Methods of financing agricultural machinery in Russia
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The agricultural sector
1- Share in the economy
The agricultural sector accounts for 5% of GDP and agricultural production accounts for 3.5% of GDP.
2- Working population
The agricultural sector in Russia employs 10% of the working population.
3- Split of UAA
Russia has 220 million hectares of cultivable land. A substantial portion of this land was set aside in the 1990s and restoring it to productivity is now a strategic priority.
From the USSR to the Russian Federation: the transition of the agricultural system
| Structures | Surface area (UAA) | Production (share in %) |
|---|---|---|
|
1989 (USSR) |
||
|
• Collective structures
• Smallholdings: “additional production economy” |
Sovkhozes = 121 million ha. (56%) Kolkhozes = 87 million ha. (40%)
Smallholdings = 8.8 million ha (4%) |
Smallholdings: - potatoes = 59% - vegetables = 30% - fruit = 58% - meat = 30% - dairy = 27% |
| 1991-1995: Transitional reforms (Russian Federation) | ||
|
- 9,600 kolkhozes and sovkhozes remained (29.3% of the UAA) |
||
| Situation in 2000-2001 | ||
|
- “Agricultural organizations”, merging of kolkhozes, sovkhohzes and new types of private companies (almost all of the 7.9 million people involved in farming) - “Farms”: 260,000 farmers - Family economy of urban or rural smallholdings “available to citizens” |
Farms = 8.1% of UAA, 9.2% of cultivated land Family economy: 14.1% of UAA, 5.7% of cultivated land
Total UAA = 196 million ha. |
Farms producing crops = 11% cereals, 16% sunflower, 6% sugar beet, 1.2% potatoes, 2.9% vegetables Farms producing animals = 8% sheep, 2-3% cattle, dairy, pork Family economy: 92.5% potatoes, 80% vegetables, 40% herds of cattle, 48% dairy cows, 43% pigs, 63% sheep. |
Source : http://geoconfluences.ens-lsh.fr/doc/etpays/Russie/RussieScient.htm
4- Main areas of production
Krasnodar is the leading agricultural and agri-food production region. It is followed by Rostov-on-Don and Stavropol (South), Tatarstan (Volga) and Altai (Western Siberia).
The “Black Earth” region, an extension of the Ukrainian cereal plains, is also a very important agricultural hub (the Kursk, Belgorod, Voronej and Lipetsk regions).
5- Main crop and livestock production
Crop production (54%) outstrips livestock production (46%).
6- Strengths and weaknesses of agricultural production
Russia’s cereal production continues to grow as yields increase and the cultivated area expands. Production reached a peak in 2008 due to excellent climatic conditions: 108 million tonnes of cereals were harvested. The lack of transport infrastructure and insufficient silo capacity nevertheless pose the problem of bottlenecks in the production cycle. In 2009, a partial drought in several regions resulted in a drop in cereal production.
Cattle production has decreased by 50% since the reorganization of the sector in the 1990s. This trend is reversed in the pig and poultry sectors.
7- Russia’s fleet of agricultural machines
Russia stopped investing in the agricultural sector at the end of the 1960s. Consequently, most of the equipment and machines in use today are seriously obsolete. Agricultural mechanization, which was a jewel in the crown of the Soviet agricultural production chain, experienced a period of decline, illustrated by the economic collapse - in the 1990s - of giants such as Rostelmash, which produced tractors and combine harvesters under the Don brand.
Today, the use of a fleet that is too old is generating substantial losses at the sowing and harvesting stages. 70% of the fleet of agricultural machines need to be replaced. There is a very strong demand for machinery and equipment in the cereal sector (combine harvesters, soil preparation equipment etc.) and the livestock sector.
The Russian agricultural machinery sector is generally represented by locally produced machines, which accounted for 79% of the fleet in 2007 as against 21% imported.
In 2007, the fleet of agricultural machines in Russia totalled 1.2 million units including:
- 405,700 tractors
- 140,800 combine harvesters
- 121,200 ploughs
- 153,400 cultivators
- 178,700 seed-sowing machines
According to the records for that same year, the total number of agricultural machines in Russia decreased by nearly 10%, which shows the recessive spiral into which this sector had fallen while the rest of the economy was experiencing strong growth (2000-2008).
