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Russia’s agriculture sector continues to BOOM in face of Western sanctions

A major economic shift unremarked by the West, while multiple production dimensions come on line.

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Much is written about the vast strides Russia has made in matters agricultural. The many different Cheese types that were previously imported are now largely produced in Russia. The gains are across the edible board, from poultry, fish and pork through to fruits, vegetable and grains. Grains specifically have shown strong and steady growth due to increased investment as well as using the latest management and production technologies.

For example, wheat harvests in Russia are now not only satisfying Russia’s national demand, but also form a significant and steadily increasing part of the country’s global exports. In Soviet times, world traders and specs eagerly awaited the announcement of the wheat harvest or its forecast potential. To those punters on the world’s futures exchanges it usually signaled how much the USSR will BUY over the coming year to meet its internal needs, as they didn’t ever SELL. That has radically changed, much like the country, its direction, politics, beliefs, abilities and its people.

One small but glaring opportunity gap in this growth curve has only recently come to active investor attention, and is finding real support from the financial institutions in Russia. This gap is in the range of products and ingredients derived through the deeper processing of raw materials, in this case grains. These little known, not off-the-shelf products are an essential part of the processing and manufacture of almost all foods and beverages, and a number of pharmaceutical products, even textiles.

These ingredients are exclusively obtained through deep processing and treatment of wheat and other grains. They include dry wheat gluten, modified starches, glucose-fructose syrup, molasses, and feed mixtures (as a by-product of the technological process).

These products are widely used for not only food production, but also pulp/paper manufacturing, in low-alcohol and beverage industries, pharmaceuticals, cosmetics, animal husbandry and in several other industrial sectors. The demand for these products both domestically and in the global markets is strong and continually growing.

In general, only 10-12% of such ingredients are produced in Russia while 88-90% must still be imported. The irony of the situation is that one of the major raw materials used to produce these products is wheat, which has been steadily growing to large surpluses these past several years. Today several multinational firms involved in agricultural processing like Cargill, Archer Daniels, L. Dreyfus and several Asian groups have already started either through M&A or through investing in their own processing to begin filling this void inside Russia.

Russian agricultural companies have been quite active too, as deep processing of grain results in products with far higher economic benefit than simply selling raw material or milled flour/starch. Establishing such deep processing projects also addresses the challenge of partial or even complete import substitution. These valuable and increasingly demanded ingredients can easily use even extremely low grades of wheat as perfectly suitable raw materials, which without deep processing are close to valueless.

One example is a start-up in the Kursk region, which is part of the famously fertile “black earth” area of Russia. The company, a 100% Russian start-up called OOO “InnPromBioTec” is a group of young and experienced professionals in the food processing industry. Their expertise has ranged from implementing and successfully commercializing production of food ranging from low-fat mayonnaise to fermented “kvass” (a traditional Russian grain based beverage), as well as oil from various grains. Today they are in the process of establishing a technologically cutting-edge deep wheat processing facility in the middle of this grain rich region.

With sanctions in place, while they officially do not impinge of food production or foodstuffs, they do and have affected the attitudes of traditional investors in the USA and the EU, not to mention the non-Russian banks. There is a palpable fear among the potential and logical investment partners in both the EU and US not to bend, therefore dismissing profit, rather than risk forging ahead and perhaps facing politically unstable censure from their own countries.

This Kursk based company therefore shifted its focus to the Far East, specifically China, Japan, Thailand, Korea and possibly India. This, while the most cost effective points of export realization and ready markets demanding such deep processed products are next door in Europe, who also import, albeit to a lesser degree, to meet their production requirements.

From an economic perspective, projects such as InnPromBioTec’s are attractive, especially in today’s markets. The capital required for such technologically intensive production is about 150 million Euro equivalent to process 250,000 tons per annum. Russian banks are willing and prepared to lend fully 80% of the needed capital as project financing, and the government affords a number of easements and incentives to make such projects as riskless and transparent as possible as they are considered a national priority, and are therefore quite secure and problem free.

Projects like this are not immediately operational, they must be planned as well as built from scratch, and this has been the bane of long term investing in Russia. Local investors want huge returns on their money and they want it almost immediately, therefore Greenfield projects have tended to suffer neglect.

Projects like deep wheat processing have a very long productive lifecycle, measured sustainably for decades with their products in perpetual and growing demand. Typically, the discounted payback period is from 6 – 7.5 years, with an internal rate of return of approximately 40%, profit margin realistically near 50%.

