian Government’s
official estimates.

(2) See Mr Fischler’s ‘Background note for the Agricultural Council of
28 September 1998’: ‘As regards EU agricultural products and espe-
cially animal products, maintaining the normal level of export to Rus-
sia is essential, as the balance on the European markets is highly
dependent on exports to Russia’.

(3) OJ L 349, 24.12.1998, p. 12.

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Programme components

Community market, all the products were taken from interven-
tion stocks.

3. This complex, ambitious programme provided for the supply
of 1,85 million tonnes of food products with a value of 377,7 mil-
lion euro to around 50 regions out of the 89 administrative entit-
ies that constitute the Russian Federation. Cereals and rice
accounted for approximately 40 % of the total value, against 50 %
for meat products, with skimmed-milk powder making up the
balance. With the exception of pigmeat, which was bought on the

4. The costs of monitoring (mobilisation in Europe and distribu-
tion in Russia) and transporting the products to the Russian bor-
der were charged to the Community budget. Taking into account
the savings on storage costs and export refunds, which are esti-
mated at 71,5 million euro, the net total cost of the programme
financed with EAGGF appropriations was estimated at 411,1 mil-
lion euro (see Table1).

Table 1

Estimated programme cost

Product

Wheat
Rye
Rice
Beef
Pork
Skimmed-milk powder

Quantity
(in tonnes)

1 000 000
500 000
50 000
150 000
100 000
50 000

Value (1)
(in EUR)

105 800 000
29 900 000
17 500 000
75 000 000
110 000 000
39 500 000

Transport as far as
Russian frontier
(cost in EUR)

25 000 000
12 500 000
2 500 000
30 000 000
20 000 000
2 500 000

Toal cost
(in EUR)

130 800 000
42 400 000
20 000 000
105 000 000
130 000 000
42 000 000

Total

1 850 000

377 700 000

92 500 000

470 200 000

Technical assistance, monitoring, audit and evaluation

Savings on storage costs and export refunds

12 400 000

– 71 500 000

Total net cost

411 100 000

(1) Estimated accounting value at the level of intervention stocks as of end-September 1998, except for pork, where the price taken was the

market price at the time of estimation.

Source: DG AGRI.

Scope of the audit

5. Given the significant inherent risks of implementing this pro-
gramme (1) the Court’s audit mainly centred on its implementa-
tion in Russia. The audit objective was, firstly, to verify the effec-
tiveness and impact of the programme and, secondly, to examine
the Commission’s performance as regards both the transport of
products to their destination and the collection of counterpart
funds, as well as ensuring that they were used for the intended
purposes. As the Commission had made provision for the deliv-
ery of the products during the first six months of 1999 (point
3.11 of the Memorandum of Understanding), the on-the-spot
audit was carried out in the second half of 1999, at the Commis-
sion and its Delegation in the country, on the premises of the

Russian authorities concerned (Ministries of Agriculture and
Finance, State pension fund, operators responsible for distribu-
tion) and in nine beneficiary regions. The total value of the sup-
plies allocated to the regions visited represents approximately
35 % of the entire programme. Meetings were also arranged in
Moscow with counsellors from embassies of Member States and
the United States of America, local representatives of the Interna-
tional Monetary Fund (IMF) and the World Bank, and with the
United Nations Food and Agriculture Organisation (FAO).

PREPARATION OF THE PROGRAMME

Analysis of needs

(1) See Council Regulation (EC) No 2802/98 of 17 December 1998: ‘...
despite all the precautions which have been and will be taken, the
operation inevitably involves inherent risks’ (OJ L 349, 24.12.1998,
p. 12).

6. At the meeting of the Agriculture Council of 28 September
1998, the Commission stated that there were no food shortages
in Russia and that on a macroeconomic level there was enough
money to buy foodstuffs. It also pointed out that most analysts
considered that Russian food imports would resume as soon as

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exchange rates had stabilised (1). In November 1998 it neverthe-
less submitted a proposal for a programme of food supplies to
Russia.

7. The actual need for such a programme formed the subject of
an extensive debate in Russia, with semi-public trade organisa-
tions in favour and private-sector operators and the groups in
favour of the economic reforms against. Despite warnings from
the World Bank, the Commission did not analyse the negative
impact that such a programme might have on the emerging pri-
vate sector (local producers, new private operators). Neither did
it attempt to assess how far internal trade barriers were affecting
the supply of cereals, even though in November 1998 the FAO
had expressed the view that if there were any shortages in Russia,
they would be local and attributable to the existence of these
internal barriers (2).

8. Although the supply of cereals on the Russian market was
actually lower in 1998, there is no evidence to show that Russia
could not have resorted to imports, despite the financial crisis of
August 1998 (3). Moreover, the problem for a large part of the
population was not so much food shortages as lack of money to
buy food (4). Furthermore, according to Russian cereals experts (5),
the official statistics underestimated cereal stocks by 10 % to 20 %,
especially as regards production capacity and the stocks held by
private operators.

9. Article 3.9 of the Memorandum prohibits the export, for the
duration of the programme, of products of the same kind as those
supplied by the EU, except in cases where the contracts were
signed before 1 October 1998. According to the OECD, between
July 1998 and February 1999 Russia exported 1,04 Mio tonnes of
cereals, thus exceeding the record volume of 1997/1998, and was
a net exporter of cereals during the second half of 1998 (6).
Although it was not established that exports to Russia took place
in violation of the Memorandum, it must, however, be noted that
the European Union adopted a programme of food aid to Russia
at the very moment when Russian cereals exports were reaching
record levels.

10. Following the devaluation of the rouble, the Commission
particularly feared that there would be a substantial drop in Rus-
sian imports of meat (7). However, it overestimated the duration
of the financial crisis in Russia and, at the end of 1998, Commu-
nity exports of pigmeat to Russia had already returned to their
pre-August 1998 level. When the pigmeat supplied under the
programme arrived in Russia, it had to compete with commercial
imports (see paragraph 35). The effect of increasing export refunds
for pork and extending the export facilities for Russia was largely
to blame for this situation. Disregarding food aid, EU exports to
Russia in 1999 were, in fact, relatively stable in the case of beef
and even increased relative to previous years in the case of pig-
meat (see Table 2).

Table 2

Exports of meat from the EU to Russia (1997 to 1999)

Year

1997
1998
1999

Exports of beef

Exports of pigmeat

Total

Excluding aid

Total

Excluding food aid

427 403
260 282
535 521 (1)

397 071

358 988
335 984
591 000 (2)

532 500

(tonnes)

(1) Based on applications for export licences.
(2) Including approximately 450 500 t subject to export refunds.
Source: DG AGRI.

(1) See ‘Background note for the Agricultural Council of 28 September

1998.’

(3)

(2) For example, price regulations varied from region to region, the main
cereal-producing regions speculated on price rises by banning exports
to other regions.
In the World Bank’s opinion Russia was in a position to import cere-
als and meat, in view of the state of its balance of trade. See ‘Outlook
for Russian agriculture’, World Bank, 1999.

(4) Sources: ‘European Union Heads of Mission assessment on the situa-
tion of Russian agriculture, harvest and food aid’, September 1999
and ‘The Association of Russian Agricultural Reform Funds’.

(5) Especially the main Russian cereals-marketing company, OGO, and

the Institute for the State of the Agrarian Market (ISAM).

(6) OECD: A review of recent developments in agricultural policies, mar-

(7)

kets and trade in Russia and the NIS, April 1999.
In 1997 Russia relied on imports for approximately a third of its meat
supply.

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11. Neither did the Commission make a detailed examination of
the supply situation in the various beneficiary regions proposed
by the Russian authorities. For example, there is no objective fac-
tor, except, perhaps, privileged contacts with the federal authori-
ties, to justify the choice of certain regions (1). The Commission
was mainly content to exclude the Moscow and St Petersburg
regions from those that were eligible (2), so as not to penalise
European exporters, estimating that 85 % to 90 % of EU meat
exports went to these regions. These imported products do not
necessarily remain in these regions, however, because the big
meat-processing factories situated in these regions in fact sell their
products all over the Federation (3).

Preparation of the legal base and implementation framework

12. The legal framework for the programme was prepared very
quickly, because of the supposed urgency of the programme. The
Russian Government submitted its request in November 1998,
the Council adopted the Regulation for this operation in Decem-
ber and the Commission signed a Memorandum of Understand-
ing governing the implementation of the programme in Janu-
ary 1999. The Commission negotiated the Memorandum with
the Russian Ministry of Agriculture without having an opportu-
nity to consult the Ministry of Finance which, however, plays an
essential role in the collection of counterpart funds (see para-
graphs 42 to 47).

