Russia starts to sow seeds of ‘wheat diplomacy’
“Vladimir Putin had just become president,” says a market consultant in Moscow, who asks to remain anonymous. “And he was told in a meeting that Russia imported more than 50 per cent of its food. His face went pale.
“Putin has since made it his goal to ensure better food security in the country,” adds the person who attended the meeting in 2000. “He dreads dependency. And now Russia is number one in wheat, and is having others depend on it.”
A hangover from the era of the Soviet Union, when it had been a net importer of grain, the sector was by 2000 neglected, with no subsidies to producers and heavily reliant on imports.
Putin launched a state-led programme to develop agriculture through national projects aimed at stimulating investment and developing production in 2004. It included targets to ensure 80-95 per cent of self-sufficiency in key products, including grain. A decade later a grain charter to boost transparency in the market was introduced. “Large players and the state agreed to make this market less shadowy for everyone’s benefit. The effect was very positive,” says Daria Snitko, analyst at Gazprombank. “This has helped exports for sure.”
So too did the sharp devaluation in the rouble — making exports cheaper — that followed the imposition of US and EU sanctions against Moscow after the 2014 annexation of Crimea and stand-off with neighbouring Ukraine. Counter sanctions by the Kremlin, banning most food imports from the west, further boosted domestic producers.
Shortly afterwards, the world’s biggest country by landmass became the world’s top wheat exporter, passing the US and Canada for the first time in 2017. “We are number one,” Putin declared in a later press conference. “We beat the US and Canada.”
Wheat, and especially grain, have become valuable sources of foreign capital in a sanctions-hit economy. Now Russia is slowly making its way across Eurasia, Africa, and Latin America as an agricultural export powerhouse as it looks to reduce its reliance on oil, identify new markets and extend its global diplomatic reach. Some even anticipate Russian grain becoming the Kremlin’s new oil — a commodity through which to keep some countries dependent on its resources — or to at least open doors to others.
Russia’s deal to cut oil output in a joint effort with Opec in 2016 was a trade-off with Saudi Arabia, the de facto head of the oil cartel. Riyadh needed a higher oil price to balance its budget than Russia, says Madina Khrustaleva, analyst at TS Lombard investment research provider, so Moscow compromised, cutting output and raising oil prices more than it wanted to. “Russia [co-operated but] in return Saudi Arabia opened its huge market for chicken [and grain].”
Riyadh also recently eased its requirements for imported wheat quality, opening the door to Russian exports, which now account for 10 per cent of Saudi Arabia’s grain imports, mostly barley, according to Rusagrotrans, Russia’s leader in railway grain transportation.
After successful lobbying for new markets, particularly in Asia, China and Vietnam have become big customers. Russia has tripled its 2020 beef exports, and doubled those of pork, both in tonnes and dollar revenue year on year. Half of the beef went to China, after it opened its market to Russian cattle producers last year. Vietnam, which started importing Russian pork in late 2019, is now the second-largest importer of meat from the country in the world.
Grain and meat exports have deepened Russia’s presence in developing countries, say industry experts, especially those that are neighbours or close enough for logistics not to be problem. The UN calculates that the world will need to produce an extra 40 per cent more food by 2050 simply to keep pace with a world population that is expected to rise by 2bn people over the next 30 years.
“We are destined for certain growth and success in the food industry,” says a confident Oleg Rogachev, board member at Rusagrotrans. “It is profitable because of the geopolitical position.
“Most of our consumers, which experience food shortage, are located practically in our underbelly,” he adds. “They are very close — it’s all of Africa, the Middle East, the Asia-Pacific countries, the Far East. The shortest and easiest way to satisfy their need is through supplies from Russia.”
Not just ‘oil and Kalashnikovs’
This was not always the case. Russia produces enough crude oil to satisfy 10 per cent of the world’s demand, and in the 1990s — after the collapse of the Soviet Union — it used its oil money to import most of its food.
Now, however, Russia is nearly self-sufficient in everything from grain to cheese. And, according to Rusagrotrans data compiled based on US Department of Agriculture statistics, accounts for a third of Middle Eastern and African wheat imports, 10 per cent of those in Asia and supplies about a fifth of the planet’s total wheat demand.
Agricultural output in the country has grown by almost 50 per cent since 1991. Exports have more than trebled in that time to over $30bn last year, having jumped by a fifth in money terms over 2019. Of all the agricultural exports it is grain that is the main source of foreign exchange, with Egypt and Turkey being the biggest single buyers.
Now Dmitry Patrushev, the agriculture minister and son of a close Putin ally Nikolai Patrushev, secretary of Russia’s Security Council, has been tasked with adding another 50 per cent to the value of agricultural exports by 2024. He is also under pressure to raise grain production to 140m tonnes by 2025 to feed those export markets.
Temporary export quotas on grain — triggered by labour shortages and poor weather hitting crops — are expected to force output levels down to 127m tonnes in 2021, highlighting how difficult it will be to reach the 2025 target.
Food has been a diplomatic tool in Russian relations with its neighbours before. It banned some Turkish agricultural imports as part of a package of measures following the downing of a Russian fighter jet by Turkish forces in 2015. The imports resumed two years later and Turkey became the top importer of Russian wheat in 2019 after it agreed to transit Russian gas to Europe after Bulgaria had refused. In return for wheat sales to Iran, Russia agreed to take and sell Iranian oil as part of its oil-for-goods swap prior to the reimposition of US sanctions on Tehran in late 2018.
