Wheat from Chaff: Russia’s going Agro

Guest Contribution by Nick Trickett 

Russia as oil and gas behemoth dominates headlines but the country has become an agricultural superpower whose agricultural exports now vie with military arms for the distinction of Russia’s second-largest export. Russia has been one of the world’s leading wheat exporters for some time. Five years ago, Russia held 14% of the international market for grain exports and wheat exports have grown considerably since then, aided in part by the Russian government’s “counter-sanctions” banning various EU and US food imports. In August, the USDA reported that Russia has overtaken United States as the world’s leading wheat exporter. September saw Russia use its clout in a trade fight with Egypt and points to a trend that may produce investment opportunities and a growing Russian role for wheat and grain importers internationally.

Egypt recently learned how Russia can use its growing predominance on international wheat markets to affect other states’ policies. The grain-poor country leads the world in wheat imports and will import an estimated 11.5 million tons of wheat for the marketing year 2016-2017. Attempting to protect the public’s health, Egypt’s state grain buyer GASC changed its regulatory standards in August introducing a zero-tolerance ban on ergot fungus, a poison that causes hallucinations and other negative health effects in large quantities but is considered harmless in trace amounts. The previous standard allowed for a 0.05% infection rate in wheat and followed commonplace international practice. After the provision was introduced by GASC, Russian exporters refused to pick up tenders as they would fail the new inspection regime. Any interruption for Egypt’s bread subsidy program—a lifeline for tens of millions of the country’s citizens—threatens President Al-Sissi and the country’s stability. Russia applied its leverage forcefully.

Egypt is the world’s second largest exporter of oranges while Russia has become the biggest importer of Egypt’s oranges and citrus fruits. To shore up market access for its wheat growers, Russia banned the imports of fruits and vegetables from Egypt on September 22, lifting the ban five days later—potato imports are still banned—after GASC reverted to its previous regulatory stance on ergot fungus. The exchange highlights the role agriculture plays in Russia’s political economy and diplomatic arsenal.

Current Minister of Agriculture Alexander Tkachev’s assumption of his post last year was a key moment for the country’s agricultural lobby. The government’s policy of import substitution has been a boon for domestic food producers and required a steady hand to manage tight budgets and economic targets. Trade barriers shield domestic producers and saturate the domestic market. Exports will drive further gains for Russia’s wheat production. Tkachev—a former governor of the Kuban’ whose family owns one of the largest agricultural holding firms in the country—lead the charge on lobbying the Duma and decision-makers in the Kremlin to lift an export duty on wheat until July 1st, 2018 this last week. Tkachev also signaled that the duty would be reintroduced in case of a force majeure, such as a ruble devaluation to 80 or 100 on the dollar or a crop failure. Still, the exemption should encourage exports.

Sanctions, counter-sanctions, and the Kremlin have been kind to the agricultural sector and the influential agricultural lobby. Tkachev and other leading figures secured 650 billion rubles through fiscal year 2020 in state spending for various programs to implement the policy of import substitution. Despite fluctuating harvests, farmers and small holdings took a greater share of the industry between 2010 and 2015.The black section of each bar on the far left represents the share of farmers’ holdings in grain production:

Agro.png

Structural shifts in state spending and the sector at large are making it more competitive for investors looking for opportunities amidst Russia’s recession. Putin’s 2001 land code has stabilized private farm ownership. Small agribusinesses were slated to receive 237 billion rubles in the 2016 budget, 10 billion rubles were spent subsidizing domestic production of agricultural equipment, and vertical integrators in the agricultural sector have consolidated in Russia’s Central Federal district—the Moscow-dominated border region with Belarus and Ukraine—reducing physical distances between production of equipment and goods, businesses, and population centers. In short, subsidization and protectionism have made smaller producers more competitive.

Here’s a brief snapshot of grain production in millions of tons (mt) right before and after counter-sanctions and the state’s spending program took effect:

moregrain

As we can see, total production hovered around 105 million tons the last three years. There are structural challenges, not just weather-related, that Russia must address to keep this streak going.

Russia’s small business lending is quite weak, with historically high interest rates and demanding regulations that require banks to apply the same risk scrutiny to both a big business and a small startup when assessing loans. A lot of the hubbub in Russia over the growth of its small business sector stems from forced innovation. With the state controlling so much of the economy, wage arrears, and stagnation, people get creative to make money. But where does the money come from?

In 2013, 55.2% of those polled in the agricultural sector said they primarily funded themselves by attracting investment. By 2015, that was down to 38.5% with personal funds picking up the slack. All that federal money thrown at businesses doesn’t seem to be aiding startups so much as firms already in operation. Foreign investment and exports are likely the best sources of newer funding, assuming that small business growth has continued this year and budget tightening threatens state subsidies. To maintain growth, the sector needs investment.

Agriculture does not fall under the sectoral sanctions put in place by the US and EU and has remained of interest to international players. Since sanctions have gone into effect, Saudi Arabia’s Public Investment Fund reached a deal with Russia’s Direct Investment Fund to put $10 billion into various projects, many of which were in the agricultural sector and to be implemented over the next few years. China also joined with Russia in forming a $2 billion agricultural investment fund. The Direct Investment Fund has also partnered with Abu Dhabi’s Mubadala Development Company for a $2 billion fund and a $1 billion deal with the Japan Bank for International Cooperation, with all of these partnerships geared towards development projects of mutual interest—read: agriculture—as all of the players have concerns over their food security. Anyone looking for financial opportunities in Russia should keep their eyes trained on agriculture since it has to room to grow despite the recession, but is sorely in need of financing to capitalize on export opportunities and other countries’ food security strategies.


Next week, Nick will be back with an update on Russia’s infrastructure challenges for related exports. After all, this stuff has to be moved from A to B if it’s going to sell!

Nick Trickett currently works as a policy analyst on the Eurasian space at the Foreign Policy Initiative in Washington D.C. and is a contributor for Global Risk Insights. He has focused and written on Post-Soviet foreign policy and energy politics, with an emphasis on Russia’s Pivot to Asia, Russia’s East Asian energy relations, and evolving projects in the Eurasian space such as the Silk Road or the North-South Transport Corridor. He is finishing an M.A. in Eurasian studies through the European University at St. Petersburg.

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