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Russia’s agricultural revival continues apace, 30.06.16

Russian agricultural is flourishing as leading companies and the state pour money into the sector amid the sanctions that have cut food imports.

In June, Russia became the world’s biggest grain exporter and the Ministry of Agriculture is expecting a record harvest of 106mn tonnes of grain this year. Poultry and pork deficits have already been turned into surpluses and beef will soon close the gap to make Russia self-sufficient in meat. Next up, investors are starting to turn their attention to fruit and veg, the highest value per hectare crops; hundreds of town-sized greenhouses are planned in the snow wastes of Russia’s hinterland and the Kremlin is opening up the agricultural markets of Asia for local producers.

The Kremlin has finally turned its attention to fixing the stagnant economy and boosting export-orientated industries is a core goal of the new economic blueprint, Plan K. Following the fall of the Soviet Union in 1991, Russia fell into what the leading companies call “an agricultural black hole”, whereby most food products had to be imported. But Russia has come a long way in the last decade: while Russian-made cars on sale in Berlin and Madrid is still a long way off, grain and poultry exports are already a reality.

In addition to 25mn tonnes of grain exports this year, Russia will send an estimated 100,000 tonnes of chicken meat abroad this year, according to Anatoly Kutsenko, director of the Department of Economics and State Support of Agriculture of Russia. Chicken meat output grew 6.3% in the last quarter year on year, according to the agriculture ministry, following a record 4.49mn tones in carcass weight in 2015, according to the Institute of Agricultural Market Studies, which is more than the domestic market can consume.

Kazakhstan and Hong Kong already account for three-quarters of Russia’s poultry exports, but the state is targeting all of Southeast Asia and Africa to find new markets for the meat. Overall, agricultural exports have risen from $5bn a year to $16bn now, and industry experts believe they will top $100bn by 2040.

“The world’s population is growing at a very rapid pace and we need to continue to grow,” Maxim Basov, CEO of RusAgro, said during the St Petersburg International Economic Forum (SPIEF) on June 17. “Nothing is going to get cheaper: not sausage nor bread. That is a good incentive for investors, who will get richer. The domestic market is rapidly becoming saturated. We need new markets if we are going to continue to develop the sector.”

Europe used to be one of Russia’s biggest suppliers of agricultural products, but it is now cut off due to the Kremlin’s counter-sanctions imposed in 2014. Now Russia is becoming self sufficient in many categories of food, it is looking east where much of Asia still can’t feed itself. “The state import substitution policy has been successful. We think of ourselves as a European country, but we are an Asian country and that is the future of the world. We need to go there with the government,” said Basov.

China is the biggest market, but as food security is as much a political issue as economic it has a strict import regime on agricultural goods. All China’s neighbours are eyeing it hungrily and the Russian government is working hard to prise open the door. This year the Chinese made the first concessions to Russia by agreeing to open up its grain market to Russian imports starting in December. Russian Minister of Agriculture Alexander Tkachev has been in Beijing several times this year and said that talks on opening up China to Russian poultry and pork are also making progress.

South Korea is also currently closed to Russian imports of agricultural products. However, the Middle East is more amenable to Russian imports and already sources a large part of its halal meat from factories in Tatarstan. “We are also in negotiations with Dubai and UEA to create hubs to transfer our food products,” said Tkachev. “That is quite a market and we are knocking at the door and it is about to open.”

Cees 't Hart, president of Carlsberg Group, which has significant investments in Russia, welcomed the growing emphasis on exports. But as one of just a few companies with production in Russia that exports to the rest of Europe, he worries that the government is not paying enough attention to making the export regime predictable. “The economic slowdown [in Russia] has affected sales, but the real pressure on the market has been the changes in excise duties. We need a more pragmatic approach to taxation and predictability,” Hart told the Spief delegates.