13. The Commission drew up the operational procedures for the
programme, together with the Russian authorities, on an ad hoc
basis. As some aspects were not covered in this first Memor-
andum, signed on 20 January 1999, the Commission negotiated
a supplementary Memorandum with the Russian authorities in
February 1999 in order, in particular, to take into account the
Council’s demand that monitoring and controls should take place
on Russian territory. It was only in July 1999 that both parties
accepted the terms of reference of the Russia-European Commis-
sion working group (set up to assist programme implementation)
laying down additional implementing rules.

14. As regards the counterpart funds, the Commission agreed to
allocate 80 % of them to paying off the pension fund arrears,
which was a priority of both the Russian Government and the
International Monetary Fund (IMF). Despite the volume of funds
to be collected, the international community’s concern over the
lack of transparency in Russian public finance and the numerous
irregularities revealed at this time by the Russian Court of Audi-
tors in the management of pension funds, the Commission did
not make an analysis of this fund’s function, its current and pro-
jected financial statute and its precise utilisation before taking this
decision of principle (see paragraph 42).

(1) World Bank report ‘Outlook for Russian agriculture’, October 1999.
(2) Poverty rates in these regions outside urban centres are, however,
amongst the highest in Russia; these regions received American food
aid.

(3) Part of the meat supplied by the EU was, moreover, processed in these

regions.

IMPLEMENTATION OF THE PROGRAMME

Budgetary resources

15.
In the Commission’s view, it would have been preferable for
the programme to have been financed on the basis of 1999
appropriations, but the Council and the Parliament preferred to
use unused appropriations from the 1998 budget (4). Since it was
not possible to effect any budgetary commitments in 1998, the
Commission requested the carryover of 400 million euro from
the 1998 financial year to 1999. At the beginning of 1999, while
awaiting the Budgetary Authority’s formal decision on the carry-
over of appropriations, the Commission found itself in a situ-
ation where it was impossible to start the programme, because of
the absence of appropriations. It then transferred 10 million euro
from article B1-3 1 2 ‘School milk’ to article B1-3 1 5 ‘Food aid
for Russia’.

Resources deployed by the Commission

16. The decisions on how the programme was to be imple-
mented were taken centrally, in Brussels. Neither DG Agriculture
nor DG External Relations nor the Delegation in Moscow were
given any additional resources with which to implement it. The
American Embassy in Moscow had a staff of around 20 persons
to manage similar aid, with more decisional freedom. Whereas it,
for example, decided price adjustments or product destinations
on a weekly basis, the only major change decided upon by the
Commission (to change the regions eligible), required the author-
isation of two Members of the Commission and took more than
two months.

Mobilisation of foodstuffs

17. At the end of 1998, in its financial forecasts, the Commis-
sion made provision for an average budget of 110 EUR /100 kg
for the supply of pigmeat. The average price for this meat,
ex-slaughterhouse, on the Community market in 1999 was, in
fact, 112 EUR/100 kg. However, the price paid within the pro-
gramme framework amounted to an average of 150,5 EUR/
100 kg. The Commission’s pigmeat forecasts did not take into
account the costs of freezing, packaging, handling, transport and
storage. The cost of the consignments of pigmeat was 31,4 %
greater (per tonne) than the Commission’s forecasts.

18. The Council Regulation clearly stated that it was imperative
that products should reach their destination as soon as possible,
and the Memorandum concluded with the Russian authorities
provided that the Commission would endeavour to supply the

(4) See the Commission’s reply to paragraphs 2.16 and 2.17 of the Court’s
annual report concerning the financial year 1998 (OJ C 349, 3.12.1999,
p. 52).

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products to the Russian ports or the Russian border during the
first half of 1999. By mid-July 1999, only 45 % of these products
had arrived in Russia. By the end of 1999, 89 % of the volume of
products, but only 58 % of their value, in terms of the initial pro-
gramme, had been delivered to the beneficiary regions. Deliveries
of wheat, rye and rice were practically complete, but only two
thirds of the beef and half of the pigmeat and skimmed-milk
powder had been delivered.

20. Because of these delays almost half the grain arrived during
or after the harvest, large amounts of meat arrived during the
summer when demand for this product was at its weakest and it
was impossible for the full programme to be carried out. The
delays also made it necessary to extend the control work commis-
sioned from outside companies. The totals of the contracts for
monitoring in Europe and in Russia rose from 2 million euro to
5,5 million euro and from 4 million euro to 8,8 million euro
respectively.

19. The Commission was, in fact, obliged to suspend mobilisa-
tion of the products for almost four weeks until the Russian
authorities accepted the Community’s safety, hygiene and health
certification procedures. Mobilisation of the products was sub-
sequently suspended for more than a month, because of the dif-
ficulty of reaching a settlement between the Commission and the
Russian authorities on the pricing mechanism. Additionally, deliv-
eries of pigmeat were suspended for some time because of the
Belgian dioxin crisis (see paragraph 40) and it was not until July
1999 that the Russian health authorities accepted the delivery of
milk powder.

21. On 22 December 1999 the Commission decided to break off
the programme. Since the Commission was unable to use all the
carryovers of appropriations before the end of the 1999 year, an
amount of 64,5 million euro lapsed. In consequence, even though
most of the grain had already been delivered, the 41 500 tonnes
of pigmeat, 11 550 tonnes of beef and 5 000 tonnes of skimmed-
milk powder initially promised to the Russian authorities for an
overall value of more than 71,2 million euro were not delivered.
Since the programme no longer had to finance the transport of
these products, the total cost of implementation was thus reduced
by 74,4 million euro relative to the forecasts (see Table 3).

.

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2
5
1
2
0
0
1

Table 3

Actual implementation of programme (April 2000)

Quantities
(in tonnes)

Value
(in EUR)

Cost of transport
(in EUR)

Total cost
(in EUR)

Products

Delivered

Difference rela-
tive to forecasts

Value/tonne (1)

Difference rela-
tive to forecasts

Total value (1)

Wheat
Rye
Rice
Beef
Pork
Skimmed-milk powder

974 000
460 000
49 750
138 450
58 500
45 000

– 26 000
– 40 000
– 250
– 11 550
– 41 500
– 5 000

81
47
331
500
1 495
790

– 24,8
– 12,8
– 19,0
0,0
395,0
0,0

78 894 000
21 620 000
16 467 250
69 225 000
87 457 500
35 550 000

Difference rela-
tive to forecasts

– 26 906 000
– 8 280 000
– 1 032 750
– 5 775 000
– 22 542 500
– 3 950 000

22 897 105
16 160 850
1 902 405
24 780 594
12 483 954
4 344 165

Difference rela-
tive to forecasts

– 2 102 895
3 660 850
– 597 595
– 5 219 406
– 7 516 046
1 844 165

101 791 105
37 780 850
18 369 655
94 005 594
99 941 454
39 894 165

Difference relative
to forecasts

– 29 008 895
– 4 619 150
– 1 630 345
– 10 994 406
– 30 058 546
– 2 105 835

Total

1 725 700

– 124 300

309 213 750

– 68 486 250

82 569 073

– 9 930 927

391 782 823

– 78 417 177

Techical assistance, monitoring, audit and evaluation

Savings on storage costs and export refunds

16 400 000

4 000 000

71 500 000 (2)

Total net cost

336 682 823

– 74 417 177

(1) Accounting value at level of intervention stocks as of 1 October 1998, except for pork, where the price taken is the market price at the time of estimation.
(2) Commission estimate.
Source: DG AGRI.

E
N

O

f
f
i
c
i
a
l

J
o
u
r
n
a
l

o
f

t
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e

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a
n
C
o
m
m
u
n
i
t
i
e
s

C
2
5
/
7

C 25/8

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Official Journal of the European Communities

25.1.2001

Transport of products

22. The actual cost of transporting the milk powder was approxi-
mately 93 % higher than the initial estimate. As for the transport
costs for rye, they were 40 % higher than forecast (see Table 3),
because the forecasts had not allowed for carriage of the product
to the Community port for shipment. The financial forecasts in
respect of the cost of the programme which were submitted to
the Budgetary Authority by the Commission therefore underesti-
mated the cost of the deliveries of milk powder, rye and pigmeat
(see paragraph 17).

23. The Commission entrusted to a monitoring company the
task of checking the quantities and quality of the products removed
from intervention stores by carriers. There were delays in for-
warding the beef, because the company in question did not have
enough staff to monitor the loading of the goods which, in France,
were spread among some 30 warehouses. Furthermore, during
controls of operations concerning the release from storage of
common wheat destined for Russia, UCLAF ascertained that the
company’s inspectors were not always present when the grain
was loaded.

