Russia starts to sow seeds of ‘wheat diplomacy’

Russia starts to sow seeds of ‘wheat diplomacy’

 “Vladimir Putin had just become president,” said a market adviser in Moscow, who requested anonymity. And they told him in a meeting that Russia imports more than 50% of his food. His face went pale.

"Since then, Putin has set himself the goal of ensuring better food security in the country," he added during a meeting in 2000. "He is afraid of addiction." And now Russia is number one in wheat and let go. others depend on it."

The sector, beleaguered since Soviet times when it was a net importer of grain, was neglected until 2000, with no subsidies to producers and heavily dependent on imports.
Putin launched a state-run rural development program in 2004 through national projects aimed at stimulating investment and boosting production. It included goals to achieve 80-95% self-sufficiency in basic commodities, including cereals. A decade later, a grain charter was introduced to increase market transparency.

The result has been very positive," said Daria Snitko, an analyst at Gazprombank. “It certainly helped exports.”

The same goes for the sharp devaluation of the ruble - making exports cheaper - that followed US and European sanctions against Moscow after the annexation of Crimea in 2014 and the confrontation with neighboring Ukraine. Kremlin bans banning most food imports from the West have further boosted domestic producers.

“We are the world's largest country by region, becoming the world's largest wheat exporter, overtaking the United States and Canada for the first time in 2017.” We are number one,” Putin said at a later press conference.

Wheat, and especially grain, have become valuable sources of foreign capital in a criminal economy. Russia is now slowly making its way into Eurasia, Africa, and Latin America as an exporter of agricultural products as it seeks to reduce its dependence on oil, identify new markets and increase its global diplomatic reach. Some even expect Russian grain to become the Kremlin's new oil – a commodity that will keep some countries dependent on its resources – or at least open the door to others.

Chicken carcasses at the Oktyabrskaya poultry farm in the village of Koltsovo in the Novosibirsk region © Kirill Kukhmar / TASS

Russia's deal to cut oil production in 2016 in partnership with OPEC was a compromise with Saudi Arabia, the oil cartel's de facto leader. Riyadh needed higher oil prices to balance its budget with Russia, says Madina Khrustaleva, an analyst at investment research firm TS Lombard, so Moscow compromised, cut production, and raised oil prices more than it could. wished. "Russia [cooperated, but] in return, Saudi Arabia opened up its huge market for chicken. 

Riyadh has also recently reduced its demand for quality imported wheat, opening the door to Russian exports, which now account for 10% of Saudi Arabia's grain imports, mainly barley, according to Rusagrotrans, the largest transport company. the grain from Russia.

After successfully conquering new markets, particularly in Asia, China and Vietnam have become major customers. Russia has tripled its beef exports and doubled its pork exports by 2020, both in tonnes and year-over-year dollar gains. Half of the beef went to China after it opened its market to Russian beef producers last year. Vietnam, which started importing Russian pork in late 2019, is now the country's second-largest meat importer in the world.

Industry experts say grain and meat exports increase Russia's presence in developing countries, especially in neighboring or very close countries where logistics is not a problem. The UN estimates that the world needs to produce 40% more food by 2050 to keep up with the global population, which is expected to grow by 2 billion over the next 30 years.

“Safe growth and success in the food industry is our destiny,” said Oleg Rogachev, a member of the board of directors of Rusagrotrans. “It is beneficial because of the geopolitical situation.
“Many of our food-insecure consumers are almost below us,” he adds. “Very close – everywhere in Africa, in the Middle East, in the Asia-Pacific region, in the Far East. Deliveries from Russia are the fastest and easiest way to meet their needs.”

Not only "Oil and Kalashnikov"
It wasn't always like that. Russia produces enough oil to meet 10% of the world's needs, and in the 1990s, after the collapse of the Soviet Union, it used oil money to import most of its food.
But now Russia is almost self-sufficient, from grain to cheese. And according to Rusagrotrans, compiled by USDA statistics, it accounts for a third of wheat imports from the Middle East and Africa, 10% to Asia, and about one-fifth of all wheat demand in the world.

Russian Minister of Agriculture Dmitry Patrushev (left), factory director Murat Tlyuangelov and Russian Prime Minister Mikhail Mishustin inspect dairy products during a visit to a dairy plant at the Astryakh T/A Tambovsky Giaginsky District

Agricultural production in the country has increased by almost 50% since 1991. Exports more than tripled last year to over $30 billion following the fifth cash increase in 2019. Cereals are the main source of currency for all agricultural exports, only in Egypt and Turkey. are the biggest buyers.

Today, the son of Agriculture Minister Dmitry Patrushev and Secretary of the Russian Security Council, Nikolai Patrushev, a close associate of Putin, is responsible for increasing the value of agricultural exports by 50% by 2024. He is also pressured to increase his perseverance. Increase production to 140 million tons by 2025 to supply these export markets.

Temporary grain export quotas driven by labor shortages and adverse weather affecting crops are expected to boost production to 127 million tonnes by 2021, highlighting how difficult it will be to meet the 2025 target.

Food has long been a diplomatic tool in Russia's relations with its neighbors. It banned the import of some Turkish agricultural products as part of the package after a Russian military aircraft was shot down by Turkish forces in 2015. Imports resumed after two years and Turkey became the largest importer of Russian wheat in 2019 after accepting Russian imports. After Bulgaria refused gas, it gave gas to Europe. In exchange for selling wheat to Iran, Russia agreed to buy and sell Iranian oil in exchange for oil at the end of 2018 to restore US sanctions against Tehran.