Fruit & veg

So far the emphasis has been on meat, but that is already starting to change. Russia has been striving for years to become self-sufficient in poultry production to wean itself off the “Bush’s Legs”, as imported frozen chicken legs were dubbed by Russians in the 1990s. But now companies are looking at investing in giant greenhouses to produce fruit and veg. Russia’s second largest agricultural conglomerate, RusAgro, is planning to build four greenhouses, each one the size of 100 football fields, and has already given the goahead for construction of the first two in Siberia and the Far East. Agriculture Minister Tkachev said that a total of 200 such greenhouses are needed that would cover 3,400 hectares (ha) of land scattered across the country.

Russia has already made some inroads into the production of fruit and veg. Peter Brabeck-Letmathe, chairman of the board of directors at Nestle, said that his company already sources 90% of its food inputs in Russia for the food it sells in the country. Specifically, a potato deficit has been turned into a surplus, but Russia produces no tomato paste at all that could go into things like ketchup. (A quirk of Russian culture means that tomato soup is almost non-existent, as no one seems to like it.)

“Russia has a competitive advantage in agriculture that is as big as it is in oil,” said Brabeck-Letmathe. “That is thanks to some of best soils in the world and don’t underestimate the water; Saudi was one of top 10 grain producers and now imports as it’s running out of water. But attention goes on the big things like chicken, pork and beef. Vegetables have higher returns; [they are] labour intensive, but can be done with little investment.”

Brabeck-Letmathe went on to point out that Russia is a net importer of apples, which used to come from Poland before the sanctions but now come from Serbia. Russia could become self-sufficient in apple production, but as trees take longer to grow than, say, sugar beets, the investment capital going into the sector has been targeting the easier crops with a shorter payback cycle for now.

“You need about 40,000-50,000ha of apple trees to supply the Russian market and that would take an investment of about $1bn, but that is not a lot in the grand scheme,” Silviu Popovich, president of PepsiCo Russia, Ukraine and CIS, told Spief delegates. “Once the government takes an interest in these sorts of investments, that is what will make the difference.”

Pepsi used to import sugar, but can now source it entirely in Russia. “We are close to sourcing 70% of all our agricultural inputs in Russia domestically,” Popovich said.

Investment opportunity

Until now, the agriculture sector’s development has been pushed by a state that made large and generous subsidies available. But increasingly, private investors are becoming interested, partly thanks to the sheer size of the projects. Still, the leading companies say that the conditions are still too tough to see a real boom. Ilya Nitsenko, director of development at Primebeef, one of Russia’s leading beef producers, recently told bne IntelliNews that investing in agricultural was still not possible without state subsidies.

“We need cheap investment credits if we are to continue to grow and reach the country’s full production potential,” said Basov. “We can expect activity to increase 15% every year, but then we need interest rates of 4-5% to build up exports, not 10.5%. We also need good government policy to ensure there is equal access to subsidies that are distributed evenly and fairly. And we need predictability: our projects are for the long term and don’t pay quickly.”

The government is also keen to see the imported equipment and technology replaced by homegrown alternatives. Agriculture Minister Tkachev complained that 80% of equipment needed to raise pigs in Russia comes from abroad, “down to the tiniest screw”. “Why can’t we create facilities that generate these things here in Russia?” the minister complained. “It will decrease the prices and have a positive effect on growth.”

In the meantime, bne IntelliNews sources report that the Russian government has been placing record orders for agricultural equipment and the foreign makers of this equipment are currently enjoying a bonanza.

Another piece of the puzzle that remains underdeveloped is the supporting infrastructure. It is no use producing thousands of tonnes of potatoes until you have somewhere to store them; Russia still needs a lot of investment into things like sophisticated refrigerated warehouses and irrigation systems.

But targeted investment could still deliver big gains: Tkachev said that Russia is on course of produce 106mn tonnes of grain this year, but with more investment and better use of technology that could rise to 150mn tonnes a year within a decade. “That would bring a lot of money into the country,” Tkachev said.

“We need to invest in genetic selection for breeding and technical innovation and upgrades to cultivate millions of hectares of unclaimed land to ensure increases in grain and other cultures,” said Rosagro’s Basov. “The prospects are bright and the black hole we had in the agro sector will be closed for ever. Agriculture will be profitable and we will be self-sufficient.”

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