24. Almost 40 % of the deliveries were shipped via Baltic ports.
Approximately 25 % of cereal deliveries were routed via Muuga
(Estonia), although handling charges there are higher than at Riga
or St Petersburg. The higher costs, which were mainly due to the
monopoly control exercised over the port facilities (1), were borne
by the beneficiary (see paragraph 26).

25. Better analysis of the handling and storage capacities on the
spot and better coordination with the Americans would have
enabled the Commission to avoid some of the congestion in the
ports.

26. Some meat was also transported as far as the Urals by lor-
ries coming from Europe, i.e. more than 2 000 km inside the
Russian borders. Since the Russians did not bear these costs, the
transport costs due to the European operators, port handling
charges and demurrage (4,5 million euro) were deducted by the
Commission from the overall budget allocated for the supply of
products to the neediest regions.

27. The European carriers experienced considerable delays in
payment and in the release of their bank guarantees by the inter-
vention bodies. These delays were partly to blame for the increases
in the level of the bids for the subsequent tranches of the opera-
tion as operators tried to cover the additional costs incurred.

Distribution in Russia

Implementation by the Russian authorities

28. On conclusion of an invitation-to-tender procedure that, in
terms of the selection criteria adopted, could barely be described

(1) OLAF is investigating certain anomalies that were established follow-

ing a call for tenders for transport via this port.

as open, the Russian Ministry of Agriculture and Food entrusted
the distribution of the products to operators who came from the
former central planning system and had retained close links with
it (see paragraph 51).

to bear

29. The Russian Government did not comply with the Memo-
randum of Understanding, which stipulated that the Russian Gov-
ernment was
for domestic transport
the costs
(Article 3.3). The buyers had to pay transport costs to the national
operators, as well as extra commission of between 2,5 % and 3 %
to the regional operators chosen by the regional governments,
which often maintained close links with these same authorities.

Delivery of products to the regions

30. Although most of the products (97 % by value) were safely
delivered to the selected regions, shortfalls were nevertheless
established when the goods reached their destinations. For
example, out of the 196 950 tonnes of meat and 45 000 tonnes
of skimmed-milk powder delivered to Russia, 7 947 tonnes of the
former and 3 045 tonnes of the latter had not arrived by April
2000.

31. The monitoring system established by the Commission in
collaboration with the Russian authorities made it possible to
limit losses during shipment of products to the beneficiary regions.
However, the terms of the contract with the company responsible
for monitoring in Russia did not provide for an adequate report-
ing system, even though improvements were made after an initial
Court audit in July 1999 identified shortcomings. The monitors
were required to verify the quantities of products from their arrival
at the Russian frontier through to delivery to the processing
plants. In practice, however, where the meat was sent to the ben-
eficiary regions’ cold stores first, the monitors did not check
whether the meat was subsequently delivered to processing plants
in those regions, as the terms and conditions stated that such
checks would be made only if the Commission specifically asked
for them.

The selling price of products

32. For the purposes of determining amounts to be deposited in
the special account, the Russia-European Commission working
group (see paragraph 13) was to meet every two weeks to deter-
mine an estimated value in roubles in the Russian Federation for
the shipments provided. These estimates were to be considered
definitive only after the approval of the European Commission
had been received on a non-objection basis within five working
days. Within 120 days of the arrival of the shipment at the Rus-
sian border, or 75 days from the time of arrival of the commodi-
ties at the point of intended destination in the targeted region,
whichever came first, the Government of the Russian Federation
was to deposit an amount equal to the estimate into the special
account established for the sole purpose of receiving such funds.
Any inability on the part of the Russian Federation to collect the
sales proceeds in line with the estimates would not nullify the
Government’s obligation to make full deposits to the special
account within the periods specified above.

25.1.2001

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Official Journal of the European Communities

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33. Proceeds to be deposited in the special account were to be
based upon the estimated values of shipments as determined by
the working group, and approved by the European Commission.
The estimated shipment values had to be discussed with the work-
ing group to determine the cause for the shortfall and to identify
remedies. If total actual proceeds were subsequently determined
to be larger than total estimated proceeds, the Russian Federation
had to deposit the difference in the special account.

34. The Commission regularly fixed a net port price in agree-
ment with the Russian authorities, in order to determine the
amount of the initial deposit that the Government of the Russian
Federation was to place on a special account after delivery of the
products. However, it was not the Government of the Russian
Federation which paid the initial deposit but the Russian opera-
tors, who transferred the counterpart funds to this account (fre-
quently late) after the products had been sold to the first buyer
(see paragraphs 42 to 47).

35. Products were sold by the Russian authorities for the net
port price (estimated in agreement with the Commission) plus the
commissions charged by national and regional operators, as well
as handling, transport and storage costs, and not necessarily at
prices that did not disturb the local market, as required by the
basic Regulation. In consequence prices for the meat were some-
times much higher than the price of commercial imports (often
of better quality) from the EU (1) or other central European coun-
tries. In September 1999, for example, pigmeat supplied by the
EU was sold for 25 roubles/kg. The meat, plus transport and hand-
ling charges, reached a price of 33 roubles/kg, whereas commer-
cial imports for total prices varying between 15 and 23 roubles/
kg were observed in several regions away from Moscow and St
Petersburg.

36. As the selling price of the meat supplied under the pro-
gramme was considered uncompetitive by the processing com-
panies, most of the meat was held in cold stores in the various
regions for several months. No less than 37 000 tonnes of beef (or
26,7 % of the quantity of beef supplied) was still in storage await-
ing sale as of mid-February 2000 and 35 000 tonnes of pigmeat
(or 60 % of the supplies of this product) as of mid-March 2000.
In other cases the meat was redirected to other, more solvent,
regions, thus increasing the transport costs, and hence the selling
price, still further.

37.
It was too late by the time the Commission ordered the pro-
gramme audit that was to establish whether the products had
been sold at market prices and whether the payments to the
counterpart funds reflected those prices. In fact, that audit had
still not begun in March 2000, one year after the first consign-
ment of products. Even if it is possible to show that some opera-
tors made an undue profit on some products, it will be difficult
for the Commission to demand that the difference be allocated to
the counterpart funds. Moreover, by acting in this way, the Com-
mission did not ensure that the price fixed for the sale of the
products did not disrupt the local market.

(1) At Archangel, Samara, Nizhny Novgorod and Smolensk in particular.

Quality and use of the products

38. Although the wheat supplied was of intervention standard
(and, in particular, was suitable for bread-making), it was not of
adequate bread-making quality according to Russian standards.
The flour mills could only use it by mixing it with higher-grade
Russian or Kazakh wheat. The quality of the wheat supplied by
the EU, which, according to local operators, was inferior to the
quality of the wheat supplied by the Americans, was the cause of
a certain amount of resentment on the Russian side. The Com-
mission is aware of this problem and is considering raising the
intervention criteria, especially as regards protein levels.

39. The quality of the rye and rice supplied by the EU was, in
general, appreciated by the beneficiaries. The rye, however, was
used for purposes other than those intended. Following tests by
an agreed laboratory in Hungary, it was found that rye (almost
5 000 tonnes) delivered to Smolensk was unfit for bread produc-
tion. Contrary to the Commission’s instructions, it was sold for
alcohol production and the corresponding counterpart funds
were paid. A similar quantity of rye delivered to Tula met the
same fate, even though the same laboratory concluded that the
quality of the product was acceptable. Furthermore, in the region
of Sverdlovsk, 4 000 tonnes of rye was used, not for the specified
purpose of making bread, but for feeding poultry, although the
quality of the product was not questioned.

40. When the dioxin crisis erupted in Belgium, deliveries of Bel-
gian pigmeat had already been made. Sales of this product, which
was suspected of being contaminated with dioxin, were then sus-
pended while the necessary tests were carried out. These showed
that 104 tonnes were actually contaminated. The costs connected
with the supply of this meat were borne by the European ten-
derer, who eventually disposed of it as feed for fur-producing ani-
mals. The fact that contaminated meat had been supplied made it
even more difficult to sell the meat supplied.

41. Some processing companies did not want any beef because,
as a rule, it had been held in cold storage in the EU for three years.
In addition, in some of the cold stores visited by the Court’s audi-
tors in Russia, the temperature was sometimes considerably higher
than the – 18°C required for storing meat.

The counterpart funds

42.
Initially the amount of counterpart funds was expected to be
around 320 million euro. The Council Regulation stated that the
net receipts from the sale of the products were to be used for the
implementation of social measures. The Russian Government’s
Decree No 130 (see paragraph 9) went further, however, specify-
ing that the funds would be allocated to the federal pension fund
budget for the payment of pensions and discharge of the pension
indebtedness accrued in 1998 (see also paragraph 14). The Com-
mission was nevertheless able to obtain an agreement that 20 %

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Official Journal of the European Communities

25.1.2001

of the funds would be used for other specific social purposes (1).
In most of the regions visited by the Court’s auditors the regional
authorities would have preferred a substantial part of the coun-
terpart funds generated by the programme to have been ear-
marked for the development of local agriculture, a wish that had
already been expressed by the Russian Ministry of Agriculture
when the programme was being negotiated with the Commission
in November 1998. The use of the counterpart funds for agricul-
tural programmes could have been made conditional upon the
adoption of certain reforms in this sector.