It looks like Russia’s steady economic evolution away from simply exporting raw materials, but opportunities to deepen the dimensions of production will be financed by visionary, practical and pragmatic Asia. The products of which inescapably will be demanded and consumed by Europe one-way or another, if only because of the secure price of proximity.

At a deeper level, this one project example is indicative of many similar projects coming into being throughout the length and breadth of Russia. The vast soybean farms in the southern parts of the Russian Far East have historically simply sold and shipped the harvests unprocessed across the border into Asia. Today, projects are starting up to add value to these crops by processing some of the myriad products obtained from soybeans both for internal consumption as well as for ready export markets literally next door.

The list goes on, with one of the longest coastlines on the planet (23,000+ Miles), the opportunities for fish, mollusk and crustacean farming is vast. The relatively low cost of energy in Russia and no shortage of fresh water also allows for controlled environment farming regardless of climate, be it hydroponics, greenhouses or commercial scale urban agriculture year round. All of these opportunities afford similar value added dimensions through processing and producing market ready finished goods.

On reviewing Russia’s economic path it is worth noting that it has managed to rebalance its exports from 70 percent energy in 2013 to 59 percent in 2017, according to the World Bank. As of this writing, the budget is again in surplus, and government debt stands at a notable 33% of GDP, the lowest among all of the G20 nations. Inflation is now running at a record low of 2.4% year-over-year, well below the CBR’s target of 4% and food inflation despite sanctions is close to 0%. Simply to contrast, and yes, sizes and volumes do make a difference, so just to cherry-pick: The S&P 500 Index is up just a tad over 13% for the past year, while at the same time the MOEX Russia Index has shown 21+% growth with an attractive 6.46% dividend yield, compared to 1.94% for U.S. stocks.

A major economic shift is occurring as secondary, tertiary production, manufacturing and the support and services infrastructure businesses establish and develop inside Russia. Some projections indicate that in these new business areas Russia will show a sustainable 5-6% year on year growth from 2018 – 2020, and perhaps greater. Incredibly, it is woefully under-reported even by the international financial press.

These secondary and tertiary industries have been historically left to the outside world to import into Russia. Be it in agriculture, textiles, machinery or oil patch technologies, Russia is now steadily filling these internal niches, and the opportunities for investors today have vastly expanded into many previously ignored dimensions. It only requires the business will and clarity of “blinders-free” vision to investigate, get involved and step up to the table.

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WalterWayne BlowfoxenburgGano1William Reston Recent comment authors
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Walter
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Walter

Sanctions against Russia are a big laugh. Sanctions are a big loss to EU countries who want them ended. Maybe the Putin-Trump meeting next month will correct this problem.

Walter
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Walter

Why are my comments not published??

Walter
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Walter

Why are my comments not published ???

Wayne Blow
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Wayne Blow

Go Russia, beats gas pipes and bomb making eh ??

foxenburg
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foxenburg

You say Russia is short of, inter alia…..dry wheat gluten, modified starches, glucose-fructose syrup, molasses.

The Russians would be wise to steer clear of this obesity-inducing Western crap.

Gano1
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Gano1

Farm machinery is selling well too, they build some very good machinery and it is cheaper than Western junk.

William Reston
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William Reston

As usual, excellent insights Mr. Goncharoff. Your opinion articles are a breath of fresh air and a wonderful truth window into Russia for all of us “out here” in the States. Thank you!

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Russia calls on US to put a leash on Petro Poroshenko

The West’s pass for Mr. Poroshenko may blow up in NATO’s and the US’s face if the Ukrainian President tries to start a war with Russia.

Seraphim Hanisch

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Russia called on Washington not to ignore the Poroshenko directives creating an active military buildup along the Ukrainian-Donbass frontier, this buildup consisting of Ukrainian forces and right-wing ultranationalists, lest it “trigger the implementation of a bloody scenario”, according to a Dec 11 report from TASS.

The [Russian] Embassy [to the US] urges the US State Department to recognize the presence of US instructors in the zone of combat actions, who are involved in a command and staff and field training of Ukraine’s assault airborne brigades. “We expect that the US will bring to reason its proteges. Their aggressive plans are not only doomed to failure but also run counter to the statements of the administration on its commitment to resolve the conflict in eastern Ukraine by political and diplomatic means,” the statement said.

This warning came after Eduard Basurin, the deputy defense minister of the Donetsk People’s Republic noted that the Ukrainian army was massing troops and materiel for a possible large-scale offensive at the Mariupol section of the contact line in Donbass. According to Basurin, this action is expected to take place on 14 December. TASS offered more details:

According to the DPR’s reconnaissance data, Ukrainian troops plan to seize the DPR’s Novoazovsky and Temanovsky districts and take control over the border section with Russia. The main attack force of over 12,000 servicemen has been deployed along the contact line near the settlements of Novotroitskoye, Shirokino, and Rovnopol. Moreover, more than 50 tanks, 40 multiple missile launcher systems, 180 artillery systems and mortars have been reportedly pulled to the area, Basurin added. Besides, 12 BM-30 Smerch heavy multiple rocket launchers have been sent near Volodarsky.