What has changed since those one-offs is the scale and ambition of the industry, say analysts China, where Moscow has pivoted since its relations with the West plunged and where it has launched a major gas pipeline, is seen by Russia as its big future food market, given the population, geographical proximity and the expansion of its infrastructure presence, including its eastbound railways. Yet, for now, Russia’s share of the Chinese market remains relatively small due to China’s grain standards and wheat imports actually fell in 2020.
“Of course, we always count on China. It is our main neighbour and the main trade partner as a whole, including in agriculture. It is the most interesting market we want to win over. All the major producers are competing against one another for it,” says Snitko at Gazprombank, adding that Australia and Ukraine are also fierce rivals for the Chinese market.
As Russia gains the leadership in the global wheat market, it is trying to find a balance between securing future markets and driving foreign policy. For now, says Khrustaleva, the former trumps the latter. “For Russia in the current economic situation, it is important to get access to external markets rather than try to achieve something in international policy, or foreign policy with the supply of wheat,” she says.
Some industry watchers see grain revenues offsetting a proportion of the losses from falling oil production. Yet agriculture accounts for just 4 per cent of Russia’s gross domestic product at the moment, compared with 15 per cent for oil and gas, according to Russia’s official statistics.
Oil and gas revenues still make up nearly a third of the state budget, but recent price volatility has bitterly exposed Russia and other producers. Global trade wars and the arrival of the clean energy transition has forced Moscow to look at its options for cutting its dependence on fossil fuels. In that context food has become a useful new tool for its diplomacy.
Moscow sees the niche in food supplies to regions with the fastest population growth, such as Africa and south-east Asia, where the majority of the additional 2bn people on the planet by 2050 will be living.
Russia, says Andrei Guriev, chief executive of Phosagro — one of the largest fertiliser producers in Russia and Europe — is well placed to satisfy that demand. “Russia has the land, the water, ports, railways. No other country has that big a potential,” he adds.
“Even if we don’t win some competition with our rockets and satellites, our agriculture products will see global demand,” he says. “The world does not only have oil and Kalashnikovs to get from Russia, but also green land, blue water and clean food.”
‘Something happened in the Kremlin’
Investors have also noticed, attracted by the longer-term potential. Jim Rogers, who co-founded Quantum Fund with George Soros and is now a renowned bull on Russia and China, has invested in Russian fertilisers and agriculture via Phosagro and believes the sector’s success is only starting.
“My investments here are profitable, but not as profitable as they are going to be eventually,” he says. “If you look at the map you’ll see Russian agriculture could dominate the whole world. Russia has whatever it takes to be the great agricultural nation again or certainly one of them.”
Rogers says the change in the leadership’s attitude made him invest. “It’s not a one-time shot. Something happened in the Kremlin in the past decade, and it’s beyond just one person, it’s too big a change [for that],” he says.
Russia has gained an advantage as economic and climate conditions have made life more difficult for some of its main rivals. US grain producers have had one of their worst seasons in 2019 due to low margins and the trade war with China, with a number of companies that previously relied on state support going bankrupt when it was removed and as prices dropped. Wheat output has also fallen, according to the USDA. Wildfires in Australia have damaged crops and the USDA expects its wheat exports to drop 17 per cent year on year in the 2021-22 season.
Yet, in Russia, climate change is opening up new frontiers for more agricultural usage of land in the north with the melting of permafrost. To an extent, this offsets droughts in the south.
“Russia has various climate zones, and if the Volga region burns down, Siberia will grow, or if something happens in the south, the Volga and central regions will compensate,” says Rogachev of Rusagrotrans. “It’s impossible for all the regions to have floods or [be suffering] drought at the same time.”
Russia also put emphasis on clean food production, and the use of fertilisers free or low in metals content, as buyers grow cautious of food purity. Fertilisers in Russia come from some of the cleanest rock with no heavy content of cadmium, offering it additional competitive advantage, producers and analysts say.
Investors such as Rogers, as well as local businessmen, are drawn by the prospects of Russian agriculture, due to its size, various climate zones, existing infrastructure, and room for increasing the yield through technological development and greater use of fertilisers.
“Russia has got the most potential. Russia has the scope,” Rogers says.
“America cannot invent more land, American farmers already use fertilisers coming out of their ears, America is already mechanised and unlikely to get much more mechanised,” adds Rogers. “Canada knows as much about farming as it will probably ever do. Argentina is not as big.
“There is a lot more scope for improvement for Russian agriculture,” he adds.
The investment prospects have not gone unnoticed by other Russian billionaires, a number of whom now own land and are involved in agricultural exports. Vladimir Yevtushenkov, the main shareholder in the Sistema conglomerate, has a stake in Steppe Agroholding, one of the country’s largest grain exporters, which has a nearly 3 per cent market share.
Oleg Deripaska, once Russia’s richest man, owns one of Russia’s largest agricultural holdings, Kuban. The US imposed sanctions on Deripaska and he was forced to give up control of his key business Rusal, the country’s top aluminium producer. Yevtushenkov is on a US watchlist of businessmen close to Putin, and he too could potentially face sanctions.
But even Deripaska — considered a Putin ally — has been critical of the agricultural sector lately, particularly due to high interest rates for farmers. And Russia still needs to improve its production efficiency, infrastructure and financial tools to prompt greater investment, experts say, if it is to achieve its ambitions.
The country’s second-largest lender, VTB has taken on the task of reforming the industry and becoming the biggest player in the grain market. The bank has invested over $2bn in the grain business via a series of high-profile acquisitions in the past few years, before selling half of these assets to Russian investors.
“We are at the bottom of the efficiency chain,” says Atanas Djumaliyev, head of global commodities at VTB Capital. “The US agriculture derivative market is around $1tn and it has more players, including financial investors. That has allowed the industry and technology to develop. In Russia, it will take years to build that market.”