43. Both the Commission and the Russian Government attached
the utmost importance to the collection of the counterpart funds.
The Russian Government accordingly tried to establish a system
of guarantees that would result in a reduction of central budget-
ary transfers to regions which did not pay for the products. How-
ever, these guarantees were not always enforceable. The largest
beneficiary region (Sverdlovsk), for example, did not itself stand
guarantee for the consignments of meat but delegated this respon-
sibility to a private company instead. When the latter was unable
to sell the meat at the price demanded it withdrew from the pro-
gramme and the meat remained in cold stores. In addition, some
regions which were unable to provide the required guarantees
preferred to reduce their meat orders and the produce went to
other more prosperous regions (see the annexed table comparing
the poverty indicator for the regions with the amount of aid alloc-
ated per head of the population).

44. As the Government of the Russian Federation did not pay
the initial deposit as stipulated in the Memorandum of Under-
standing (see paragraph 32), the rouble equivalent of 129,4 mil-
lion euro had been collected by mid-March 2000, that is to say,
only 74,5 % of the total amount of counterpart funds that the
programme was supposed to have generated by that date. As the
counterpart funds were kept in a non-interest-bearing bank
account and the annual inflation rate in Russia was 36,5 % at the
end of 1999, the value of the frozen funds earmarked for social
projects (see paragraph 47) was rapidly eroded.

45. At the same date the payment arrears for the counterpart
funds amounted to the equivalent of 44,4 million euro. The main
regions affected were in arrears (2) primarily because they could
not sell the meat at the prices set. These regions, which were
among the poorest, were also exposed to financial penalties from
the central authorities, which proposed to deduct the amounts
that the regions still owed by way of counterpart funds from any
financial transfers to which they might be entitled.

arrears. Apart from a relatively modest amount set aside for the
repayment of a loan which the Russian authorities had taken up
in order to pay off the arrears, most of the counterpart funds ear-
marked for the pension fund were used for several months to
finance an increase in pensions.

47.
In January 2000, the Russian Government had still not pre-
sented any plan for using the 20 % of the counterpart funds ear-
marked for specific social purposes or for projects acceptable to
the Commission. The Commission itself still had no precise idea,
at that time, of the use to which this 20 % should be put, even
though it had frozen, for social projects, the equivalent of 35,7 mil-
lion euro in roubles that were steadily depreciating (see para-
graph 44). However, in January 2000, the equivalent of 20,5 mil-
lion euro was transferred to the Ministries of Health and
Employment without authorisation from the Commission and
11,6 million euro of that had already been spent without any
project having been proposed to the Commission. In April 2000,
in view of the difficulty of reaching agreement with the Russian
side regarding individual projects, the Commission finally agreed
to finance some budget items proposed by the Health and Employ-
ment Ministries.

IMPACT OF THE PROGRAMME

On the price of foodstuffs

48. The programme was supposed to help regularise agricultural
markets in Russia. In 1999, however, there was, in general, a
strong increase in prices. The cost of 25 basic products rose by
42 % between January and September 1999.

49. The price of the wheat bought by the flour mills rose from
33 to 101,2 EUR/t between January and September 1999 (4). In
view of the political sensitivity of the availability and price of
bread, the regional executives tried by various means, and admin-
istrative price controls in particular, to prevent increases in the
price of bread from being passed on to consumers directly. In
some regions the weight of a loaf of bread was quite simply
reduced from 500 grams to 400 grams while the price remained
approximately the same. Nevertheless, it may be considered that
by increasing the supply of cereals for breadmaking by 5 % (5), the
Community programme prevented an even bigger price rise.

46. Due, in particular, to an improvement in the collection of
revenue as well as to the fact that pension levels did not keep pace
with the rate of inflation (3), the pension fund arrears had been
paid off in full by 1 September 1999. In consequence, only 882
million roubles of the 8 500 million roubles that were to be drawn
down against the counterpart funds were used to pay off the

50. Consumer prices in the meat sector more than doubled
between August 1998 and September 1999, bringing about a
widespread fall in consumption (6). If it was possible to limit the
increase in meat prices, it was due more to the export refunds
which enabled local operators to contain prices than to the

(1) The counterpart funds for the American aid programme were allo-

cated to this pension fund in their entirety.

(2) Republic of Komi and regions of Kemerovo and Yaroslavl.
(3) Pensioners’ purchasing power is estimated to have fallen by 45 %

against 1998 levels.

(4) Russian Ministry of Food and Agriculture
(5) Even if half the deliveries did not reach their destinations until after

(6)

the harvest.
‘European Union Heads of Mission assessment on the situation of
Russian agriculture, harvest and food aid’, September 1999.

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Official Journal of the European Communities

C 25/11

Community aid programme which, as of September 1999, had
recorded the sale of only limited quantities of meat. The increase
in the level of refunds for pigmeat from 40 to 70 EUR/100 kg
between November 1998 and July 1999 proved to be a more eco-
nomic and effective instrument for securing the continuity of
Community exports of pigmeat to Russia (see Table 2). The Com-
mission actually estimated that in May 2000 the total cost of the
export refunds on 450 000 tonnes of pigmeat exported to Russia
in 1999 amounted to between 270 and 290 million euro (1),
whereas the supply of only 58 500 tonnes of the same product
under the programme amounted to some 101 million euro, includ-
ing the costs of monitoring and technical assistance for imple-
menting the programme. This measure made it possible to partly
cover the deficit on the Russian market and also had a positive
impact on pigmeat prices by reducing stocks in the Community
market while allowing the EU to keep its export market (see para-
graph 35).

On the private sector

51. The operation was criticised by the large private Russian
operators set up in the 1990s, which considered that the pro-
gramme strengthened operators from the old regime to their det-
riment (2). The fact that, in some regions, the cold stores were
filled to capacity for many months as the meat could not be sold
for the price demanded by the Russian authorities, prevented
some local producers from selling their products when they
wished although they were often already in a difficult financial
position (see paragraph 35). While the Tacis programme was try-
ing to develop local agriculture, food aid prevented it from taking
full advantage of the rouble devaluation that had made imported
foodstuffs less competitive (3) and allowed the local authorities to
postpone until later indispensable agricultural reforms (4).

52. At the same time the CIS countries were receiving excep-
tional Tacis aid (20 million euro) to alleviate the effects of the
financial crisis in Russia. However, the food aid took away these
countries’ export markets. During the first six months of 1999,
while imports of pigmeat into Russia increased by 32 % com-
pared with the corresponding period of 1998, imports of this
product from other CIS countries fell by more than two thirds (5).

(1) Source: DG AGRI D/02. The exact amount will not be known until the

accounts have been cleared.

(2) See, in particular, ‘Food aid is not what Russia really needs although
it gives an opportunity to certain lobbying groups to use it to their
benefit’, E. Serova, Centre for Agrarian Policies and Economic Issues,
Institute for Economy in Transition, Moscow 1999 and ‘Outlook for
Russian agriculture’, World Bank, October 1999.

(3) Recovery of competition emphasised in ‘European Union Heads of
Mission assessment on the situation of Russian agriculture, harvest
and food aid’, September 1999.

(4) See: The Association of Russian Agricultural Reform Funds, Assess-
ment of the impact of food aid on the availability and affordability of
food in Russia report, first quarter of 2000.

(5) Source: Russian Ministry of Food and Agriculture, Price Policy and
Monitoring Division and ‘Outlook for Russian agriculture’, World
Bank, October 1999.

On supplies to the regions and on the neediest groups

53. Because the Commission agreed to the Russian authorities’
requiring a financial guarantee from regions which requested sup-
plies of food products, the poorest regions, which the programme
was supposed to help but which could not provide such guaran-
tees, forwent certain products which they had, however, consid-
ered that they needed. Furthermore, the poorest regions refused
to buy the meat supplied by the EU, because they found the sell-
ing price too high, and the meat went instead to more favoured
regions. Thus regions such as Belgorod and the republic of Komi,
which are among the least poor regions in Russia, received more
aid than Ingushetia and Daghestan, which are severely affected by
poverty (see Annex).

