RF bets billions on becoming a dominant grain exporter

18 Jun '10
Oleg Kouzbit, Online News Managing Editor

The RF has announced a $120m partnership with Basic Element aimed at bolstering grain exports. It is part of a $700+m effort Russia’s United Grain Co. has unveiled for the next five years, and a fraction of what the Medvedev administration sees as a $3+bn grain logistics overhaul. After a dismal decade, the RF has staged a spectacular comeback as a leading global supplier of grains with 14% of global sales, challenging 60-year U.S. dominance in the market. The big questions are how successful Russia will be in overcoming its abysmal logistics and whether or not it can cope with what looks like a looming global glut in grain supplies.

The United Grain Company (UGC) has announced plans to build a $120m grain terminal in the Khabarovsk regional sea port of Vanino.

One of Russia’s largest grain PPPs with a majority government stake has pooled efforts with Oleg Deripaska’s Basic Element to build a 150,000-ton harbor silo with a transshipment capacity of 2.5 million tons a year. Another partner to reportedly take part in the project is Rusagrotrans, a sizable rail shipment operator set up by First Freight Co. and Russian Transportation Co. to secure an ever-growing share in Russian grain exports.

Timeframes for the project have yet to be disclosed.

Deripaska weighs in

What roles each of the partners will play in the project and how ownership will be distributed has yet to be specified. According to UGC, as the government partner it expects at least 25%.

However, market players with knowledge about the project tend to think it is Basic Element that is the key to making the future endeavor very profitable.

UGC and Rusagrotrans ship grains to Vanino where Deripaska who controls the port takes over and sends trains back to Siberia and beyond with a full load of imported argil for Basic Element’s aluminum production sites throughout the country—that may be the best option, experts say, to avoid a money-losing business of running huge trains empty.

And it is Basic Element, too, that has reportedly found a long-term partner to buy Russian grains from Vanino; a company spokesman said this would most likely be Japan’s Itochu Corp, with others also being considered.

A logjam blocks a hungry Asia

Russia has been talking about boosting Siberian and Far East grain exports to Asia since the mid-2000s. As far back as 2006, plans were to establish infrastructure and export up to 5 million tons of grain.

Little was done until late 2009 when Vladivostok Commercial Sea Port inked a memo of intent with Siberian Agrarian Holding to build their terminal with a capacity of 1.5 million tons a year—a move that may or may not materialize at all.

The logjam is the current logistics that involve direct transshipment from rail to ship and containers, which limit exports from Russia’s Far East to a mere one million tons a year.

Japan alone reportedly expects more than 20 million tons of grains each year, so with the fast-growing markets of China, South Korea and other ‘tigers’ lining up for Russia’s grain drastic logistical improvements are a must.

The Kremlin reportedly has $3+bn worth of plans to address the problem. The UGC-led partnership sounds determined to make some real headway.

Looking West to a new St. Pete grain terminal

The Vanino project is part of a much broader effort by state-run UGC to maximize Russia’s grain export potential, both in the Far East and other parts of this country.

According to UGC CEO Sergei Levin, the firm is finalizing details of the Khabarovsk regional project and already eyeing a similar project in Primorsky’s Nakhodka port.

The company is reportedly in talks with North-Western logistic partners over possible construction of a grain terminal at the sea port of Ust-Luga outside St. Petersburg. The prospective project’s tentative transshipment capacity will be six million tons a year; UGC believes the Ust-Luga price tag will be the same as Vanino’s.

Exports from the Black Sea to triple

Over the next two years the United Grain Company plans to put up about $170m to nearly triple grain exports from four of its main assets in the Azov – Black Sea basin, both harbor silos and port terminals.

Overall, between now and 2015 the company estimates its investments in Russia’s port grain transshipment development to hit $730+m.

The prince, the pauper…

After years of being a virtual underdog in the global grain export market, Russia is now playing catch up. Its large-scale use of advanced agricultural techniques has enabled many more projects to be developed and is changing the country from being an importer to becoming a net exporter of grains.

Between the late 19th century and the WWI, followed by the Bolshevik coup in 1917, Russia was an indisputable leader in grain exports to the world’s most lucrative market of that time, Central and Western Europe.

The Yarmarka trade fair in Nizhny Novgorod was internationally known in the 1890s as a central market point for establishing European grain prices.

The revolutionary havoc of the late 1910s – early 1930s was a major disruption and Russia’s historical role of being a global grain supplier ended.

The violent de-privatization of Russian farmlands and the subsequent impoverishment of tens of thousands of peasants (of whom many had by 1917 set up what the contemporary world would call small and medium-sized agribusinesses) eventually ruined what was left of Soviet agriculture.

Newly established kolkhozes and sovkhozes (Soviet collective farms), with little or no skilled workers, found themselves with thousands of acres to plant with not enough seed, poor equipment and abysmal management.

Only in the late 1950s did the USSR re-emerged as a player in international grain (wheat) markets, driven primarily by the necessity to raise enough hard currency to modernize its industry and agriculture.

Following the demise of the Soviet regime in 1991, Russia’s agriculture defaulted again. It took another decade for the country to become an exporter.

By 2008, with the grain markets seeing record price highs, both Russian and international investors flocked into the sector. Land prices in Russia still remain far below the price in any EU country. But the global economic meltdown left investors hurrying for the exits and even highly-promising domestic players like Razguliay saw share prices fall 75%.

From 0.5% to 14% of global grain exports

Between 2000 and today Russia has gone from providing a diminutive 0.5% of global exports to a solid 14%, pushing the U.S. share down seven percentage points to 19%.

The Russian government has made agricultural exports a key priority. Last year, the RF invested more than $6bn in its agriculture. For this year, $3.5bn has been allocated, with a special focus on increased land fertility measures.

By mid-June Russia’s regions, from Northern Caucasus to Sakhalin, reported over $2.7bn already spent or about to be spent on agriculture.

Last year, Russia exported about 20 million tons of grains. The Kremlin has set a goal of boosting exports to 30 million tons within the next few years. According to a U.S. Department of Agriculture forecast, by 2019 Russia has every potential to outperform America as the world’s largest wheat exporter.

Grain dumping or smart business?

Recently the country made waves with a below-market sale of 180,000 tons of wheat to Egypt, the world’s number one wheat importer—the move that some have already called a bellwether of Russia’s ability to dump grain at will.

According to Egyptian authorities, Russia now accounts for a hefty 58% of that country’s annual purchases, leaving the U.S. with just 8%.

Too much of a good thing?

Some sector analysts are less concerned with Russia’s new export muscle and more worried about a possible market glut.

This year looks like the second yearly bumper-crop in a row which caused a plunge in prices in the aftermath of the financial crisis. These analysts think that any glut will depress Russia’s domestic grain market and stifle investment—inventories are already on the rise, they say.

Russia’s Grain Union, a lobby association in the sector, is bullish.

It has reportedly solicited as much as $320m in federal subsidies to support grain exports should there be difficulty in finding willing domestic buyers.

With the raft of new logistic projects, including UGC/Basic Element’s Vanino, everything seems to be falling in place to enable exporters to once again become a dominant player in the world’s export grain sector.

Readers' comments:

Pensioner: "Russian annually imports $29-$32bn worth of groceries. Grain should not be exported, but rather used to make meat, milk and eggs."
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