The table below shows the scale of the decline seen in this sector over the past 20 years:
Number of agricultural machines in Russia, 1992-2007 (in thousands of units)
| 1992 | 1995 | 2000 | 2005 | 2007 | |
|---|---|---|---|---|---|
| Tractors | 1209,7 | 1052,1 | 746,7 | 480,3 | 405,7 |
| Ploughs | 460,3 | 368,3 | 237,6 | 148,8 | 121,2 |
| Cultivators | 541,6 | 403,5 | 260,1 | 175,5 | 153,4 |
| Seed sowing machines | 582,8 | 457,5 | 314,9 | 218,9 | 178,7 |
| Cereal combine harvesters | 370,8 | 291,8 | 198,7 | 129,2 | 107,7 |
| Reaping machines | 208,2 | 161,6 | 98,4 | 63,9 | 53,8 |
| Side discharge harvesters | 218,7 | 152,2 | 85,2 | 46,9 | 37,6 |
| Irrigation equipment | 69,5 | 46,3 | 19,2 | 8,6 | 6,7 |
| Crop spraying machines | 88,6 | 56,9 | 32,5 | 24,6 | 24,5 |
| Milking machines | 197,5 | 157,3 | 88,7 | 50,3 | 39,8 |
Source: AMIKO study (2008)
In 2007, local production of agricultural machinery rose to 193,811 units, an increase of 11% over 2006. This trend continued in 2008, until the beginning of the global economic crisis.
The main producers of agricultural machinery in Russia are:
- Rostelsmach (Rostov-on-Don, producers of combine harvesters)
- Peterbourgski Traktokny Zavod (St. Petersburg, tractors, ploughs, harrows)
- Elaboujski Avtomobilny Zavod (Tatarstan, tractors)
Exports of Russian agricultural machinery
- In 2007, Russia exported agricultural machinery, equipment and spare parts with a total value of USD293.9 million, i.e. 32% more than the previous year (USD222.6 million).
- The main customers for Russian machinery and equipment were Kazakhstan (57.9%), Ukraine (12.9%) and Usbekistan (9.3%).
Source of data: French Customs authorities
Top
The politics of agriculture
1- Recent history
Russia is not self-sufficient in food, which is an economic aberration for such a sparsely populated country that has high quality agricultural land and relatively strong rural traditions. According to D. Ryko, CEO of an agricultural market analysis firm, Russia will be Europe’s leading market for foodstuffs by 2015 and also the most attractive market in the world after India: “It is a challenge for national agriculture, which is not very competitive.”
Since September 2005 and the announcement by President Putin of the implementation of four priority national plans, agriculture has become a political priority for the State. Russia’s dependency on foreign food suppliers must be reduced, and it needs to combat the abandonment of vast rural areas of the country and develop a sector with strong potential for the future.
Mr Putin has stressed his interest in the question of agricultural development on numerous occasions and is in close contact with the management of agro holdings. Whilst President of the Russian Federation, he participated in the demonstration of agricultural machinery at Russia’s “Day of the Countryside 2007”, which was held at Rostov-on-Don. Some analysts believe that as President, Putin also sought to reinforce his power and authority inside the country through direct contact with the Russian peasantry.
2- Development projects
a. National projects
The State programme for the “Development of agriculture and regulation of agri-food, raw materials and food markets for 2008-2012” drawn up by the Russian Ministry of Agriculture sets out a long term agricultural strategy and allocates substantial financial resources to enable it to achieve its objectives (EUR20 billion over 5 years).
The accent is on development projects in the breeding sector, and particularly beef production.
b. International projects
Financed by the IFC
Increasing the production capacity of producers of meat and agricultural foodstuffs (May 2008)
- Status: Approved
- Details of project: The IFC has invested USD50 million in the capital of Belgrankorm to increase the company’s production capacity and introduce best practice in governance and social and environmental sustainability.
- The funds will enable Belgrankorm to modernize and expand its poultry, pig and dairy breeding facilities and buy new agricultural machinery. The funds will also be used to build a new poultry breeding facility and buy a mill in the region of Veliky Novgorod.
- The IFC will also grant the company a loan of USD30 million over and above its investment. These funds will enable it to introduce best veterinary, nutrition and livestock management practice.
- Contracting entity: Belgrankorm Group
- Financing: International Finance Corporation (IFC)
- Amount of loan: Loan of USD30 million + USD50 million investment in the capital of the Group
- Date of approval of loan: 29/05/2008
- UBIFRANCE contact: Agnes Paulus, email: agnes.paulus@ubifrance.fr
Financed by the BRED
Construction of a vegetable and salad processing facility and increased lettuce production (June 2009)
- Status: Under evaluation
-
Details of project: The BRED is planning on granting finance of USD20 million (USD10 million in the form of a loan and USD10 million as a capital injection) to Belaya Dacha Trading to finance the construction of a new vegetable and salad processing facility in the St Petersburg area. The EBRD funding will also enable the company to increase its own production of field-grown lettuces in central and southern Russia. The funds will also finance circulating capital requirements from 2008 to 2011. The project will have an impact on the transition by enabling farmers to invest in modern harvesting technology and introducing healthy and high quality products outside Moscow.
The estimated total cost of the project is USD32.8 million.