54. Unlike the American aid which, from the outset, provided
for 191 000 tonnes of products to be distributed free by NGOs to
the most vulnerable groups in the population, the EU aid ben-
efited the neediest groups only to a limited extent, although the
basic Regulation laid down that exceptionally ‘the products sup-
plied may be distributed free to the neediest people of the regions
concerned’ (6). It was only in March 2000 that the Commission
allocated a small quantity of products (3 000 tonnes of beef and
1 000 tonnes of rice) for free distribution to refugees and their
hosts via NGOs in Ingushetia. It is clear that the products sup-
plied by the EU did little to improve the living conditions of the
poorest groups (7). It is especially true of an expensive product
such as meat. The counterpart funds nevertheless helped to
improve the pensioners’ lot and made it possible for the Health
and Employment Ministries to finance projects of a social nature.

CONCLUSION

55. The need for the programme in the form it took is arguable;
the country exported cereals in 1999 (see paragraph 9) and the
hardships facing a large part of the population were attributable
more to a lack of financial resources than to the failure of supply
(see paragraphs 6 to 8). Supplying meat proved to be particularly
complicated and expensive (see paragraphs 17, 36, 40 and 41)
and, with no guarantee as to its final destination (see para-
graph 30), appeared to be particularly unjustified.

56. The desire to maximise the revenue from sales of the prod-
ucts, and thus the counterpart funds, ran counter to the pro-
gramme’s principal declared objective of helping the neediest
regions (see paragraphs 42 to 47).

(6) Council Regulation (EC) No 2802/98 of 17 December 1998,

Article 1(4).

(7) Around 52 million Russians (35,3 %) live below the poverty line,
according to the Russian Ministry of Social Development. In 1999 the
most needy consumed 8,2 times less meat and 2,9 times less bread
than the average for the better off.

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Official Journal of the European Communities

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57. Such an operation could have been carried out specifically
for the benefit of the poorest regions by dealing with the regional
authorities and traders direct. Such an approach would have made
it possible to assist the development of the private operators and
to avoid strengthening the old, centralist State structures (see
paragraphs 28 and 51).

58. When the Commission proposed this operation to the Coun-
cil, it underestimated the length of time for which the financial
crisis in Russia would last and underestimated the impact of
export refunds, which also contributed supplies to the Russian
market, but at less cost, and, at the same time allowed Commu-
nity exporters to retain their market (see paragraph 10). The
Commission should also have made its aid more conditional on
the adoption of reforms that would promote a recovery in agri-
cultural output and should have called for the setting-up of a sys-
tem to encourage trade between producer regions and deficit
regions (see paragraph 7).

59. The deadlines for the implementation of the programme
were greatly overstepped (see paragraphs 18 to 20) and the Com-
mission was unable to deliver all the products initially planned
before the carryovers of appropriations lapsed (see para-
graph 21). Nevertheless, it managed to minimise the losses incurred
during transport of the products to the beneficiary regions (see
paragraph 30).

60. Not having assigned or redeployed the necessary human
resources to the Delegation on the spot (see paragraph 16), the

Commission was unable to effect adequate monitoring, particu-
larly as regards the adaptation of the selling prices of the products
in the various regions (see paragraph 37). Moreover, the need to
constantly refer them back to headquarters in Brussels before any
decision could be taken on changes to the prices and quantities
allocated to the beneficiary regions led to delays in the implement-
ation of the programme.

61. The principal declared objective, of improving the precar-
ious situation of the Russian people and regularising agricultural
markets by delivering to the neediest regions agricultural prod-
ucts that were to reach their destination as soon as possible, was
only very partially achieved. The lot of the people that were most
at risk was little improved by the consignments of cereals, and
certainly not by the consignments of meat, as the people in this
category did not have the financial resources with which to buy
the products. The counterpart funds, on the other hand, helped
to improve the situation as regards health care and pensioners
(see paragraphs 46, 47 and 54). As regards regularising markets,
the impact of consignments of cereals was limited, especially as
less than half the consignments reached their destination before
the harvest (see paragraphs 48 and 49). As for the consignments
of meat, they had no impact on the market in 1999, and a large
proportion of the meat was still unsold in March 2000 (see para-
graph 50). Furthermore, some of the most favoured regions ben-
efited as much from the programme as the regions with the high-
est poverty rates, if not more (see paragraph 53).

This report was adopted by the Court of Auditors in Luxembourg at the Court meeting of 5 October 2000.

For the Court of Auditors

Jan O. KARLSSON

President

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COMPARISON OF POVERTY INDICATOR TO ALLOCATED EU FOOD AID PER CAPITA BY REGION

ANNEX

Region

Area

Percentage of households
below the subsistence level
(June 1999)

Order of ranking according
to % of households below
the subsistence level

Allocated EU food aid per capita
(roubles)

Order of ranking according to
EU food aid allocation

Ingushetia
Aga Buryat
Koriak
Chita
Dagestan
Magadan
Tuva
Komi-Perm
Kalmykia
Chuvashia
Volgograd
Nenets
Leningrad
Archangelsk
Novosibirsk
St Petersburg
Mari-El
Kamchatka
Mordovia
Amur
Astrakhan
Ust Orda
Khakassia
Penza
Buryatia
Altai Rep
Yakutia
Kemerovo
Kabardino
Taimir
Tver
Altay Kraj
Saratov
Sakhalin
Kirov
Stavropol
Tula
Krasnodar
Average
Sverdlovsk
Karelia
Moscow oblast
Smolensk
Kostroma
Chelyabinsk
Omsk
Kurgan
Bashkortostan
Pskov
Nizhny Novgorod
Novgorod
Ryazan
Khabarovsk
Udmurtia
Orenburg
Karachey
Samara
Tomsk
Kaluga
Perm
Kaliningrad
Yaroslav
Adygea
Voronezh
Vologda
Primorye Kraj
Ivanovo
Tatarstan
Vladimir
Komi
Ulyanovsk
Irkutsk
Bryansk
Krasnoyarsk
Kursk
Rostov
Murmansk
Tyumen
Orel
Khanty
Tambov
Moscow
Iamal
Lipetsk
Belgorod

Caucasus
East Siberia
Far East
East Siberia
Caucasus
Far East
East Siberia
Urals
Volga
Volgo-Vyatsky
Volga
North
North West
North
West Siberia
North West
Volgo-Vyatsky
Far East
Volgo-Vyatsky
Far East
Volga
East Siberia
East Siberia
Volga
East Siberia
West Siberia
Far East
West Siberia
Caucasus
East Siberia
Central
West Siberia
Volga
Volgo-Vyatsky
Volgo-Vyatsky
Caucasus
Central
Caucasus

Urals
North
Central
Central
Central
Urals
West Siberia
Urals
Urals
North-West
Central
North-West
Central
Far East
Urals
Urals
Caucasus
Volga
Urals
Central
Urals
North-West
Central
Caucasus
Chernozem
North
Far East
Central
Volga
Central
North
Volga
East Siberia
Central
East Siberia
Chernozem
Caucasus
North
West Siberia
Central
West Siberia
Chernozem
Central
West Siberia
Chernozem
Chernozem

96,3
85,8
82,2
79,9
75,2
72,6
71,4
70,7
70,5
65,6
65,3
63,5
63,0
62,5
61,2
59,7
59,6
59,3
59,2
58,6
58,1
57,8
57,4
56,6
56,3
56,2
55,7
55,1
55,0
54,9
54,6
54,6
53,3
53,0
52,8
52,1
51,4
51,2
50,6
50,3
49,9
49,3
49,2
48,5
47,8
47,7
47,4
47,2
47,1
46,7
46,7
46,5
46,4
46,1
46,0
45,7
45,5
44,8
44,3
44,0
43,6
42,8
41,7
41,4
41,2
41,1
40,5
40,5
40,5
39,8
39,0
38,3
37,5
37,4
36,2
36,2
34,6
33,3
29,6
29,6
28,7
28,4
28,3
27,3
21,3

Source: Goskomstat and Economic Section of the Delegation of the European Commission in Moscow.

