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Digging for long-term growth

‘Для того чтобы коровы меньше ели и больше давали молока, их надо меньше кормить и больше доить’ – Музыкант и актер Николай Фоменко


‘To make cows eat less and give more milk, you should feed them less and milk them more’ – Joke by Russian musician and comic actor Nikolai Fomenko


While the Russian economy is struggling, the agricultural sector is doing better than most. Here, I wish to suggest that – aside from filling us with optimism, as we look to plant this year’s crops – current developments in agriculture could see Russia reaping economic rewards for years come.

According to a recent report in Argumenty Nedeli, agriculture is serving as a driving force for the Russian economy. With higher output levels of goods such as meat – which has seen a 5.3% increase in production in 2015 – and cheeses – which have seen 14.6% growth – the sector is bucking the overall economic trend. Where other areas of the economy have been lagging, agriculture has seen profits rise in 2015 by 3.5%, with a notable increase in margins on goods sold and a corresponding reduction in the number of unprofitable businesses. According to RT, preliminary estimates for agricultural production in 2015 show an increase of 3%, bringing the total to $82 billion.

Among the reasons for the slowdown in other sectors of the Russian economy are restrictions linked to ongoing sanctions, and the corresponding protectionist measures including import limits. However, the agricultural sector has succeeded in taking advantage of reduced import levels and as Argumenty Nedeli notes, the uptick in Russian output has come precisely as overall traffic of farmed produce into Russia has dropped by 40%.

Much of the growth in the domestic Russian agricultural sector can be attributed to the success stories of numerous state-funded industry support programmes, which are gaining popularity in Russia and other former Soviet countries. Agro-Alliance, a leading St Petersburg-agricultural firm, has recently announced that it would be investing over one billion roubles (around US$16 million) in a new grain and oat processing facility in the Orlov region. It would, however, be too simplistic to attribute this recent development solely to the decreasing availability of goods from elsewhere.

Agro-Alliance, our recent investee that we divested successfully in 2015, has already changed the landscape of domestic rice production and manufacture, and its diversification in other crops and regions was strategically planned long before the sanctions had bitten in. Their new plant is located in the Zelenaya Roshcha (‘Green Grove’) business park and will ultimately have an annual output of over 30,000 tonnes, significantly rebalancing Agro-Alliance’s previous reliance on the import of these crops.

In order to return successful yields, it is also necessary to have an appropriate level of support from successful private equity investment firms like VIYM. In the words of the Agro Alliance CEO, Viktor Kozyrev: “It is unlikely that our company would have charted these successes without VIYM’s involvement. In the investors VIYM represents, we found the support we needed.”

These new opportunities for growth in the agricultural sector provide openings for investors to develop business in a protected market focusing on domestic consumption. However, any such endeavors would be very short lived when EU/RU sanctions are inevitably eased unless they are rooted in a solid strategy and linked to investments in highly priced, competitive production processes, such as those that Agro-Alliance is undertaking. In the future, such companies would be better placed to enter new markets and expand beyond Russia’s borders, while also hopefully opening up to public investment – at present, they rely predominantly on private equity vehicles like the VIY Growth Fund, SICAV.

While the lack of growth in the wider Russian economy is temporary, it should be remembered that the protected market conditions which stimulate growth, especially in the agricultural sector, will not last forever. For now however, any expansion of operations or profits accumulated by agricultural firms will provide solid ground upon which the Russian agricultural sector – and those who invest in it – can flourish in the future.

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