The DPR has warned about possible provocations plotted by Ukrainian troops several times. Thus, in early December, the DPR’s defense ministry cited reconnaissance data indicating that the Ukrainian military was planning to stage an offensive and deliver an airstrike. At a Contact Group meeting on December 5, DPR’s Foreign Minister Natalia Nikonorova raised the issue of Kiev’s possible use of chemical weapons in the conflict area.

This is a continuation of the reported buildup The Duran reported in this article linked here, and it is a continuation of the full-scale drama that started with the Kerch Strait incident, which itself appears to have been staged by Ukraine’s president Petro Poroshenko. Following that incident, the president was able to get about half of Ukraine placed under a 30-day period of martial law, citing “imminent Russian aggression.”

President Poroshenko is arguably a dangerous man. He appears to be desperate to maintain a hold on power, though his approval numbers and support is abysmally low in Ukraine. While he presents himself as a hero, agitating for armed conflict with Russia and simultaneously interfering in the affairs of the Holy Eastern Orthodox Church, he is actually one of the most dangerous leaders the world has to contend with, precisely because he is unfit to lead.

Such men and women are dangerous because their desperation makes them short-sighted, only concerned about their power and standing.

An irony about this matter is that President Poroshenko appears to be exactly what the EuroMaidan was “supposed” to free Ukraine of; that is, a stooge puppet leader that marches to orders from a foreign power and does nothing for the improvement of the nation and its citizens.

The ouster of Viktor Yanukovich was seen as the sure ticket to “freedom from Russia” for Ukraine, and it may well have been that Mr. Yanukovich was an incompetent leader. However, his removal resulted in a tryannical regíme coming into power, that resulting in the secession of two Ukrainian regions into independent republics and a third secession of strategically super-important Crimea, who voted in a referendum to rejoin Russia.

While this activity was used by the West to try to bolster its own narrative that Russia remains the evil henchman in Europe, the reality of life in Ukraine doesn’t match this allegation at all. A nation that demonstrates such behavior shows that there are many problems, and the nature of these secessions points at a great deal of fear from Russian-speaking Ukrainian people about the government that is supposed to be their own.

President Poroshenko presents a face to the world that the West is apparently willing to support, but the in-country approval of this man as leader speaks volumes. The West’s blind support of him “against Russia” may be one of the most tragic errors yet in Western foreign policy.

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Second Canadian Citizen Disappears In China

According to the he Globe and Mail, the man was identified as Michael Spavor, a Canadian whose company Peaktu Cultural Exchange brings tourists and hockey players into North Korea.

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Via Zerohedge…


For a trade war that was supposed to be between the US and China, Canada has found itself increasingly in the middle of the crossfire. And so after the arrest of a former Canadian diplomat in Beijing in retaliation for the detention of the Huawei CFO in Vancouver, Canada said a second person has been questioned by Chinese authorities, further heightening tensions between the two countries.

The second person reached out to the Canadian government after being questioned by Chinese officials, Foreign Minister Chrystia Freeland said, at which point Canada lost contact with him. His whereabouts are currently unknown and Global Affairs Canada said they are in contact with his family.

“We haven’t been able to make contact with him since he let us know about this,” Freeland told reporters Wednesday in Ottawa. “We are working very hard to ascertain his whereabouts and we have also raised this case with Chinese authorities.”

According to the he Globe and Mail, the man was identified as Michael Spavor, a Canadian whose company Peaktu Cultural Exchange brings tourists and hockey players into North Korea. He gained fame for helping arrange a visit to Pyongyang by former NBA player Dennis Rodman, and he met North Korean leader Kim Jong Un on that trip, the newspaper reported. Attempts to reach Spavor on his contact number either in China, or North Korean went straight to voicemail.

Spavor’s personal Facebook page contains several images of him with North Korean leader Kim Jong-un including one of him with both Jong-un and former Dennis Rodman at an undisclosed location.

Michael P. Spavor, right, pictured here with North Korean leader Kim Jong-un, second from right, and Dennis Rodman.

Another image shows the two sharing a drink on a boat.