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38

39
40
41
42
43
44
45
46
47
48
50
49
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
68
67
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84

73,64
0,00
0,00
0,00
137,54
0,00
366,14
0,00
22,40
120,05
47,18
0,00
0,00
202,32
40,95
0,00
202,39
0,00
170,91
0,00
60,59
0,00
0,00
0,00
52,71
0,00
132,11
209,40
103,94
0,00
181,66
13,49
50,98
0,00
34,19
0,00
219,25
0,00
69,34
208,91
325,25
0,00
319,90
99,50
4,20
0,00
123,72
13,64
223,24
85,25
58,59
84,64
0,00
61,82
25,64
98,22
109,39
41,74
105,50
44,04
55,52
187,23
149,05
31,35
108,41
0,00
69,33
37,99
29,41
257,29
72,41
0,00
90,81
40,24
43,14
18,93
0,00
0,00
0,00
0,00
37,24
0,00
0,00
0,00
121,51

29
NA
NA
NA
15
NA
1
NA
50
19
38
NA
NA
10
42
NA
9
NA
13
NA
33
NA
NA
NA
36
NA
16
7
23
NA
12
53
37
NA
46
NA
6
NA

8
2
NA
3
24
54
NA
17
52
5
27
34
28
NA
32
49
25
20
41
22
39
35
11
14
47
21
NA
31
44
48
4
30
NA
26
43
40
51
NA
NA
NA
NA
45
NA
NA
NA
18

C 25/14

EN

Official Journal of the European Communities

25.1.2001

THE COMMISSION’S REPLIES

EXECUTIVE SUMMARY

The programme, the largest ever food delivery programme under-
taken by the EU, has achieved some very positive results. The
combined effect of both the EU and American programmes made
a significant contribution to the stabilisation of market prices and
to the issue of affordability by the use of counterpart funds to
clear pension arrears and to enable significant pension increases
to be made (Article 4, Council Regulation (EC) No 2802/98).

The Commission services faced numerous difficulties in imple-
menting the programme undertaken by the EU. The primary task
of delivering the food supplies to the agreed destinations was
achieved with relative speed, despite a lack of human resources
within the Commission itself.

In the view of the EU, the need was evident and was supported,
inter alia, by the following facts:

— according to official Russian statistics, the 1998 cereals har-
vest was one third below the average harvest of the preceding
years,

The Court’s observations relate to a programme that is still under
way. In accordance with the Council Regulation, the Commission
contracted independent consultants to carry out an evaluation of
the programme. The final evaluation report from the consultants
will be published shortly. Even though the Commission has moni-
tored and managed the risks associated with the implementation
of the programme, a full and final audit, as mandated by
Article 1(4) of the Council Regulation, is also planned.

INTRODUCTION

Scope of the audit

5. Although the Court recognises the significant risk inherent in
the programme, its observations do not fully take account of the
dynamics of managing the risk in the programme’s implementa-
tion. The Commission, in applying point 3.16 of the Memor-
andum of Understanding, was forced to suspend deliveries on two
occasions during the first half of 1999, each for a period of one
month. Inevitably, this has had an impact on the Commission’s
ability to respect the delivery schedule referred to by the Court.

— the marked fall in the importation of meat products brought

about by the financial crisis in autumn 1998,

PREPARATION OF THE PROGRAMME

— an analysis carried out by the other donor.

Analysis of needs

Furthermore, even if money existed inside Russia on a macro
level, it was impossible for private operators to execute commer-
cial imports as they could not bear the risks linked to the erratic
dollar-rouble conversion rate.

It is not the case that meat prices were primarily set at levels that
safeguarded commercial imports from the EU. The first price pro-
tocol for the programme (adopted on 14 May 1999) agreed price
estimates which corresponded to prices set by the Russian admin-
istration in its decision of 5 February 1999.

The Court considers that a targeted humanitarian programme
would have been more appropriate, but the NGOs which would
have been charged with the execution of such a programme did
not have sufficient resources to execute a programme of this mag-
nitude throughout the Russian Federation. Furthermore, such a
programme would not have produced the considerable benefits
produced by the generation of counterpart funds which were
used to wipe out pension arrears and contributed to the increase
in basic pensions.

6. The following factors were taken into consideration when the
possibility of launching a food-aid programme to Russia was con-
sidered.

(a) In the Russian Federation 31 % of the population is under the
poverty line and after a particularly poor harvest of cereals
and the severe financial crisis of August 1998, the European
Union considered that the situation did justify some form of
external assistance.

(b) After information was provided by some of the EU Member
States, the World Bank and the other donor, and after a fact-
finding mission was sent to Moscow, the European Union
concluded that Russia was unable to carry out normal com-
mercial imports for the winter and that she had no financial
resources to import food from abroad.

(c) In the event, the low economic and budgetary opportunity
cost of supplying food products from EU intervention stocks
made a food aid programme an attractive alternative to direct
balance of payments support. Sales of the food could provide
budgetary support and effective targeting could solve the
affordability problems for vulnerable groups.

25.1.2001

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Official Journal of the European Communities

C 25/15

Following the formal food aid request from the Russian Govern-
ment on 12 November 1998, and in the light of a food aid pro-
gramme being launched by the other major donor, the European
Union finally took the decision to supply agricultural products to
the Russian Federation.

The programme was designed to meet two basic needs:

— availability of food, by increasing supplies and thereby keep-

ing prices at an ‘affordable level’,

— affordability, by using counterpart funds to speed up the pay-

ment of pensions arrears.

7. One of the major aims of the programme was to ensure that
the local markets were not disrupted. To achieve this, the Russian
Federation and the Commission sought to use the existing sys-
tems for the distribution and processing of the food supplies. In
the main, Russian operators were used for distribution in Russia
and the processing of food was kept to the local level. In doing
so, the programme has not had a negative impact on the private
sector. On the contrary, the food supply programme has provided
Russian transport and industry with a lifeline to survive and
recover from the economic recession.

8. With bad harvests and the collapse of the processing industry
there is no doubt that food reserves in Russia were low. The EU
food supply programme together with those of the other donor
sought to increase the supply of foodstuffs. By redistributing the
majority of the sale proceeds to State pensioners, one of the poor-
est sections of Russian society was better enabled to purchase the
increased supplies available on the market.

9. The exports referred to by the Court would have been subject
to irreversible contracts entered into by the Russian private sec-
tor. Point 3.9 of the Memorandum of Understanding (MoU) spe-
cifically permits the export of goods similar to those supplied
under the programme where the contracts for such exports have
been concluded prior to 1 October 1998.

10. The products delivered under the programme were supplied
to regions which are not traditional markets for commercial
imports. Furthermore, as indicated in paragraph 35 of the report,
the sale price of meat was often higher than that of commercial
imports.

The fact that EU exports to Russia were maintained in 1999 for
beef meat and even increased for pigmeat at the same time as the
food aid was arriving is further evidence that there was a real need
for this aid.

reflected the needs of the regions. However, the list was examined
during the negotiations on the MoU in coordination with the
experts of the Delegation in Moscow. Not only Moscow and St
Petersburg were excluded but also several other regions, as they
were not considered to be among those in need. This was also one
of the main reasons for the exclusion of Moscow and St Peters-
burg and was also the reason why the lists of destinations were
regarded with inflexibility.

Preparation of the legal base and implementation framework

12. The question of the urgency of the programme has been
confirmed by the Council of
the EU in Regulation (EC)
No 2802/98 authorising the programme and also by the action
of the other main donor. The Ministry of Agriculture was the rep-
resentative of the Russian Government at the negotiations on the
Memorandum of Understanding, although the Commission had
requested the presence, in addition to that of the Ministry of Agri-
culture, not only of the Ministry of Finance, but also the Minis-
tries of Transport and Health and the State Customs Committee.
In the final analysis, it was for the Russian Government to decide
which Ministries represented it during the negotiations.

13. The original MoU negotiated at the beginning of December
1998 did not contain any omissions by reference to the original
Commission proposal which only foresaw delivery of the goods
to the Russian frontier. Taking into account the limited time for
execution, it was indispensable that the MoU already negotiated
be operational as early as possible. The additional MoU was nec-
essary to complete the arrangements required for internal moni-
toring imposed by Council Regulation (EC) No 2802/98, and its
entry into force was required only with effect from the time the
goods started to arrive at the Russian frontier.

14. Along with the other donor, the Commission sought for the
larger part of the counterpart funds to be made available to the
Russian Federation pension funds. The Commission had never-
theless taken the precaution that any release of the funds to the
pension funds would be subject to prior approval from the joint
working group and therefore from the Commission services.

The Commission services carried out checks on the statute, sys-
tems and control mechanisms of the pension funds before any of
the counterpart funds were released. The viability of the financial
systems was validated with other donors and international organi-
sations having dealings with the State pension funds. The Com-
mission was reassured that the pension funds are also subject to
the audit of the Audit Board of the Russian Federation.

11. The Commission had no time to examine in depth whether
the list of regions presented by the Russian authorities really

The efficacy of the choice made has been confirmed by many
control and monitoring missions undertaken on behalf of the
Commission services.

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Official Journal of the European Communities

25.1.2001

IMPLEMENTATION OF THE PROGRAMME

Resources deployed by the Commission

16. As the increased level of risk became apparent the Commis-
sion was obliged by the legislative authority to monitor and audit
the flow of food and of the resulting finances generated by the
sales in Russia.

