Russia's new direction

by Emily Buckley
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By David McKee

The Russian Grain Union is an industry association established in 1996, with a membership consisting of more than 200 of Russia’s largest grain enterprises and associated companies.

Arkady Zlochevsky has been president of the RGU since October 2002, during which time the full time staff has been expanded from 10 to 17, and an ambitious program has been embarked upon. World Grain had the chance to meet with Zlochevsky at the end of January and discuss the issues facing the Russian grain industry.

WG: The European Union has established quotas for grain imports from Russia, as well as from its other trading partners. How do you feel about the quota given Russia?

AZ: On the one hand Europe talks all the time about free markets, and on the other hand they limit the access of fully competitive Russian goods to their territory. Of course the Russian Federation is not pleased by these limitations. The reason is very simple: we are not practicing dumping, and we do not subsidize the export of grain in Russia. If the situation arises that we are able to produce inexpensive grain in significant quantities and we have a surplus of this grain, then naturally Russia will look for a market to move it to. Europe proposed to the Russian Federation a separate country quota of 600,000 tonnes per year. Without a quota, Russia could ship 2.5 to 3.0 million tonnes in this time period.

WG: In January, Russia announced quotas on meat imports. To what extent are these in response to the disappointingly low EU quota for Russian wheat?

AZ: The need to protect the Russian meat market from massive subsidized imports long ago became apparent. And this is not a response to Europe’s limitation on Russian grain imports. This is really a separate issue. What is the significance of limiting the import of meat? Through this meat we are importing grain. We have nowhere to go with our grain surpluses, and we could be feeding it to livestock on our own territory. Instead we are importing huge quantities of meat products for our population. This is not very beneficial for the Russian economy. Limits are needed in order to establish parity, that is to say, equal competitive conditions between domestic manufacturers of meat products and foreign producers.

WG: What is being done to reduce the cost of transporting grain around Russia?

AZ: When we began to have a significant harvest and large carryover stocks, there arose the problem of moving these stocks around. The problem is connected to the huge territory of the Russian Federation and the high cost of transport. The RGU set out to resolve this issue and began a large-scale campaign to promote discounts for transport of grain. We were successful. In September 2002, tariffs for grain were set 20% below those for transport of other goods. This discount has been extended through the first quarter of 2003, and we are pushing to get it extended to the end of 2003. We also have the idea to push for more significant discounts for transport over distances longer than 2,000 to 3,000 km (1,240 to 1,860). These discounts should be up to 50%.

WG: Tell us about what you are doing to support construction of more port facilities for grain exports?

AZ: We have had a program to push the government to provide targeted stimulation of exports. We succeeded, and in the 2003 budget 130 million rubles (US$ 4.1 million) has been set aside to subsidize credits for the construction and expansion of port facilities. These 130 million rubles will go to pay two thirds of the annual interest on 5-year project finance loans. The 130 million rubles are only for the first year. In the second and third years, and beyond, 130 million rubles per year will also be provided. Such a program will facilitate annual investment of one billion rubles (US$31 million) in the expansion of port infrastructure.

WG: This year the Russian government very actively intervened in the grain market. What was the result?

AZ: Market intervention has been carried out two years in a row. The first year was more of a trial, and was perhaps not very successfully executed. Nevertheless much experience was gained. In the current season the intervention operations achieved the maximum effect. That is to say the price level that the government established for its purchases has now been reached by the market. On average the intervention raised the price by 300 rubles ($9.40) plus per tonne, which is about 15% at current price levels. This is a significant increase and represents a very substantial influence that the government was able to have on market prices.

WG: In just a couple of years, Russia has accumulated very large carryover stocks. How will these stocks be managed?

AZ: We estimated the carryover stocks as of July 1, 2002, the threshold between the old and new harvest, at 24 million tonnes. If we calculate in the order of 13 million tonnes of exports, and subtract the 3 million taken off the market through government intervention, then on July 1, 2003 we will have about 8 million tonnes of carryover stocks. This leftover will be a well-balanced amount considering the level of consumption.

WG: Do you have a prognosis for the coming grain crop?

AZ: I think that the coming crop will be lower — rather significantly lower — than the harvest of the past year. This is connected to a whole range of things resulting from the fall in prices. And prices have fallen in the domestic market severely in the last two years. One effect has been reduced sowing of winter wheat. And we have to figure in one other considerable factor, which is that Russia has been lucky with the weather two years in a row. It hardly seems possible that we could be lucky a third year in a row. So there will be a reduction in the crop, but not to a severely critical level. Rather it will still be in a good range of 65 to 75 million tonnes, which is about the level of consumption. Taking into account the carryover stocks, these quantities will allow for a good life in Russia and even afford a certain level of exports — not the record amounts of this year, but a good steady flow.

WG: What are some of the other tasks that the RGU has set for itself?

AZ: Lowering of tariffs on rail transport domestically and for export; shortening the time it takes for VAT (Value Added Tax) to be refunded to export companies; reduction of export handling costs and increasing handling capacity; participation in the distribution of subsidized loans for export terminals; development of a legal basis for a warehouse receipts system; lowering of customs duties for importation of corn and other feed components, especially protein components like soy meal and corn gluten; limiting the importation of certain grain products, in particular rice; setting up leasing of equipment for processing, storage and transport of grain, including rail hopper cars, and even small vessels for transport by river to the sea; organization of a commodity exchange for grain where quotations are given, prices are forecast, and risk can be hedged; estimation of the budget resources that would be needed to support a mechanism for crop insurance — this is poorly developed in Russia. We are advocating that government money should not be spent for imported grain, but only for domestic grain, and that this money be used for advance payments to agricultural producers, in effect as credits. We are also advocating direct subsidy of exports, in order that money can be earmarked in the budget for this purpose.

We are also pushing for a civilized way to resolve disputes, through reforms of the court system. And so that a civilized turnover of land can start taking place in the Russian Federation, it is necessary to divide up land in nature and not just grant shares in land. These are the programs that we are working on at this time.

WG: You have a full plate in front of you. We wish you success.


David McKee is a grain industry consultant providing market research and other services to companies seeking to initiate business in new markets. He can be reached by email at