The unexplained disappearance takes place after China’s spy agency detained former Canadian diplomat Michael Kovrig in Beijing on Monday, who was on leave from the foreign service. The arrest came nine days after Canada arrested Huawei Chief Financial Officer Meng Wanzhou at the request of U.S. DOJ. While Canada has asked to see the former envoy after it was informed by fax of his arrest, Canada is unaware of Kovrig current whereabouts or the charges he faces.

“Michael did not engage in illegal activities nor did he do anything that endangered Chinese national security,” Rob Malley, chief executive officer of the ICG, said in a written statement. “He was doing what all Crisis Group analysts do: undertaking objective and impartial research.”

One possibility is that Kovrig may have been caught up in recent rule changes in China that affect non-governmental organizations, according to Bloomberg. The ICG wasn’t authorized to do work in China, Foreign Ministry Spokesperson Lu Kang said during a regular press briefing in Beijing Wednesday.

“We welcome foreign travelers. But if they engage in activities that clearly violate Chinese laws and regulations, then it is totally another story,” he said, adding he had no information on Kovrig specifically.

As Bloomberg further notes, foreign non-governmental organizations are now required to register with the Chinese authorities under a 2017 law that subjects them to stringent reporting requirements. Under the law, organizations without a representative office in China must have a government sponsor and a local cooperative partner before conducting activities. ICG said this is the first time they’ve heard such an accusation from the Chinese authorities in a decade of working with the country. The company closed its Beijing operations in December 2016 because of the new Chinese law, according to a statement. Kovrig was working out of the Hong Kong office.

Meanwhile, realizing that it is increasingly bearing the brunt of China’s retaliatory anger, Trudeau’s government distanced itself from Meng’s case, saying it can’t interfere with the courts, but is closely involved in advocating on Kovrig’s behalf.

So far Canada has declined to speculate on whether there was a connection between the Kovrig and Meng cases, with neither Freeland nor Canadian Trade Minister Jim Carr saying Wednesday that there is any indication the cases are related. Then again, it is rather obvious they are. Indeed, Guy Saint-Jacques, who served as ambassador to China from 2012 to 2016 and worked with Kovrig, says the link is clear. “There’s no coincidence with China.”

“In this case, they couldn’t grab a Canadian diplomat because this would have created a major diplomatic incident,” he said. “Going after him I think was their way to send a message to the Canadian government and to put pressure.”

Even though Meng was granted bail late Tuesday, that did not placate China, whose foreign ministry spokesman said that “The Canadian side should correct its mistakes and release Ms. Meng Wanzhou immediately.”

The tension, according to Bloomberg,  may force Canadian companies to reconsider travel to China, and executives traveling to the Asian country will need to exercise extra caution, said Andy Chan, managing partner at Miller Thomson LLP in Vaughan, Ontario.

“Canadian business needs to look at and balance the reasons for the travel’’ between the business case and the “current political environment,’’ Chan said by email. Chinese officials subject business travelers to extra screening and in some case reject them from entering, he said.

Earlier in the day, SCMP reported that Chinese high-tech researchers were told “not to travel to the US unless it’s essential.”

And so, with Meng unlikely to be released from Canada any time soon, expect even more “Chinese (non) coincidences”, until eventually China does detain someone that the US does care about.

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Multipolar World Order in the Making: Qatar Dumps OPEC

Russia and Qatar’s global strategy also brings together and includes partners like Turkey.

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Authored by Federico Pieraccini via The Strategic Culture Foundation:


The decision by Qatar to abandon OPEC threatens to redefine the global energy market, especially in light of Saudi Arabia’s growing difficulties and the growing influence of the Russian Federation in the OPEC+ mechanism.

In a surprising statement, Qatari energy minister Saad al-Kaabi warned OPEC on Monday December 3 that his country had sent all the necessary documentation to start the country’s withdrawal from the oil organization in January 2019. Al-Kaabi stressed that the decision had nothing to do with recent conflicts with Riyadh but was rather a strategic choice by Doha to focus on the production of LNG, which Qatar, together with the Russian Federation, is one of the largest global exporters of. Despite an annual oil extraction rate of only 1.8% of the total of OPEC countries (about 600,000 barrels a day), Qatar is one of the founding members of the organization and has always had a strong political influence on the governance of the organization. In a global context where international relations are entering a multipolar phase, things like cooperation and development become fundamental; so it should not surprise that Doha has decide to abandon OPEC. OPEC is one of the few unipolar organizations that no longer has a meaningful purpose in 2018, given the new realities governing international relations and the importance of the Russian Federation in the oil market.