Other similar programmes were better resourced. It would have
been better if the Budgetary Authority had provided for sufficient
personnel resources to manage such a complex programme. Never-
theless, the Commission was able to optimise the use of the lim-
ited resources available for this programme with a high degree of
inter-service cooperation.

Mobilisation of foodstuffs

18. Considering that the first deliveries commenced in March,
and taking into account the various suspensions and delays which
the programme encountered, the Commission services consider
that the mobilisation of goods took place within the time frame
originally foreseen in the Memorandum of Understanding.

In some cases, notably that of skimmed-milk powder, delays were
deliberate and reflected the desire on the Russian side to receive
the food at a time when it would be needed.

In effect, at the end of 1999, within nine months of commence-
ment, 97 % of the largest EU food aid programme ever had been
delivered to the Russian frontier. The fact that only 58 % in value
of products were delivered to their final destination at the end of
1999 was because the Russian authorities proceeded with mass
interim storage of high value products (beef, pork, and skimmed-
milk powder) which was contrary to the technical annex to the
MoU.

19. With the exception of pigmeat, all the suspensions men-
tioned were imputable to the Russian authorities, either as a result
of their unwillingness to accept the intervention standards, which
had already been made clear in the MoU, or their unwillingness
to reach an early negotiated resolution of difficult issues which
arose during implementation.

21. The quantities indicated in the Council Regulation were indi-
cated as maximum possible quantities and as such were not quan-
tities promised to the Russian authorities. Despite the delays the
programme encountered, it remains the case that 97 % of the
quantities foreseen under the programme was delivered within
the space of nine months. On 22 December 1999 the Commis-
sion therefore considered that its mandate covering the physical
delivery of food products had been met and accordingly decided
not to carry over the credits necessary to mobilise the maximum
quantities possible.

Transport of products

22. The original transport costs for rye did not include the costs
of transport from an internal point of storage to the port of exit
as, at the time of preparation of these estimates, the precise loca-
tion to be used and quantities to be drawn from each location
were unknown. Had the quantities used, as quite often is the case,
been located close to ports, then the estimates would have been
more accurate. In the event, the stocks chosen for shipment were
often located inland and the transport costs were therefore higher
than initially foreseen. For skimmed-milk powder and pigmeat
the divergence between estimated cost and actual cost was due to
a lack of previous experience in the purchase (pigmeat) and trans-
port (milk powder) of such products.

23. The Commission has always been conscious of the need to
verify that the amounts invoiced for monitoring were correct, and
for this reason the SCR commissioned an independent audit of
the invoices of the monitoring companies. This audit report con-
cluded that there were no grounds for disallowing work per-
formed by these monitoring companies.

See also the reply to paragraph 37, for details of the controls put
in place by the Commission.

24. The Baltic ports were used, simply because from the outset
it was evident that the Russian ports alone would not be able to
absorb the quantities in question. Discharge and transit costs for
quantities passing via the Baltic ports were for the account of the
Russian authorities. Additionally, an offer for delivery to St Peters-
burg which did not include discharge of the cargo cannot be com-
pared with an offer for Riga or Muuga where discharge and transit
on Baltic territory was included.

20. The timing of the deliveries was influenced by the large
quantities of products which had to be mobilised and the need to
minimise the risk of port congestion and consequent claims for
demurrage costs

No instances of demurrage were recorded at Muuga and very lim-
ited instances at Riga, indicating a high level of efficiency at these
ports. Nevertheless, the Commission was aware of the monopo-
listic situation in Muuga and imposed alternative ports wherever
possible.

25.1.2001

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Official Journal of the European Communities

C 25/17

25. The port congestion which arose during the period July/
August was not due to an insufficient analysis of the handling
capacities of the port or insufficient coordination with the other
donors, but simply due to the fact that the Russian operator
insisted on shortening the delivery schedule for the third tranche
of cereals. The schedule eventually implemented was longer than
that demanded by the operator, who coordinated both the EU and
American programmes, and resulted in less congestion than would
otherwise have been the case.

27. During the course of the programme the Commission on
several occasions recalled in writing to the Member States, and
repeated during management committee meetings, the need to
deal promptly with the release of guarantees, payments on account
and final payments on presentation of the appropriate documen-
tation.

Additionally, in cases where particular dossiers presented prob-
lems, the Commission services repeatedly advised that partial
payments be made for that part of the dossier which did not
present difficulties. It is unfortunate that on many occasions this
advice was not followed and the operators suffered serious delays.

Distribution in Russia

Implementation by the Russian authorities

28. The Commission wishes to emphasise the cooperation
aspects of the food supply programme. In the spirit of coopera-
tion the Russian Federation agreed to be responsible for the trans-
port of food supplies delivered to its borders. This arrangement
was made not only for the European Union’s programme but also
held for that of the other donor supplying food assistance.

Delivery of products to the regions

30. There were difficulties over the delivery of a quantity of
skimmed-milk powder and meat. Nevertheless, monitoring of
deliveries from interim storage in St Petersburg was carried out
on all consignments. In the case of goods leaving the stores with-
out precise details of their final destination, or where goods did
not arrive at the predetermined final destination within a certain
time-frame, dispatch details were meticulously recorded and fol-
lowed up. Through the forum of the joint working group (JWG)
the Russian operator gives precise details which indicate that the
goods have been received at those destinations originally agreed.
The verification by the technical assistance unit in Moscow of the
information supplied was still ongoing in September 2000 and
the Commission expects that all quantities will be accounted for.

The selling price of products

the late summer and autumn of 1999. This coincided with the
period when indigenously-produced meat was most available. By
comparison, the remaining stocks of meat (almost 40 000 tonnes
of beef and 35 000 tonnes of pigmeat) were dispatched from
store relatively quickly between February and May 2000, when
local supplies were depleted. In the case of beef, this was assisted
by a decrease in price. In the case of pigmeat, the Russian side
rejected a decrease in the price offered by the EU, and went on to
sell the meat notwithstanding. This implies that the problem of
initially slow sales was an underlying one of timing, rather than
price alone.

37. The Commission has gone to great efforts to minimise and
limit the risks associated with a complex and inherently risky
operation. The audit effort was composed of three strands:

— the use of Commission staff, specialising in audit, to assess
and minimise the financial risk associated with the pro-
gramme by establishing tighter internal controls,

— the use of external auditors to examine the cost claims sub-
mitted by monitoring companies to ensure that the claims
were reasonable and supported by underlying records,

— the use of external auditors for the examination of the finan-

cial flows associated with the programme.

The third component involves engaging external auditors for
ex-post checks on the financial flows resulting from the sale of
food deliveries and the use of the proceeds. The Commission con-
sidered it inappropriate to start the audit before the majority of
supplies had been delivered and sold to avoid basing the audit on
incomplete documentation, which would have been neither effec-
tive nor efficient. The contracting of external audit assistance has,
indeed, been delayed.

The Court’s claim that the surplus generated on the sale of food
supplies cannot be collected seems to imply that the Russian Fed-
eral Government will be or is unable to honour the agreements
entered into. The Commission has confidence in the Russian Fed-
eral Government’s ability and intention to fulfil not only the spirit,
but also the letter of the signed agreements.

Quality and use of the products

38. The Commission in Regulation (EC) No 824/2000 of
19 April 2000 amended the requirements for intervention wheat
which now specify increasingly higher minimum levels of protein
for the marketing years 2000/2001 to 2002/2003.

36. A reason for problems in the sale of meat came from the
timing of deliveries. The bulk of the meat was delivered during

39. The lodgement to the special account in respect of the

C 25/18

EN

Official Journal of the European Communities

25.1.2001

quantities used for the production of alcohol was the same as if
the rye had been used for its original purpose i.e. bread-making.

Despite the favourable laboratory analysis in respect of the rye
delivered to Tula, the Russian authorities refused to accept it for
bread-making. The Commission eventually authorised the use of
the quantities in question for animal feed but with a lodgement
to the special account consistent with the use of rye for bread-
making.

The total rye allocation for the Sverdlovsk region was 5 000
tonnes, and a certain amount of this was found to have been
diverted to animal feed processing plants rather than to bread
mills. At that time the poultry industry was in a critical condi-
tion, and a letter dated 23 April 1999 from the regional admin-
istration to the director of the oblast grain operator explains the
decision and states the precise amount of rye to be allocated to
each factory. This indicates that the rye was not re-exported to
other regions. The full amount due for the shipment was submit-
ted in two separate payments for RUR 3,5 million.