The company is one of the main suppliers of iceberg lettuce to Macdonald’s and is intending to adopt the ISO 14001 and OHSAS 18001 standards in the future. - Contracting entity: Vadim Ekomasov
- Total project cost: USD32.8 million
- Financing: European Bank for Reconstruction and Development (BRED)
- Amount of loan: USD20 million
- UBIFRANCE contact: Agnes Paulus, email: agnes.paulus@ubifrance.fr
Programme of investment in a pig farming and meat processing facility (October 2008)
- Status: Under evaluation
-
Details of project: The BRED plans to grant loan to a maximum of EUR20 million to Kuzbassky Pischekominat, a pig farming and meat processing company, to finance its medium term investment programme. The estimated total cost of the project is a maximum of EUR76 million. An independent consultant and the BRED undertook a preliminary environmental and social study of the project. The aim of the programme is to enable the company to conform to international best practice. The planned modernization should improve the yield, the well-being of the animals, the standards of hygiene and the environmental management of the existing facilities.
The BRED will monitor the project (site visits) and carry out independent audits once the facilities have been built. -
Contracting entity: Stanislav Lomov, Head of Department of Investment and Development,
CJSC "Kuzbassky Pishekombinat" - Total project cost: Maximum EUR76 million
- Financing: European Bank for Reconstruction and Development (EBRD)
- Amount of loan: Maximum EUR20 million
-
UBIFRANCE contact: Agnes Paulus, email: agnes.paulus@ubifrance.fr
Financed by the EC
No projects currently identified
Financed by the EIB
No projects currently identified
c- Bilateral projects
No projects currently identified
3- Budgetary options and financing arrangements implemented
In 2009 the Russian Government increased the federal budget of its Ministry of Agriculture by RUB54.24 billion (USD1.9 billion) over the budget initially approved. Total expenditure in 2009 would therefore be RUB148.23 billion (USD5.3 billion), almost 68% of which would be transferred directly to the budgets of the provinces and municipalities or used to subsidize interest paid by agricultural producers. The Government also increased its expenditure on agricultural education, professional training and applied research by RUB4.70 billion (USD168 million) to RUB17.89 billion (USD629 million). The budget for the Federal Fisheries’ Agency remained unchanged at RUB8.32 billion (USD297 million). The USDA report is available on request.
Market opportunities for French exporters
The global financial crisis, which had a brutal and unexpected effect on Russia, called into question the ambitious modernization strategies embarked upon in the agriculture and agri-foods sectors.
The crisis was much more vicious in the agricultural sector.
All banks, even those controlled by the State, revised their policy of granting credit, even though this policy governed demand up until 2008. The Russian regions whose budgetary resources had been suddenly cut off retreated on their aid and subsidy programmes. Finally, Prime Minister Putin brought relief to local machinery producers by announcing a complete end to public aid (direct or indirect) for the purchase of foreign equipment and a rise in Customs duties on imported combine harvesters from 1 January 2009 (from 5 to 15%).
Foreign suppliers of agricultural equipment were therefore suddenly faced with a collapse in orders, and Russia moved in just a few months from Eldorado status to that of the market most affected by the crisis.
The new market conditions resulted in a change in behaviour by foreign suppliers. This entailed taking advantage of the benefits afforded to local production to gain access to public finance:
- German constructor Claas led the way in 1995 by establishing a combine harvester factory at Krasnodar. It was followed by Amazone, which entered into a partnership with Russia’s Evrotekhnika (Samara) in October 2005.
- In summer 2009, US company John Deere announced the construction of factories in Kalouga and Domodedovo, near Moscow, for a budgeted amount of USD120 million.
- In September, Germano-Italian Group Same Deutz Fahr announced the launch of production of tractors and combine harvesters at its new factory in Russia. The maximum annual production of the factory - working at full capacity - will be 2,000 tractors and 500 combine harvesters. To realize this project, Same Deutz Fahr and EuroAgroPostavka joined forces to create Same Deutz Fahr Russia Agricultural Machinery, a joint venture of which Same Deutz Fahr holds 75% and EuroAgroPostavka - the exclusive distributor of the Deutz-Fahr brand in Russia - holds the balance. It was decided to establish the factory to the south of Moscow as the region is central to a number of potential suppliers and close to Russia’s most important agricultural areas. The factory, which is currently only a simple assembly unit, may be in line for an investment of over €20 million.
Voices in Russia are currently being raised against the strategies of foreign companies that are seeking to find a way round obstacles to importing their products without genuinely integrating elements of Russian manufacture in their production (particularly an article in the weekly journal Russkii Buzines on 4 October 2009). However in the medium term, it is only through the integration of foreign-manufactured elements (particularly diesel engines) that the local Russian industry will recover.
Opportunities still exist for smaller French exporters to supply parts and elements used in the local production of agricultural machinery.
