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. Last Updated: 07/27/2016

U.S. Aid Deal Hits 11th-Hour Snags

The government announced Thursday that it had reached a favorable $600 million deal with the United States for food for the coming winter, but later the signing ceremony was suddenly put off after Washington made last-minute demands.

Deputy Prime Minister Gennady Kulik said the U.S. wanted tax exemptions for the food aid, Interfax reported. He also said that the U.S. wanted profits made from the sale of grain provided for free be deposited in the Federal Pension Fund, which has historically been unable to meet its payments. That U.S. condition, in Kulik's opinion, "violates [Russian] rights."

The Russian government wanted to direct the money toward pensions but also other social programs, including one for victims of Chernobyl, Kulik said.

The signing ceremony had been set for Thursday evening in the Russian White House. The U.S. delegation has extended its stay and talks are to resume Friday, The Associated Press reported, citing a U.S. Embassy official.

Under the deal announced by Kulik, the money offered was a loan to be used to purchase 1.5 million tons of U.S. food products, mainly grain. In addition, the deal calls for Russia to receive 1.5 million tons of wheat, plus 100,000 tons of produce, for free.

Kulik said the terms of the loan were good, and the United States has promised to cover the costs of getting the food to Russia.

"Never before has Russia obtained such favorable conditions," Kulik said.

If it goes through, the deal would be a bittersweet victory for government officials who are scrambling to prepare for what promises to be Russia's most difficult winter in years. Russia imports up to 60 percent of its foodstuffs, according to analysts, and a steep devaluation of the ruble has made many food items unaffordable to the average consumer.

At the same time, the agreement with the United States demonstrates the weakness of Russia's economic and agricultural system, which has failed to produce sufficient food for Russia's 150 million people, economists said.

The $600 million is to be given to Russia in the form of a 20-year loan, with an annual interest rate of 2.5 percent. Interest on the loan will not have to be paid for the first five years, which will ease pressure on Russia's already strained debt servicing.

With the loan, Russia is to buy 500,000 tons of corn, 500,000 tons of soybeans, 200,000 tons of wheat and 120,000 tons of meat. Together with the free grain, the deal represents some 3.1 million tons of U.S. food, which is the amount the U.S. presidential administration said it was aiming for on Wednesday.

For many economists, however, the deal creates more questions than answers. Given Russia's awful track record of internal distribution, the remote areas that need the food the most are likely to be the ones to see it last, analysts said.

"Where is the mechanism for distributing this aid?" said Leonid Kholod, a former deputy agricultural minister and a specialist in the agricultural industry.

Toby Moore, an official with the USA Poultry & Egg Export Council, said in a telephone interview that "Our main concern is that there is no viable state distribution system, and so therefore, much of the food will not reach the people who need it."

It is not clear at this stage who will have the right to distribute the food. Roskhleboprodukt, an agency that is partially state-owned, and that used to procure grain for the Soviet Union, is said to be in the running to distribute the grain and meat, and it is known that the agency president attended the negotiations. A Roskhleboprodukt official was unable to comment Thursday.

Red Cross officials in Moscow said they were looking into using their distribution system within Russia for transporting part of the new food.

Previous attempts at distributing food, including humanitarian aid, resulted in massive amounts of produce being dumped into the most liquid markets, such as Moscow and other regional centers.

One U.S. official familiar with commodities exports to Russia said, "I do not trust the Russian government to do the right thing."

One potential area for abuse in this new deal, according to specialists, involves the free wheat Russia is to receive. Kulik said that all free wheat will be processed into flour and sold at the market price. All funds generated will then be placed in a special account to be used for social programs and for developing Russia's agricultural sector, the deputy prime minister said.

Analysts, however, see this as an opportunity for bureaucrats and inside businesses to make a windfall in easy money.

Others questioned the sincerity of the U.S. government, which has been known to lobby for the interests of its agricultural sector in foreign markets through such programs.

The deal represents a good opportunity for U.S. farmers to sell their surplus produce, and the National Cattlemen's Beef Association said on Thursday that it had received assurances from the U.S. government that beef will be included as part of the package. Moore said he would be surprised if chicken wouldn't be included in the deal as well.

"I don't see any catastrophe on the domestic produce market," Kholod said. This type of deal, he said, "decreases demand for domestic produce and destroys incentives to improve domestic agriculture."

If Russia needed food for the winter, he said, the government should have first studied where food is needed, and then conducted a tender among other countries that want to export grain and meat to Russia, such as Kazakhstan and different nations in Europe.

Kholod said that Poland, for instance, had to feed hot dogs to its pigs because of an excess in sausage products. "We should have exploited the competition among food exporters," he said.