The counterpart funds

42.
In many regions the local administrations would have pre-
ferred to use special account funds to finance agricultural devel-
opment programmes. Although the Russian central administra-
tion proposed that a proportion of the funds be channelled to the
development of local agriculture, this was ruled out at an early
stage. The decision not to fund agricultural development has been
vindicated by the independent evaluators, on the grounds that the
Russians were not sufficiently committed to reform the agricul-
tural sector. Furthermore, to make the food supplies foreseen by
the programme conditional on the reform measures would cor-
respond to an objective that had not been intended by the Coun-
cil. The primary concern was to respond to a critical food short-
age brought about by exceptional and unforeseen circumstances
and not to undertake any far-reaching structural reform.

43. The Court notes that the Russian Federation has gone much
further than the requirements of the MoU and the OMoU in ask-
ing the regional authorities for financial guarantees to secure the
delivery of the food supplies. As far as the Commission is con-
cerned this is an internal matter for the Russian Federation and,
given the financial situation in Russia, should be seen as a mea-
sure of prudence on the part of the Federal Government which is
ultimately responsible for the sums due to the special account.

44. The Commission did consider the need for the Russians to
hold the special account as an interest-bearing account. In con-
formity with ‘Government Regulation on the Federal Treasury of
the RF#864 of the Council of Ministers — 27 August 1993’, the
Treasury was obliged to open the special account in the central
bank. To have this disposition modified to allow the account to
be interest-bearing would have introduced unacceptable delays to
the programme.

45. The problem of guarantees is an internal matter for the Rus-
sian Government, who is responsible for payment, as the MoU
makes clear. The Commission has consistently argued, at succes-
sive joint working group meetings and bilateral meetings with the
Deputy Prime Minister, for the prompt clearance of arrears.

46. As of 1 September 1999 RUR 882 million went directly to
liquidating the arrears in the pension fund. However, the pension
fund was able to take a sizeable loan from the Sberbank on the
strength of the funds it knew would accrue from both the EU and
the other food delivery programme.

Transfers from both programmes together with other fiscal
resources enabled sizeable increases to take place in State pen-
sions throughout the Federation. The first, on 1 November 1999,
was 15 %; the second, on 1 February 2000, was 20 %; and the
third, on 1 May 2000 was 7 %. In real terms this represented a
48 % increase of basic pensions.

47. With regard to the 20 % usage of the special account for bud-
get support to the Ministries of Health and Labour it is true that
the original intention was individual project funding. However,
because of the delay on the part of the Russian administration in
submitting appropriately designed proposals, and the fact that the
Commission did not have sufficient resources to properly assess
and evaluate proposals, the decision was taken to switch to bud-
get support.

Nevertheless, in doing so the Commission insisted on there being
a sustainable audit trail in place to the point where the transfers
from the special account were deposited to the nominated budget
lines. These approved budget lines (and not all the budget lines
proposed by the Russian side have been approved by the Com-
mission) represent expenditure targeted at the most vulnerable
groups.

IMPACT OF THE PROGRAMME

On the price of foodstuffs

48. There was little if any negative impact of the programme on
the local market, and the supply of cereals did stabilise prices for
basic food products.

50. Even if the 58 500 tonnes of pigmeat had been exported
commercially, almost EUR 41 million of the EUR 101 million
mentioned would have been charged to the Community budget
in any event in respect of export refunds. In addition, the consti-
tution of the counterpart funds from the sale of the 58 500 tonnes
delivered, which amounted to almost EUR 54 million and which
assisted in the clearance of pension arrears, would not have been
possible if only export refunds had been implemented. The Com-
mission considers that the cost of EUR 101 million is therefore
justified.

25.1.2001

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Official Journal of the European Communities

C 25/19

On the private sector

CONCLUSION

51. The Commission wishes to emphasise the fact that the Rus-
sian Federation was responsible for organising the transport of
food supplied under the programme within the Russian Federa-
tion. Unlike the Tacis programme, the food supply programme
was designed to meet an urgent need and not necessarily to reform
the agricultural sector. According to the independent evaluators,
the EU food programme has undoubtedly eased the situation of
many processors by providing de facto free credit. In the wheat/
flour/bread chain, this permitted a swift supply and contributed
to a stabilisation of prices on urban retail markets. In the grain
chain, the programme was used to stabilise prices of flour and
bread, thus preserving affordability of basic food for poor con-
sumers.

52. The Commsision has no evidence that the EU programme
undercut the exports of neighbouring countries.

On supplies to the regions and on the neediest groups

53. All regions of the Federation received products under the EU
and other programmes taken together. The table given in the
Annex of the Court’s report therefore should be read in the over-
all context of those programmes.

Although there may have been a bias by the Russian Government
in the allocation of food under the EU programme towards those
regions that could pay or provide the necessary guarantees, the
impact of the supplies and special account disbursement has been
felt throughout the Federation. Irrespective of whether or not a
particular region received products through the programme, there
has been no differentiation in the way pension arrears have been
cleared and pensions increased.

This twofold effect led to increases in demand and in affordability
in those poorer regions, and thereby ensured the availability of
food supplies through normal commercial channels.

54.
‘Free distribution’ was permitted by the Council Regulation
only in ‘exceptional circumstances’, the principal objective of the
programme being to make food available at prices which would
not disturb the local markets. The provision of large scale ‘free
food’ would certainly have undermined local markets and for this
reason the quantities so far supplied in this way have been limited.
Nevertheless, the Commission continues to consider requests for
free supplies from the quantities still remaining in stock under the
programme.

55. The Council’s primary intention in launching the programme
was to address the critical food supply situation in over 50 regions
throughout the Russian Federation, and the programme devel-
oped relatively quickly.

Council Regulation (EC) No 2802/98 was published on 17 Decem-
ber 1998. Before any product could be mobilised detailed tender
regulations for product procurement and transportation had to
be put in place. Commission Regulation (EC) No 111/1999 was
adopted, without delay, and published on 19 January 1999. Never-
theless, operational modalities had to be put in place for the pro-
gramme, especially for dealing with the goods after arrival at the
Russian border, before products could be dispatched from EU
stores. Memoranda of Understanding (including technical annexes)
were negotiated and concluded with the Russian authorities by
early February 1999.

This process of putting in place the necessary legal texts cleared
the way for the first tenders, which were in fact launched while
the MoUs were being negotiated. Despite the speed at which the
Commission services worked, the award of these first tenders had
to be postponed because of the failure of the Russian authorities
to notify and agree the certification procedures for all products
being mobilised. It was not until 15 March 1999 that the Member
States made the first transport tender awards and the programme
finally got under way.

As at October 1999 approximately 1,33 million tonnes i.e. 73 %
of the global quantity had been shipped (over 55 000 tonnes per
week) and most of this quantity had already arrived at the vari-
ous final destinations. Despite a number of programme suspen-
sions, procurement difficulties, especially for pigmeat, and con-
siderable logistical problems, the performance of the Commission
services in delivering the food represents considerable success in
implementing the wishes of the Council. This success was achieved
despite the failure to secure sufficient resources to manage the
single biggest food delivery programme that the EU has under-
taken.

56. The contradiction between the main aim as stated by the
Court and the implicit aim of maximising receipts from the sale
of food products is more theoretical than real. In fulfilling its
mandate, the Commission has minimised the risks attached to the
programme while ensuring the successful delivery of foodstuffs to
the regions as requested by the Government of the Russian Fed-
eration. Through contributions to pension funds and social activi-
ties, the proceeds from the sale of the food products have helped
the vulnerable sections in Russian society.

57. The Commission does not believe it would have been appro-
priate to implement the programme without the full cooperation
of the Government of the Russian Federation. To ascribe other
objectives not covered by the legal base to an already complex
programme would have introduced an unmanageable level of
risk.

C 25/20

EN

Official Journal of the European Communities

25.1.2001

58. The absence of the food aid programme might have led to a
need for even higher export refunds. In addition, it has permitted
the constitution of counterpart funds which aided the clearance
of pension arrears and contributed to the significant increase in
basic pensions. This helped to provide pensioners with the means
to purchase the increased supplies available.

The Council Regulation required the proceeds of the special
account to be used for social purposes and therefore precluded
conditioning the programme to agricultural reform. (See also
reply to paragraph 7).

the food supplies had been met. The level of losses both during
the transport to Russia and within Russia was remarkably low for
an operation of this size and level of risk.

60. The Commission recognises that that more could have been
done had resources been liberally available. Nevertheless, the
Commission continues to press the Government of the Russian
Federation to resolve all outstanding problems satisfactorily and
in full compliance with the MoU and the OmoU.

59. Despite the delays the programme encountered, 97 % of the
quantities foreseen under the programme were delivered within
the space of nine months. On 22 December 1999 the Commis-
sion concluded that its mandate covering the physical delivery of

61. The objectives of the programme were twofold: to ensure
that food was available, and to make sure it was affordable. There
was little negative impact on local markets, and the positive effects
of the programme were felt throughout the Russian Federation.