That prospect is sounding alarms in the EU. Brussels is weighing new import quotas that would keep out Russian and Ukrainian grain

By Catherine Belton in Moscow
Business Week Online, International Business
New York, New York
November 4, 2002

Just three years ago, Russia was on the breadline, negotiating with the U.S. for a 5 million-ton food aid package it desperately needed after its second poor harvest in a row. Now, in a startling about-face, Russia is harvesting bumper crops and giving established grain exporters, such as the European Union, Australia, the U.S., and Canada a run for their money. It's even on track to beat records set by the czarist regime almost a century ago, when Mother Russia was the world's breadbasket. "Now that other countries have cut back exports [because of drought], we have a chance to occupy a new niche in the market," says Yury Ognev, general director of Roskhleboprodukt, a former state-owned grain trading company bought up by metals magnate Vladimir O. Potanin last year.

Thanks to good weather and investments by new agribusiness barons such as Potanin, Russia is likely to match or beat last year's record grain harvest of 85 million tons. SovEcon, a Moscow agricultural research agency, estimates that exports in the 2002-03 agricultural year starting July 1 will rise nearly 50%, to 10 million tons. That would wipe out the 8 million-ton record set in pre-revolutionary Russia back in 1913, and bring in revenues of $850 million.

Most of Russia's grain goes to Italy, Greece, Spain, and Northern Africa. With labor and farming costs less than half of Canada's, Russia is well-placed to win market share from suppliers in Australia, Canada, and the EU that have been hit by drought and flooding. Russian milling wheat meets EU standards. Priced at $85 to $95 per ton, it is $50 below U.S. wheat of the same quality, and $20 below EU wheat. Russia hopes that the low prices will cement its hold on new markets.

That prospect is sounding alarms in the EU. Brussels is weighing new import quotas that would keep out Russian and Ukrainian grain. Such a move raises the threat of a trade war with Russia. It also could snarl already fraught negotiations on Russia's entry into the World Trade Organization. "While European countries are calling on others to be liberal and open, they do the complete opposite when it touches their own interests," says Russian Agriculture Minister Alexei Gordeyev. Russia is considering setting quotas on imports of European meat products in retaliation, he adds.

Despite the two bumper harvests, Russia is far from having the weight it had in czarist days, when it supplied one-third of global markets. Russia's exports of 4.2 million tons of wheat last year are far behind the 26 million tons exported by the U.S. That won't change unless Russia can construct new port terminals and improve its railroad system to ship surplus grain cheaply.

That's where the financial muscle of the new barons of Russian agriculture comes in. Russia's main port on the Black Sea, Novorossisk, is overloaded, and routes through Baltic ports are getting clogged, too. So Igor Potapenko, founder of the Moscow-based Razgulyai-Ukrros agriculture holding company, is in negotiations with the European Bank for Reconstruction & Development over its possible participation in his project to complete a $14 million grain terminal on the Azov Sea by next year. "Russia's potential as a world player on the grain market is huge," says Potapenko. Roskhleboprodukt plans to spend up to $100 million on a new deepwater terminal at Novorossisk, as well as terminals on the Azov and Baltic Seas.

So far, so good. But how long can Russia hold on to new markets after a decade of farm-sector neglect? Most new agribusiness owners are starting to plough millions of dollars into equipment and fertilizer. But the really big bucks won't come in until the government gets a new farm insurance program off the ground. Meanwhile, Russia will continue to enjoy its edge in cheap labor and abundant land. By European standards, Russian farmland currently is underfertilized by a factor of ten. If farmers just increased their use of fertilizer, output would soar. The czars would be proud.