Besides that, Saudi Arabia requires the organization to maintain a high level of oil production due to pressure coming from Washington to achieve a very low cost per barrel of oil. The US energy strategy targets Iranian and Russian revenue from oil exports, but it also aims to give the US a speedy economic boost. Trump often talks about the price of oil falling as his personal victory. The US imports about 10 million barrels of oil a day, which is why Trump wrongly believes that a decrease in the cost per barrel could favor a boost to the US economy. The economic reality shows a strong correlation between the price of oil and the financial growth of a country, with low prices of crude oil often synonymous of a slowing down in the economy.

It must be remembered that to keep oil prices low, OPEC countries are required to maintain a high rate of production, doubling the damage to themselves. Firstly, they take less income than expected and, secondly, they deplete their oil reserves to favor the strategy imposed by Saudi Arabia on OPEC to please the White House. It is clearly a strategy that for a country like Qatar (and perhaps Venezuela and Iran in the near future) makes little sense, given the diplomatic and commercial rupture with Riyadh stemming from tensions between the Gulf countries.

In contrast, the OPEC+ organization, which also includes other countries like the Russian Federation, Mexico and Kazakhstan, seems to now to determine oil and its cost per barrel. At the moment, OPEC and Russia have agreed to cut production by 1.2 million barrels per day, contradicting Trump’s desire for high oil output.

With this last choice Qatar sends a clear signal to the region and to traditional allies, moving to the side of OPEC+ and bringing its interests closer in line with those of the Russian Federation and its all-encompassing oil and gas strategy, two sectors in which Qatar and Russia dominate market share.

In addition, Russia and Qatar’s global strategy also brings together and includes partners like Turkey (a future energy hub connecting east and west as well as north and south) and Venezuela. In this sense, the meeting between Maduro and Erdogan seems to be a prelude to further reorganization of OPEC and its members.

The declining leadership role of Saudi Arabia in the oil and financial market goes hand in hand with the increase of power that countries like Qatar and Russia in the energy sectors are enjoying. The realignment of energy and finance signals the evident decline of the Israel-US-Saudi Arabia partnership. Not a day goes by without corruption scandals in Israel, accusations against the Saudis over Khashoggi or Yemen, and Trump’s unsuccessful strategies in the commercial, financial or energy arenas. The path this doomed

trio is taking will only procure less influence and power, isolating them more and more from their opponents and even historical allies.

Moscow, Beijing and New Delhi, the Eurasian powerhouses, seem to have every intention, as seen at the trilateral summit in Buenos Aires, of developing the ideal multipolar frameworks to avoid continued US dominance of the oil market through shale revenues or submissive allies as Saudi Arabia, even though the latest spike in production is a clear signal from Riyadh to the USA. In this sense, Qatar’s decision to abandon OPEC and start a complex and historical discussion with Moscow on LNG in the format of an enlarged OPEC marks the definitive decline of Saudi Arabia as a global energy power, to be replaced by Moscow and Doha as the main players in the energy market.

Qatar’s decision is, officially speaking, unconnected to the feud triggered by Saudi Arabia against the small emirate. However, it is evident that a host of factors has led to this historic decision. The unsuccessful military campaign in Yemen has weakened Saudi Arabia on all fronts, especially militarily and economically. The self-inflicted fall in the price of oil is rapidly consuming Saudi currency reserves, now at a new low of less than 500 billion dollars. Events related to Mohammad bin Salman (MBS) have de-legitimized the role of Riyadh in the world as a reliable diplomatic interlocutor. The internal and external repression by the Kingdom has provoked NGOs and governments like Canada’s to issue public rebukes that have done little to help MBS’s precarious position.

In Syria, the victory of Damascus and her allies has consolidated the role of Moscow in the region, increased Iranian influence, and brought Turkey and Qatar to the multipolar side, with Tehran and Moscow now the main players in the Middle East. In terms of military dominance, there has been a clear regional shift from Washington to Moscow; and from an energy perspective, Doha and Moscow are turning out to be the winners, with Riyadh once again on the losing side.

As long as the Saudi royal family continues to please Donald Trump, who is prone to catering to Israeli interests in the region, the situation of the Kingdom will only get worse. The latest agreement on oil production between Moscow and Riyad signals that someone in the Saudi royal family has probably figured this out.

Countries like Turkey, India, China, Russia and Iran understand the advantages of belonging to a multipolar world, thereby providing a collective geopolitical ballast that is mutually beneficial. The energy alignment between Qatar and the Russian Federation seems to support this general direction, a sort of G2 of LNG gas that will only strengthen the position of Moscow on the global chessboard, while guaranteeing a formidable military umbrella for Doha in case of a further worsening of relations between Saudi Arabia and Qatar.

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