Analysts say the size and ambition of the industry have changed since these emergencies. China, to which Moscow has moved after severing ties with the West and home to a major gas pipeline, is seen by Russia as the largest future food market due to its population, geographic proximity, and expansion. presence in the infrastructure. including Eastern Railways. However, for now, Russia's market share in China remains relatively small as Chinese grain standards and wheat imports fell in 2020.

A construction worker inspects a section of the Turkish Stream gas pipeline of Gastrans, a joint venture between Srbijagas and Gazprom, in Zajecar, Serbia © Oliver Bunic / Bloomberg

“Of course, we always rely on China. It is our most important neighbor and our most important trading partner, including agriculture in general. The most interesting market that we just want to conquer. All the big producers are fighting for it. Snitko from Gazprombank added that Australia and Ukraine also have serious competitors in the Chinese market.

Although Russia leads the world grain market, it is trying to strike a balance between securing future markets and pursuing a foreign policy. At this time, Khrustaleva says that the first prevails over the second. In the current economic situation, it is important for Russia to enter foreign markets, and not try to use its wheat reserves to achieve something in the foreign or foreign policy sphere," he said.
Some industry watchers believe that grain revenues will offset some of the losses from falling oil production. However, according to official Russian statistics, agriculture currently accounts for only 4 percent of Russia's gross domestic product, compared to 15 percent for oil and gas.

Russia's 2016 agreement with OPEC to jointly cut oil production was a compromise with Saudi Arabia © Sergey Karpukhin / Reuters

Oil and gas revenues still make up about a third of the state budget, but recent price fluctuations have hit Russia and other producers. World trade wars and the emergence of clean energy have forced Moscow to consider options to reduce its dependence on fossil fuels. In this context, food became a useful new tool for his diplomacy.

Moscow sees its place in providing food to the fastest growing regions, such as Africa and Southeast Asia, where most of the world's additional 2 billion people will live by 2050.
Andrey Guryev, CEO of Phosagro, one of the largest fertilizer producers in Russia and Europe, says Russia is well-positioned to meet this demand. Russia has land, water, ports, railways. No other country has such great potential," he said.

“Even if we do not win the tender with our rockets and satellites, our agricultural products will be in demand all over the world.” People should buy in Russia not only oil and Kalashnikov, but also green land, blue water, and clean products.”
“Something happened in the Kremlin”

This was noticed by investors, fascinated by the long-term potential. Jim Rogers, who co-founded the Quantum Fund with George Soros and is now a famous bull in Russia and China, has invested in Russian fertilizer and agriculture through Phosagro and believes the industry's success is just beginning.

Russia has everything it needs to become a great agricultural power again, or at least one of them.”
Rogers says the change in leadership motivated him to invest. “This is not a shot. Something has happened in the Kremlin over the last decade, and it's a few people, it's a big change [for that],” he said.

Russia has gained an edge as economic and climatic conditions have made life difficult for some of its main rivals. U.S. grain producers experienced one of the worst seasons in 2019 due to lower profit margins and a trade war with China that excluded some companies that historically relied on government bailouts and lowered prices. 

Wheat production has also fallen, according to the USDA. Wildfires in Australia have destroyed crops, and the USDA expects wheat exports to fall 17 percent year-on-year in 2021-2022.

As consumers become wary of food purity, Russia has focused on producing organic products and using low or no mineral fertilizers © Alexander Ryumin / via Getty Images TASS

But in Russia, climate change is opening up new frontiers for more farmland in the north as perennial frosts melt. This partially compensates for the drought in the south.

“Russia has different climatic zones, and if the Volga region burns down, Siberia will flourish, and if something happens in the south, then the Volga region and the central regions will be compensated,” says Rogachev from Rusagrotrans. "It is not possible for all regions to experience flooding or drought at the same time."

Russia has also stressed the need for organic food production and the use of low or low mineral fertilizers as consumers become wary of food purity. Manufacturers and analysts say Russia's fertilizers are sourced from some of the cleanest rock, free of heavy cadmium, giving them an added competitive edge.

Investors and local entrepreneurs like Rogers are interested in the prospects for Russian agriculture because of its size, different climates, existing infrastructure, and opportunities to increase yields through technology development and increased use of fertilizers.

“Russia has the biggest potential. Russia has opportunities,” Rogers said.

Russian President Vladimir Putin visits a barley field at a farm near Grigoropolisskaya, Stavropol Territory © Eduard Kornienko / Reuters

The investment prospects have not gone unnoticed by other Russian billionaires, some of whom now own land and export agricultural products. The main shareholder of Sistema Group, Vladimir Yevtushenkov, owns an approximately 3% market share in the Steppe agricultural holding, one of the largest grain exporters in the country.

Oleg Deripaska, formerly the richest man in Russia, owns one of the largest farms in Russia, Kuban. The US allowed Deripaska in and was forced to hand over control to parent company Rusal, the country's largest aluminum producer. Yevtushenkov stood in line at American businessmen close to Putin and threatened sanctions.

However, Deripaska, who is seen as a Putin ally, has also been critical of the agricultural sector in recent times, especially for high-interest rates for farmers. Experts say that in order to realize its ambitions, Russia needs to increase production efficiency, improve infrastructure and financial instruments in order to attract more investment.

The country's second-largest credit institution, VTB, continues its mission to transform the industry and turn it into a major player in the grain market. In recent years, the bank has invested more than $2 billion in the grain sector through a series of high-profile acquisitions, after which it sold half of these assets to Russian investors.

“We are at the very bottom of the production chain,” said Atanas Dzhumaliev, Head of Global

Commodities at VTB Capital. "The U.S. agricultural market is roughly $1 trillion and has more players, including financial investors. This has allowed industry and technology to flourish." It will take Russia many years to build this market.